TweetIn the last 12 months or so there has been a number of natural events that have had unpredicted consequences to business. There was the Volcano that grounded Europe and created significant disruption to some global supply chains.  There was (and still is) unrest in northern Africa that made many business question the safety of their assumptions when selecting locations for low cost country outsourced operations and there was the tragic earthquake and tsunami in Japan with it enormous human cost and the lingering consequences to any business reliant on Japanese industry.

Procurement and sourcing organizations play a vital role in helping to mitigate and manage the risks inherent in operating in a fragile global economy. Risk management is regrettably under valued sometimes but these events should have brought into crisp focus the necessity of ensuring that backup strategies are in places – not just for the routing, mundane and predictable events but also for the unthinkable. And this is why it’s so shocking to have seen the massive disruption cause by Amazon cloud crash this week. continue reading…

TweetWhat gets measured gets managed. It’s a slightly tired truism but it’s very relevant to Purchase to Pay and, sadly, often overlooked.

Most P2P (Purchase to Pay) projects are justified as a means to reduce cost. They introduce efficient processes that allows  purchasing payment and accounting functions to operate with fewer people. They create more responsive and agile purchasing environments and utilize leading edge technology to create synergy with suppliers. It is relatively rare that  P2P program is initiated in order to increase visibility of spend and deliver spend analysis capability. On the contrary, it is lack of visibility of spend that make the business case for P2P difficult to develop. If you don’t know how much you spend, with whom or how often you buy stuff, this makes it difficult to quantify the benefits of implementing P2P – and it’s a difficult sell to suggest that you need P2P in order to create the visibility you need to understand the benefits. It requires a leap of faith for a CFO to buy in to this type of justification.

Spend Analysis

Visibility, and the tools to understand what you see and interpret it, is crucial and with the prospect of a double dip recession, there is no time for complacency. A business will not exceed if it doesn’t know it’s competition. It won’t succeed if it doesn’t understand the changing needs of its customers. It won’t succeed if it doesn’t know how much capital it requires and it certainly won’t succeed if it doesn’t know how much it spends, with whom – and if it fails to understand, manage and mitigate the supplier risks in a recessionary and liquidity constrained stage of the economic cycle, it might as well give up now.

In a recent post by Jason Busch in Spend Matters he puts it very succinctly:

Make sure your spend analysis and P2P (including invoice automation) capabilities are fully in place and ramped up as soon as possible. If you don’t have visibility (both historic and forecast) into what you’re spending and who you’re doing business with, it’s not only impossible to act nimbly and take action when it comes to identifying at-risk suppliers, it’s also challenging to develop accurate forecasts into your current and future payment obligations — which directly impacts broader margin, EPS and financial forecasts

TweetThe supply chain world is changing. The disruption in Europe recently caused by the grounding of aircraft as a result of the volcano in Iceland; the soaring labor costs in Asia and the far East; the green and ethical agenda that has taken hold in much of the developed world. Doesn’t it tell you something?

The New York Times published an insightful article on the impact of rising labor costs in China on Apple’s supply chain and the iPhone in particular. In response to cost increases Foxconn Technology is reported to be moving hundreds of thousands of workers away from this country’s dominant electronics manufacturing center in Shenzhen toward lower-cost regions far west of here, even deep in China’s mountainous interior. It was Foxconn who, in response to complaints about working conditions that had driven some employees to suicide, increased pay by 20% (The Guardian). It begs the question, how sustainable is the global sourcing model? At what point will consumers say “No” to Apple – even for the sexiest gadget on the planet. When will the cost of risk mitigation tip the balance towards local supplies. And when will there be another Eyjafjallajökull?

Changes in consumer demand, cost and supply chain models that are becoming non-viable and supply risks inherent in globally dispersed supply chains means that it’s time for sourcing to change its mind set: “Think Global. Act Local”

TweetAs the mass grounding of aircraft across most of Europe is about to enter its 5th day, the consequences to business of the major eruption of the volcano Eyjafjallajoekull in Iceland are just beginning to be contemplated.

The priority thus far has been to get stranded European passengers home. For some, it’s been a welcome extension to a holiday, for others a travel nightmare without precedent. But now the focus is moving to the economic consequences of the disruption to supply chains and the possible consequences of further disruption. Buyers and sourcing and supply chain managers across Europe are likely to be burning the midnight oil in the coming weeks trying to ensure that supply disruption is kept to a minimum.

The first consequence is likely to be a shortage of some fresh fruit and vegetables imported from outside Europe. Christopher Snelling, head of global supply chain policy for the Freight Transport Association, has been quoted as predicting shortages if the grounding continues. “There are no shortages yet, but we may start to see certain ranges affected if this carries on”

Global sourcing, low cost country sourcing as well as global labor arbitrage, all of which have been part of the sustained economic growth of the developed world over the last 20 years, all depend on reliable means of global transport. What the events of the last week has taught us is that local contingencies and risk management and mitigation in respect of global sourcing is crucial.

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Here’s an illustrative, real example of a bank that spent in excess of $250 million per annum on contingency labor. With that spending power, they were able to get margins down to levels that the supplier was barely able to operate with. The CPO was a hero of course, delivering massive saving s to the bank. But there were three areas that were neglected. Compliance; Purchase to Pay Processes (P2P) and risk management.

First, the compliance problem. There was $250 million spent on contingency labour and the deal struck with the single preferred supplier worked because of scale. But although the supplier was the only preferred supplier, compliance wasn’t enforced so that nearly half of the spend leaked to other suppliers on bigger margins and for the single preferred supplier, they weren’t even breaking even. No cosy savings delivered and huge risks introduced through non compliance.

Secondly, Purchase to Pay. P2P is all about recognizing that professional purchasing doesn’t stop at the signature on a contract. It’s about making sure that everything is in place to ensure that the commercial befits are actually delivered and that means that the contract runs properly, including that the supplier gets paid. Managing $250 million of invoices is non trivial and when you have a contract that is balanced on a profitability knife edge, there is no room for late payment.

Thirdly, risk management. The supplier was put through the risk management gauntlet, checking profitability and financial strength and reputation but formal risk management was not completed and no contingency or risk management plan was put in place in the event that the supplier went bust.

So what happened, The contract lasted 6 months. The supplier was losing money and could not tolerate the risk of continuing. For the bank, they were faced with the task of switching $250K worth of contingent labor in a timescale of 3 months. Want that job anyone?

The lessons are obvious. Take P2P compliance seriously and recognize vendor risk management as a key spend management tool. Ensure that the correct purchase to pay processes are in place so that contractual commitments can be fulfilled.

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It’s quite alarming how many large and even very large organisations that, despite performing adequate or even thorough risk assessments of their vendors at the outset of a contract, do not carry out on-going risk assessments of their supplier base. It is all too often seen as just another job that needs to be done that distracts from the day job and lip service only is paid to risk assessment in many cases.

But at a time when the economy is fragile this is a high risk approach. At a time when smaller suppliers are conducting risk assessments on their larger customers, it’s not a time to sit idly back and hope for the best. (To quote one supplier to a large bank in 2008: “We don’t worry too much about late payment – after all, they’re a bank. We know we’ll get paid eventually” – not a sentiment you’d hear expressed in 2010). In some industries like the banking industry – increased profile of corporate compliance is an increasingly important driver. The use of the old boy network to source big ticket professional services contracts is questionable to say the least and would be seen as totally unacceptable by some of the new government shareholders in the financial services industry. A highly visible approach to compliance is required – including to detailed risk assessments before and after contracts are signed.

Risk-based classification of supplier relationships [An article from: Journal of Purchasing and Supply Management]