Return to Gunpowder

 This Issue—May 2005
In this fifth edition of Gunpowder, our trusty European correspondent, Stuart Burns, ignites a bit of a controversy by offering a perspective on what sourcing professionals can learn from commodities traders. Having run a metals trading desk for over twenty years, Stuart has a unique perspective on how traders approach direct materials sourcing. Back on this side of the Atlantic, Lisa Reisman offers some candid perspectives on how automotive suppliers can increase their attractiveness to outsiders, especially OEMs and Tier 1’s. Last, we have adopted a few of Jason Busch’s entries from Spend Matters, a blog dedicated to Spend Management. In this edition, Jason tackles the future of spend visibility and analysis.

Disagree with us or got an idea for an article? Let us know:

Tricks of the Trade—A Commodity Trader’s Approach to Sourcing

Based on having spent twenty years of my career moving direct materials around the world on my account, I can honestly say that traders view the world differently from many procurement professionals. While I would not propose to anyone that a trader’s approach to purchasing is a desirable way to run a major manufacturer’s supply side, there are certainly a number of lessons that a professional purchasing manager could learn from trading to secure his or her aims.

First, true traders tend to look at the world globally; they are never focused on one market either for buying or selling. Theirs is a highly opportunistic approach to business driven entirely by the need to arbitrage transitory opportunities as they arise (from basic metals to complex fabrications).

Consequently, traders will always have their finger on the pulse of foreign exchange movements and commodity markets. A good trader is incredibly sensitive to how a shift can open or close purchase or sale opportunities in different countries. Likewise, traders know from experience which ports have direct shipping services, which require transshipment, which are prone to congestion delays, strikes, and where container availability is at a premium. A good trader knows that shipping rates can vary significantly among ports which are even within relatively close proximity. And they know that this is driven by the global flow of products into buoyant markets where thousands of buyers and suppliers are competing for space. They also know that price variance can manifest seasonally as well (e.g., variability of truck rates into and out of Russia).

Second, a traders—instinct is to sort supply decisions for semi or fully manufactured products by engineering complexity rather than product. For example, a trader may intuitively search for manufacturers of products requiring medium to high degrees of machining but in small production runs from India, regardless of whether they are made from Steel, Aluminium or Plastic because he knows that similar drivers will influence the comparative competiveness of suppliers handling those different materials. A trader knows how the underlying structure of each country’s industrial base can be used to gauge pricing even before sending up an RFI. And traders are also always ready to “cream skim”” and take savings where they can, whereas a purchasing professional will tend to take a more disciplined approach, only looking to re-source larger volumes and complete categories, often missing valuable savings.

Third, traders are an impatient breed and are often driven by short-term time scales and a realization that they need to maintain momentum if they are to seal a deal before a competitor appears (which often leads them to create fictitious deadlines to speed along a deal). As a result, their offers will be time limited with short validities. And they’ll often tell stories of competing demands on the material or the supply source. This may sound like a game, but the result can create rapid closure on a situation that could otherwise possibly unravel over time, or take months (or years) to come to fruition.

Last, like the merchants of old, traders are sometimes branded with having a cavalier approach. But while there are certainly some who would qualify for this badge, their willingness to often look outside of the box is also an asset. From personal experience, I can say that traders have very little regard for multinational corporate sales hierarchies or global sales networks. If a trader is not getting the price he needs from the sales channel of a multinational in his own country, then he’ll often look to a sales channel in another country.

A good trader also keeps his cool under pressure and knows that the majority of sales networks within suppliers are loose and uncoordinated (and that a supplier will rarely discover that he has been had by an internal market a trader has created within his organization). I once purchased chemicals from the 6th floor of Shell Petroleum’s headquarters in London and sold it back to the 9th floor. But let’s keep that between us!

Stuart Burns is Managing Director of Aptium Global where he leads the firm’s practice in Europe and Asia.

Increasing Your Value: An Automotive Supply Approach

In today’s increasingly transparent markets, it’s no longer a black science for outsiders (including customers) to predict the financial and operational performance of other organizations. Thanks to companies like Open Ratings, which rely on external and internal information feeds, buying organizations are now able to continuously evaluate the stability and ongoing performance of their suppliers.

But this does not imply that suppliers need to sit idle. In the automotive environment, they’re a number of things that suppliers can do to improve how customers perceive them. A short list of these factors should always begin by looking at lean. Is your company TS16949 certified—and more important, does your organization breathe and live its ideals? Do you follow standardized work procedures, incorporate 5S systems, maintain visual controls, have a best in class plant layout, and strive to eliminate inventory (both WIP and finished)? Does your organization implement Kaizen events as part of its standard operating procedure? From a lean perspective, a buyer can look at these lean elements along with others (e.g. pull/kanban, cellular flows, Total Productive Maintenance, quick changeovers etc) and make an immediate snap judgment about your operational efficiency.

Next, focus on quality levels. Many smart buying organizations look for suppliers who can produce with an internal customer PPM of less than 50. In addition, to differentiate yourself to the Tier 1’s and OEMs, demonstrate value added capabilities such as engineering and the ability to deliver innovative solutions such as integrated systems.

The quality and track record of your organization’s management team can also help convince buyers of your value. Has the team languished in middle management in the past or stagnated in family-based leadership roles? What are there operational and management qualifications? What will references say about your leadership? All of these are questions smart buyers ask in evaluating partners.

Global capabilities—and reach”can also go a long way to convince buyers that you’re getting the best pricing and selling into the most appropriate markets. But don’t forget the location of your supplier facilities (smart buyers will balance global capabilities with the ability to evaluate how you can cost effectively deliver your parts in a lean environment). What is your company’s on-time delivery record? Still, having—and being able to talk about—your ““Asia strategy”” is also important to improving how buyers perceive you.

Last, buyers are increasingly evaluating suppliers on the concepts of lean sourcing. Do you proactively bid out materials and parts? Are you aggressively and proactively managing suppliers using tools, techniques, and standardized practices? Suppliers who perform these activities will not only have a greater chance of survival—they also have a better understanding of what it means to run world class operations. And they’re more valuable to their clients as a result.

Lisa Reisman is Managing Director of Aptium Global where he leads the firm’s practice in North America.

Unlocking the potential of Spend Visibility

In my Spend Management travels over the years, I’ve had the opportunity to work alongside purchasing organizations, consultants, and analysts alike. And if there’s one thing everyone universally agrees on, it’s the need to gain better visibility and insight into what organizations buy and how they’re buying it.

Spend Management vendors agree with this as well. In less than two years, the number of independent providers with spend visibility and analysis solutions has dropped precipitously, as broader suite vendors have snapped them up. Ariba acquired Softface and FreeMarkets. Emptoris snapped up Zeborg. And Verticalnet devoured Tigris. The only remaining stand-alone vendor of any scale is Zycus.

Due in part to this market consolidation, new approaches to supplier and spend analysis will soon emerge that incorporate advanced technology and information management. For example, emerging applications will have the ability to look at spend data and understand it with the context and clarity as a commodity manager/expert while reducing systems complexity. These types of systems will recognize and cleanse information based on a set of adaptive rules without creating a new system of record. The analogy is to think of these future approaches as a portable spend prism when you draw the prism over information, it automatically extracts what it needs to.

Previously, solutions to manage spend data would also rely on a subject matter expert to interpret it. But these new approaches will embed expertise which allows companies to manage the classification process while building new unique approaches to managing information. Many of these approaches will rely on a semantic knowledge base and natural language system. In theory, this new type of analysis technique—which is unproven in the spend analysis field but has already been used in other areas such as customer data integration (CDI) and catalog information management—will work very well for spend and supplier analysis as well. The beauty of this is that once a system is set up—and the rules are determined and embedded—integration with new systems (e.g., those of a potential acquisition target), will be a breeze—at least in theory.

The flexibility and rules driven approaches these technologies use will enable organizations to pull and push information nearly instantaneously from multiple systems while applying any classification code / structure to it—even on the fly (e.g., UNSPC, Federal, maintenance, etc.) In essence, these future solutions will enable organizations to take spend data from any number of disparate sources, standardize it, and then classify it without expert intervention, in essence providing real-time spend classification, regardless of source and interface. The notion is that the spend / supplier analysis will be a rules-based outcome—which can be displayed through any interface (a portal, web-service, etc.).

In the future, visibility will not just be about improving an organization's internal spend and supplier management capabilities. It will also be about incorporating external information to make more informed decisions to predict and model supplier—and supply market—performance. Want a peek at the future? Check out Open Ratings. They claim the ability to predict both supplier financial and operational performance, based on comparing dozens of external information feeds (e.g., D&B) with internal information. Fascinating stuff.

Jason Busch is editor of the blog Spend Matters. He is also Managing Director of Azul Partners.




This newsletter is published by Aptium Global Inc a direct material advisory firm based in Chicago, IL. With offices in the UK, China, India and a network of global associates, Aptium Global works with small and medium sized manufacturing companies to save money on direct material purchases. Smaller companies face the same cost pressures as the Fortune 500, yet often lack budgets for cost reduction services. Aptium Global works with organizations on a pay-as-you-save™ basis, minimizing impact on cash flow and maximizing impact on the bottom line. We aim to publish this newsletter on a monthly basis but reserve the right to miss a few deadlines here and there.

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