Archive for the ‘Outsourcing’ Category

Procurement function focus: Go broad or go deep

March 16, 2010

The past few weeks I’ve been going through the ever-growing pile of reports that amass on my digital desktop and one thing that strikes me when comparing different best practices is that one re-occurring theme is focus; be it for supplier base consolidation or central co-ordination.

As an avid runner and cyclist I’m rather surprised that this still seems to be an issue for many companies. To succeed one has to specialize – your either a sprinter or a long distance runner. It’s quite simple and universal actually, yet when it comes to IM&S procurement many companies are still viewing their task as a pure support function that needs to be able to deal with any and all issues that may arise. To put things bluntly:

How many category managers for office supplies do we really need?

I doubt that they are viewed as strategically important in any industry sector. In a sense I can feel that any IM&S category that can easily be placed into a category tree should be viewed as un-strategic. In our era of focus, as such they should be viewed as a candidate for outsourcing so I believe it’s prime time to do some make/buy homework.

As companies downsize their supplier base – focusing on closer relationships with strategic suppliers (as leaders do for instance according to this Roland Berger report) – it’s due time that purchasing functions take a good look at IM&S outsourcing possibilities; go deep my friends and let others do the more un-strategic work.

Posted in IM&S, Organization, Outsourcing | Leave a Comment »

Treading the (not so) Fine Line Between Classic Consulting and Outsourcing

February 4, 2010

Over at Coupa Cabana, guest blogger of the week Dustin Mattison does a great job of outlining some of the challenges and opportunities that procurement functions are facing in 2010. Second on his list is outsourcing.

2. THE PROS AND CONS OF OUTSOURCING

Many of the themes that floated to the surface overlapped to one degree or another. The recession, for example, forced us to re-examine the practice of outsourcing. What made sound financial sense in the previous decade doesn’t necessarily make sense today. Now, more than ever, we need improved supply chain visibility, and while some see outsourcing as a practice that tends to block the view, many others see it as an opportunity to improve collaboration and communication with their partners. The purpose of outsourcing is to hire experts in areas outside our key competencies. The challenge, of course, lies in making those connections — something we are already seeing as a hot topic for discussion 2010.

Though I do agree that the pros and cons of outsourcing is one of the key trends in purchasing at the moment, I thing that many companies need to re-assess why they are looking into the issue. Dustin and many of others are clear with their view on why and when to outsource; “to hire experts in areas outside of our key competencies”. In some cases this may be true, but to me that sounds more like typical consulting/services needs. Outsourcing on the contrary should – in my mind – be used to increase focus on core issues.

For instance, many companies can still count quite a few resources that know IM&S procurement inside and out. Using the logic Dustin describes above, this would then be out of scope for outsourcing as there are in-house experts. If I was in charge of the purchasing function, I would do the opposite.

Outsource IM&S procurement and re-focus the IM&S experts to DM and vital services procurement. Expert staff in procurement are not only experts due to their deep category knowledge, they are also skilled in purchasing process, strategy, relationship management, implementation – skills that would generate far more value if applied on more core commodities.

Given the fact that procurement outsourcing will be a focal point of 2010 – I would argue that the functions response should be to focus on the core commodities and look into how one could benefit from outsourcing the commodities and processes that are non-core. Boost your core with outside experts and consultants, but don’t confuse this with outsourcing.

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Moving from cost to value

June 11, 2009

A few days ago David Rae of Procurement Leaders highlighted a viewpoint given by Tim Williams in Advertising Age  regarding how marketing agencies should align their compensation in such a way that it actually supports instead of opposes the procurement process. Tim Williams proposes that in order to do this, advertising agencies must “make the mental leap from cost to value”.

What struck me with Tim’s reasoning was how strongly it resonates in almost all service categories. In many purchasing departments strive to lower hourly costs – since this is the one variable that is on the table – real value is lost in the fog.

As I outlined here, some old dogs go as far as to oppose the entire idea of large consulting firms (and outsourcing houses) since their experience is that it in the long run costs more than what it initially said on the price tag. By focusing on delivered value instead of purely cost and working tightly with stakeholders I truly believe that purchasing can evolve service procurement to a higher level.

And this type of paradigm shif is especially interesting in times like ours as we are approaching the tipping point leaving the fierce badlands of right side of the A.T. Kearney diamond for the more co-op pastures on the left.

Posted in Business, Negotiation, Outsourcing, Sourcing, Strategy | Leave a Comment »

IT-procurement – the global giants vs. the boutique firm

June 8, 2009

According to an IDC report quoted by Sweden’s Dagens Industri (in an article highlighting India’s IT-wonder – exemplified by Tata Consultancy Services) IT-outsourcing rise from 12 percent in 2004 to 27 percent in 2009, during the same time frame the share of companies that consider IT-outsourcing has risen from 5 to 37 percent.

Now, IT-outsourcing covers a wide array of services ranging from help desk functions to network management to systems architecture so although the numbers may be right in a rough sense when one looks closer at the category I suspect that certain subcategories are more prominently represented than others.

In any case, this development will create quite a challenge for IT-procurement – especially when it comes to consultancy services. In fact, the development has gone as far as to prompt Stockholm University to offer courses in Computer Science focused on managing IT-services in low cost countries. For purchasing the major challenge will be to win the confidence of the internal stakeholders, acting as the margin hunter whose only task is to negotiate lower cost per hour will inevitably see a rift open up between IT and purchasing no matter how strict the corporate guidelines describing processes are. Any slack of quality will be seen as a reason to sidestep purchasing – turning any project into the battle of the C-s. And chances are that the remaining management will side with the IT-side of the story instead of opting for the (in theory) right side (when it comes to purchasing policy).

So how does one assure quality when purchasing IT-consultancy services?

One rather simplistic answer was given to me by an experienced (and almost cynical) senior purchaser. His blunt answer was this:

Go for the small boutique firms, any extra cost per hour will be saved due to the fact that they are forced to deliver results. If they don’t their reputation is in jeopardy and due to their size their reputation is their only selling point. In essence they need to deliver on every single assignment since they are judged solely on the last assignment. Exploit the fact that they have no room for failure.

Posted in Best Cost Country Sourcing, Global trade, Low Cost Country Sourcing, Outsourcing | 1 Comment »

How far should one go to implement full procure to pay automation

April 15, 2009

As I rode my bike (a deep red metallic Pinarello Treviso from 1984 with the group set removed and replaced by a pair of Campagnolo track hubs) to work this morning I passed a queue of cars slowly making their way along Strandvägen being held up by one of the royal horse carriages. Marveling at the historic advances of transportation – horse, bicycle, automobile – it got me thinking about how far one can take automation.

Many have championed the full automation of the procure-to-pay cycle; yet few have actually been able to show any real and substantial benchmarks that go beyond the pre-implementation business case.

Last year, I had the privilege of working alongside some of the senior purchasing executives as they prepared their presentations for the IBX Purchasing Executive Summit. One interesting findings that was presented was that it was very hard to create a business case for full automation of the procure-to-pay cycle. Instead, a hybrid model that included scanning, workflows, automated matching as well as a shared service center in a low cost location to process some of the invoices manually was presented as the best cost alternative. The streamlined process cost was in the low double digits with retained quality and while expanding on the subject in the presentation, the switching costs were ruled to high to go further into full automation even though it was technologically possible.

I think there is a great lesson to be learned from this; while technology might dazzle us with its might, one should not forget the human alternative as it may still be able to do the job faster and at a lower cost (be it to process invoices or as in my case – get me to work quickly and in style).

Posted in E-invoice, eprocurement, Outsourcing, procure-to-pay cycle, Procurement | Leave a Comment »

Defining outsourcability

March 25, 2009

If it’s non-core; it can; and some claim should; be outsourced. But how does one really define non-core.

Recently several municipalities in Sweden have outsourced their ordering services for mobility service- and medical service transportations to call center service providers. In theory this seems just fine; municipalities should focus their activities on issues more core than just answering the phone and placing an order to a local transportation provider (such as the local cab company).

Unfortunately this non-core business is slightly more complex than it may at first appear to be:

  1. It’s highly dependent on local geographic knowledge, knowing where a certain street actually is located will certainly speed up the process and minimize errors
  2. It’s highly dependant on communication skills, both from a customer confidence angle, as well as the ability to correctly receive and process customer demands
  3. If something goes wrong, there needs to be a feedback possibility connecting the transportation provider with the customer to sort out any misunderstandings

Given these three preconditions, the sourcing decision to award the contract to the lowest bidder might make sense from an economic perspective, but who would have thought that call centers in Tartu, Estonia and Chisinau, Moldavia really had a fair chance to live up to any of the above mentioned preconditions. Especially given that the customers are most often elderly, disabled and in need of special services (hence the municipal involvement).

Our task is to plan cost-efficient trips of high safety and quality. We specialise in coordinating and planning trips, which allows us to handle the demands for quality and safety of our travellers.
About Samres from their corporate website

When the buyer Stockholm Läns Landsting (SLL) measured their customer satisfaction after a few months; the satisfaction level had dropped from 85 percent to 77 percent. The contract has not been renewed and SLL is currently looking for a new supplier.

What can a purchasing department learn from this: make sure to evaluate outsourcability from more than just the core/non-core aspect. Equally important is the strategic importance and the depth of stakeholder involvement as well as the impact on the customer.

Posted in Outsourcing, Risk Management | Leave a Comment »

Protectionism starts to factor into supply risk management

March 16, 2009

A few weeks ago BDO Seidman, LLP released the results of their annual BDO Seidman Technology Outlook Survey and some of the results were quite startling (worrying even, if you see it from a free trade vs. protectionism angle).
According to the survey; 62 percent of the responding US companies outsource services or manufacturing. A pretty typical number according to our experiences from the European perspective; the startling results come when the respondents were asked where they will go to find the market for this outsourcing:

  • 22 percent answered the US
  • 16 percent answered China
  • 13 percent answered India

Douglas Sirotta, a Partner in BDO Seidman’s Technology Practice explained the numbers by saying the following:

“This year we are seeing three global factors that are causing U.S. technology companies to pull back from traditional outsourcing locations, led by the recent boom and bust of the worldwide economy. Satyam’s fraud case and the terrorist attacks in Mumbai are causing a lot of companies to reconsider operating in India. And supply chain and shipping cost issues in China are negatively impacting the attractiveness of outsourcing technology operations to the Far East.”

But that’s not the only reasons for the backshoring; Business Week reported that the Indian government is worried that protectionism and the regulations that rule the US stimulus package (as well as tax-reforms) are also part of the equation.

Whilst I can agree with the worries expressed by the respondents of the BDO survey; supply chain risk must be part of the equation when one seeks to outsource even non-core categories; the worries of the Indian government is of even greater importance. Protectionism should not have to be a factor that has to be considered when managing a global supply chain.

Posted in Best Cost Country Sourcing, Business, Global trade, News, Outsourcing, Strategy | Leave a Comment »

If outsourcing doesn’t work, can one sell the procurement function?

February 23, 2009

This weekend, while flipping through the pages of the Sunday paper (and lazily watching the Swedish winter athletes excel at various world championships), I ran across a most curious advertisement; at the bottom of the front page of the business section there was an ad that read: Sell your IT department.

Not outsourcing the IT department, sell it. Now, I have little knowledge about the price of an IT department, and even less knowledge if there are any potential sellers out there. The one thing I know is that there is – in fact – a potential buyer of IT departments.

This led me to thinking if there is actually a market of selling other departments as well. Outsourcing has been flourishing in various sectors for decades; IT being one of the most prominent examples. While outsourcing of procurement has yet to catch on, the ad about selling your IT department posed two questions:

  1. Can one sell the purchasing department?
  2. And if so, what would it be worth?

Just for the record, I’m not a even strong advocate for purchasing outsourcing due to the strategic importance of direct material purchasing and the often very complicated matter of indirect materials and services, but that shouldn’t stop someone from actually considering what may – at first – seem like an undoable thing.

Consider for instance the following scenario; Manufacturing Company A has a low indirect/direct materials ratio, so low that they’ve made the strategic decision not to bother with their indirect spend at all. Now, most purchasing theorists may argue that even the smallest amount of spend makes a difference; and in theory they’re right; but considering the amount of effort required and the minimal benefits someone with their feet firmly planted in the mud will probably come to the decision that it’s to little bang for the buck.

That’s definitely not the case for Service Company B; they have nearly no direct material costs at all – their cost structure is based on personnel and indirect materials. Now ponder the scenario where they want to boost volumes. Most companies look themselves in the mirror and try to do the best with what they’ve got; minimize maverick spend, increase e-procurement coverage, train staff, increase contract coverage etc.

Would they get a better deal if they actually bought the potential IM&S spend volume from Manufacturing Company A? My gut reaction is that it probably wouldn’t work, but that does not say it’s undoable. So the real just might be; who will be the first to take the plunge into the unknown?

Posted in Business, Organization, Outsourcing | 1 Comment »

The Re-emergence of Nearshoring – aka Best Cost Country Sourcing

October 23, 2008

In response to the latest business trend (as reported by most American business press) backshoring Booz&Co has authored a piece in their strategy+business publication called “Is Backshoring the New Offshoring?”. Their answer is a vague “not yet”. The increasing presence of India’s Wipro and TCS and the backshoring efforts of Dell and American Express might be a sign of things to come but it’s not nearly enough to make backshoring a viable business trend.

So is there a definite trend in offshoring vs. nearshoring vs. backshoring?

From a European perspective the answer is rather clear. As deregulation efforts are increasing in Eastern Europe and the near East; this is where European business is going. And it’s easy to understand why: it’s close, it’s cheap and it’s a great place for doing business.

Just take a look at the results of Doing Business 2009 – the sixth annual in a series from IFC and the World Bank; out of the ten economies making the most regulatory reforms, the top four are from Eastern Europe or the near East (Azerbaijan, Albania, the Kyrgyz Republic and Belarus).

Whilst backshoring might be something to think about for strategic or customers value reasons; I believe that what the press is really talking about (and this is echoed by Booz&Co as well) is plain old fashioned best cost country sourcing. In the words of Booz&Co:

..,companies have begun to rethink their offshoring decisions in a way that ultimately will render “offshore” and “onshore” no longer meaningful or relevant. Instead, companies are making choices about the best place to do a given piece of work — be it offshore, onshore, or nearshore.

Posted in Best Cost Country Sourcing, Business, Global trade, Low Cost Country Sourcing, Outsourcing, Supply Chain Management | Leave a Comment »

One Supplier Audit Question You Probably Never Asked

September 5, 2008

Michael Bengtssons post yesterday regarding cost and quality in the teddy bear industry made me want to share a fantastic story regarding cycling manufacturer Bianchi and their factory in Triviglio in northern Italy. In the latest issue of the fabulous cycling magazine Rouleur, british cycling connoisseurs Guy Andrews and William Fotheringham visited the factory to write an article about the 120 year old cycle manufacturer; who’s riders read like a who’s who of cycling greats: Fausto Coppi, Felice Gimondi, Marco Pantani, Jan Ullrich, all have ridden celeste Bianchi’s to victory.

Starry eyed, the authors traverse the factory speaking to old mechanics, frame welders and R & D staff; sampling frames ridden by champions over the years and looking at what the the future may bring (steel frames, carbon monocoque T-cube bikes and even a titanium frame with etched graphics).

They summarize their factory tour with the words:

You’ll be glad to know that today the staff, including [Felice] Gimondi [Who is one of the cycling greats and an Italian icon, one of only four cyclists to win all three grand tours – Giro d’Italia, Tour de France and Vuelta Espana – as well as the world championships, he is the current president of the Bianchi-Gewiss MTB Team], ride their bikes at Treviglio. Bianchi’s management team are keen too, riding daily and taking great pleasure in ripping the legs off unsuspecting journalists. It is a friendly factory, with a devoted team who seem to like what they do.

And if that wasn’t enough, they end their factory exposé in the staff canteen:

Lunchtime in the canteen with relaxed conversations, wholesome Italian food and proper espresso machines: it all makes for a civilized atmosphere.

Proper espresso machines.

Now that might not be a mandatory question for you regular supplier audit, but for the avid cyclists – who are basically romantics with their hearts on their sleeves – I don’t think you could do any better.

Back to Steiff, co-chief executive Martin Frechen said in a Financial Times article that some suppliers only “think in terms of price and volume” and concludes that “for children, surely only the best is good enough – the best design, the best production, the best safety standards”.

To me, this spells out one thing; passion for your business. In a world where cost and volume seem to be the rule of the day; passionate businesses can surely find a niche market and exploit it to the fullest, but it also means that the business must share the same passion as the consumers. Steiff has understood this, and so has Bianchi.

Posted in Business, Global trade, Outsourcing, Supply Chain Management | 1 Comment »

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