Daily Archives: June 8, 2016

How Does Your State of Flux Measure Up?

Your SRM (Supplier Relationship Management) is in a state of flux. It’s a fact. Policies are undocumented. Processes are not automated. Critical interaction data is not captured. And the majority of your employees interacting with your suppliers on a daily basis cannot even identify five of your top ten strategic suppliers. (Finance might hazard a guess, but while dollars spent is an indicator, it’s not a guarantee.)

A strategic supplier is any supplier that supplies products and / or services that are critical to your operations and that cannot be easily replaced by going out to bid to one of three suppliers in the next state. The supplier might get 1 Million annually and might get 100 Million annually. And if you want the best value from that strategic supplier, you have to be a customer of choice.

How do you become a customer of choice? Good SRM. How do you get good SRM? Good processes, and good platforms. That’s why it’s quite appropriate that this year the annual State of Flux research report is centered around technology. In particular, State of Flux will be researching the use of SRM technology globally, the benefits achieved, and implementation best practices for commercial success.

As with previous years, the 75-question survey takes about 20 minutes and all respondents get a free copy of the annual report, released at the end of October. This report has traditionally been the most extensive research on SRM on the global market and is well worth the time investment.

This year, as a bonus, State of Flux will immediately provide all companies that take the survey a benchmark ranking of how well they are doing against their peers based upon the eight years of survey data they have collected and a standardized ranking system that they are able to use. (And if multiple parties from your organization in different roles complete the survey, they will even augment that benchmark ranking with a SWOT analysis.)

The survey is open until July 1, 2016. Take the survey here.

How to Save a Whopping £500 on 1.0M of Spend!

Unless you are a best-in-class purchasing organization (and that is not the case for 92% of you), then you need to save. Budgets are shrinking. Costs are rising. Growth and consumer spend is flatlining. And if you don’t get your costs under control, you will be out of a job one way or the other.

But there’s a right way to save, and a wrong way to save.

The right way to save is to apply advanced analytics and optimization across your strategic and high spend categories which has proven time and time again to save an average of 10% across the board year after year when properly applied.

The right way to save is to influence and control demand. The only time demand should increase year over year is when it is for products or components that are for sale, or go into for sale products, and sales for those products are increasing. Demand should not increase more than x% for office supplies or MRO where x% is the increase in workforce, and, in fact, in many categories, should be decreasing year over year. For example, paper spend should decrease (since so much can be distributed online). MRO should decrease, as better inventory management and higher quality parts should decrease the number of products required. Etc.

The right way to save is to increase the value of the product sourced without increasing the price, so that even if costs stay constant, value increases and allow for an increased revenue stream.

So what’s the wrong way to save? Capital manipulation. In particular, earlier customer payment and later supplier payment.

The majority of analysts, accountants, and consultants, especially the unenlightened ones, will dazzle you with calculations that show how if you decrease accounts receivable from 30 days to 15 days and extend accounts payable from 30 days to 60 days, the extra 45 days of working capital you have will save you a fortune as you’ll either have to borrow less or can invest more and generate a huge savings on every Million that stays in your coffers an extra 30 to 60 days.

For example, if you have an annual cost of capital of 6% and you typically have to borrow 50% of required working capital to pay your suppliers on a timely basis, you will be paying:

  06% ACC   12% ACC  
Borrowed Amount 30 days 60 days 30 days 60 days
1 M  5,000 10,000 10,000 20,000
10 M  50,000 100,000 100,000 200,000
50 M   250,000   500,000   500,000 1,000,000

And as soon as a CFO at a mid-size company believes that if he can squeak out an extra 60 days across 50 Million of expenditure at 6%, he can save £500,000, a blind mandate to delay payment terms and expedite payment collection goes out across the board. And then CFO pats himself on the back and goes on a well deserved corporate retreat to the next conference he can find at a mountain resort.

But what actually happens?

If you do the proper calculation, which is:

You see that very little is actually saved because the savings is on the cost of capital for the payment days of the amount, NOT cost of capital for the payment amount. Which is a much smaller number. If you do this calculation, the real numbers are:

  06% ACC   12% ACC  
Borrowed Amount 30 days 60 days 30 days 60 days
1 M  500 1,000 1,000 2,000
10 M  5000 10,000 10,000 20,000
50 M   25,000   50,000   50,000 100,000

Remember, in the long run, the payments still have to be made and, most importantly, still have to be made on a monthly basis. So while you might see a savings the first month, there will be no further savings because all you have done is shifted all payments ahead by x days. A payment delayed is not a payment negated.

Moreover, all you’ve really accomplished is p!ss!ng off the supplier. And any chance of being a customer of choice has been thrown under the bus, where you effectively threw the supplier, who now has to borrow more capital to stay in operation, often at a rate double yours. In other words, the whopping £5K you saved likely cost the supplier £10K and, at the end of the contract, the first thing they are going to do is increase their costs substantially to cover their loss. So, at the end of the day, your short term savings of £5K is likely going to cost you £15K or more (especially when you consider the value associated with being a customer of choice). But hey, the CFO is always right, right? Wrong!

Don’t believe the doctor? Check out this great piece over on the public defender‘s blog that goes through this calculation in even more detail.