By now, what I once coined “Corporate America’s dirty little secret” is a secret no more. Poor visibility is as pervasive as Janet Jackson; and it’s wreaking havoc on supply management performance everywhere from L.A. to Tokyo.

Lack of visibility into timely, detailed, and accurate spend data limit spend leverage, hinder compliance, and cause supply managers to develop sourcing and supplier strategies in the dark. Throw in tightening supply market dynamics and tougher scrutiny from CFOs and regulators, and the spend deficiency syndrome is now more exposed than Miss Jackson at halftime.

Considering these factors, it’s no surprise that the nearly 300 supply management and business executives attending Empower 2006 listed improving visibility into timely and accurate spend data as their top initiative for the next two years.  

I won’t get into a long-winded diatribe on the hurdles and best practices for spending analysis. I’ll leave that to the professional prognosticators. In fact, Aberdeen Group’s most recent study on the subject – The Spend Intelligence Benchmark Report: Turning Data into Action – does a smash-up job of dissecting the issue.

Instead, I’d like to share a true story of one company’s journey to spend intelligence. For the purposes of this story, the company, whose name will be protected to avoid divulging their competitive edge, will be referred to as Global Tech Co.

Once upon a time back in the last century, Global Tech Co. realized it had a problem. It had poor visibility into how much it was spending, with which suppliers, and on what products and services. Spend data was stored in multiple, disparate systems across the enterprise. Collecting and analyzing this data was very labor intensive, so the company’s supply management team defaulted to doing periodic spend analysis projects that only examined a fraction of its spend data.

Global Tech Co.’s IT leadership assured the supply management group that the spend visibility issue would be resolved when the company standardized on a common ERP system. After the fact, the supply team quickly realized that ERP systems are built for high-level financial analysis and lacked the detailed, line-item attribute data needed for meaningful spend analysis. For example, ERP standardization reaffirmed what the supply team already knew – Global Tech Co. spent a lot on hardware. But the ERP data didn’t help commodity managers determine how much was being spent on high-end SPARC stations versus laptops. Nor could it shed insight into whether these items were being bought for development engineers or office administrators. (Earlier this year, SpendMatters’ Jason Busch posted on the follies of the ERP-only approach to spend analysis.)

Global Tech’s next strategy was to assign standard part numbers to the items it purchased.  This led to a proliferation of part numbers as well as differences within the part numbers. To continue our example in the area of hardware, part numbers were difficult to assign due to different models and configurations.

Global Tech’s next move was to dump spend data into a data warehouse with a snazzy reporting tool on top. This allowed the supply team to slice and dice spend data and create reports to impress their boss and friends. However, this approach still didn’t solve the core symptom: Global Tech lacked spend data detail that could support accurate classification and meaningful analysis. (Garbage in, garbage out, anyone?)

As a result, the supply team spent their time pulling spend data from the warehouse into spreadsheet pivot tables so they could sort it by attributes. But with key detail – like processor speed or memory – buried in the description, this information was hard to dig up. This lengthy and labor-intensive process forced Global Tech to continue to conduct spend analyses on a project basis. Worse yet, time and resource constraints limited analyses to Global Tech’s big-ticket spend categories.

Finally, Global Tech Co. adopted a solution that automated spend data extraction, classification, and analysis. Through the use of business-rule and category-libraries, the tool rapidly accessed and evaluated the line-item spend attributes and classify these to a common schema.

[Because it mostly bought common indirect goods and services, Global Tech Co. elected to map spend data to the industry standard UNSPSC. However, UNSPSC has proven too limited for use by many companies, particularly manufacturers. We will analyze the pros and cons of UNSPSC in a future post.]

This automated attribute-based classification gave Global Tech Co. the detail required for meaningful analysis, enabling the supply management team to improve spend leverage and develop informed sourcing and supplier management strategies. For example, the company has been able to change its hardware buying policies and practices, assigning approved hardware types and configurations for each role in the organization. (No more SPARC stations for the receptionist!) It also uncovered more spending power, such as hardware purchases that had been misclassified under office products.

Such insight and detail enabled Global Tech Co. to achieve additional 5% - 15% cost savings – depending on the spend category – through improved spend leverage, supplier rationalization, and new buying rules.
This automated spend intelligence approach enabled Global Tech Co. to be more systematic about spending analysis. The company auto-refreshes 100% of its spend data pool on a monthly basis, arming its supply team with the intelligence required to make and execute informed sourcing and supplier strategies across a much broader portion of Global Tech’s spend.

The moral of this story (in case you missed it) is not about cost savings. It’s about understanding that the success of any spend analysis initiative has less to do with reporting and analytics (although chief execs always like a story with pretty pictures) and more to do with having the proper tools to extract, cleanse, classify, and enrich spend data at a detailed level – all on a repeatable basis.

Building your spend analysis initiative without a repeatable process for detailed data classification is like building a sand castle on the shore. It may look nice momentarily, but it will certain erode with time. And it will take heck of a lot of effort to rebuild.

Yesterday, I shared the top challenges facing supply management executives, as reported by the nearly 300 supply and business executive attendees at Empower 2006. Topping the list were continued pressures to reduce supply costs, new scrutiny for better compliance, and heightened supply risks.

The below table (click to enlarge) reveals the Top Five Supply Management Strategies executives said their companies would implement within the next two years. The table also lists the issues driving these strategies and the most likely approaches supply management executives will use to overcome these issues and improve supply costs and performance.

 

In the coming weeks, Supply Excellence will examine each of these strategies in more detail and review real-world examples of these strategies in action.  

I’ve caught the research bug again. And Empower 2006 is to blame. Two-days with nearly 300 supply management executives at my disposal afforded a rich pool to investigate supply and contract management best practices.

In addition to dozens of private interviews and conversations with supply execs, I took the opportunity to survey all attendees on their top supply management challenges and strategies. And, I’m somewhat dismayed to report that not that much has changed since I turned in my analyst badge back in March.

Reducing supply costs remains the top challenge and focus for supply management executives, according the survey I put to Empower 2006 attendees last month. Cost-cutting angst has been fueled by the long-held run up in energy costs and the inflationary issues it sparked. Economists expect that the recent downturn in fuel prices will take months to show up in lower supply costs. And news that OPEC could curtail production could cause another run up in oil prices right before the holiday shipping season and the home-heating crunch.

Confusion over the future of supply markets was evident when the Institute for Supply Management (ISM) released its latest Manufacturing Business Survey earlier this month. The survey of supply managers provides an aggregate index of orders, inventories, supply prices and availability. The index was down to 52.9, indicating that the economy was expanding, but at a slower rate. Supply managers continued to report price increases and supply constraints for key commodities, including copper, plastics, electronic components, and chemicals

I sat down with Norbert Ore, Chair of ISM’s Manufacturing Business Survey Committee, last week, in part to better understand future predictions for supply prices and markets. Norbert said, “It’s just too early to tell. Changes in fuel prices take months to impact [commodity] prices and manufacturers are unsure whether fuel prices will stabilize. Most inventories have been worked off and [suppliers] have been more cautious about building up inventories.” Upshot: Commodity prices will remain inflated until the energy supply stabilizes.

However, driving compliance and managing supply risk as challenges were the fastest-growing challenges reported by supply management executives. Compliance pressures have increased in recent years due to heightened financial and environmental regulatory scrutiny (e.g., SOX, RoHS, WEEE, etc.) and CFO’s tougher stance on measuring cost savings reported from strategic sourcing and supply management initiatives.

Supply risks have grown in tandem with the increase in globalization and outsourcing, both of which have expanded supply chains and introduced new challenges in the form of governance, visibility, and compliance. Mark Hillman, AMR Research’s supply risk czar, reports that supply chain risk management is emerging as a dedicated focus at many enterprises. In his recent research, nearly one-third of supply managers said their companies have dedicated budget line-items for supply chain risk management, and 54% expect spending on resources and technology to monitor and manage risks will increase this calendar year.

In the conference survey, attendees also rated securing executive support for supply and contract management initiatives among the top challenges they face today. Luckily, Dave Anderson, partner at Supply Chain Venture and former head of Accenture’s Supply Chain Management consulting practice, has shared tips for developing the perfect business case for any supply management initiative – whether it’s securing new category experts or deploying sourcing automation.

Supply Excellence readers can access a complimentary copy of Dave’s white paper on this subject, How to Make the Perfect Pitch, here.

Tomorrow we’ll examine the leading strategies supply management execs are employing to overcome their cost, compliance, and risk management challenges.

When Airbus CEO Christian Streiff resigned this week after just three months on the job, he blamed the “current governance structure has insufficient delegation t lead Airbus through the crisis successfully.” That so-called governance structure is a consortium created in 1970 by technocrats in France, Germany, Britain, and Spain. Even Airbus’ parent company, EADS, is split by a Franco-German consortium structure of which DaimlerChrysler holds a leading 22% stake.

It remains to be seen whether Streiff is a power-hungry exec (as Airbus board members are painting him) or whether the company’s politically charged governance structure is really broken. (Although most market-watchers have fingered the latter as the likely culprit.) The issue raises the bigger question, can consortia really work?

Supply managers have been grappling with this conundrum for years, debating the pros and cons of buying consortiums or group purchasing organizations (GPOs). Julie Murphree, founder and former editor-in-chief at Supply and Demand Chain Executive magazine, reenergized the debate in a recent article in her former publication.

In the article, Julie takes the issue to Pierre Mitchell, Senior Research Fellow (whatever that means) at Hackett Group and AMR Research’s former go-to guy on supply management, SpendMatters Jason Busch, and yours truly.

My take: “GPOs have traditionally suffered from the same factors that have plagued enterprise procurement organizations: high transaction costs and poor compliance. Of course, with multiple, disparate, and often, competing constituents, GPOs have had this problem in spades.”

However, “advances in procurement automation and new On Demand application delivery models have helped mitigate these factors by providing the visibility and control requirement to effectively leverage spending, monitor execution, and measure and enforce compliance. On Demand has reduced the costs and implementation barriers to driving such visibility and control across multiple, disparate enterprises.” (Even Gartner in its somewhat reluctant endorsement of Software as a Service (SaaS) noted that On Demand solutions have found a stronghold within business process outsourcing (BPO) offerings.)

In the article, Jason aptly points out that GPOs have been most widely used within the healthcare sector, where spend attributes – from syringes and IVs to defibrillators – are common across hospitals. With ever-increasing pressures to curtail costs without degrading service levels, healthcare GPOs are leveraging technologies – from sourcing automation to contract lifecycle solutions – to increase spend leverage, streamline contracting cycles, and improve visibility and compliance.

I am working with one the nation’s largest contracting services provider (read: GPO) that is automating its sourcing, contracting, and supplier management processes to improve spend leverage and compliance across thousands of hospitals and affiliates. The GPO is also using optimization to satisfy unique requirements, inventory management, and allocation strategies across constituents. The GPO says the use of automation has more than halved its contracting cycles and has improved its ability to monitor, report, and encourage compliance across its members.

Julie correctly concludes that GPOs will always have a strong play in indirect spend categories – such as office supplies and equipment, cleaning supplies, etc. — which are commoditized and non-strategic to most organizations. However, with the visibility and control afforded by supply management automation, consortium approaches are being extended to more strategic spend categories.

For example, one airline consortium I’ve worked with recently used an optimization tool to source global ocean freight services for its constituents. Optimization enabled the consortium to evaluate thousands of lanes, service levels, and complex rate and tariff schedules – all within the “constraints” or buying preferences of individual members. For example, one participating airline wanted to consolidate with a global carrier for all its ocean freight needs, while another wanted to get the best value by dividing its business between a global provider and several local carriers.

Pierre sums the consortium trend up best when, in the article, he recommends that supply management professionals evaluate GPOs within the larger procurement outsourcing landscape. He notes that the major BPO players have incorporated GPO-like attributes within their offerings, such as aggregated buying and pre-contracted pricing as part of their outsourcing menu. Says Pierre: “This becomes critical for the customer wanting a complete mix of options in his spend management goals.”

Long tied to the fortunes (and misfortunes) of information technology executives and traditional hardware and ERP goliaths, Gartner Group seems to finally be embracing Software as as Service (SaaS) — albeit somewhat reluctantly. In its latest report, On Premise Software Will Be Challenged By SaaS Software Delivery (membership required), the old-school analyst firm predicts that SaaS will account for 25% of all new business software sales within the next five years.

That prediction is well below SaaS market projections from others like IDC and Triple-Tree, but it does indicate a self-admitted shift in Gartner’s original thinking that SaaS was a passing fad. Report author Robert DeSisto, research vice president for Gartner, straight talks IT execs: “SaaS solutions are here to stay and [IT] must look to leverage the upside potential of these approaches rather than see them as a threat to their existing modus operandi.”

It’s nice to see arguably the leading advisor to CIOs announcing the arrival of SaaS. But the declaration may be a case of too little, too late. The admission comes months (and in some cases years) after the world’s largest traditional installed ERP and business software providers publicly declared that market dynamics required them to embrace SaaS. (Evidence a previous post on Microsoft President and CEO Steve Ballmer views on the future of enterprise applications: “If you want to be a leading software company, you’ve got to be a leading Software as a Service company.”)

And, despite the research data showing how enterprises are embracing SaaS, DeSisto and his fellow authors still seem intent on minimizing its impact and applicability. In one sentence, DeSisto touts that “SaaS providers are enhancing their software functionality and improving the ease with which companies can customize and more uniquely configure SaaS software to meet business requirements…and we are beginning to see [SaaS] vendors provide capabilities, such as opportunity to order and in integration as a service.” In the next, he states that “no [SaaS] provider offers the functionality capability or process management capabilities on par with on premise software to support end-to-end cross departmental business flows.”

Try telling that to Salesforce.com. (Or the CRM or ERP giants that bought, begged, and stole to try to emulate Salesforce’s SaaS approach.) Or any host of end-to-end supply management or Procure-to-Pay vendors that have embraced SaaS and that lead the market in terms of application functionality.

Interestingly, the report doesn’t break out SaaS revenue projections for the supply (or spend) management solution segment. Instead, Gartner lumps these into the overall supply chain management, which is unduly weighted by applications for planning and managing internal inventories and demand plans and that have long been extensions of ERP. As other analysts have speculated — and Salesforce.com has proven — SaaS adoption will grow fastest in supporting inter-enterprise business processes, such as customer or supplier management, where traditional ERP and installed software models lack advanced functionality and are costly to extend to external trading partners. (Read EDI all over again.) (more…)

Automotive suppliers breathed a collective sigh of relief yesterday when news reports leaked that General Motors had rejected plans for a global alliance with Renault and Nissan Motor Co. As I speculated in previous posts, the parties recognized that the proposed synergies were less than originally expected. (Specifically, Renault-Nissan was touting that the alliance would bring synergies of $10 billion, while GM estimated the deal would only bring $3 billion in savings.) GM also feared that joining up with Renault-Nissan would preclude an alliance with other automakers — such as joint-ventures with Japanese automaker Toyota. 

The news was welcomed by U.S. automotive suppliers who feared any global alliance would bring yet another round of aggressive cost-cutting and supply base rationalization. As noted in previous posts, GM and Ford both announced plans to reduce total supply costs by 2% - 3% this year. However, experts agree that the reprieve will be short-lived.

Reports of the end of GM alliance talks revitalized speculation that Renault-Nissan may link up with Ford Motor Co. In confirming past alliance discussions with Ford, Renault-Nissan CEO Carlos Ghosen reaffirmed his commitment to joining forces with a U.S. automaker. Yesterday’s run up in Ford’s stock seems to suggest that Wall-Street is betting that Ford is the likely candidate.

However, any merger for Detroit automakers will be difficult for one key reason: profits. Neither Ford nor GM have them. And Daimler-Chrysler CEO Dieter Zetsche is blaming financial declines on the company’s “poor peforming North American operations” (i.e., Chrysler). These factors make Detroit automakers a questionable investment — without some major restructuring.

To illustrate the profitability challenge U.S. automakers face, I pulled together a side-by-side comparison of beleagured GM and Ford operations versus high-flying and profitable Toyota. (NOTE: These are 2005 numbers. Just last month, Toyota pulled ahead of GM as the world’s leader in vehicle sales, widening the profitability gap even further.)

And it doesn’t look Detroit can close this gap anytime soon. A new report from the Harbour-Felax Group reveals that GM, Ford, and Chrylser make $2,400 less profit per vehicle than Japanese automakers, Toyota, Honda, and Nissan. This profit difference is usually chalked up to higher labor wages, health care, and pensions paid by Detroit automakers. However, the study reveals that there are a number of factors contributing to the (less) Big Three profit disadvantage:

• Product and manufacturing engineering – Japanese automakers are way ahead of U.S. firms in collaborative design and parts standardization and reuse. U.S. manufacturers also struggle to produce more than one vehicle platform per plant, pay nearly 50% more to build and equip factories, and have high costs for excess capacity. (Although Detroit is desparately making moves to catch up in these areas.)
• Labor practices — Production workers at U.S. automakers get more paid time off than their Japanese counterparts. Uncontrolled absences are also higher among workers at U.S. firms. In addition, workers at Japanese automakers get fewer breaks, but are more productive overall.
• Higher health care and pension costs– Detroit firms pay $900 to $1,400 more per vehicle due to higher health care costs for active and retired workers. Job bank programs (which pay union workers who have lost their jobs) and supplemental employment benefits (which pay union workers who are temporarily laid off) raise costs and force U.S. automakers to produce more vehicles than necessary — which leads to price discounting.
• Price discounting – To boost factory output (generally in response to the aforementioned labor rules), Detroit firms have relied heavily on discounted sales, especially to corporate fleets and rental agencies.
• Unfavorable currency exchange rates – Harbour-Felax calculates that Japanese automakers gain or lose $174 per vehicle for every one-point change in the yen rate. The depreciation of the yen in 2005 added $5.8 billion in profits for the Japanese automakers.
• Supplier relations – as noted in previous Supply Excellence posts, Japanese automakers have long embraced true collaborative and consistent supplier development methods and platform and systems standardization, giving them advantages in product innovation, supply assurance, and costs. By contrast, U.S. automakers have wavered in their approach to supplier relationships over the past few decades, alternating between an iron fist and a velvet glove. This has strained supplier relationships. Harbour-Felax adds that many U.S. auto suppliers suffer from the same ailments as the Big Three — poor manufacturing performance, weak leadership, and a lack of engineering process.

These issues portend continued turmoil in the automotive industry for years to come. By necessity, GM and Ford will enter into new global alliances — the only question is with whom. Regardless of who commander’s the wheel at GM and Ford, one thing is certain, big changes are afoot. New development, manufacturing, and supply management approaches will be mandatory to regain profitability. (And union concessions will also be in play.) The resulting mega-automaker will definitely not be your father’s Detroit.