The Shared Services & Outsourcing Network (SSON) has asked me to present the “Top Categories to Source Now” in a webinar next week (details & registration here). As those of you who have seen other iterations of this presentation know, the categories themselves and strategies for approaching them change as market conditions shift. The big change right now is the time frame you have to take advantage of buyer’s market conditions for direct and indirect spend categories. The clock is ticking…
The National Association for Business Economics released results of their economic forecasters survey yesterday, which showed that over 90% believe the recession will end in this year (74% say in Q3 and 19% in Q4). Couple that with forecasts from the Fed and a higher than expected rise in consumer confidence and it seems as though we may finally have a light emerging at the end of the economic tunnel. But, those surveys are still somewhat “touchy feely” and potentially influenced by group-think. What about the hard numbers?
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Diebold CEO Tom Swidarski just wrapped up his “Spend Management: A CEO’s View” presentation. When Tom took over the reigns as Diebold (a company with $3.2B in revenue in 2008 and celebrating their 150th year), he set an ambitious goal of cutting $100 million from costs structures by the end of 2008. But rather than quietly setting this goal internally, where the risk of failure isn’t so great, Tom “got everyone’s attention immediately by announcing this externally [to the market].”
The good news for Diebold’s stock holders, employees and suppliers is, they hit their goal. Tom attributes their success to a three pronged approach:
Structure - Diebold streamlined their procurement organization and focused on developing the right skills within their employees. They also added a financial analyst to validate that the “savings” the company earned were actually valid costs taken out of company spend. And they unified their goals for each business unit across the globe, enabling the teams to work together to identify efficiency and savings across time-zones, borders and vendors.
Technology - They leveraged technology - including esourcing, procurement and spend visibility tools - to give their people the real-time insights and leverage in their supplier relationships.
Process - Weekly project meetings kept stakeholders on track…and if they didn’t…the monthly executive reviews likely did. In addition to accountability, Diebold tackled things like warehouse optimization, where they were able to reduce operations from 89 different locations to 3 distribution centers.
Not happy to sit back and celebrate, Tom and Diebold have doubled down and announced the “SmartBusiness200″ plan, which aims to take out another $200 million by 2011.
The replay is available now (register here if you haven’t already).
Justin Fogarty is Managing Editor of Supply Excellence. For any questions or feedback on the blog or its contributors, Justin can be reached at jfogarty[at]ariba.com.
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We sponsored a CPO dinner in Madrid recently, and I had the privilege of being a “fly on the wall” for the candid discussions (i.e. I furiously took notes while the distinguished attendees shared wine and procurement war stories). Obviously, as all of us in the field know, it is a time of tremendous responsibility for procurement departments as their organizations increasingly look to them to provide cost savings during a time of shrinking topline revenues. Add in the risk management role that procurement is increasingly asked to take on - in terms of supplier viability, product safety, currency rates, etc, etc, etc - and you see the weight on CPOs’ shoulders (and their often shrinking staffs) is mounting.
But this was not a table full of executives complaining about their workload. Instead the discussions centered around the tremendous opportunity this downturn provides…and how to make the most of it.
Forgive me if I can’t share the names and companies in attendance (it was a closed door meeting), but the major points, action items and lessons were:
Greater influence. Procurement now has greater visibility, and the trust they’ve built in recent years as the department became more strategic and drove cost savings, has given their input far greater weight in decisions and strategy.
Creativity counts. CPO’s have to be creative enough to access the CEO and present real business improvement plans. Taking smart risks in the current environment - not just a reliance on quick wins - is key. Some great examples included one CPO’s success in promoting green purchasing decisions, which was a win for the environment, the brand, and the bottom line.
Risk is top of mind. Supplier risk is maybe the most difficult issue to tackle these days. So, framing necessary changes, opportunities and needs in that light may help gain buy-in from the top.
Don’t neglect the fundamentals. Everybody insisted that process and technology changes must be handled properly in order to ensure compliance and success. The risks and opportunities may seem obvious to purchasing, but effective change management is critical to driving transformation programs in other areas of the company.
Raf Jacobs is a Principal Consultant in Ariba’s European Strategic Sourcing group. Raf manages purchasing and cost reduction projects for large, international (EUR 1billion+) organizations in a host of industries, including; Banking and Insurance, Business services, Diversified manufacturing, Automotive, Pharma, Energy, FMCG/Food, Mining, and Telecom.
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In our last post, we laid the foundations for cost reduction in tough times by pointing out that, regardless of whether you are sourcing products or services, you start with:
A Spend Analysis
A Should-Cost Model
e-Sourcing
In this post, we’re going to lay out some general techniques for saving money on your direct sourcing categories that are widely applicable.
Understand the Market Dynamics of the Significant Inputs. Your should-cost model will give you the major cost components, which might be raw materials, energy, and/or labor. If your major costs are raw materials or energy, then you can save money by locking in long-term contracts when rates are low. If your major costs are labor, then you need to look for productivity improvements to achieve significant savings.
Manage Your Inventory. Storage costs can account for up to one third of a product’s total cost. Look for ways to streamline your supply chain and improve your forecasting so that inventory is minimized as this is often an easy way to take 10% to 20% off-the-top.
Move to Lean Manufacturing. Work with your chosen supplier to streamline production and take waste out of the process. If your supplier has not undertaken a lean manufacturing effort in the past five years, you can expect to easily take 10% to 20% of cost out of the process. A typical lean manufacturing consultancy with true lean and six sigma experts can typically generate 5X to 10X returns on any investment you make.
Design for Supply. If you design your contract manufactured products so that they are efficient to produce, use the most cost-effective raw materials that will meet your quality and reliability requirements, and can be produced cost-effectively in smaller batch sizes to reduce the need for storage (and inventory costs), you will find that your savings can be very significant. Apriori and Akoya both have real-world examples where part and component redesign reduced costs by as much as 90%. These are extreme examples, but they regularly take out 10% to 20% of cost with their virtual production environment models and competitive costing analyses.
Make Environmentally Friendly a Core Requirement. While payback won’t always be immediate, with energy costs, water costs, and waste-disposal costs sure to rise over the long-run, any reductions you can make will pay off year after year after year.
Re-design your Distribution Model in the Sourcing Event. We’re no longer in the dark ages of optimization where solutions were impossible to use by anyone who didn’t have a Ph.D. in mathematics and arcane application interfaces and where it cost millions of dollars to have your network analyzed. These days, a number of providers have solutions that cost less than six figures per year that are quite capable of modeling multiple distribution network models and doing total distribution network cost analysis in near-real time. As I’ve never encountered a real-world project that didn’t save at least 10% to 20%, especially when current, actual freight costs were input (and not weak estimations thereof), this can be a real money saver!
Don’t Be Afraid to Call in an Expert. There are many service providers with category expertise, should-cost modeling expertise, lean-expertise, and modeling and optimization expertise that can often find 20% savings opportunities in a few days. This means that, on a $10 M category, they can often find you $1M in savings for about $10K in services. That’s a 100:1 return. So call a consultant … they really are cheap. Especially when you consider that many are willing to delay invoice, or payment thereof, until the new contract is signed or the new process is implemented and you actually see the savings.
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Spend analysis was the topic du juor at the Ariba Spend Management Day in Atlanta earlier this month. Faced with a sagging economy and highly volatile supply markets, presenters at the event pointed to improved visibility into spending as key to a number of strategies — from queuing up new sourcing opportunities to enforcing contract compliance to improving planning and forecasting.
Yet, while the benefits of improved spend visibility were compelling, presenters had two warnings for anyone embarking on a spend analysis program:
ERP systems are not effective for spend analysis; and
Spend classification does not go far enough.
“As we move up the curve for sourcing maturity, we need better tools to identify opportunities and develop informed strategies,” said Reno Rojales, Vice President of Procurement at CheckFree Corporation, which is now part of Fiserv. “ERP helps the accountants, not procurement. [ERP] data is not broken down by commodities or attributes that are useful for developing sourcing and compliance strategies.”
Considering that Fiserv is capturing spend data from more than 95 source systems — including multiple instances of SAP — it’s not surprising that Rojales is dubious of the ability of ERP systems to provide the right detail required for effective spend analysis. However, Rojales wasn’t alone in his sentiment. In fact, H&R Block’s Vice President of Strategic Sourcing Gerry Hudson was equally emphatic of the limits of ERP systems — and his company has standardized on a single PeopleSoft instance globally for both Accounts Payable and Purchasing.
Says Hudson, “Even with our data captured in a [single] source system, we didn’t have real insight into our spending. We knew what our top three spend categories were [rent, marketing, and professional services], but we lacked the detail to understand the attributes of our spending with whom we were spending it.”
Such factors led H&R Block to leverage a specialized spend data classification and enrichment solution to augment its ERP investment. (I’ll let you guess which company provided the solution.) The company also pulls Corporate Card and P-Card data from its issuer to capture spend that happens outside its purchasing systems. The solution autoclassifies H&R Block’s spend data is classified to the UNSPSC standard. (However, Hudson’s teams extended the UNSPSC schema to get more detail into certain complex services spend categories, such as commercial printing.) According to Hudson, the solution gives his team visibility into 99.5% of his company’s total spending.
But, for Hudson, the real benefit of the specialized spend analysis solution comes from enriching H&R Block’s classified spend data with related business information, such as parent-child relationships. “Data enrichment gives us greater and more accurate understanding of our spending so we can actually make informed decisions,” Hudson told the audience. H&R Block uses this enhanced spend intelligence for a host of activities, including sourcing and savings opportunity assessments and planning, compliance analysis, and procurement and settlement decision-making.
Hudson says the fact-based spend detail they provide has elevated the strategic role of the procurement organization within H&R block and its franchisees. In fact, the company now relies on Hudson’s team to develop plan and forecasts. “We do the budgets for the businesses based on our spend analytics,” reported Hudson.
Now that is a true example of the power of effective spend analysis.
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