While the primary concern around the world in the recent Japanese tsunami and quake was for the many victims of the disaster, the continuing deterioration of the nuclear plant at Fukushima is starting to create worries that extend even to supply chains.
Faint traces of radiation are being reported from many different areas and the Japanese government has already banned milk and some other agricultural products produced in the surrounding region. But even more ominous is that concerns with radiation are disrupting commerical shipping. According to one report, a cargo vessel was rejected by a port in China last week because of “abnormal” radiation levels after passing more than 120 kilometers off the coast of the Fukushima prefecture.
For the auto industry, there has been a major disruption with some US auto plants stopping production because they cannot get parts from Japanese suppliers because factories are shut down for the time being. The more far reaching effects could be random radiation levels on components and the fears that consumers harbor — even if the levels are deemed safe.
Already some US auto plants are pausing their production because they cannot get parts from Japanese suppliers who have shut down factories for the time being. What happens if it continues for any length of time.
What bears watching now is how much worse the radiation gets and whether the resulting fears over contaminated imports from Japan could ultimately collapse its economy — which would also have a large effect in the US and other countries.
I read an interesting blog by Michael Koploy the other day. Koploy, an ERP market analyst, did some research on trends for procurement solutions. Koploy has noted the with the economy improving, companies are spending more on procurement software this year.
Koploy also notes that some of the most active buyers are mid-market businesses. He discovered that one reason, for instance, is that some procurement specialists who were displaced by larger enterprise downsizing landed at mid-market companies. Many of these specialists are pushing to implement more sophisticated procurement systems to create more efficiency and improve their business’ bottom line.
In the past, that would have been a big undertaking for a mid-market company in terms of scale and capital outlay, but with the advent of the cloud and the reduced costs of ownership, it’s become much more doable.
Read more of Koploy’s blog here.
If you’ve spent any time watching TV news, the rapidly spreading political and social unrest across the Middle East, and in particular Libya, is disturbing on its own merits.
If you are a procurement officer, it may even be more disturbing. All this unrest is driving up the price of oil and energy, and if this trend continues, as it appears it will, the implication for supply chains may be dire.
Fuel Volatility Will Cause Disruptions, Delays
There is no doubt that the volatility of fuel prices will create supply disruptions. The question is in what form. You can expect suppliers to be hit hard with rising operational costs due to fuel, raw materials and possible labor increases. The danger is that some suppliers may no longer have cash to fund customers’ orders which will create critical delays and in some more critical circumstances, bankruptcies.
Now more than ever, procurement and supply chain teams need to come together for developing alternative scenarios for any number of options related to an increasingly uncertain economy, and uncertain customers.
If you’re lagging behind and have not done so by now, you better emphasize to key suppliers how their success is tied to your success. We talk a lot about collaboration and understanding your supply base, but if the meaning isn’t clear to you by now, it will be. Collaboration with your suppliers will be critical in the stormy months to come.
The most important thing is having up-to-date supplier information. This is why supply base management is jumping into the forefront of procurement strategy. Nothing is more vital in volatile times than being able to mitigate risk and create alternative sources of supply.
Creating Alternative Sources of Supply is Critical
When it comes to sourcing and procurement, you need to be able calculate net landed costs and identify and analyze acquisition and life cycle costs as well. Planning and forecasting goals may not change, but you can expect that the parameters and interactions will. For example, creating alternative sources of supply closer to home will be an important factor in managing rising fuel costs.
You can also expect other facets to be affected by fuel prices, including order size and frequency.
With the possibility of oil somehow hitting $150 a barrel and a devastating double-dip world-wide recession, true visibility and collaboration will be vital tools for your survival. If you do not have current information on your suppliers, than mitigating risk and disruption becomes more of a coin-toss in the dark.
Now that is disturbing.
Tags: mitigating supplier risk, supplier collaboration, supply disruption
Companies have traditionally measured direct suppliers’ performance as a way to control quality, reduce costs and ensure timely performance. As companies continue to expand the depth and breadth of supply chain management, it is becoming increasingly important to measure and manage indirect material and service suppliers’ performance.
Wait a minute, doesn’t direct spend eat up the biggest percentage of spend? Once upon a time it did. But here’s a sobering number: The average indirect spend for a Fortune 500-size Company is now approximately 50% of its total spend.
Direct Spend vs. Indirect Spend
First a quick definition: Indirect spend, as used in the context of this blog, is defined as any purchased good or service that does not end up in the product or service delivered to a customer. Direct spend is defined as a purchased good that is required to manufacture a finished good or a service that is provided to a customer.
KPIs have traditionally been used to as a way to control quality, reduce costs and ensure timely performance of direct suppliers. But as the global economy became more volatile in the last few years, companies started looking hard at reducing their costs by placing more emphasis on measuring and managing indirect material and service suppliers’ performance.
Still the journey has not been an easy one. Procurement teams in most product-based companies have traditionally focused on reducing direct spend because it’s easier to measure. Indirect spend with its broad spectrum of commodities, increased supplier base and lack of standards and requirements, is much more complex.
Comparing Apples to a Fruit Medley
To use an analogy I once read on this direct vs. indirect topic, the comparison between the two is not so much apples to oranges, but “apples to a fruit medley.”
Transforming indirect spend requires a disciplined, systematic, multi-dimensional approach that captures and leverages its spending data; consolidates business processes and demand in a more efficient manner. It also has to create compliance that actually works and turns suppliers into collaborative partners instead of disparate vendors, each with its own agenda. In other words, taking your suppliers and creating a positive force rather than an obstacle.
That’s really what Procure to Pay does. It closes the loop, connecting all the pieces, from key Suppliers (direct) to Low Volume (indirect) to create one consolidated business process for all inbound supply chain activities.
Through easy-to-access online catalogues, “Maverick” buys are reduced and replaced with lower priced contract buys. The automated process also allows employees to self-service, which helps to rapidly onboard suppliers regardless of language and location, not to mention the elimination of paper processes for better order accuracy, better PO to Invoice matches, timely delivery and dramatically reduced payment cycles.
Improved Visibility
The critical factor is having improved visibility of this “fruit medley,” which transparently manages the complexity of the transactions between buyers and suppliers by reducing errors and significant costs that occur with off-contract and low-volume spend.
Alcoa is a perfect example of how effective closing the loop can be for a large global company.
Alcoa was virtually able to eliminate accounts payable rework issues associated with lost invoices, late payments, and missing receipts. This vastly increased efficiency and visibility allowed internal buyers to pursue other cash generation activities and removed $2B USD in procurement costs for 2009.
Tags: Direct spend, Indirect Spend, Procure to Pay, spend managment, spend visibility, supplier performance, supply chain management
How about a little weekend reading? Today’s Lunch Links cover a broad gamut from rising commodity prices to a potential evolution in Procurement.
Spend Matters’ Jason Busch sees a significant evolution coming in P2P. Busch doesn’t see spending on solutions slowing down, but a shifting of priorities and emphasis to capabilities outside of just core eProcurement applications. He thinks electronic invoicing, working capital management and discounting solutions are about to get much more attention.
Here’s another interesting thought about the changing role of procurement in today’s supply chain from Procurement Profesional Online. Procurements main role may have been about security and reducing costs, but now you can add reducing risk, sustainability, and improving process and service to the ledger.
Will the rising price of oil have a negative effect on procurement? This blog from Procurement Leaders says yes.
Are U.S. distributors falling behind the Automation Technology Adoption Curve?
Much of the order fulfillment material handling technology has to do with traditional mechanized receiving, storage, picking, sorting, and shipping systems. But the increasingly important role automation is playing in the warehousing and distribution environment can’t be overlooked. Logistics companies outside the U.S. have been deploying automation in their DCs since the early 90s. It’s not coincidental that (15) of the top (20) worldwide providers of automated material handling systems are headquartered outside the USA.
This blog from Supply Chain Digest thinks automation is rapidly becoming the common dominator – providing real solutions with real ROI for competing domestically and in the global marketplace.
For a long time, smaller and mid-sized companies eschewed the idea of investing in technology not preferring to focus on growth. When the recession hit, the immediate answer was to scale back growth expectations and reduce staff.
While this may have saved some smaller and mid-sized companies in the short term, it was a crappy long-term strategy.
More Intense Competition
Now as things are starting to rebound, the competitive environment is much more intense. Larger competitors are becoming increasingly interested in reaching out and grabbing customers that the smaller businesses once had all to themselves.
Not to mention that the recession also forced these customers to become more knowledgeable and more adept at leveraging relationships. Add to that a tightening credit picture, and you can understand the steep slope facing smaller companies when it comes to making any major investments.
So how do mid-sized and small businesses compete in this new version of the Wild, Wild West?
The answer is simple. These companies have to raise their level of performance in every aspect. While this is easy to say, what does it mean? How can smaller and mid-sized businesses achieve maximum efficiency and at the same time be agile enough to ensure their futures?
The answer of course is technology.
Improving Productivity
No question that the improved environment means more hiring, but most do not anticipate reaching the levels they once were. But while technology makes it possible to “do more with less” the overriding goal should be to improve productivity, better positioning workers, both new and old, to maximize objectives.
There are a number of ways that different technology solutions can enhance operating efficiencies to the benefit of a company, its employees, and its extended community of customers, suppliers and partners.
For one, the right technology will improve basic internal processes. Often companies that struggle to meet the demands of their customers, struggle with inefficiency and inaccuracy of their own internal processes. Focusing on your own operational success will yield immediate benefits.
Another important benefit is building trust and strengthening relationships with your customers and partners. Increased accuracy and efficiency tend carry over in your business relationships, not only saving you money and time but your customers as well.
The final benefit is perhaps the most important and that is the ability to share information, not only internally, but externally as well. Key performance metrics can be standardized or even customized and easily understood, meaning that everybody from marketing to sales staff is now on the same page, This in turn, makes the decision-making process much easier with less risk involved.
Yes, technology can be a major investment for many smaller-mid-sized firms, but the changing environment and more intense competition makes improvement in operational excellence a necessity rather than a luxury.
If you spend a lot of time reading industry blogs as I’m wont to do (perhaps I need a life), you’ll run across the latest buzzword making the rounds. It’s called supplier innovation.
While I’m discussing buzzwords, how about business collaboration? Heard that one? I think we all have to the point of numbness. But here’s the thing, these two buzzwords, or phrases are the peanut butter and jelly of a welcome trend for suppliers and their customers in 2011.
More Than Just Research and Development
Now when you mention a word like innovation, the tendency is to start thinking of things like research and development, technology invention, new ideas, etc. More than 50 years ago, Manufacturing Guru Peter Drucker defined innovation as the primary way a business builds and maintains a competitive advantage in the marketplace. That definition, by the way, still stands. But it’s taken on a new meaning this year.
Suppliers have long been considered a great source of innovation by their customers, but only recently have companies identified and attempted to cultivate this source. If you think about it, it makes a lot of sense. Who knows better what their customers are doing and what they need than suppliers? And in most cases, the technology is already in place for this exchange. Yet, there has been very little collaboration between the two.
So what’s been missing all this time?
There are many reasons why it’s taken so long for supplier to be part of the collaborative process with their customers. Trust, for one. It’s kind of hard for a supplier to want to share ideas with a procurement department that’s always asking for a price reduction. Companies can create even more stress and distrust when they ask for late changes to specs or create impossible deadlines that foster an adversarial relationship between the two. Lost invoices, late payments and poor communication just added fuel to this fire.
From Cost Reduction to Shared Value
But as companies steered through a difficult recession, they discovered that maybe shifting from cost reduction to shared value would create less risk and more long-term stability. In other words, more trust and shared investment between supplier and buyer. Reducing costs will always be a driver for companies, but the interesting thing is that allowing suppliers to be part of the innovative process often does just that – lower costs.
But the key to that collaboration has been better communication. Electronic invoicing, better supplier base management and cooperation has opened the door and eliminated much of the mistrust that once existed replacing it with more shared vision of success.
From a supplier standpoint, more collaboration between them and the customer means more investment, more knowledge about their customer’s needs, plans and strategies. It means becoming more like a partner instead of a vendor. Having more of stake in their customer’s success means have a more long-term secure future in an often volatile economy that may not be done riding the roller coaster.
Tags: supplier innovation
First of all, welcome to 2011 and here’s hoping for a happy and prosperous New Year for everyone.
To start the New Year off, I ran across a couple of great articles that should provide some food for thought as the world-wide economy starts to chug forward like a tug that has weathered a brutal storm. Are there calmer waters ahead? Or more turbulence? How will companies handle one or the other?
The first article helps define what business agility means in terms of competing in a global market regardless of the economic situation. Author Greg Johnson, the Founder of GT Nexus writes in Supply Chain Digest “that business agility is no longer a nice-to-have, but a requisite capability.”
“If companies are to compete and win, they must have a strategy for broad and pervasive business agility,” said Johnson. ”What this means is the ability to re-wire and re-deploy when global plans large or small – change.”
Johnson refers to web-based programs like Procure to Pay and Supplier Base Management as next generation control towers that place both your company and your supply chain on the same page in a virtual community. Johnson believes this control tower technology is the “single version of truth system” that enables massive scalable information sharing across a diverse and distributed trade community.
“These control towers,” writes Johnson, “don’t replace the ERPs that companies have been investing in for the past three decades they connect to these systems. They extend them.”
Read more
The second is study done by the IBM Institute for Business Value called A Vision for Smarter Supply Chain Management.
Perhaps the most interesting facet of this study is how it breaks down 664 supply chain organizations that participated in the study into three categories: Operators, Planners and Visionaries.
Not surprisingly, the study shows that Visionaries are far outperforming the other two categories in return on investment and average revenue growth.
Interesting reading on the new rules for a new decade:
As the world-wide economy continues to recover, the danger is not completely over for many companies. There is plenty of supply chain and bottom line risk from suppliers and who may be struggling to keep out of bankruptcy court or who may be failing.
And the scary part? You may not even know it.
Even just in the U.S. alone, bankruptcies are up 126% and while the U.S. economy appears to be slowly recovering, the world-wide situation remains dicey. Fitch Ratings, a credit rating company downgraded credit ratings of almost a quarter of the large companies in 2009. The financial condition of many smaller suppliers may be even worse.
Complex and Messy Situations
Buyers face the continuing risk of a supplier going under, maintaining the prospect of interruptions or failure in the supply of critical components and services. Even worse, if a supplier fails or goes bankrupt, who owns the part completed or fully completed goods? Retention of title clauses can make for complex situations that may become very messy.
Need evidence? Just take a look at the mess General Motors encountered last year.
After a much publicized government bailout in 2008, GM got back into the national spotlight with a whole new line of cars, including the much-talked about Chevy Camaro. But instead the buzz it should have created for the ailing automaker was drowned out when one of its critical suppliers of key components for the car filed for Chapter 11. Not only did the delays shut down an assembly plant to the tune of a million dollars per day, but lawsuits filed by GM and a countersuit from the bankrupt supplier, have created a legal mess that will cost millions of dollars to sort out.
More than Just the Bottom Line
The moral of the story here is the real cost of supplier failure is far more than just the bottom line. It can and does weaken competitive advantage and erode or even destroy reputations.
If a supplier is vulnerable it is worth knowing about it in advance, even just a few months in advance. One of the absolute critical components of a Supplier Base Management tool is you have all that information now from performance and financial data to analysis and an action plan that may give you the time to find an alternative supplier. Either way, predictive financial tools, KPIs and an up-to-date consolidated, consistent view of supplier master data is the only way of reducing exposure to this very real risk.
As long as we continue to navigate through this volatile economy, risk will always be an issue. Mitigating that risk is all about understanding your supply chain. Companies that manage risk successfully will continue to reap the benefits; companies that mismanage it will expose themselves to a far greater chance of failure, or equally as bad, will become far less competitive.
Tags: supplier base management, supplier risk, supply chain risk
We spend a lot of time on here discussing how improved procurement can transform private sector companies, but the same budgetary pressures that those companies face, are also are placing strains on government agencies worldwide.
There is something to learn from private sector practices to implement new procurement strategies that will improve service performance levels and reduce costs for governments. Using a Procure-to-Pay process framework or model based on public sector standards, best practices and peer experience can dramatically assist a government agency in improving its procurement processes.
Core Operation
The procurement of goods and services by governments is basically a core element of their operation because it enables governments to deliver public services and fulfill their tasks. Government procurement does have a significant impact, economically speaking, too.
The parallel is that many government agencies face the same obstacles as private-sector companies when it comes to procurement. And the idea or overarching goal for both is to save costs and maximize service delivery.
But there are key differences. Government procurement must be done within a strict code of laws and rules, and in many cases, those rules and laws are different in different countries. Second, governments almost always have to purchase goods in larger quantity than businesses, so they often demand more from their suppliers.
Level Playing Field
Finally, government procurement seeks a level playing field between competitors by use of the sealed competitive bidding and awarding bids to the lowest bidder meeting specification. Government records are open and the prices revealed in the public arena. Thus, under public scrutiny, public purchasers must attempt to conserve the taxpayer’s money in an open arena. That makes transparency and visibility vital.
This is why electronic procurement can work so well for governments.
- They are able to leverage purchasing power and can often get better deals on items. Volume, volume, volume.
- E-procurement process automation not only increases the accuracy of large orders, but speeds the process forward. Instead of days or weeks, it now can be minutes.
- Many Government ERPs usually support the creation of online catalogues containing goods from multiple suppliers. Instead of going to multiple places to find an item, you have one.
- Since one of e-Procurement’s hallmarks is transparency and visibility, it’s easier to comply with myriad governmental rules and laws.
There are always more challenges with governments because not everything is uniform, but the versatility of most P2P systems makes this task much less daunting.