Over on SpendMatters, Jason Busch is doing a Casey Kasem-like countdown of his favorite posts of the year. (That is, if Mr. Kasem wrote and recorded his own songs.) The multi-part series is a not so subtle reminder of the great service Jason is doing for the supply management sector.

In the spirit of plagiarism being the finest form of flattery, I have elected to borrow Jason’s approach and showcase some of the better posts from contributors to Supply Excellence over the past year. Guest bloggers include a variety of sourcing managers, researchers, consultants, and industry luminaries. Their advice is well worth a second read:

• Counterpoint: In Defense of Reverse Auctions featuring Jessica Dunlop, e-Sourcing and Strategic Purchasing Manager at ITT.
• SupplyNow Podcast Features Supply Management All-Stars featuring Doug Smock, Robert Rudzki, and Stephen Rodgers, long-time procurement executives and market watchers and co-authors of On Demand Supply Management: World Class Strategies, Practices, and Technology.
• Making Sense of the ISM Index featuring Norbert Ore, Chair of ISM’s Manufacturing Business Survey Committee and Group Director of Strategic Sourcing and Procurement for Georgia Pacific Corporation.
• Why Outsourcing Fails featuring Tim Cummins, President and CEO of the International Association of Contract and Commercial Management (IACCM).
• Caveat Emptor: Economic Indicies Could be Misleading You featuring Charles Dominick, president and founder of Next Level Purchasing and author of the Purchasing Certification Blog.
• The Illusion of Six Sigma featuring Jeff Wincel, Principal at LSC Consulting Group and former leader of purchasing and supply chain management for Donnelly Corporation.

Earlier this year, I noted China’s plan to embrace sustainable business practices. A recent Wall Street Journal article shows signs that country leadership is making good on its green promise.

Under new anti-pollution rules, China’s Ministry of Commerce threatened to shut down polluters for a period of one to three years, depending upon the severity of the infraction. Now China’s State Environmental Protection Agency (SEPA) has gotten more stringent when evaluating the environmental impact of requests to build new manufacturing facilities.

According to the Journal article, in 2006, SEPA rejected 110 construction projects for steel mills, power plants, and other facilities that were submitted for its review due to potentially damaging environmental impact. Through October of this year, the agency has vetoed 187 project proposals, putting the nix on capital investments totaling about $91 billion. SEPA officials told the Journal that they are now rejecting nearly one-third of the projects that submit an environmental-impact assessment. “And most of the ones that clear the process do so only after making changes to satisfy SEPA’s demands.”

While the new moves may curb some of China’s near-term capacity, developing more environmentally sound factories and facilities will yield long-term benefits in the form of more sustainable capacity and growth.

We’ve all heard stories of procurement managers turning their hard-earned negotiation tactics on the Sears salesman to shave a few bucks off that new stainless fridge or flat panel LCD. But a new Web 2.0 service called Mint aims to bring spend management to the common man. (Hat-tip to Fast Company for turning me onto Mint.)
Yes, Jason, you did hear me use the term Spend Management; but in this case it’s apropos. Aimed at helping the under 35 set, Mint positions itself as a remedy to the personal credit crunch by delivering an idiot-proof solution for gaining visibility into and managing your finances.

Now I have made it a policy of not specifically referencing or evaluating technology solutions on Supply Excellence, but when I saw the chance to explain to my wife what it is we do, I had to jump at it.

Mint’s magic is a patent-pending auto-classification engine that matches your monthly credit card and banking transactions to a database of 14 million U.S. merchants. Apparently there are a host of other personal spend management services — with names like Geezeo and Wesabe – but they require users to classify their own data. And we supply types all know the pains and challenges in that task as well as keeping it frewsh over time.

The free service auto extracts data feeds from your bank and credit-card accounts. And displays your classified data in easy-to-use analysis tools that allow you to drill into further spend detail (see graphic). It’s basically spend analysis for the home.
(Click to enlarge image.)

I haven’t been bold enough to upload my own data just yet. (Still convincing the CFO of the house that it’s prudent.) However, Mint offers a host of other services, including online budgeting and controls, targeted content and in-context special offers from sponsors that should help even the average Joe or Jane keep their finances in order. (Or at least alert them to how big a debt hole they’re in.)

This post is by no means an official endorsement for Mint. If nothing else, it should help you better explain — or in this case demonstrate — a portion of what it is you do at your next holiday party. (”Okay, this is sort of like what I do, except I’m responsible for millions — or billions — of dollars, thousands or suppliers from all reaches of the world, and this spend data is tied up in dozens of disparate systems.”)

Yet, the self-service start up and ease-of-use of the service, coupled with the in-context expert intelligence should be a wakeup call to supply/spend management solution providers everywhere. There’s a new generation of smart, MySpace-toting-text-messaging-blog-reading finance and supply managers coming into leadership positions. They won’t accept old school, rigid application interfaces, churning out static data. They want easy-to-use, graphically oriented solutions with embedded analytics and expert intelligence. And they want to access this information and collaborate with their co-workers, trading partners, and information from anywhere and on any device.

Supply and spend management solution providers take heed. The future is coming fast.

For many companies, supplier diversity has been like New Year’s resolutions: we have the best intentions of doing them, but typically fail to as other initiatives get in the way.

Sure certain industries like Aerospace and Defense have been pushing diversity programs for decades, but their initial motivation was largely government mandates. Automakers and retailers initially jumped on the supplier diversity bandwagon as a way to demonstrate their commitment to their core customer segments.

However, along the way, companies ranging from Boeing to Toyota have found that supplier diversity can yield some significant benefits in the areas of innovation, supply security, and competition. The problem with supply management teams reluctant to jump on board sometimes lies with the perception of it working against broader objectives of cost cutting and consolidating supply bases.

In November’s Supply & Demand Chain Executive, Raj Sharma, founder, president and CEO of Censeo Consulting Group, wrote about on three drivers that strengthen the case for supplier diversity: demographic shifts in the U.S. population, the need for compliance with small business goals and alignment with broader supply management goals.

• Demographic Shift- changing demographics have lead to an increase in the number of minority-owned businesses. From 1997-2002, the number of woman-owned businesses increase 19.8 percent. Contrary to belief, Sharma explains that minority-owned businesses generally provide commoditized products and services with a large portion in the professional, scientific and technical fields. A diverse supply chain can become a great “selling” point to local and community leaders of various ethnic groups.
• Compliance with small business goals- government purchasing rose above $400B last year so small business compliance has become a necessity for companies serving the government or looking to enter the government market. Innovative programs that lead to compliance with government small business goals can become a source of competitive advantage and new business. The same goes for the increasing trend of Fortune 500 supplier diversity goals.
• Alignment with supply management objectives – small and diverse businesses typically have lower cost structures, Sharma explains. Larger companies often embrace small companies with large potential, investing in them to help them realize their full potential.

With a strong internal commitment to supplier diversity, Sharma concludes, successful companies are building a new type of competitive advantage that will enable them to more effectively leverage the value of a diverse supply base. Once again, your supply strategy has a direct impact on your company’s brand and competitive advantage in the marketplace. What are you waiting for?

In an interview with European Leaders in Procurement, Richard Nixon of KPMG (no relation to the former U.S. President) states that companies will “increasingly look to procurement to stave off the effects of recent volatility on stock exchanges throughout the world.”

In his ELP interview (registration required), Nixon said companies will adopt a more cautious approach to cash management, which would result in many becoming increasingly reliant on procurement to keep cost under control. He explains that this will place a unique set of pressures on those working in procurement.

“The stock market uncertainty is going to make companies think long and hard about how acquisitive they want to be. And businesses in the technology and manufacturing sectors are going to be looking towards procurement to deliver cost optimization.”

Such trends send a clear message to supply managers: your time has come. Use the current economic crisis to reinforce the strategic nature of supply management and demonstrate how you can not only help with near term cost reduction but also with long-term sustained competitive advantage.

Tis the season for inflation. That’s the song according to the 23rd annual PNC Christmas Price Index, which tracks the costs of the goods and services referenced in the holiday classic, The 12 Days of Christmas.

According to PNC Wealth Management, which compiles the Index, the cost for the 364 items referenced in the song — from a single partridge in a pear tree to 12 drummers drumming — is up 4% over last year. Those of you crazy enough to purchase these items would ring up a $78,100 tab — although I’m not sure how romantic eight maids a milking is to anyone outside Wisconsin.

While intended to be a humorous look at markets, the Christmas Index closely mirrors changes in the Consumer Price Index. Evidence of this linkage comes in fact that higher food costs have pushed up the year-over-year price for six geese a-laying from $300 to $360. The minimum wage for maids-a-milking rose from $41 to $47. (PNC expects additional increases for milkers in 2008 and 2009.) And gold prices are up a whopping 21.5% over last year.

Not all items were up in this year’s Index. All fowl prices remained static. (In fact, PNC said the price of swans has been cut in half since 1984.) The price of nine ladies dancing also held steady.

Those of you who think you could scrounge up discounts by buying these items over the Internet, think again. (Besides, I’m certain that some of these purchases are illegal across state lines.) PNC reports that “goods and services from the survey purchased on the Internet tend to be more expensive than those purchased in a more traditional transaction.” The culprit? You guess it. High shipping costs, which have only increased over the past year due to soaring oil and gasoline prices.

I’m certain that, faced with rising energy and commodity prices today, supply managers are finding news of inflation in the Christmas Index bittersweet. Yet many of you have been able to level out recent market fluctuations through a mix of creative negotiations, improved spend leverage, and demand management techniques. These approaches will put you ahead of the cost curve as we enter the New Year.

Last weekend, I supported a Toys-for-Tots drive at my alma mater, Boston College. The organizers needed extra hands this year to inspect toys made in China to ensure they weren’t tainted with lead or other hazardous substances.

With precautions like this, you’d expect that manufacturers and importers would be stepping up their diligence and auditing of Chinese suppliers. You’d be wrong.

A new study from Smart Cube found that 78% of supply chain executives at consumer product manufacturers feel no need to revisit their vendor selection and inspection procedures. Only 12% of study respondents saw the need for on-site inspections.

What?!? Mattel’s recent quality challenge should have taught us all a valuable lesson not only about the importance of strong supplier and quality controls but also about the importance of using demonstrable and documented supply management procedures to calm nervous customers and revitalize brand equity.

I’d like to think that every supply chain manager has thoroughly vetted each Chinese supplier with which they do business. I’d also like to think that they have formal procedures for quality and performance measurement. But industry research and my own experience suggest that this isn’t unilaterally the case.

Yet, study respondents said the recent spotlight on Chinese product quality will not slow plans to increase their sourcing from the region. Most respondents felt the recent quality glitches were isolated incidents rather than a widespread epidemic. And, while feeling that supply chain managers were responsible for their own fates when it comes to product quality, many respondents were hopeful that recent moves by the Chinese government to step up quality standards and supplier site inspections would help root out any remaining problems.

Considering the rising concern from parents, politicians, and consumer groups over the China quality issue, companies would be wise to demonstrate and document stepped up vetting and inspections of Chinese suppliers – even if such efforts are viewed as redundant. Heck, a smart buyer could probably figure out a way to have marketing fund the additional inspections. And for those of you that already have these procedures in place, be sure to document these efforts and share them with your finance and risk officers to demonstrate how you’re contributing more than cost reductions to the company.

As the brouhaha surrounding the reverse auction posts on these pages rages on, I thought I would add some fuel to the fire by sharing more early findings from the Center for Advance Purchasing Studies (CAPS) ongoing investigation into this area.

As noted here last week, CAPS is conducting a review of enterprise procurement technology strategies, including the use of reverse auctions. Early findings from the study indicate that reverse auctions are used for only a fraction of total spending.

Other interesting early findings from the CAPS investigation include:

• More than half of study participants have run an average of 110 awarded auctions.
• Average dollar value for these auctions totaled $2 million per auction.
• 32% of reverse auction awards were for direct materials or goods; 26% were for indirect goods; and 35% were for services.

The latter finding busts myths that reverse auctions are only applicable for commodity items and raw materials. Increasingly, e-sourcing users are applying reverse auctions to a wider range of service categories — from travel to consulting — for highly positive results.

For example, Sun Microsystems is applying reverse auctions — what the high-tech manufacturer calls “dynamic bidding” — to business services from temp labor to field service support to, believe it or not, IT outsourcing and procurement outsourcing services. Similarly, KLM Royal Dutch Airways runs a daily reverse auction to capitalize on changes in supply availability for hotel lodging.

The full CAPS report is not yet published. However, you can check out the raw data and run your own analysis here. The final report will be published to the CAPS Website, when available.

Tis the season for good cheer. Unless, of course, you’re discussing reverse auction technologies.

Last week’s post previewing early findings from the latest Center for Advanced Purchasing Studies (CAPS) investigation into reverse auction usage rekindled the ongoing debate of the value of such negotiation approaches.

Consider this comment from one supply manager: “I have conducted two reverse auctions. [In] both cases, sales people left the company shortly after. Prices dropped significantly as did the commissions of the sales people. [In] both cases, the replacements were not as good as prior and we were [faced with] additional work for them [because] we were not a key account anymore. If service is important, be very careful.”

While I concur with the contributor’s final bit of advice — “be very careful” — I strongly detract from his other comments making reverse auctions the scapegoat for poor supplier vetting and performance. And I’m not alone.

As indicated in previous exposes on the e-sourcing strategies of companies like Sun Microsystems, ITT Industries, and others, reverse auctions can actually improve the overall integrity and discipline of the e-sourcing process.
As Dave Nelson, former CPO of Honda, Delphi Automotive, and John Deere (and one of the godfathers of modern supply management), once said, ““Buyers do not like e-sourcing because it makes them do their work and it keeps them honest.”

Indeed, when manged properly, reverse auctions require buyers to clearly define their specifications, rules for engagement, and award criteria at the outset of the process. Suppliers benefit by having constant visibility into how competitive they are in the negotiation. Suppliers also benefit by understanding which levers to pull to increase the competitiveness of their bid — whether it be price, delivery time, quality, or some other factor. And, when managed with integrity, suppliers are willing to bid more aggressively for the business because they have assurances of how the business will be awarded.

Yet, the market transparency and competitiveness of reverse auctions does not relinquish buyers from doing their homework on suppliers. In fact, because of the agreement to award business based on certain criteria, supply managers must be even more diligent in their vetting of supplier capabilities. Kurt Doelling, Sun’s Vice President of Supplier Management, puts it best: “You have to have very high integrity in auctions. Sun only invites suppliers to its reverse auction events that are approved and that have a legitimate chance of winning the business.”

As with all attributes of business, companies that thoroughly vet suppliers, clearly state their requirements and rules of engagement, and follow through on the promised award strategy see tremendous benefits — in terms of cost, performance, and supplier relationships — from reverse auctions. Those that fail to manage auctions with such diligence and integrity experience less than satisfactory results.

Reverse auctions gained popularity during the halcyon buyer’s market days of the late 1990s. Today, e-sourcing is standard operating procedure for nearly all large companies, as well as many mid-size firms. And reverse auctions are becoming as common as Abercrombie and Fitch T-shirts in your local high school.

Yet, despite their growing, reverse auction technologies are still only applied to a small fraction of total spending. According to new research from the Center for Advanced Purchasing Studies (CAPS Research) the typical e-sourcing user applies reverse auctions to only 5.4% of total spending.

No, that is not a misprint. And the number is way off the one-third of total spending previous CAPS said could benefit from reverse auctions. My own experience suggests that some of the low penetration of reverse auctions can be attributed to the following factors:

• Supply market dynamics: earlier studies into reverse auction use were conducted during a time when supply market dynamics favored buyers and the use of reverse auctions. The rising energy prices and tightening commodity markets in today’s global economy are less conducive to reverse auctions.
• User demographics: earlier studies were also conducted during a time when reverse auctioneers were predominantly early adopters at larger U.S-based enterprises – a segment that has larger spend leverage and is generally more aggressive in its negotiation approaches. The growing number of mid-market, European, and Asia-Pac companies adopting reverse auctions skewed the overall bell curve. On the whole, these companies are less aggressive in their application of reverse auctions and less mature in their reverse auction approaches.
• e-sourcing approaches: most of the early market hype surround e-sourcing focused on the market clearing benefits of reverse auctions. So much so, that many companies – particularly those in Europe and Asia — continue to erroneously equate e-sourcing and reverse auctions as synonymous. They are not. Reverse auctions are merely one negotiation approach within the typical e-sourcing solution. In fact, other online negotiation approaches – such as e-RFx or sealed bid – are used far more often than reverse auctions. (A fact that is growing due to tighter supply markets.)

Unfortunately these factors only partially contribute to the low penetration of reverse auctions. The greater culprit is that we haven’t really come all that far as a supply management discipline.

Sure, nearly all e-sourcing users report amazing savings for the spend they’ve sourced online. And certain companies like Sun Microsystems are applying e-sourcing techniques to most of their spending. But the harsh reality is that most companies have had a hard time expanding and sustaining their e-sourcing results.

Evidence a recent Aberdeen Group report (registration required) which found that even the “Best-in-Class” companies were only applying e-sourcing to about a third of total spend. And in my own personal experience, a week doesn’t go by that I don’t hear of a company requesting help in expanding their e-sourcing program to more spending.

Some tips for overcoming e-sourcing mediocrity:

• Reorganize e-sourcing operations into a hybrid center-led structure in which field sourcing and commodity managers can specify requirements, initiate sourcing projects, and even run basic e-RFx and reverse auction events. But all complex e-sourcing projects – such as those with multi-line-items or cost structures – are managed by highly trained e-sourcing experts in a shared center of excellence.
• Alter your negotiation approach, trying alternative lot structures, bundles, or negotiation types to encourage more aggressive bidding and alternative offers from suppliers.
• Lower the dollar volume thresholds required for e-sourcing – i.e., if you only require e-sourcing be used for spend volumes over $1 million, try lowering that threshold to $500,000 or even less.
• Recruit an executive champion, such as a functional head – CFO, CIO, etc. – or business unit executive to help evangelize how e-sourcing has improved the cost structure, performance, quality, and productivity of their organization.
• Market your successes by issuing deal sheets – pre- and post projects – that clearly communicate your e-sourcing approach and results. Piggyback on existing company communiqués, such as internal newsletters or intranet, to deliver your message.
• Tap market and sourcing expertise either within other functions (e.g., IT, marketing, or advertising personnel) or outside your company (such as the category and sourcing support from your e-sourcing provider) for assistance in attacking new categories or applying new techniques.

Use the comments section below to post your own recommendations and tactics for expanding and sustaining e-sourcing success.