How much do currency fluctuations matter in sourcing decisions? The answer is simple: they matter a lot.
If you are in India and buying from America and your contract is in dollars then you are bleeding money like hell. Rupee was at Rs39.36 in Jan 08 and in Dec 08 it had moved to Rs 49.66, 26% decrease in value of Rupee. Now take an example of a contract of a part worth $100 dollar made in Jan 08, it would have cost the company Rs3, 936. But if you had re-bought the same part at same price of $100 in Dec 08, it would have cost at Rs4, 966. Oops!!! You lost 1000 bucks if you don’t understand the currency fluctuations.
Similarly the weaker Indian Rupee has helped the Indian Outsourcing and IT industry in great deal. Now with Dollar hovering at around Rs 52 in March 09 things have become slightly easy for Indian ITES Industry and exporter.
Dollar being primary currency of trade globally so it is very important to understand what its fluctuation means to the world. Currently dollar is very strong despite of economic uncertainties in the US economy. The main reason for that is flight to safety into U.S. Dollars and U.S. Treasuries by different governments who still perceive the US economy to be the safest.
But Strong dollar is hurting the US industry most right now because it is making American goods much more expensive abroad thus making American industry uncompetitive abroad. Similarly Toyota posted loss for the first time in its history thanks mainly due to huge drop in sales but also due to the fact that Yen has become very strong vis a vis the dollar.
Due to these factors Sourcing decisions are becoming increasingly complex. Anticipated savings can disappear due to currency fluctuations alone. Two equally capable suppliers from different companies who had quoted at same US dollar price equivalent can end up generating significantly different costs for the buyer over along contract period.
But forecasting currency changes is extremely risky and tricky. Companies can go for “Hedging” of currency to offset any high risk associated with fluctuation but this policy can boomerang if the dollar becomes weaker thus leaving you with higher import bill.
It’s important that companies model the possibility of changing currency values when making global sourcing. Too often, those analyses are made using current exchange rate levels, and don’t well vet the impact if those ratios change significantly. Doing different analysis to understand the change in costs under different currency scenarios can lead to more informed and balanced decisions.
On the other hand, fear of exchange rate changes shouldn’t cause companies to abandon outsourcing strategies that have the opportunity to lower costs. This argues for maintaining a maximum level of operational flexibility in terms of sourcing. While this may result in somewhat higher costs versus the optimum strategy at the present moment, the huge swings in currency values seen across the globe in recent years place a premium on flexibility, which should result in overall lower costs over time.
Buyers can also try to secure contracts that lock in a price regardless of currency changes for a given period. This, in a sense, can be a form of hedging, as the overseas supplier may command a higher unit price for this guarantee. They may also negotiate large shipments as the “price” of this guarantee, in which case buyers must weigh the potential increase in inventory holding costs against currency swing protection.
Companies can also sometimes negotiate a risk-sharing clause in offshore contracts. For example, the buyer and seller might agree to split any changes in currency swings, regardless of direction. The downside to this strategy – currency swings that increase the value of the U.S. dollar would result in higher unit costs, not further reductions, as would be the case without such a risk sharing clause.
Saturday, March 28, 2009
Thursday, March 26, 2009
Total Value Management
Purchasing has evolved from simpler buy and sell to find absolute value of every dollar amount you spent.
There have been many concepts to ascertain value of spent.
PPU: Price per Unit, it is the cost paid for each bought unit. Although it never gives the true cost of owning the unit
TCA: Total Cost of Acquisition, It takes into account multiple variables – PPU, transportation costs, duties, tariffs, temporary storage costs, and any other external cost that is incurred from the time an order is placed to the time the product is received.
TCO: Total Cost of Ownership, The most talked about concept. It takes into account all direct costs (such as PPU, transportation, tariffs, etc), indirect costs (product utilization costs, switching costs, transaction costs, etc), and quantifiable market costs (quality, brand, etc.). It captures every cost associated with the product and gives a total usage cost and it is often considered the best comparative cost metric.
However All concepts were cost based concepts and were focused on short term goals of cost optimization. Now the latest concept to measure sourcing value is TVM (Total Value Management).
TVM: Total Value Management, It is a comparative cost metric that quantifies the overall cost of each acquired unit relative to the overall value of the spend category as it relates to the organization’s sourcing strategy and supply chain goals.
To understand this concept take an example of a sourcing done considering Total Cost of Ownership and Multi Year Contract is awarded with considerable cost savings based on the current cost model. But no overview is done on the actual implementation of the contract. If due to certain issues you were forced to give extra money like due to urgent shipment, late order, sudden breakdown of the current tool etc the actual savings after the contract period becomes negative due to extraordinary “leakages” in the system.
TVM concept not only takes into account the overall total cost of each acquired unit from a direct, indirect, and quantifiable market cost viewpoint, but the impact costs of deviating from the overall sourcing and supply chain strategies.
Strategic sourcing is sourcing for value, not lowest cost. Sometimes value is gained by selecting a lower cost provider, and sometimes value is gained by selecting a higher cost provider with greater quality and reliability. Producing poor quality products or failing to meet demand hurts both current and future sales. TVM insists all value-based measures and costs are included in the model, thus minimizing potential risks.
There have been many concepts to ascertain value of spent.
PPU: Price per Unit, it is the cost paid for each bought unit. Although it never gives the true cost of owning the unit
TCA: Total Cost of Acquisition, It takes into account multiple variables – PPU, transportation costs, duties, tariffs, temporary storage costs, and any other external cost that is incurred from the time an order is placed to the time the product is received.
TCO: Total Cost of Ownership, The most talked about concept. It takes into account all direct costs (such as PPU, transportation, tariffs, etc), indirect costs (product utilization costs, switching costs, transaction costs, etc), and quantifiable market costs (quality, brand, etc.). It captures every cost associated with the product and gives a total usage cost and it is often considered the best comparative cost metric.
However All concepts were cost based concepts and were focused on short term goals of cost optimization. Now the latest concept to measure sourcing value is TVM (Total Value Management).
TVM: Total Value Management, It is a comparative cost metric that quantifies the overall cost of each acquired unit relative to the overall value of the spend category as it relates to the organization’s sourcing strategy and supply chain goals.
To understand this concept take an example of a sourcing done considering Total Cost of Ownership and Multi Year Contract is awarded with considerable cost savings based on the current cost model. But no overview is done on the actual implementation of the contract. If due to certain issues you were forced to give extra money like due to urgent shipment, late order, sudden breakdown of the current tool etc the actual savings after the contract period becomes negative due to extraordinary “leakages” in the system.
TVM concept not only takes into account the overall total cost of each acquired unit from a direct, indirect, and quantifiable market cost viewpoint, but the impact costs of deviating from the overall sourcing and supply chain strategies.
Strategic sourcing is sourcing for value, not lowest cost. Sometimes value is gained by selecting a lower cost provider, and sometimes value is gained by selecting a higher cost provider with greater quality and reliability. Producing poor quality products or failing to meet demand hurts both current and future sales. TVM insists all value-based measures and costs are included in the model, thus minimizing potential risks.
Tuesday, March 24, 2009
Supplier Risk Mangement
The major role of the buyer is to manage his business with all his suppliers. One bad supplier can ruin the complete supply chain thus managing supplier proactively is critical. Also if you add the current situation of global uncertainty managing supplier is very high on priority list.
In a more general term if you ask any buyer whether he will be able to manage his business if one of his top three suppliers fails. The answer comes out as NO. Also companies go to great lengths to assess the quality of the suppliers output or there delivery model but do very less on assessing how much strong supplier financial and production aspects are.
So it is very important for companies to implement a supplier focused risk identification and management model. The basic framework of supplier risk management should include:
1. Communication is key: To manage supplier the communication is the key. The best a buyer can do is having an information strategy that calls for more emphasis on risk management. If you talk to suppliers on daily or weekly basis regarding what’s happening in their organization, it would provide an input to vast information as to what might go wrong and you can sense whether an issue with supplier is coming or not. This acts as a predictive model for supplier risk management.
2. Making an Effective Process: Make a strong process to monitor and mitigate risk. The process should measure, monitor and mitigate risk using a repeatable and scale able process. The process should be rating supplier in green yellow and red zones. The green one the best and red being worst. Whenever a supplier enters red zone, there should be a defined process to analyze whether it is worth to continue business with him and if yes then how and when supplier will come out from the red zone.
The common criteria for supplier ratings include:
a) Quality- ppm
b) Delivery – Schedule Adherence.
c) Cost / Price - Savings targets
d) Capability
e) Service.
Suppliers and Buyers should also utilize supplier ratings system to drive performance and improve the business relationship.
3. Incorporate it in sourcing Decision: Now most companies think risk management comes from continuous evaluation of their supplier base. There is a critical error in that Risk management of supplier should start at the sourcing cycle itself. Incorporate risk mitigation evaluation in your sourcing decision making and supplier evaluation cycle itself. Once Suppliers are identified due diligence should be done on their economic and functional risks. Only then a supplier can be selected.
4. Develop Exit Strategies: Buyers should always augument their knowledge and resources relating to potential exit strategies. The main goal should always be no supply chain disruptions.
Supplier Risk management should not be a single activity done once or twice in an year but should be a continuous process. The goal should be to find the best tactic to deal with any general issue or a specific one. A good business sense is to look every movement and every factor more closely as you can so as to predict a failure before it effects your supply chain.
In a more general term if you ask any buyer whether he will be able to manage his business if one of his top three suppliers fails. The answer comes out as NO. Also companies go to great lengths to assess the quality of the suppliers output or there delivery model but do very less on assessing how much strong supplier financial and production aspects are.
So it is very important for companies to implement a supplier focused risk identification and management model. The basic framework of supplier risk management should include:
1. Communication is key: To manage supplier the communication is the key. The best a buyer can do is having an information strategy that calls for more emphasis on risk management. If you talk to suppliers on daily or weekly basis regarding what’s happening in their organization, it would provide an input to vast information as to what might go wrong and you can sense whether an issue with supplier is coming or not. This acts as a predictive model for supplier risk management.
2. Making an Effective Process: Make a strong process to monitor and mitigate risk. The process should measure, monitor and mitigate risk using a repeatable and scale able process. The process should be rating supplier in green yellow and red zones. The green one the best and red being worst. Whenever a supplier enters red zone, there should be a defined process to analyze whether it is worth to continue business with him and if yes then how and when supplier will come out from the red zone.
The common criteria for supplier ratings include:
a) Quality- ppm
b) Delivery – Schedule Adherence.
c) Cost / Price - Savings targets
d) Capability
e) Service.
Suppliers and Buyers should also utilize supplier ratings system to drive performance and improve the business relationship.
3. Incorporate it in sourcing Decision: Now most companies think risk management comes from continuous evaluation of their supplier base. There is a critical error in that Risk management of supplier should start at the sourcing cycle itself. Incorporate risk mitigation evaluation in your sourcing decision making and supplier evaluation cycle itself. Once Suppliers are identified due diligence should be done on their economic and functional risks. Only then a supplier can be selected.
4. Develop Exit Strategies: Buyers should always augument their knowledge and resources relating to potential exit strategies. The main goal should always be no supply chain disruptions.
Supplier Risk management should not be a single activity done once or twice in an year but should be a continuous process. The goal should be to find the best tactic to deal with any general issue or a specific one. A good business sense is to look every movement and every factor more closely as you can so as to predict a failure before it effects your supply chain.
Thursday, March 19, 2009
The Strategy of Supply Chain Cost Reduction
In the era of recession every industry wants to rationalize their spend by initializing various strategies to cut costs. But do cutting costs across the board is the right way of achieving success is recession?
There are various views on this while most companies are doing aggressive cuts in all sphere of business like payroll, advertising, consulting, strategic initiatives etc. But again is it the right approach? Jim Tompkins (of Tompkins Associates) recently published a very detailed article on this where he emphasized on the fact that cut, cut, cut across the board is not a right strategy.
The cost in an organization can be broken into three categorize i.e Capitol and operating costs, Talent and Resource cost and strategic costs.
While Capitol and Operating costs are traditional ongoing expenses and full emphasis should be given on reducing this cost. Talent and Resource Cost should be carefully analyzed and any decision to cut here should be taken after due prudence. The talent pool is essential for the running of the organization and will be an important asset to turnaround the company towards success and profitability. Strategic Cost must be protected at all costs. Taking any decision to cut this will be suicidal for the organization as it will have nothing left to innovate and succeed if they do not make any strategic initiatives.
So how do you achieve true cost reduction?
The answer to the question is doing it in a very aggressive and intelligent way. As Jim points out Today's marketplace is full of folks who want to help reduce capital and operating costs in a piecemeal fashion. Transportation costs, purchase costs, customs and duty costs, inventory carrying costs and distribution center costs are all very, very important expenses that in these difficult times need to be reduced, and you should do so aggressively and intelligently.
The answer to the riddle is an integrated, holistic approach that increases profitability and puts your company in a stronger competitive position.
There are various views on this while most companies are doing aggressive cuts in all sphere of business like payroll, advertising, consulting, strategic initiatives etc. But again is it the right approach? Jim Tompkins (of Tompkins Associates) recently published a very detailed article on this where he emphasized on the fact that cut, cut, cut across the board is not a right strategy.
The cost in an organization can be broken into three categorize i.e Capitol and operating costs, Talent and Resource cost and strategic costs.
While Capitol and Operating costs are traditional ongoing expenses and full emphasis should be given on reducing this cost. Talent and Resource Cost should be carefully analyzed and any decision to cut here should be taken after due prudence. The talent pool is essential for the running of the organization and will be an important asset to turnaround the company towards success and profitability. Strategic Cost must be protected at all costs. Taking any decision to cut this will be suicidal for the organization as it will have nothing left to innovate and succeed if they do not make any strategic initiatives.
So how do you achieve true cost reduction?
The answer to the question is doing it in a very aggressive and intelligent way. As Jim points out Today's marketplace is full of folks who want to help reduce capital and operating costs in a piecemeal fashion. Transportation costs, purchase costs, customs and duty costs, inventory carrying costs and distribution center costs are all very, very important expenses that in these difficult times need to be reduced, and you should do so aggressively and intelligently.
The answer to the riddle is an integrated, holistic approach that increases profitability and puts your company in a stronger competitive position.
Tuesday, March 17, 2009
Buyers Strategy in Recession : Business Consolidation
The times are tough for most companies globally including both OEM and suppliers. The buzz word during any recession is cost cutting. With declining revenues, companies are looking to reduce costs to preserve profit margins. Now how can a buyer manage sourcing decisions during recession while achieving both business continuity and cost savings targets.
There are lots of factors in favor of buyers:
· Opportunity to have a discussion with your supplier to have cost savings. In times when you are under extreme pressure of savings target you can ask the same to your key suppliers for cost savings and make them recognize the need. It’s perfect opportunity to start a discussion.
· Business consolidation is key. You may have five suppliers for a particular product and you have given all equal share of business. Now is the time to consolidate. Suppliers will be more than willing to have additional business as overall volume has reduced while providing you the most competitive pricing. It’s a win win situation for both parties as more business with key suppliers will bring cost down.
· Lower Commodity pricing are there lowest since 2005, this helps in making a strong business case with your existing supplier base to pass on the cost savings.
There are few factors unfavorable also:
· Suppliers unwilling to hold prices due to extremely low volume. You might be producing 1000 parts in good times but with reduced volume of 500 parts the complete costing of the part goes for a toss.
· Supplier must be fighting to save his operations and would have no opportunity to have any new initiative for you.
Overall it’s a tightrope for a buyer. The mantra for success is consolidation of supplier base by identifying key long term players and focusing your purchasing strategy around them. Offer them more business by cutting the smaller player and push them to work harder.
There are lots of factors in favor of buyers:
· Opportunity to have a discussion with your supplier to have cost savings. In times when you are under extreme pressure of savings target you can ask the same to your key suppliers for cost savings and make them recognize the need. It’s perfect opportunity to start a discussion.
· Business consolidation is key. You may have five suppliers for a particular product and you have given all equal share of business. Now is the time to consolidate. Suppliers will be more than willing to have additional business as overall volume has reduced while providing you the most competitive pricing. It’s a win win situation for both parties as more business with key suppliers will bring cost down.
· Lower Commodity pricing are there lowest since 2005, this helps in making a strong business case with your existing supplier base to pass on the cost savings.
There are few factors unfavorable also:
· Suppliers unwilling to hold prices due to extremely low volume. You might be producing 1000 parts in good times but with reduced volume of 500 parts the complete costing of the part goes for a toss.
· Supplier must be fighting to save his operations and would have no opportunity to have any new initiative for you.
Overall it’s a tightrope for a buyer. The mantra for success is consolidation of supplier base by identifying key long term players and focusing your purchasing strategy around them. Offer them more business by cutting the smaller player and push them to work harder.
Sunday, March 15, 2009
Lean Purchasing
In the past decade the concept of Lean Manufacturing has picked up in a great deal. Companies are looking forward for reducing wastage in the system and improving performance and efficiency. This resulted in reduced inventory, increased throughput and improved customer service levels. Using the similar dynamic concept of lean companies are now moving fast ahead in Lean Purchasing. This concept helps companies to broaden their framework of Lean concept deeper into their supply chain.
Lean Purchasing is a long term commitment to combine elements of strategic sourcing and Lean principles. It provides visibility to suppliers about customers current and future business and stressed at lasting, collaborative relationships with suppliers and business partners.
The key to lean purchasing is visibility. Suppliers must be able to "see" into their customers' operations and customers must be able to "see" into their suppliers' operations. Organizations should map the current value stream, and together create a future value stream in the procurement process. They should create a flow of information while establishing a pull of information and products. Lean purchasing calls for partnering with supplier and understand the total cost of doing business with a particular supplier.
The first step in conducting any type of Lean Sourcing initiative involves understanding where dollars are spent. Companies often track expenditures by supplier, but this approach is limiting, particularly if there are a large number of parts (e.g., over several thousand). Companies that manage their expenditures by part groupings or categories typically have a better handle on where their dollars go and can analyze pricing trends over time.
The Benefits:
Lean Purchasing provides four key benefits to organizations. These are:
· Greater buy-in from key functional areas—operations and purchasing which care about both price and performance
· Greater likelihood of implementing identified sourcing savings
· Improved quality and reduced waste
· On-going additional cost reduction opportunities via collaboration with supply partners
More advanced organizations that begin to experiment with lean purchasing quickly realize that strategic sourcing does not have to be in conflict with lean. Rather, they observe that strategic sourcing is really a precursor step to identifying long-term supply partners and more tightly coordinating purchasing efforts with operations and manufacturing. They also realize that in an increasingly global supply market, conditions change and leading companies need to regularly go to the market to identify, qualify, benchmark, ensure best global supplier capability and competitiveness.
Today, Lean Purchasing is making its way into the middle market, where smaller organizations are beginning to realize that strategic sourcing provides a means for substantial cost savings and at the same time addresses the concerns of operations personnel. Many are beginning to bridge the gap between procurement and operations by getting started with Lean Purchasing. At its core, Lean Purchasing is really about reducing Total Enterprise Cost.
Lean Purchasing is a long term commitment to combine elements of strategic sourcing and Lean principles. It provides visibility to suppliers about customers current and future business and stressed at lasting, collaborative relationships with suppliers and business partners.
The key to lean purchasing is visibility. Suppliers must be able to "see" into their customers' operations and customers must be able to "see" into their suppliers' operations. Organizations should map the current value stream, and together create a future value stream in the procurement process. They should create a flow of information while establishing a pull of information and products. Lean purchasing calls for partnering with supplier and understand the total cost of doing business with a particular supplier.
The first step in conducting any type of Lean Sourcing initiative involves understanding where dollars are spent. Companies often track expenditures by supplier, but this approach is limiting, particularly if there are a large number of parts (e.g., over several thousand). Companies that manage their expenditures by part groupings or categories typically have a better handle on where their dollars go and can analyze pricing trends over time.
The Benefits:
Lean Purchasing provides four key benefits to organizations. These are:
· Greater buy-in from key functional areas—operations and purchasing which care about both price and performance
· Greater likelihood of implementing identified sourcing savings
· Improved quality and reduced waste
· On-going additional cost reduction opportunities via collaboration with supply partners
More advanced organizations that begin to experiment with lean purchasing quickly realize that strategic sourcing does not have to be in conflict with lean. Rather, they observe that strategic sourcing is really a precursor step to identifying long-term supply partners and more tightly coordinating purchasing efforts with operations and manufacturing. They also realize that in an increasingly global supply market, conditions change and leading companies need to regularly go to the market to identify, qualify, benchmark, ensure best global supplier capability and competitiveness.
Today, Lean Purchasing is making its way into the middle market, where smaller organizations are beginning to realize that strategic sourcing provides a means for substantial cost savings and at the same time addresses the concerns of operations personnel. Many are beginning to bridge the gap between procurement and operations by getting started with Lean Purchasing. At its core, Lean Purchasing is really about reducing Total Enterprise Cost.
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