Archive for November, 2010

When should you run a reverse auction? How much margin is enough?

Tuesday, November 30th, 2010

A lot of privately owned companies are happy to grow a little every year, add employees, make payroll, have happy associates and put a little money in the bank. It is only when a company decides to be a public company or use a Venture Capital Company that this philosophy becomes a problem.

This author could go on and on relative to the subject of realistic earnings; which continues to piss me off. However the title of this blog is much simpler. The answer is how much margin  you want to target and how much should your supplier be allowed to make when selling products to your company.

A simple suggestion is if your company margin is plus or minus 5% of the industry norm you probably can afford to look at a number of categories as good candidates for a reverse auction. The technology area is one that often offers a pretty good opportunity for cost improvement which means increasing your margin and reducing what the manufacturers is making. A site that can help you with this in the technology area is isuppli.com which provides market intelligence for the technology space. In a recent review of technology gadgets in Men’s Health magazine isuppli lists a number of products such as Apple IPOD’S and Blackberry Torch whose margins are above 60%. This is based on materials plus production costs and the current retail price.

If you want to come up with a list of good items to take to reverse auction, look at your company’s gross margin and the margins of your suppliers by product and a pretty good list will reveal itself.

We look forward to and appreciate your comments.

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What steps are required to launch a successful e-negotiation program?

Monday, November 29th, 2010

As you might imagine, each of the steps I offer below can easily be expanded to include a great deal of detail. However, since the question came from a senior executive who was really looking for an elevator ride type of answer I offer the following as a simple guideline.

1. Select customer & provider project leads
2. Conduct detailed category discoveries
3. Rank categories and findings by category
4. Develop a and prioritize a category strategy
5. Select lead category items
6. Conduct supplier discovery & research
7. Select suppliers
8. Train suppliers
9. Conduct online e-negotiation
10. Deliver online e-negotiation reports
11. Analyze e-negotiation results
12. Request samples if necessary
13. Award Business
14. Sign contract and begin delivery
15. Report ROI.

We know these steps return results quickly.

We look forward to and appreciate your comments.

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S.510 Food Safety. The government will screw this up too.

Wednesday, November 24th, 2010

Last we the U.S. Senate invoked cloture (what the hell is that and why not just say closure) to move forward with debate on S. 510, the FDA Food Safety Modernization Act.  During the debate on the bill, the Senate will consider a provision in the bill that would exempt certain segments of the food industry including food facilities and farm operations from requirements for basic food safety standards.

Guess what, they are going to exempt the places that suffer the most problems. Does anyone remember the recent egg issues? That was an Egg Farm People.

Now it’s time for the lobbyists to enter, the discussion to continue and updates to be offered in language we don’t understand in volumes we would not be able to read in this lifetime.

With the above said, I’m off to have some Turkey. Buy the way what came first the Turkey or the egg?

We look forward to and appreciate your comments.

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I’m not involved in procurement! How many times have we heard this one?

Tuesday, November 23rd, 2010

The best procurement professionals are those that understand the interactions of all functional areas within a business. These well informed professionals also understand the importance of collaboration and aggregation in order to drive as much cost from an organization as possible. So what functional business areas might be actively involved in or impacted by procurement and or e-procurement systems?

There are certainly many areas of a retail company that have procurement connections as well as some input as to products or services being sourced with e-procurement tools. The following although not complete are probably a pretty good start.

1. Finance
2. Purchasing
3. Logistics
4. Manufacturing
5. Warehousing
6. Materials Management
7. Inventory Management
8. Supply Chain
9. Distribution
10. Transportation
11. Maintenance
12. Administration
13. Operations
14. Loss Prevention

What other areas can you come up with?

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Rest area safety tips for all retail travelers that want to avoid being a victim.

Monday, November 22nd, 2010

I was reading today’s edition of USA TODAY and read the front page article titled Along Highways, signs of serial killings by Blake Morrison. The data was shocking to someone that travels a lot and also has family members that do so to make their living. Over the road travel is how most of our goods are shipped and is also a necessary part of how most suppliers representatives travel to call on our retailers and our retailers work with their stores. 

As such I am posting tips by AAA titled Avoid being a victim.

AAA offers these tips for motorists concerned about their safety at rest areas and truck stops:

• Avoid being the only person at a rest area.
• Park in well-lit spaces near the facilities.
• If you see someone suspicious, wait until the person has left or drive to another location.
• Keep your keys in your hands as you walk to your car. That way, you can quickly enter and lock your car.
• If you’re approached by someone seeking help or information while you’re in your car, keep the doors locked and crack your window to talk with them. Offer to call help for them, but do not get out of your car.
• If someone confronts or grabs you, react loudly and fight back. Make a scene.

Be SAFE out there.

We look forward to and appreciate your comments.

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Just what is a reverse auction? Be careful the answer is not that easy.

Friday, November 19th, 2010

There has been a lot of discussion about reverse auctions lately in the blogosphere. Most of it has centered on whether or not reverse auctions are strategic or not. Many of you are well aware of my opinion on that subject. What interested me was my customers thought that there was a negative reaction to the term. Guess where it came from? You’re right it came from the buyers which is one of the two places it usually comes from, the other being the suppliers. This normally happens during the early adoption stage of e-procurement tools within a company.

My answer to the question was you can call it what ever you want within your own company but do you know how many kinds of reverse auctions there really are. The answer was no. So listed below are some of the names of different types of reverse auctions. Some apply to specific industries while others are just enhanced versions of a particular type. Probably the most commonly used is the classic Dutch auction.

My question to you e-procurement types out there is how many can you name or better yet define the use of. And if there are so many types with the reason being manipulation of the results in different ways, then maybe reverse auctions are strategic or not.

1. English Auction
2. Multi unit English Auction
3. Yankee Auction
4. Proxy English Auction
5. Classic Dutch Auction
6. Vickrey Auction
7. Japanese Auction
8. Chinese Auction
9. Pay-Your-Bid Auctions
10. Aggregate Demand Auction
11. Negotiated Price Auction
12. Exchange

We look forward to and appreciate your comments.

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Retail Senior Executives have you ever really calculated the potential impact of using next generation e-procurement tools? I mean really?

Thursday, November 18th, 2010

Let’s face it, this may not be as sexy as releasing a new format, not as political as chasing down run away health care costs, and it just doesn’t resonate as fun.

For most companies, the cost of goods and services (COGS) is the single largest line item on their P&L. Historically the Retail industry has cost of goods across all segments of between 55% and 81%. In the supermarket segment cost of goods has a historical average of 72.0% and Drug Stores are right behind. The convenience stores segment cost of goods is a staggering 81%!

The single-largest opportunity to improve net income is by addressing the largest line on the P&L which is the cost of goods and services. The good news is that every dollar reduction in COGS falls directly to the bottom line. The finance department may argue that there are supplier related switching and timing costs incurred in order to get to the true savings, but the majority of these savings end up on the bottom line if you are attaining plan in other areas.

So let’s measure the impact this could have on a retail company. The math can easily be applied to any retail vertical. An Aberdeen report stated that a 5% reduction in cost of goods would have the same impact to a retailer as a 30% increase in top line sales.

Let’s do some simple math: a five billion dollar ($5B) supermarket company has an approximate cost of goods of $3.6B. Assuming a net income of one percent (1%) this retailer would have earnings of $50M. Let’s assume that they assigned fifteen percent (15%) of their total spend next generation e-procurement tools. This would be approximately $540M. Assuming a savings of 10% which is well documented within the industry, savings would equal $54M which would equate to a net earnings improvement of $54M or greater than 100%.

Yes this is simple math. There are dependencies related to percent of above the gross margin line and below the gross margin and a lot of sin falls into the expense category which is why net profit sucks in the first place. There is also the issue of the rest of the company performing to their plan guidelines so that these real reductions don’t just mask other problem areas. Timely award and timely contract implementation are also important

There is an old saying that figures lie and liars figure. At the end of the day you just can’t hide from the numbers. If you don’t trust the math, let us prove it to you.

We look forward to and appreciate your comments.

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Don’t ASK don’t TELL procurement risks.

Wednesday, November 17th, 2010

We have posted numerous times on product safety as regards everything from prescription drugs to receipt paper and just about every for resale and not for resale category in between. What is a given, is that if you do not ask about product safety your supplier is not apt to tell you what they do relative to product safety.

Let’s look at just a few examples.

1. Fresh Eggs: Did your buyer’s specification ask where the eggs you are planning to buy come from to the farm level?  Did you ask if the the farm or farms in question have been inspected and what their inspection record is. Did you ask if they have any certifications, what they are and if they are up to date?  Did you ask for the right to visit and walk the farm?
2. Receipt Paper:  Did your buyer’s specification ask who the source supplier is for your receipt paper to the mill level? Did you ask if the receipt paper is BPA free?
3. Reusable Grocery Bags: Here is a good one. All sorts of chains jumped on this in order to reinforce their CSR programs and claim a green initiative. Did your buyer’s specification ask if the product contained lead? Probably not.

These are just a very limited view of what is the growing issue we have with product safety in the United States and globally for that matter when we source off shore. The real question here is did your buyers even know to ask these questions? If they did not, who is really culpable down the road when a problem arises?  A better question here is, are your consumers just supposed to trust that you are doing the right thing by them.

If you don’t ask and your suppliers don’t tell, how in the world to we get control of this problem.

We look forward to and appreciate your comments.

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Twenty-one reasons why all retailers should use E-Procurement tools.

Monday, November 15th, 2010

 These are certainly not all of the benefits that retailers can drive from the use of e-procurement tools, but it is a good starting point.

Our list is not ranked in order of importance although many might argue that not much is more important than improved earnings.

1. Guaranteed to improve net earnings
2. Guaranteed to improve safety
3. Guaranteed to improve Corporate Social Responsibility.
4. Guaranteed new sources of supply
5. Retail has less spend assigned than any other industry
6. Streamlines the  procurement process
7. Holds suppliers accountable to your standards.
8. Improves quality
9. Cost avoidance in a volatile market
10. Creates a competitive environment
11. Drives reliable market pricing
12. Maintains a reliable history for future comparison
13. Educates suppliers as to how retailers wish to procure products
14. Supplier training eliminates questions
15. Improved and consistent product specifications
16. Improved negotiation.
17. Improve carbon footprint
18. Simple award of business process
19. Frees up time for other tasks
20. Works for procurement of all product categories
21. Provides a detailed audit trail.

This author is not sure why a derivative of this list could not become the mission statement for any procurement department.

We appreciate and look for ward to your comments.

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A timeless repost titled Twenty steps to running high quality e-procurement events.

Monday, November 15th, 2010

These sessions can from time to time also run as forward auctions in order to reduce over stock conditions and reduce shrink. Regardless of the naming convention used there are certain rules which if followed will create higher quality events for the retailer and the supplier? This will result in creating better savings opportunities or cost avoidance in a tough market. The importance of focusing on a clear process will increase event participation. This focus on quality will be recognized by your existing trading partners and potential new sources of supply, and will keep them coming back in the future to compete fairly for your business.

1.Executive sponsorship is mandatory
     a. This is required at the CEO, CFO, CPO, CLO or head of the supply chain.
2. Get the entire buying organization together for a kickoff session.
3. Provide an over view of what you are going to do and the impact it can have on the company. Use company financial models.
4. Discuss and agree on success criteria.
5. Every event is not a homerun. Singles and doubles score runs.
6. Create a fun environment.
7. Consider prizes for the most creative use of an auction.
8. Use scorecards by department with percent of savings.
9. Discuss the meaning and importance of corporate aggregation.
10. Hand out event templates to gather existing product specifications.
11. Put a time requirement on data collection.
12. Gather an accurate list of your present suppliers.
13. Work with your sourcing company to identify a top 100 list of events.
14. Calendar the events.
15. Prioritize by dollar value, date and strategic value.
16. Conduct department level discovery meetings of 30 minutes to an hour.
17. Investigate existing contract language.
18. Look for auto renewal (evergreen) language roadblocks.
19. Determine alternate sources of supply with your sourcing company.
20. Develop an event rules and instruction template and post with each event.

Although these steps are not all encompassing, they provide a format for getting started that offers the best opportunity for reduction in cost of goods, expenses and improvement in corporate earnings. Be sure to combine this with a business partner that knows your business.

We look forward to and appreciate your comments.

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