The usual suspects of smart supply guys ...
Michael (Sourcing Innovation) - here - here - here (and many more)
Tim (Supply Excellence) - here - here - here (and also many more)
Jason (Spend Matters) - here - here - here (and you guessed it ... many more)
... keep trying to make us pay attention to supply risk. A recent quote from Michael "Your supply chain will be disrupted. Bet on it. You'll win." If only some of the brain trust in the Toronto and Calgary offices of Imperial Oil (Esso) had been paying attention. While it's been making news for a week or so, (and hitting our wallets) today's Globe and Mail article on the retail gasoline supply chain disruption in Ontario provides a nice summary of how it happened.
1. Take a couple of refinery fires to constrain production.
2. Add in the winter closing of the St. Lawrence Seaway (if you're not familar with the seaway, or perhaps more importantly if you think you do, spend some time on their site to gain an appreciation of just how important this stretch of water is to the North American economy) to limit alternative distribution
3. Simmer with a rail strike to further limit distribution
The result has been a 25% spike in retail prices for gasoline and "dozens" of gas stations being closed due to lack of gasoline. If this can happen in Ontario in a widely competitive commodity market like retail gasoline what are the odds that it can happen in your supply chain? If you disagree would you care to take me up on Michael's bet? Thought not.
Cheers,
David Rotor
Saturday, March 3, 2007
Friday, March 2, 2007
A life without compliance
Ask procurement types what are their major challenges and you'll routinely hear:
1. Talent (attracting, training, and retaining);
2. Data visibility; and
3. Compliance
Let me touch on compliance today. I've worked on a variety of models to drive compliance both on the demand side (buyers using the right mix of contract, supplier, and scope of service or specification) and on the supply side (suppliers honouring their commitments). My current approach has been to treat this as a sales/marketing challenge (here and here). What if we're all wrong?
Russell Roberts, writing in Cafe Hayek, talks about "Order emerges in unexpected places". His example is the experience of a couple of European towns that are deregulating their traffic patterns by removing signs, traffic signals, and the like. I'd say it was counter-intuitive, but I guess most of us actually would guess that, indeed, accidents are reduced with fewer controls. I seem to recall reading someone (The Economist, Marginal Revolution?) on this topic not long ago, and if I recall correctly it was posited that fewer external controls meant individuals felt an obligation to have more responsibility.
Can this approach translate to the procurement world, and if so, what should procurement departments consider to make it effective? It's not so crazy, most companies have some form of procurement anarchy already:
1. Expense policies that allow travellers to select hotels and restaurants
2. R&D labs that are exempt from production procurement rules
3. Conference planning that is not restricted by corporate travel regulations
4. Gifts and trinkets
5. Media and advertising relationships
etc, etc
To make it effective I believe that three conditions are necessary:
1. The cost of the decision must be visible to the person making the decision. This is often referred to, in the negative, as "visual guilt". If you can display lower cost options, the decider will often select the lower cost. A real world example is what the folks at Rearden Commerce are doing for travellers.
2. The decision has limited impact on business processes beyond the control of the decision maker. This is really just expanding on the first condition, purchases that entail risk, long-term maintenance or support costs, or which impact other purchasing decisions probably should not be left uncontrolled.
3. Decision that are either very simple and quick to make (I'd like that pen, not that one) or extremely complex and ad-hoc (this charting software is better for my development team than that one). Simple, as the cost of involving a procurement administration to make the decision would often out weigh the cost of the purchase. Extremely complex ad hoc decisions because those decisions are very difficult for the procurement department to have expertise and add value, and if they are truly ad hoc their is little value to be gained from the experience that will translate to other buying decisions.
Any thoughts, other than to lynch the procurement heretic?
Cheers,
David Rotor
1. Talent (attracting, training, and retaining);
2. Data visibility; and
3. Compliance
Let me touch on compliance today. I've worked on a variety of models to drive compliance both on the demand side (buyers using the right mix of contract, supplier, and scope of service or specification) and on the supply side (suppliers honouring their commitments). My current approach has been to treat this as a sales/marketing challenge (here and here). What if we're all wrong?
Russell Roberts, writing in Cafe Hayek, talks about "Order emerges in unexpected places". His example is the experience of a couple of European towns that are deregulating their traffic patterns by removing signs, traffic signals, and the like. I'd say it was counter-intuitive, but I guess most of us actually would guess that, indeed, accidents are reduced with fewer controls. I seem to recall reading someone (The Economist, Marginal Revolution?) on this topic not long ago, and if I recall correctly it was posited that fewer external controls meant individuals felt an obligation to have more responsibility.
Can this approach translate to the procurement world, and if so, what should procurement departments consider to make it effective? It's not so crazy, most companies have some form of procurement anarchy already:
1. Expense policies that allow travellers to select hotels and restaurants
2. R&D labs that are exempt from production procurement rules
3. Conference planning that is not restricted by corporate travel regulations
4. Gifts and trinkets
5. Media and advertising relationships
etc, etc
To make it effective I believe that three conditions are necessary:
1. The cost of the decision must be visible to the person making the decision. This is often referred to, in the negative, as "visual guilt". If you can display lower cost options, the decider will often select the lower cost. A real world example is what the folks at Rearden Commerce are doing for travellers.
2. The decision has limited impact on business processes beyond the control of the decision maker. This is really just expanding on the first condition, purchases that entail risk, long-term maintenance or support costs, or which impact other purchasing decisions probably should not be left uncontrolled.
3. Decision that are either very simple and quick to make (I'd like that pen, not that one) or extremely complex and ad-hoc (this charting software is better for my development team than that one). Simple, as the cost of involving a procurement administration to make the decision would often out weigh the cost of the purchase. Extremely complex ad hoc decisions because those decisions are very difficult for the procurement department to have expertise and add value, and if they are truly ad hoc their is little value to be gained from the experience that will translate to other buying decisions.
Any thoughts, other than to lynch the procurement heretic?
Cheers,
David Rotor
Thursday, March 1, 2007
Shared savings?
I'm working on a few investment opportunities that have come up for this fund. The fund is, obviously, interested in the mechanism for shared savings and while we are starting with a bias on how the funds would flow it's been useful to work through some other scenarios.
We're exploring five shared savings models:
This is commonly used by strategic sourcing consultancies that have contingent savings contracts with their clients. Savings are "identified" but not realized prior to payment. Often the milestone for payment is at the time of awarding a contract to a supplier that provides lower costs for a good or service.
Front-end Rebate
In this model the supplier takes on the future purchased volume risk in a contract and pays the client their savings at time of contract award.
Back-end or Volume Rebate
In this model the supplier pays the rebate at some pre-determined point in time, such as quarterly, annually, or at contract expiration. This is normally defined either as a lump-sum payment (thereby having the supplier hold the purchased volume risk) or as a volume related payment (thereby having the client hold the purchased volume risk.
Periodic Payments
Savings are tracked and paid on a periodic basis (often monthly or quarterly). While there can be multiple mechanisms this form of shared savings are managed they are usually based on tracking the volume of purchases over the defined period and applying a savings formula to that volume.
Transaction Payments
Savings are tracked and included in the transaction. Payments are made coincidental with supplier payments for each relevant transaction.
We're exploring five shared savings models:
- Identified Savings
- Front End Rebates
- Back End Rebates
- Transaction Payments
- Periodic Payments
This is commonly used by strategic sourcing consultancies that have contingent savings contracts with their clients. Savings are "identified" but not realized prior to payment. Often the milestone for payment is at the time of awarding a contract to a supplier that provides lower costs for a good or service.
Front-end Rebate
In this model the supplier takes on the future purchased volume risk in a contract and pays the client their savings at time of contract award.
Back-end or Volume Rebate
In this model the supplier pays the rebate at some pre-determined point in time, such as quarterly, annually, or at contract expiration. This is normally defined either as a lump-sum payment (thereby having the supplier hold the purchased volume risk) or as a volume related payment (thereby having the client hold the purchased volume risk.
Periodic Payments
Savings are tracked and paid on a periodic basis (often monthly or quarterly). While there can be multiple mechanisms this form of shared savings are managed they are usually based on tracking the volume of purchases over the defined period and applying a savings formula to that volume.
Transaction Payments
Savings are tracked and included in the transaction. Payments are made coincidental with supplier payments for each relevant transaction.
Sit down and read this
Procurement "professionals" are often asked, either seriously or in jest, for retail buying help from friends and family. While there is obviously some overlap in skills and approach, it's a bit akin to asking your friend the Finance Director for help selecting a life insurance policy. Over at the consumerist, they've posted an article aimed at the consumer buyer, that has a lot a valid points for the professionals. The topic is buying on-line furniture, but just as it makes sense for a professional, it also makes sense for categories beyone furniture. Here are a few of the tips, and a link to the full article.
Cheers,
David Rotor
#7. Ask them about the shipping procedure and how long it takes for
the order to be processed.
# 12. Confirm everything. Hold them to their word, and WRITE DOWN THEIR
NAMES. Get their last name if possible.
#6. Ask them what the furniture is made of, and if it can be configured in
a number of different ways.
# 3. If they have a warehouse, ask for a tour. Take a look at the way they
warehouse employees act and handle the packages. What the retailer expects of
its employees is what they expect from their manufacturers.
Cheers,
David Rotor
Subscribe to:
Posts (Atom)
