Are you watching the commodity markets?

October 27th, 2009

If you are not

A customer asked me the other day what indexes we followed in our sourcing practices. Although this is a very broad question that could be answered any number of ways such as what product are you speaking about, it is in fact a very good question. Let me give you an example.

Let?s suppose you are planning your strategy to buy egg products such as whole eggs or liquid eggs or egg mixes. The first question you need to resolve is what makes up the largest cost in the egg farming process? To provide a short answer, it is feed. The follow up question to this should be what type of grain makes up the feed? Again a short answer is corn. Resultantly these two questions should lead to the conclusion that keeping track of grain market futures is probably the best bet for locking in your pricing strategy depending on the length of your contract. As an example, with this information you might insert escalator / deescalator language in your contract based on the market price of grain at the time you negotiated your pricing.

The next step is determining where you can find this type of information. At SafeSourcing we use the CME Group which includes the Chicago Board of Trade. For the egg market there is also another tool available that can also be useful which looks at the average weekly price of egg products by region of the country. Using the two together is normally your best bet to build a solid strategy.

The previously mentioned CME Group serves the risk management needs of customers around the globe. They provide the widest range of benchmark futures and options products available on any exchange, covering all major asset classes, including interest rates, equities, FX, commodities, and alternative investments such as weather and real estate.

If you are not watching the markets that drive the pricing of the products you buy, you may make some significant mistakes that could negatively impact your financial plan down the road.

We look forward to and appreciate your comments.

Ron Southard

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Is it a poor marketing strategy, a just noticeable difference or both? You decide!

October 26th, 2009

The first time I ever heard the term just noticeable difference or jnd I was studying psychology in college. The professor used the candy bar as an example to describe the term. He began by asking the question as to whether or not we thought the candy bars that kids got at Halloween these days were the same size as they had been during our childhood. This immediately hit home with me as I already had a child and was embarrassed to give out those tiny candy bars that were much smaller than I received as a kid. The funny thing is that today?s kids never seemed to mind.

Our professor went on to explain that if a candy bar were made just enough smaller so that you would not notice that consumers would still buy it for the same price. If you continued the practice over time the product would become smaller requiring fewer ingredients and smaller packaging. The product could now be sold at the same price with lower costs and little flack from consumers.

By definition, a just noticeable difference, which is normally abbreviated as jnd, is the tiniest detectable difference between a starting and next level of a particular sensory stimulus. Human sensory systems do not respond identically to the same stimuli on different occasions which explains the candy bar story..

I?m sure you are wondering how this relates to procurement and my sandwich?

I have a favorite place that I frequent for lunch that is owned by a supermarket company that has fallen on hard times recently. Their high end store has a wonderful selection of items for lunch including salad bar, a terrific deli, pizza, and an outdoor grill. One of my favorite items is a grilled rib eye sandwich. I have commented to many people that this is the best steak sandwich in the country. Historically the steak hangs outside a large bun and is about a half inch thick. My guess would be that it?s at least a seven ounce piece of meat.

This sandwich is something I probably only order once month but look forward to. Recently I decided that I was going to have one and placed my order and went to sit and wait for the sandwich. When I went to pick up the sandwich it was handed to me in a much smaller box (clue). When I opened it to add condiments, I noticed nothing hanging out side the bun. Removing the top of the roll, I noticed a piece of meat that was much thinner and folded which would not have been possible previously. So much for the jnd approach. I was still paying the same price for this much smaller product, and was not happy.

Obviously this company is trying to reduce costs, and that?s ok. In this case they are either ordering or cutting much smaller pieces of meat for this sandwich which saves them money and then trying to sell the product for the same price to consumers, and that?s not ok. Consumers may miss psychological practices like jnd used over a long period of time. We do however pick up on very large changes that are made that result in a cost benefit that does not include us.

Consumers understand when companies fall on hard times and that sometimes drastic actions need to take place. Companies should however be careful to not make business and marketing decisions that have a negative impact on their brand or consumer loyalty.

There are numbers of ways to reduce the cost of goods and services that this author posts on regularly. There are many great marketing opportunities that can result from cost savings. Many of these can positively impact consumers and result in improved loyalty and increase market share.

We look forward to and appreciate your comments.

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To resign or to retire that is the question.

October 23rd, 2009

These terms have a lot more in common that just beginning with the letter R

Earlier this week I noticed an article that indicated that the Chief Executive Officer of one of the countries super market chains resigned. Another super market chain recently had their president retire suddenly. What both of these companies have in common beyond resignation and retirement of their leading executive is that their results suck.

It?s easy to blame the economy or the fact that consumers faced with fewer discretionary dollars are reducing their purchases and buying a less expensive product mix. Unfortunately, today?s results were born of plans that were developed in better times.

It would be interesting to take a look at these companies? detailed Profit and Loss statements. Without looking it is fair to assume that their cost of goods and services are out of line with the industry norm as well as with the leaders in the space. Certainly insurance and healthcare costs are out of control. Payroll is most likely the largest expense on the P&L. There is however ways to reduce costs that many of the companies in this space are not taking advantage of. As a result they are not getting the discounts on products and services that they or their various constituents deserve.

What is incredible is that the rising cost of employee healthcare benefits is always the first excuse we hear. Many times this is followed by a layoff. One can be managed and the other avoided. This author has posted on how to do this a number of times.

Here are 5 previous posts with some suggestions as to how to avoid poor results. This may not be as glamorous as building a new store, creating a new format or adding new categories. One question to think about is what do your shareholders and stakeholders want. A good bet would be better results. Another and more important question is what do your customers want. A great bet would be lower costs.

1. Retailers have you ever really calculated the potential impact of using next generation e-procurement tools?
2. Is the Retail industry downsizing or right sizing? If so, how can e-procurement tools help reduce this huge loss of jobs?
3. Bankruptcy Sucks PartsI, II and III. But, it does happen to good companies with well intentioned leaders.

We look forward to and appreciate your comments.

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SafeSourcing Website experiences significant traffic growth.

October 22nd, 2009

The primary goal of the Safesourcing website www.safesourcing.com is to provide an educational landing space for procurement and supply chain professionals. Our traffic growth indicates we are achieving this goal.

During the last ninety day period the SafeSourcing website www.safesourcing.com has experienced significant growth globally. According to a number of rating services including Alexa and Google Analytics our website has had visitors from thirty seven (37) countries. Our reach which is a percentage measure of global internet users has grown 130%. Our traffic rank has increased 168% and our page views have increased 150%.

This growth places us amongst the top websites in the procurement space. Spend Matters and Sourcing Innovation continue to be the ranking leaders in our space. Both are required daily reading for this author.

We are very proud of our growth as it indicates that SafeSourcing is providing valuable content to regular visitors as well as registered members. We are also enjoying a good mix of both returning and new users. In reviewing these data the entire website is being explored on a regular basis including the following areas.

1. Sourcebook our professional social network for procurement professionals.
2. The SafeSourcing Wiki
3. The SafeSourcing daily Blog
4. SafeSourcing environment and safety alerts
5. SafeSourcing specifications template library
6. The SafeSourceIt? Supplier Database
7. The SafeSourcing Query tool
8. SafeSourcing Product Information Sheets
9. SafeSourcing White Papers
10. SafeSourcing Press Releases.

Thank you to those of you that have allowed us to achieve this growth.

As always, we look forward to and appreciate your comments.

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Try using a little wizardry or sorcery in your retail procurement practices.

October 21st, 2009

Wizards can be defined as magicians

From a purely systematic or technological perspective, a wizard is a computer user interface that leads a user through dialog steps in order to accomplish something easily or for the sake of appearances magically. So to begin with if you are not using technology in your retail procurement practices this would be a good place to start. You can never tell improved profits may simply be as easy as abracadabra.

Magic which is practiced by wizards is the act of performing, entertaining or enlightening an audience by creating illusions of seemingly impossible feats, using purely natural means. As an example; maybe finding new sources of supply in order to compress a retailers pricing is as simple as having access to a supplier database (hidden knowledge) that can conjure up new sources of supply through an easy to use interface (wizard). Since most retailers do not know that such a database exits, a novice supply chain team member or apprentice (audience participant) could conjure up a query on their PDA (magic wand) that searches this database (universe) by major category, country, postal code, sub-category, safety certifications or other incantations, and in less than 15 seconds produce a result set of 200 suppliers seemingly from thin air. This act of prestidigitation to most retailers would appear as magic. To his or her boss (lord or lady) this novice or apprentice team member would be looked at as a wizard, magician or seer.

Call your solution provider and see what type of sorcery they can share with you. If they can?t, call SafeSourcing the sorcerers of sourcing.

We look forward to and appreciate your comments.

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Ninety Billion and counting. That’s 90,000,000,000.

October 20th, 2009

According to the Environmental Protection Agency or (EPA) ninety billion plastic bags are being produced annually in the United States. Recycling of polyethylene bags, sacks and wraps is also at an all time according to the agency with 380,000 tons recycled for the year ending 2007. That represents a sixty five percent increase from 2005 and a three hundred and seventy-five percent increase from 1996. Obviously consumers are concerned with the impact that the products that they buy have on the environment.

In a USA TODAY article by Bruce Horovitz titled “Target puts plastic bags in bull’s-eye”, he reports that Target will give consumers a five cent discount for every reusable bag they use to pack their purchases.

Also from the same article David Szymanski a marketing professor at Texas A&M University is quoted as saying “Retailers who want to connect with this generation have to go green”.

Target is not the only retailer to take steps in this direction, however they are the largest. CVS Stores of Woonsocket Rhode Island also has a program that rewards their CVS card holders with a bonus for not requesting plastic bags. Other retailers are buying bags with a higher content of recycled material in order to reduce their overall carbon footprint.

What are you doing to promote a reduction in your carbon footprint as a part of your socially responsible best practices? Do you have a CSR program?

We look forward to and appreciate your comments.

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Ninety Billion and counting. That?s 90,000,000,000.

October 20th, 2009

According to the Environmental Protection Agency or (EPA) ninety billion plastic bags are being produced annually in the United States. Recycling of polyethylene bags, sacks and wraps is also at an all time according to the agency with 380,000 tons recycled for the year ending 2007. That represents a sixty five percent increase from 2005 and a three hundred and seventy-five percent increase from 1996. Obviously consumers are concerned with the impact that the products that they buy have on the environment.

In a USA TODAY article by Bruce Horovitz titled “Target puts plastic bags in bull?s-eye”, he reports that Target will give consumers a five cent discount for every reusable bag they use to pack their purchases.

Also from the same article David Szymanski a marketing professor at Texas A&M University is quoted as saying “Retailers who want to connect with this generation have to go green”.

Target is not the only retailer to take steps in this direction, however they are the largest. CVS Stores of Woonsocket Rhode Island also has a program that rewards their CVS card holders with a bonus for not requesting plastic bags. Other retailers are buying bags with a higher content of recycled material in order to reduce their overall carbon footprint.

What are you doing to promote a reduction in your carbon footprint as a part of your socially responsible best practices? Do you have a CSR program?

We look forward to and appreciate your comments.

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The benefit of a large retail supplier database

October 19th, 2009

How do retail companies use this data to support growing their percent of spend with e-negotiation tools?

Many retailers have told us that they do not have continuing success when running prior e-negotiation events the 2nd time around. One area of commonality they frequently discuss is a lack of new suppliers. Another is the price being too high for the same event that has already been built and will result in lower savings the 2nd and 3rd time around.

There is a proper way to insure the sustainability of your e-negotiation events going forward. Following these guidelines will also encourage senior management to consider placing more spend under the control of e-negotiation tools and specifically reverse auction tools. Armed with a robust retail supplier database and related tools:

1. Conduct a detailed category discovery
a. Learn all there is to learn about the way a company conducts their business.
b. Walk distribution centers and warehouses
c. Walk an array of stores and understand all formats of the enterprise.
d. Compile a list of all corporate categories
2. Rank categories by
a. Total spend
b. Importance
c. Sourcing frequency
d. Quality objectives
e. Look for aggregation opportunities.
3. Conduct supplier discovery
a. Rank suppliers
i. Size
ii. Experience
iii. References
iv. Environmental certifications
v. Safety Certifications
4. With the above in hand; develop a three year game plan
a. Identify suppliers for each event over the three years
b. Develop savings targets by category
c. Develop a three year time line for all categories
5. Role Play internally the first year for a test category
a. Ask the following questions
i. How will you award the business
ii. Review alternate scenarios
iii. Review savings by scenario
iv. Determine which suppliers will be invited back
v. Determine what new suppliers from your database search will be invited to participate next year

We appreciate and look forward to your comments.

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Keys to understanding retail competitive bidding when using e-negotiation tools.

October 16th, 2009

There are several important elements to understanding retail competitive bidding when using e-negotiation tools.

There are several important elements to understanding retail competitive bidding when using e-negotiation tools.

Competitive bidding is the process of inviting and obtaining bids from competing suppliers in response to documented specifications, by which an award is made to the best overall bid that meets or exceeds the specifications in areas such as price and quality. The process contemplates giving potential bidders a reasonable opportunity to bid, and requires that all bidders be placed on an equal playing field. Ideally each supplier must bid on the same documented specifications, terms, and conditions for all the items. However breaking out individual line items that a specialty supplier can provide bids for can help to reduce the opportunity for suppliers to manage the overall gross margin of their bids and drive higher savings. The purpose of competitive bidding is to stimulate competition, prevent favoritism, and secure the best goods and services at the lowest possible price, for the benefit of the host Retailer. Competitive bidding cannot occur where specifications, terms, or conditions prevent or unduly restrict competition, favor a particular supplier, or increase the cost of goods or services without providing a corresponding tangible benefit for the host Retailer.

As always, we look forward to and appreciate your comments.

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How might suppliers benefit from participation in e-procurement events such as reverse auctions?

October 15th, 2009

During a recent conversation a customer asked me why suppliers would want to participate in an e-procurement event.

A discussion followed relative to incumbent suppliers vs. new sources of supply. In general most vendors in the space would come up with many of the same points listed below. Please read on.

SafeSourcing Inc. places a great deal of value in our SafeSourceIt? North American Retail Supplier Database of over 250,000 suppliers located in Mexico, Canada the United States and China. Additionally we also place a great deal of value on each individual supplier regardless of size. We believe that well thought out next generation e-procurement tools can provide significant benefits to buyers and suppliers whether they are hosting or participating in e-procurement events.

Some but certainly not all benefits that suppliers can anticipate from SafeSourcing are:

1. An easy to use e-procurement tool limited to a single page view where a supplier can be completely comfortable that their company?s best foot is being put forward to the soliciting company.

2. An increase in new business opportunities through engagements they would otherwise not be exposed to.

3. Clean data about the soliciting company and an accurate listing of their event guidelines, specifications, terms, conditions and other information necessary to build an accurate and successful pricing strategy.

4. Best practice training in event participation and strategy development.

5. A clear focus on what?s important beyond price in next generation e-procurement tools such as supplier safety certifications and practices as well as their environmental programs that will differentiate them from other suppliers.

6. Closed loop reporting of results of the specific e-procurement event a supplier participates in as well as a detailed supplier feedback questionnaire report.

7. Significant time savings associated with new business development that becomes more and more costly as fuel and other prices continue to rise.

8. Industry pricing trends extrapolated from their view of low quote information during the event if allowed by the soliciting company.

9. Use of these tools for their own procurement needs.

We appreciate and look forward to your comments.

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