December 12th, 2013
American Airlines and US Airways merged on December 9, 2013 to create the world’s largest Airline. That’s probably bad news for travel procurement.
Over the last year, eight major airlines have consolidated into four airlines. These four now control 90% of the market. Fares have been going up and the airlines don’t seem to be aggressively fighting over regional market share.
This is especially true as airlines are obtaining strong revenue growth from additional fees, right –sized capacity, and moderate US economic growth.
That doesn’t mean one can’t negotiate excellent rates and discounts for larger entities. It just means there is less competition. One will have to check regional competition very closely.
To learn more about methods to obtain better rates from airlines, hotels, and rental agencies contact K2 Sourcing via email at email@example.com
December 12th, 2013
A few years ago, the eSourcing team was reviewing top moving items and categories to identify best candidates for an ongoing series of reverse auction negotiations. One of the items that had a very large sales figure across the company was a gallon of milk. It was no surprise that milk was a high volume item. It is a common reason people come into a store. The retail price needs to be attractive enough to have the customer stop in. This made it difficult to raise prices. The surprising thing was that the cost figures and retail figures were virtually the same!
Having heard the old bad joke about “making up the loss with volume”, the retailer decided to look into the opportunity with the category manager. Since this was an item purchased locally by market, there were multiple dairies, costs and negotiations involved.
In most states the local milk board boards establish a milk order, a set of regulations governing the pricing of the milk for a specific marketing area. A marketing area specified in a marketing order is intended to include all of a geographic area where the same milk handlers compete for sales. A marketing order sets minimum prices to be paid for milk and establishes rules to determine which handlers are regulated and whose milk is priced and in what way. It does not set resale prices for dairy products. These minimum prices vary over time making it difficult to agree on prices for dairy products including our gallon of milk. We needed a new approach.
The new approach developed with the category manager in charge of local purchases for items like milk, was to identify all the dairies by marketing area, and to hold an events for one year’s dairy purchases. The entire set of dairy products were included in the bid as it is most efficient to obtain not only the gallons of milk, but the full section from one supplier by marketing area.
The key new element was that amount bid was the amount over the minimum set by the milk order. Over the period of the contract, if a regulation was changed, the price the retailer paid also changed by that amount. This method is also known as an “indexed cost method”.
This approach greatly raised the level of competition. As it was online bidding, the various dairies bidding could see what place they were in and if they were not in 1st place, that there were other dairies offering better prices. The retailer applied the success across many markets and lowered costs considerably thereby improving gross margin.
The index method works well for reverse auctions across many spend categories. Learn more about items for resale that can be indexed by contacting the author Dan Carlson. Email firstname.lastname@example.org.
December 12th, 2013
With the redesign of the K2 Sourcing process for multi-attribute decision making, I have been studying bias in decision making. After all, the idea of using pre-defined formulas to weight decision making is to reduce decision making bias during supplier evaluation and award.
One bias that is difficult to overcome Cognitive Bias. Let’s review what and how Cognitive Biasimpacts decision making, and then look at methods to minimize the issue.
Cognitive biases is the tendency to make decisions and take action based on limited acquisition and/or processing of information or on self-interest, overconfidence, or attachment to past experience. In procurement, that means if you don’t know what questions to ask or rely too much on past information to properly define your constituents need(s), there is a greater risk of an undesired decision outcome.
Anecdotally, I have witnessed Cognitive bias manifest itself in Requests for Proposals (RFPs) many times. In common software reviews, I have seen RFP’s that list just about every conceivable feature and function that could be utilized. Vendors are rated on how well they meet the function checklist.
Ask yourself this, what percentage of Excel’s features and functions do you really use? Just click on Formulas. The bias is to say we aren’t sure what we need now and want to be safe in the future, so let’s choose something that can do it all. That bias can lead directly to a higher cost and harder to implement solution – an undesired outcome.
The more common factor in Cognitive bias is simply to miss defining critical requirements because the right questions aren’t asked or incorrect assumptions are made. How does one minimize the impact of cognitive bias?
1) Cross functional teams create larger pools of knowledge
2) Create a more general RFI to learn from suppliers
3) Post queries on sites like Linkedin
4) Utilize research firms like Gantner, Aberdeen, Forrester, etc.
5) Read books, journal articles, and blog posts (you can find lots of tips in K2 Sourcing’s One Page Procurement!)
6) Network with other professionals
7) Hire a consultant or specialist
My favorite solution is my personal network. Here’s why. The other day I was asked about auctioning bagged deer corn. K2 Sourcing follows a lot of markets but dear corn isn’t one of them. I could have called suppliers, read articles online, bought research, etc. It took two minutes to write an email to my friend at a Kaytee who studies corn every day.
Thirty minutes later and I have market knowledge, basic benchmark cost models, and am armed with critical questions to ask. Basically my network played the role of a consultant. The only cost is I owe him a favor. Gaining an accent he said, “At some point I am going to call and ask for a favor.” Alright, I admit that didn’t happen. He was happy to share, but I do absolutely owe him a favor. To summarize there are several ways to reduce the risk of cognitive bias . The fastest way is to do your homework or find someone who has already done it for you.
If you want to learn more about reducing bias in supplier evaluations contact Matt Miller by emailing email@example.com.
December 12th, 2013
How does one transition from a poor performing supplier?
As fast as possible!
October 21st, 2013
What do you call a fertilizer buyer? A poo-curement expert.
August 27th, 2013
Plexxus Hospital Operations Sourcing Team took a new approach towards driving down costs for Member Hospitals by having proponents in the Nursing Staffing Services RFP– on behalf of University Health Network and Mount Sinai Hospital — participate in a live reverse auction, a first in healthcare in Ontario.
Six proponents who obtained the minimum score in the RFP evaluation process were shortlisted and invited to participate in a reverse auction, where they would submit decreasing bids on their hourly rates.
The Plexxus Hospital Operations Sourcing team was tasked with solutioning a tool to facilitate the live auction, which would take place online. After an involved process including research and product demos, K2 Sourcing Inc., was engaged to be the service provider for the tools required to facilitate the auction.
The auction was scheduled for 30 minutes with 5 minute extensions in the case of a last-minute bid. In total, the auction lasted 50 minutes, with four suppliers submitting 30 counter offers resulting in significant savings over the five-year agreement.
Final price submissions as a result of the auction for the four participants ended with less than a 3% spread, confirming that a market value was established. A market value allows for qualitative factors to have a larger impact on the final decision, thereby helping to ensure that the most competent supplier is selected at the best price.
Because of the successful outcome of this event, this technique may become more widely used by Plexxus as a sourcing strategy.
Additional details can be found at: http://www.plexxus.ca/annual-reporting.html
K2 Sourcing has helped many organizations reduce the cost of contingent labor and over 200 other spend categories using a combination of eRFP, and where fitting, reverse auction technology combined with the best service in eProcurement.
For more information about K2 sourcing or to set up a demonstration please contact K2 Sourcing at 1-877-824-9809
August 5th, 2013
Many CFOs and CEOs believe there is a gap between what the procurement organization is reporting as cost savings and the reality shown in the P&L. The difficulty is primarily due to poorly agreed upon definition of cost savings by many organizations, a lack of sophisticated reporting tools, and appropriate checks and balances. In the 1st installment of this multipart commentary, K2 Sourcing will provide an overview of a few different methods organizations utilize to measure cost savings.
Most organizations start with purchase price variance (PPV). This is the difference between the standard cost and the purchase price. Another way to define standard cost is to say it is the baseline to compare offers to. In an upcoming post, will examine the nuances of establishing standard costs and baselines. PPV is a good starting place because it captures a large percentage of an organization’s expenditures. However, PPV typically ignores expense items, and measured alone PPV can overweight price in decision-making.
As organizations improve their cost savings metrics, they typically add methods to review total cost. The most common categories K2 Sourcing observed included freight, duties, return allowances, co-op marketing, and rebates. These organizations have also established methodologies to measure savings on indirect categories.
The factors mentioned so far impact organization profitability, but they don’t take into cash driven goals like inventory reduction and improved payment terms. Some organizations have turned to a cost of capital calculation which converts interest on cash to show the impact on profitability and return on investment. Right now with low interest rates many organizations are using a hurdle rate for interest. We will discuss more about the math behind cost of capital based total cost models in a future installment.
We have also observed organizations including less tangible factors like engineering support, vendor managed inventory, monthly invoices, online catalogs, general responsiveness scores, risk and other probabilities, etc. One organization had an interesting method of utilizing market indexes to provide credit for cost savings. If the index increased, thereby showing unfavorable PPV, if the buyers could show their costs increased less than the increase in the index, they were given credit for cost savings.
Many organizations measure only PPV because it’s easy. As we move into more complex total cost models with additional rules, it typically takes organizations more labor to calculate savings, and usually requires manual intervention. Unfortunately, measuring only PPV holds procurement back. People work on what they get credit for.
After benchmarking several hundred organizations, K2 Sourcing observed procurement departments with great credibility had one thing in common. Cost savings were clearly defined and the numbers were regularly reviewed and signed off by the CFO or appointed accounting team member.
If there is one thing to take away from this article, it is to have a conversation with the CFO or Finance Director about the definition of cost savings. Determine where your current state and which model makes sense for the future. In future installments, K2 Sourcing will discuss establishing baselines the organization buys into (pun intended), and the variables and the math for various cost of capital based total cost models. If you want to know more now and discuss your organization, please don’t hesitate to give us a call (talking is free).
Let’s expand procurement’s impact together!
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March 22nd, 2013
K2 Sourcing has helped organizations bid over $150,000,000 in indirect consumable expenditures. We have learned a great deal on the way and will share some of that with you here. Before we talk about the seven components, let’s take a minute to define consumables and what we like and what is challenging about these categories.
Consumable expenses are those categories of purchased goods that are usually expensed (not inventoried), and that are used to support the general operations of the organization. Common categories include; office supplies, IT products, MRO, safety supplies, janitorial supplies, production supplies, distribution supplies, etc. There are many sub-categories.
What we like about these categories is they offer a medium to high savings opportunity with typically very low risk. What we find challenging is the high labor to execute, the typically poor specifications, and brand preferences. Despite the challenges, we find companies we work with typically save 15% to 35%. Here are seven components needed to create a successful project.
- Manufacturing part numbers. Many organizations buy private label or distributed products with item numbers that are difficult to link to a good product description.
- Historical purchase volumes. As expense items for many organizations it is difficult to gather purchase history and sub-categorize items.
- Tail-end spend. Indirect consumables usually are high mix low volume with many one-off purchases. Breakout contract vs. discount or cost plus items.
- Standardize. Combine the low volume purchases into higher volume purchases. Use a weighted average to later calculate savings.
- Unit of measure. A case is not a case and a bottle is not a bottle. Drive to lowest common use denominators.
- Substitute items. Allowing generics, private label, and other brands increases competition. The additional savings is worth the extra work needed to complete due diligence.
- Audit. Contract compliance within organizations can be difficult. Take advantage of web based technology suppliers offer wherever and whenever possible.
The seven components above are suggested to help get you the most out of specifically indirect consumables bids. As in any request for quote or reverse auction, a great deal of additional information needs to be defined. Please contact K2 Sourcing or ask us questions about your indirect commodities by commenting.
January 29th, 2013
For anyone procuring IT Hardware, internal customer satisfaction ranks as one of the main concerns. The article, “45,000 PCWorld readers name the brands they love (and love to hate)” (February 2013, Christopher Null) in PC World provides consumer feedback across a desktops, laptops, smartphones, tablets, and printers.
I liked the article, but didn’t get a clear feel for the number of respondents. If 45,000 people responded, the information should be statistically valid, and a good source of information. I asked the author for clarification and, provided a response is given, I will post an update.
Getting back to procurement, while customer satisfaction ranks high in importance, purchase price and ongoing costs should also be primary drivers. K2 Sourcing has helped fortune 500, large government institutions, and small business entities procure IT hardware. The projects that were most successful did NOT specify a particular brand or model number, they specified performance characteristic such as screen size, processor, memory, etc.
Of course, there is a whole lot more to IT Hardware procurement than satisfaction and cost, but it’s a good place to start when thinking about an IT Hardware Procurement RFP.
January 23rd, 2013
One corrugated box says to another box, “I just got sold at a 20% discount! What do you think of that?” The second box thinks, “Wow!!!! A talking box!”
December 14th, 2012
As a child, I remember standing on the side of the dusty road seeing the bright sun glinting off the chrome. The ground vibrating as the king of the road, the 18 wheeler, charged down the highway. Using children’s sign language my half bent arm moving up and down like a piston, my heart raced as I compelled the driver to answer my pleas. Then like a thousand trumpets playing a single perfect note the air horn heralded the king passing by.
Is this vision from the past, shared by so many children, doomed to extinction?
Google’s self driving car, enabled by GPS technology and on board computers, has now driven over 300,000 miles without incident. Nevada and California have already passed “Autonomous Vehicle Bills” into law, and Google’s Brin expects self-driving cars to be on the road in five years and drivers licenses to be obsolete by 2040.1
It is not difficult to see the impact on the trucking industry. In the US, driver shortages are common, stricter hours of driving regulations have been implemented, and fuel costs are ever increasing. Imagine a line of 50 trucks drafting down the highway a few feet from each other bumpers accident free – shaving 20% off fuel costs. Without the need for 3 manpower shifts, the asset can run round the clock shortening delivery cycles and further reducing costs. As automation impacted the factory, so will autonomous vehicles impact trucking.
As a procurement professional, I always want to select the best suppliers. In upcoming contract reviews and reverse auctions, it’s time to start asking shippers about their plans for autonomous vehicles. Those with plans to invest in the technology will provide lower costs, faster delivery times, and it almost hurts to say it, lower accident rates.
Let’s just hope the industry programs motion recognition for the kid standing on the side of the road.
1. CNN Tech, Self-Driving Cars now Legal in California, October 30, 2012 Heather Kelly
November 6th, 2012
CAPS Research provides a summary about the CPO role in the report “Snapshot of the CPO Role Shows Significant Change.”
- Increasingly CPO titles include VP or Executive VP.
- This suggests growth in the profession.
- 60% are hired from within the company.
- CPO’s average 27 years of experience with 14 years in supply chain.
- Highly educated – 43% undergraduate and 53% masters.
- The average salary according to the 2012 Survey guide is $291,000. (1) 2012 Survey guide is $291,000. (1)
The full report, “Snapshot of the CPO Role Shows Significant Change,” can be found at www.capsresearch.org.
1. Source ISM 2012 Salary Survey. http://www.ism.ws/files/Tools/2012ISMSalarySurveyBrief.pdf. You may want to compare that figure against other impartial surveys as I have heard people tend to over-inflate salaries in self surveys. I haven’t done the research. That is based an opinion of a friend in the industry.
October 6th, 2012
You have probably heard plenty about the “Euro Crisis.” However, there does not appear to be articles relating to the tremendous impact such a change would mean to global sourcing and procurement professionals. This article quickly examines how such professionals and organizations should prepare for such a split.
Roger Bootle, Winner of the Wolfson Economics Prize, argues why and how the Euro should split. The split is called bifurcation, and Bootle argues it is a necessary. The basic argument is that Portugal, Italy, Ireland, Greece, and Spain, are unable to compete globally under the Euro.
What would happen if the Euro splits? Let’s be clear. The Euro would not cease to be a currency. Rather, less competitive countries would split from the Euro. The result is massive immediate changes in exchange rates that for most would generate significant declines in purchase price variance (PPV).
As per the New York Times, Say Greece exits the Euro. The Euro valuation would immediately increase creating an unfavorable exchange for organizations buying goods from Germany, Netherland, Austria, France, etc.
Further, say all five of the underwater countries split. The Euro currency will significantly strengthen as it sheds debt. At the time of this writing, I could not find research predicting the amount of such a change. Based on a very simple look at historical figures, before the debt talk, I would suspect it could be a 10% swing or better. Mind you at that time when the Euro was stronger the debt was present the world was just not speaking much about it.
On the other hand, the new currencies would be valued significantly lower than the current valuation under the Euro. This would result in large favorable variances. However, most organization have already moved purchases away from these countries. On a macro scale, the favorable variance will not offset the unfavorable. However, Bootle suggests the needed devaluation change would be 25-55%. For long term sourcing plans, these countries may become attractive.
The unfavorable PPV is of course a generalization, and will not hold true in all circumstances. As some wise person said, “prepare for the worst and expect the best.” You might want to quantify your purchases on a regional basis to determine the risk of a Euro split on your organization, and plan your savings funnel and objectives accordingly.
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For Additional Research:
This article in Fortune, “The Euro Break Up,” offers a good summary. Bootle provides detail at
www.telegraph.co.uk/finance/comment/rogerbootle/. Will Greece be first? Read more at
the New York times, “US Companies Prepare in Case Greece Exits Euro.“
August 30th, 2012
Popular Science predicts carbon fiber as one of the major changes that will reshape the cars (Future of Cars, September 2012). 5 times stronger than steel while weighing in at two thirds the weight carbon fiber reinforced plastic (CRFP) has been used for years in race cars. Increasingly efficient manufacturing is bringing the cost down. Costs have decreased far enough that BMW expects to manufacture over 1 million parts by the end of next year. BMW predicts the cost will be on target with Aluminum extrusion. BMW further predicts CRFP will be used in normal passenger cars as well and will help drive the electric car movement.
Along with construction, the auto industry is one of the largest consumer of steel. How could a lighter weight stronger material impact building? Thinking of transport requiring ever stricter requirements and facing rising fuel prices, CRFP seems like it could be a good alternative. The more I think about the more applications I see CRFP as being a game changer.
What does this mean to procurement professionals? First it means sourcing will need to understand how it might impact there organization so we can prepare accordingly. Secondly sourcing will need to understand the market and potential suppliers so as to guide engineering and other areas of the organization to form good partnerships. Thirdly, sourcing should understand the impact to current markets-especially steel.
In the short term, it is unlikely to have an impact on steel price. However, CRFP appears to be one of those disruptive technologies that could reshape markets over the long-term. As a substitute product for steel, it is essentially creating additional supply which is one factor that will pressure price lower. If you are a strategic sourcing professional and your company purchases steel, CRFP is one of the longer term trends you will want to keep on your radar – it is certainly on ours. Come back to our blog to see updates from time to time.
July 4th, 2012
One of the big up and coming jobs is data mining. It is interesting how quickly one can find opportunities simply by taking the time to review organization data. Recently I had one such experience, when reviewing an organization’s spend and procurement process.
Like most organizations some spend was managed with minimal procurement support. Plant managers created the purchase forecast, received three quote from suppliers, then submitted a requisition to purchasing to cut the actual order.
Upon review of the req’s I noticed that though certain reqs were for slightly different products (categorized as different commodity codes), the three quote requests from one plant manager involved the same 3 suppliers each time. Combining the expenditure would provide leverage and should lead to lower costs. Lesson 1: commodity codes can be misleading and get to granular. Always look for leverage within and across plants.
The next thing I noticed was that all of the categories received a maximum of three quotes. Some of these classes of goods represented a pretty significant spend for the organization. In doing a quick search of our supplier database there were over 10 other local suppliers that appeared to have the capability to provide the product. Lesson 2: if a policy is set (in this case a minimum of 3 quotes) then expect to get three quotes.
Lesson 3 is a bit about structure. Use your best negotiators whose performance is tied to excellence in procurement to procure goods and services. It sounds simple but most organizations allow a significant amount of spend to flow through department experts (Marketing, HR, IT) that may be following a policy and may not have any formal training or real procurement experience. Additionally the procurement process may be viewed as another task that is really outside of the goals of their job.
Whether one looks at organization structure or process, data provides the supporting facts. That is why best in class organization use KPI’s like Spend Under Procurement Management and staff appropriately internally or through the use of a shared procurement service company like K2 Sourcing. The more spend managed by the experts in the procurement process the more likely the organization will have be competitive in the global marketplace.
June 4th, 2012
Sourcing Manager sensitivity classes suggest that, when a supplier’s sales manager requests a price increase, a nice way to decline is to follow these 3 steps:
1. Share a copy the article “How to Break Bad News to Your Boss.”
2. Give them a hug and let them know everything will be OK.
3. Take them to lunch and reminisce about the great service they used to provide.
In place of these three humorous steps, you might consider using the 8 Steps to Avoid Price Increases that really work.
June 4th, 2012
At the end of the year when looking at overall cost-savings, little gets in the way of the goal more than cost increases. Think of it this way. If the cost reduction goal is 3% and inflation is expected to be 3%, if the expected increases cannot be avoided the market adjusted cost reduction goal is actually 6%.
Here are 8 methods to at least delay, and likely stave off, price increases.
Ask all suppliers to sign an agreement that price increases must be provided in writing at least 90 days in advance.
All contracts should include an escape clauses for increases.
Create an internal company policy that price increases must be signed off by higher level managers in accordance with the level of increase.
Require meetings with the supplier providing detailed market data and cost breakdowns to justify the increase.
Negotiate – do your home work looking for data that does not support an increase.
Request a detailed report showing internal actions and suggesting methods to offset the increases with product and or service level changes.
Let supplier know the increase will trigger the need for you to perform a full market review justifying the increase, and the increase cannot be accepted without this data.
Consider running a reverse auction. K2 Sourcing can share many stories of requested increases that turned into substantial decreases using reverse auctions on everything from office supplies to direct materials.
The process above will many times derail price increases not fully supported by a demand driven or base cost driven issue. Even in these instances where the increase might be justified the tactics will delay price increase by a minimum of 3 months and normally much longer.
Some of these tactics may be viewed as fairly aggressive means to combat increases. When using such methods, one should take into account the power between the buyer and seller and the risk of supply disruption to your organization.
However, especially in markets pressured by inflation, managing increases effectively makes hitting the reduction goal much more likely.
May 21st, 2012
I recently visited a supplier’s plant. It needed water.
May 17th, 2012
K2 Sourcing hosted a Reverse Auction for a Fortune 100 technology related company that netted its client a savings of over 48% on Promotional Items.
Over a period of 44 minutes, 65 bid iterations were exchanged among 9 different suppliers. The suppliers involved had previously been pre-qualified to participate by the client. Duplicating this level of activity using traditional negotiation methods would take several weeks or more.
Of particular interest, was the use of negotiating improved rebate percentages during the reverse auction. Marketing organizations might be unsure of the future mix and amount of purchase dollars. The combined strategy of negotiating rebates with a sample of common items provided the flexibility needed to optimize results and manage the unknown.
This event is an example of K2 Sourcing’s reverse auction managed service. As part of the managed event service, from the start of the project, K2 Sourcing worked very closely with its clients to understand the requirements and desired results. Utilizing the requirements, K2 Sourcing designs an auction that will yield the best results. K2 Sourcing additionally provides the hosted auction software, set-up of the system, training of the suppliers, dedicated support during the event, and generates detailed post-auction analysis.
For additional case studies and tips, join K2 Sourcing on Facebook and Twitter.
May 7th, 2012
Using averages when planning is like the statistician who drowned crossing a river. The average depth of the river is 3 feet. Though 3 feet in the shallows near the shore, it’s twelve feet deep in the middle. The original story is adapted from The Flaw of Averages: Why We Underestimate Risk in the Face of Uncertainty. Dr. Sam Savage 2012. Get more tips and procurement humor by joining K2 Sourcing on Facebook and Twitter.