Business & Technology Nexus

Dave Stephens on technology and business trends

Archive for March 2006

R-E-S-P-E-C-T

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Last time I talked with Pierre Mitchell he was an AMR superstar. At Oracle, we regarded him so highly we had him come in and advise us on how to position what we would later brand “Advanced Procurement.” In my book, he’s a true Procurement expert.

And lucky for me, Pierre was kind enough to get back in touch recently. I can see his move to The Hackett Group has afforded him brand new challenges. Thanks Pierre for all you are doing to push the cause forward!

Pierre passed along some really interesting data on a measure of Procurement success all too often overlooked: Supplier Working Relations. Everyone knows it’s important to measure how happy your customers are – but few extend the same consideration to their all-important supply chain.

Although data is scarce, my belief is that, especially for manufacturers, a healthy working relations index is good harbinger of future success. Of course this doesn’t mean being soft on your supply base. But it does mean being concerned with their viability and profitability. Instead of focusing on margin transfer (increasing your profits by decreasing your supply chain’s profits), leading companies want their supply base to enjoy reasonable margins & success. And in today’s competitive markets, a supplier’s favorite customers get all their best ideas – ideas to improve products & ideas to lower overall costs. Conversely, the pain-in-the-behind customers all too often get the silent treatment from their reluctant supply base.

How well do your suppliers like working with you? Are you their favorite customer? Do you have a program to ensure you give the R-E-S-P-E-C-T that keeps your all-important supply chain on your side?

If you lack a formal program to measure the satisfaction of your supply chain, perhaps starting with a survey of your most strategic suppliers is a logical first step. The questions can be quantitative or qualitative, the most important thing is to ask them! Here are some ideas to get your started:

1) How easy are we to work with as a customer?

a) very easy b) easy c) so-so d) not easy

2) How true is the following statement: My company’s ideas to improve product quality are encouraged and respected

a) very true b) mostly true c) somewhat untrue d) untrue

3) What are the 3 most important things could we do to improve our relationship with you?

I’d love to hear about any programs you decide to run (or have already completed) in this area & any measurements on program effectiveness. Good luck!

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Written by Dave Stephens

03/31/06 10:49 PM at 10:49 pm

Posted in Opinion

IBM & BPO

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I saw IBM signed up another BPO customer for indirect procurement and accounts payable. I always thought BPO made a lot of sense, if the price was right. After all, for most firms indirect procurement is an annoyance they could do without. And as much as we want procurement to be in the board room, it's not going to be there talking about polycoms, pens and paper clips, or projectors.

In fact, I'll go one step further and suggest BPO for indirect procurement might make even more sense for many firms than SaaS. But hopefully there will be enough business to go around for KP & Ketera.

Where will Ariba focus? 

Written by Dave Stephens

03/30/06 11:15 AM at 11:15 am

Posted in Opinion

That Darned Item Category

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A comment on an old post on Procurement Intelligence got me thinking again about Item Categories and the classification problem that Oracle and SAP face. Other Procurement vendors face the same problem, but if you don't have Manufacturing or an Item Master or GL or Payables it's probably not as severe.

Let me help you see my pain by giving you a (somewhat accurate) historical account of how Oracle dealt with categories.

First, know that Oracle ships a product with 0 categories. So as a customer you are completely on your own. The thought behind this (and it applies to UOM and a bunch of other stuff) is that Oracle won't guess b/c they'd probably be wrong and you'd be mad. Flawed logic to be sure but logic nonetheless.

What customers start with is a construct from the Manufacturing space called a "Category Set". The "Purchasing Category Set" serves "core purchasing", the base module. And there are other category sets for other products.

It looks and feels like it was invented in the 70's – real green screen stuff. Of course Oracle is working on a better architecture nowadays – but don't hold your breath. Your kids will be all grown up before it sees light of day. :) But I digress.

When we first introduced iProcurement (the employee self-service requisitioning tool) we had to figure out how to categorize catalog content. And the first and most obvious choice was the Purchasing Category Set – after all, iProcurement was an add-on. Customers presumably had already set up their purchasing categories so why not use them.

Well, it was a horrible fit. You see, the Purchasing Category Set was designed & used mainly for reporting. It did things like drive Accounting. So customers had implemented it with no hint or care of intuitiveness or usability. Some customers had made some really strange choices, effectively making it infathomable for use via self-service. My favorite mistake was Oracle's internal implementation, where Purchasing categories read something like "North America – GL 123 – Martha Stewart" (hunh!?). But Oracle wasn't an outlier, it was in the majority.

Of course we did what we had to – we added a browsing categorization scheme for local catalog content specific to iProcurement. But while necessary, it really messed up the cost of ownership proposition. Suddenly customers had to set up 2 categorization schemes and map between them. And when a mapping failed, users were told at checkout "You can't buy that item". Yuck. Over time we added reasonable capabilities to make things easier, such as giving customers the choice of re-engineering their Purchasing categories and having the system do a 1:1 map.

But I never thought we got it right.

On the one hand, every data cleansing discussion I've ever been involved with has me standing firmly in the corner of "why the heck can't you get the data right on the way in?"

But on the other, I've always questioned the value of formal, normalized categorization for content (and by extension, for buying). And what I mean by that is I'm against any effort (translation: money) being required to get the contracts and content locked and loaded and the system operational. Formal, normalized classification costs you again and again, too. The big payoff, supposedly, is reporting. But I imagine better ways to get great, accurate reporting than a fat tax as data enters the system.

You see, most systems assume UNSPSC or some other classficiation scheme. And this makes sense. But when catalog content comes in, suppliers may not have made the same assumptions. Mapping is evil, it's costly, and too often it's required. And even if you're smart and avoiding local content, you still get the mapping problem on bringing the shopping cart back from a punch-out.

Problem is you can't truly fix the problem without fixing the source of the problem – which seems to me is Purchasing. Reason being the Requisition eventually does need to become a PO, and PO lines require the category (you know, for things like accounting). Which leads to waiting on Oracle or SAP. Which seems to be a colossal waste of time.

I had my chance to fix it. Just didn't get it done.

As you can guess, I wish we would have punted on rationalizing categorization on the front-end and figured out how to drive reporting, accounting, and a whole host of other capabilities from a more flexible map. I think that would have worked a whole lot better.

Procurement systems (and ERP in general) needs to be more flexible and adaptable. This is a classic example where the customer's cost of doing the right thing nearly outweighs its value. Customers shouldn't have to make choices like those with their Procurement implementations.

Written by Dave Stephens

03/29/06 8:05 PM at 8:05 pm

Tax Engine Blues

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Talking with customers, one area of Procurement came up as problematic again and again in their implementations. T-A-X-E-S. Sure, it's just an estimate on the PO and optional on the Requisition. But why, oh why Oracle can't you have a good, simple tax engine. (Because taxes aren't simple?)

Vertex and Taxware (and their ilk) were absolute must-have's for Oracle implementations.

Seriously, what is so hard about US Sales and Use Tax. Everone expects VAT and Europe in general to be difficult, but even US Sales and Use seems too difficult to believe. Government tax codes are written by committee, so I guess it's no surprise.

Do any of you know of any good, modern, tax solutions out there? What seems to be working & offers lowest TCO?

Written by Dave Stephens

03/28/06 8:57 PM at 8:57 pm

Posted in Opinion, Technology

My Favorite B2B Exchange

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Back in the day, my team was responsible for building Oracle Exchange. And in 2000, that was really saying something. But now it all seems so silly. Customers weren't that interested in what the software did – instead it was a big "land grab" along industry and geographic lines. CommerceOne was selling off equity in exchange for big deals, and their were takers everywhere.

[What is a B2B Exchange you ask? Its a hosted multi-tenant service where buyers and sellers meet to conduct business. You can use it to run forward auctions, reverse auctions, host catalogs, buy and sell, exchange messages like a VAN, and generally tie into ERP and CRM systems.]

At the height of craziness, one company I'll keep close to vest for now demanded 10% ownership in Oracle (can you believe it?) for the right to be a B2B Exchange customer (just in case you were wondering, Larry said no). My boss at the time, Kevin Miller, was flying on one of Oracle's corporate jets with Ray Lane to help close deals!

There were Catering exchanges, there were Contact Lens exchanges, there were Lumber exchanges. Perhaps the worst business plan I ever saw was the Retail Exchange (Sears and Carrefour were 2 of the principles at the time). They called themselves GNX & eventually they merged with WWRE and (wouldn't ya know it) they are still alive and kicking. So they get the last laugh. Goes to show you what I know!

My favorite idea and business plan for an Exchange was in the airline industry, and it was called Aeroxchange. It's still around, and the idea makes as much sense today as it did back then.

Airline maintenance is complicated. And airlines can't afford to have huge inventories of spare parts in all airports. So they have a few places (hubs), where they keep their stuff. And boy do they keep a lot of it. The estimates of excess inventory are astounding: billions and billions and billions. But better to have the spare part yourself than to rely on a competing airline. You see, airlines catch each other in "AOG" status (aircraft-on-the-ground). AOG means you've got a plane unexpectedly in need of service with passengers waiting. You can't take off without a part & a repair. Competing airlines come up with astronomical mark-ups for the part required for lift-off. And the cycle of revenge takes over from there.

Enter Aeroxchange, a modern day version of the old inventory listing services like ILS. Aeroxchange strives to become the trusted agent for airlines and parts dealers & manufacturers, a "neutral party between buyer and seller."

Of course, Aeroxchange turned to reverse auctions to maintain cash flow early on as they were building out their supply chain offering.

The best example I recall was sourcing all the lightbulbs in the cockpit of a particular aircraft, let's say a 737. What? You're not fascinated? The first scary piece of information was that there were over 400 different light bulbs in there. The second piece is that the airlines who participated had all been buying from the same guy. He'd take them golfing and wine and dine them. You know, a real pro on the relationship selling front. Of course, he refused to participate in the event. New suppliers were found, and at a average savings of over 50% (my memory is 73% but it's been 5 or 6 years so don't quote me). I remember feeling pretty badly about the guy who lost the business, until I realized that these more efficient suppliers had been artificially blocked from winning for so long. I believe he may have even sued AeroXchange. Sour grapes.

But with good software, Aeroxchange has an opportunity to build a much more important business than reverse auctions. By maintaining a part history that includes all regulatory requirements – for rotables and non-rotables, including scanned images of certifications, etc, it can be a brave new world. A virtual inventory of all available parts from manufacturers, brokers, and other airlines, with all the information needed to generate a "fair and reasonable" price.

It's idealistic, but that's a good thing, right? Airlines sharing inventory and parts information to make us safer in the air. Airlines benefit by more efficiently maintaining their fleet. With that & their reverse auction savings perhaps they can absorb some of the jet fuel price increases and continue to offer great fares! :)

p.s. As a total aside, here's yet more proof I'm obsessed with commodity prices. Take a look at the jet fuel chart I threw together from here. Can you imagine an airline trying to absorb this cost increase without increasing fares? That's why I was so impressed with Qantas' huge bet & long-term contract on jet fuel before prices really spiked.

 

Written by Dave Stephens

03/27/06 9:23 PM at 9:23 pm

Posted in Historical, Opinion

Legal Services – Clause Subscriptions In Our Future?

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A found this article interesting. Question is, what is a company buying when it seeks out legal counsel? How do you measure value?

Most of corporate America still uses predominantly in-house legal counsel. I find it fascinating. Each company writes their own standard clauses for areas like Returns, Disclaimers, Export Regulations, Remedies, Indemnifications, etc.

Why? Are they really that different? How are best practices shaped?

Contract management systems are shedding new light onto the corporate contracting process. And it's not pretty. In both CRM and Procurement, lawyering seems to "find a way" to bottleneck commerce. And it need not be that way.

Increasingly, corporate contract repositories are helping companies understand the cycle time problems associated with legal re-invention of the wheel. It's yet another example of standard practices enabling a self-service approach to a traditionally centralized and bureaucratic process. (How can we mitigate risk but eliminate legal review for 90% of the contracts?)

Simple contract respositories and their cousins, full-blown contract management systems, seem like a very good investment. But perhaps you're not convinced. Let's say you like the added security of a large central "lawyer bank" doing contract reviews and the authoring of custom clauses by the bushel. Here's what you get for spending all that extra dough: 75 per cent of US companies cannot find 90 per cent of their contracts!

Look at the marketing and positioning of iMany and DiCarta, 2 contract management specialists. It's a no brainer! But oddly enough, these companies and the many, many other dedicated contract management folks out there haven't been knocking the cover off the ball (i.e. customers aren't lining up around the block).

It's a tough space and a tough problem. Never argue with a lawyer unless you want to lose. :) Eventually, the chasm will be crossed & these systems will become more commonplace. And I can't wait. Perhaps this is the one application, the one system that can be used to send the lawyers home with pink slips. You see, Andy Kyte, a Gartner procurement analyst, once speculated clause subscription services from premier, brand-name law firms would soon follow. Corporate lawyer downsizing. Cool!

In the meantime, as you consider how to buy legal services & what to value, I'm no help at all. But I love the idea of putting lawyers in "reverse auction position" and watching them squirm. But be careful! They might get you back!

Written by Dave Stephens

03/27/06 6:34 AM at 6:34 am

Posted in Opinion

Procurement and New Product Design

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“Normal” Procurement organizations help engineering teams by negotiating for components in a pre-set design configuration. But new techniques are emerging where the line between engineer and Procurement professional blurs, and the art of design and procurement fuse into a discipline bound to produce strategic advantage.

Fresh off my rant on the state of US automakers, let me run with an example in that realm. How should an procurement/engineering design team in charge of something fairly straightforward, say the muffler & assembly on a new Mustang, do their job? How should the team develop its plan, validate it, and move into full production? And then how should that subassembly team interact with other subassembly teams & with the overall Mustang design effort?

First, the muffler team puts together candidate designs. The candidate designs will probably share some common components, but will also have uniquenesses. Components will largely come from a CSM system – the automaker will want proven materials for most of the new platform to ensure “buildability”.

Right up front, during this highly creative and adaptable design phase is when a company’s supply base can help the most. By treating the design exercise as a procurement problem just as much as as engineering problem, companies can make much better choices. The process is straightforward: evaluate component pricing, capacity constraints, and other risk factors for each of the designs. Solicit lots of supplier ideas and feedback, and then settle on an approach that provides the best customer value.

The tricky part, of course, is determining what customers actually do value. About all I care about the muffler is that it doesn’t break…

IMHO, now is not the time to run a reverse auction on your helpful suppliers. Just get ballpark prices, and negotiate terms later. You can guess the eventual prices using linear performance pricing as I’ve discussed in a previous post.

Oh, and of course your team will have started out with a budget for the subassembly, so you will have boundary conditions on your designs. No super-charged, zero emission mufflers made out of titanium please..

Next each subassembly team needs to be coordinated in what is a massive, massive undertaking. It’s a nearly impossible set of variables to manage, as trade-offs at a high-level on the car (dent-resistant material, weight requirement, etc) can generate huge swings in the subassembly design.

But many car makers have this process down to a science.

(After settling on a preferred candidate design you’d then build a prototype, perhaps try a light production run, and do everything possible to “prove” you can build in the volumes required for full production.)

McKinsey has called the particular approach I’ve described multi-design benchmarking, or MDD. It’s a practice where multiple designs are benchmarked on price, performance, and other factors, and where the procurement & engineering design team are one. If your German is good you can read about it here. Of course, the broader area has been promoted as a part of PLM solutions, such as those from UGS.

Happy driving! (Photo from Toyota)

Written by Dave Stephens

03/23/06 7:25 AM at 7:25 am

Posted in Opinion