Business & Technology Nexus

This story continues to interest me. Although China denied its secret price cap policy wrt iron ore prices, (see here), it continues to try and come to the aid of its steel industry. The Financial Times gives a great update here. And Austrailia’s reaction is captured here.

Since the outcome of this game of chicken will likely set not only iron ore prices but also the price of steel, it’s time to pop some popcorn and watch this drama unfold. Could a WTO dispute be next?

Could the Procurement discipline be at long last making inroads into Marketing spend? Read this, maybe so.

The world’s best Marketing often defies quantification. How do you measure the value of Apple’s “1984” campaign, or the BMW tagline: “The Ultimate Driving Machine.” Most marketing professionals might shrug their shoulders and say you pay for talent, and talent is something you “know when you see.” But of course this drives most Procurement professionals crazy – it’s just fine paying extra for top-notch service and better results, but where are the measurements?

This attitude spills over into more quantitative buying within the Marketing domain: buying ads, print runs, and space rental for events.

Companies that stay true to their Marketing “missions” and yet engage and rely on Procurement professionals for help should do well. And perhaps their numbers are growing.

Ralph Colunga was appointed to lead Oracle’s travel management program this past October. He works out of Rocklin, CA, and is Director, Global Procurement Services. He reports directly to Greg Tennyson, Oracle’s Vice President of Global Procurement. Ralph’s organization consists of 5 parts he calls “TMSDC” – Travel, Meetings, Sourcing, Data, and Card.

I interviewed Ralph to learn about his plans and progress transforming Oracle’s global travel practices. And as an Oracle shareholder, what I learned made me a little more comfortable with my ongoing investment.

[For background on Ralph’s prior experience at Cisco, look here and here.]

The Problem

Ralph started by defining the need for change at Oracle. He found a fragmented global organization which was run, for the most part, very much regionally.

“There was no defined global strategy,” Ralph said. “And there was limited communication between regions and with our customers.” And worst of all, “there was a lack of meaningful travel data” to determine the best course of corrective action.

Ralph is concentrating his efforts on establishing what he calls “a plug-and-play environment.” And he’s making progress. Oracle now has regional teams reporting with a solid line up to his central group. They’ve also instituted global policies – ones that can be consistently applied within regions. Once complete, resources will be more interchangeable. For instance, an AsiaPac travel manager can fill in for a European travel person in a pinch. They will truly form more of a global team. But procedures and processes must be standardized and aligned first!

“Look at why Southwest is successful. They have 1 type of aircraft, which means 1 type of pilot, 1 kind of maintenance crew. In addition, they have employees with broad enough skill to be flexibly applied to changing conditions. It’s a great operating model.”

Ralph stated Oracle is moving to build a best in class travel model that includes:

• Identifying and leveraging travel patterns and volumes to the supply base creating focused spend with an optimized number of suppliers resulting in economies of scale (English translation: analyzing spend, aggregating it, and negotiating volume deals)
• Increasing and improving user discipline and policy compliancy
• Providing comprehensive, meaningful reporting
• Standardizing global travel processes and procedures
• Establishing simplified pricing models
• Implementing technology to improve operating efficiencies such as self booking
• Mitigating risk and enhanced emergency assistance

It’s an ambitious agenda and will take quite awhile to progress.

On Travel

One quick win Ralph is pursuing is the global consolidation of travel sites servicing Oracle’s needs. “When I joined, no one knew how many travel sites there were. You can’t fix a problem you don’t even know exists.” So, the travel team surveyed the situation and found 71 Carlson-Wagonlit centers and 19 others. Now his people are working to get these numbers down, thereby reducing costs of operations and improving the consistency of service at the same time.

Out of the 600 or so airlines worldwide, Oracle has contracts with 28. “Our challenge is to communicate to the masses (employees) about why it’s in their collective best interest to go with a contracted carrier. Communicating policy and our supplier logic is critical.”

If there was an area of disagreement I had with Ralph, it was probably around how the LOB needs to manage travel in concert with the central travel group. I’m a fan of pre-trip approval and other “no surprise” policies. But Ralph countered: “If you don’t trust your employees, why are they here.” He believes in a pre-awareness strategy versus pre-approval (which he knows sometimes results in manual processes). When I pressed further, expressing a desire for LOB overrides on “expensive” yet corporate-approved standards, Ralph held his ground: “Our employees are our most important asset. We have to have a travel program that makes common sense from their viewpoint. If it comes down to a few hundred dollars difference for more convenience or safer travel, so be it.”

Ralph continued his argument. “Travel is the 3rd largest controllable expense. But what are travel and entertainment expenses as a % of sales? A point? We could implement a system that would get people to stop traveling. But when you are trying to grow the top line of your business and ensure your success that’s the last thing you should do.”

So Ralph is pro-travel, but don’t mistake him for someone who doesn’t care about the bottom line. “I believe in the three T’s: track it, trend it, then trim it.”

On Event Management (Meetings)

Ralph remembers a shift in the early 90′s when it came to hotel policy around events. “It used to be group rates were lower than contracted rates, but Marriott and others changed that. They started charging more for blocking out rooms for a group. It doesn’t make sense, but often they can get away with it.”

Ralph’s group works in concert with Marketing to make sure Oracle’s gigantic events and even smaller, more intimate gatherings have the logistical support they need. And the strategy for hotels? “Our transient, contracted rates will be the same as our group rates.”

On Sourcing

Ralph believes in organizationally separating operational management from the sourcing practice. “We want our operational teams to be focused on improving customer service and dealing with the day-to-day tactical issues.” Separately, Ralph will have Sourcing teams who perform contract negotiation and oversee supplier management. “Their role is more strategic in nature,” Ralph adds.

On Data And Card

“Travel data is always fragmented. It comes from 3 sources, and none are perfect: your card program, your agencies, and your suppliers. You need to aggregate these to get a complete view of your spend.”

“We are pursuing a data warehouse which will combine supplier, card, and agency data sources to get the best possible view of Oracle’s travel spend. It will never match GL perfectly, but it will be close.”

Summary

“Our program is still in it’s early days. We are just completing our ‘Discovery Phase’ and are now in a ‘Recovery Phase’ where we are deciding which programs we will introduce, re-evaluating key suppliers, and negotiating new contracts. Then it’s on to our ‘Implementation Phase’.”

Ralph is an experienced professional well on his way in transforming Oracle’s travel programs. And the destination appears well worth the trip!

Know someone who has a great Procurement story and is willing to share it? Send ‘em my way at drstephe at gmail dot com.

Any manufacturing company measures its success by the products it creates. But not every company looks inside its own products to measure success from its component supply.

Dell is a great example of a company whose very survival depends on staying on top of its component supply. Although Dell definitely has “designers” of its PC’s, it is essentially an assembler of every else’s latest gadgetry. By negotiating great prices and manufacturing to-order, Dell has consistently offered wonderful value in servers, desktops, and laptops.

Dell’s business challenge appears simple compared to Boeing. Boeing has an even greater problem. Management of its component supply has to include long-term maintenance, quality testing, and other material safety considerations. There are legal and regulatory obligations that to a simple person like me appear mind-boggling.

So how do these companies wrestle with their component supply challenges? This post explores the processes and challenges of CSM.

There are several initial CSM questions any manufacturer or assembler should be able to answer. The first is: how many component products do I have under management? In layman’s terms: how many widgets do my engineers have access to & enough information about to incorporate in a new product design? The second is: what is my plan and process to obsolete components and introduce new ones.

CSM is a process, an ongoing program. It’s an approach to managing component parts and a company’s supply base. Done correctly, it can streamline the process of new product design, placing a high degree of value on rationalization and component reuse. Organizations have simplified and improved product quality by reducing the number of discrete components required to build a product.

The amount of work required to keep a company’s component supply up-to-date depends on the pace of change in the materials. Nuts and bolts? Not too often. Flash memory? Almost continuously.

Initial CSM systems focused on the data quality problem. Systems were implemented to bridge the gap between multiple Inventory or Parts Masters and engineering CAD systems. But systems were the easy part. Companies faced massive data cleanup efforts. Specialist vendors such as Aspect offered services to remove redundant part numbers, improve the item description, expand part classification information and optimize categorization.

Some CSM solutions focused on data aggregation. I met with companies that thought their value was the clean, categorized, and classified manufacturing parts list they had steadfastly improved over the years. And maybe they were right. Again, it often depended on the pace of change for the materials in their target manufacturing industries.

The CSM problem found applications outside manufacturing as well. Home Improvement retail was one natural home – where the number of potential SKU’s under management sometimes ballooned into the millions.

So why isn’t CSM a hot topic these days? Some claim the CSM product category disappeared once Aspect’s business was trashed by i2 – and nowadays manufacturers are just doing without part rationalization and content improvement schemes. Others claim it morphed into today’s engineering design system “wars.” On one side you have CAD vendors aiming to broaden their reach into transactional systems by extending their solution to include component supply management. On the other side you have Inventory solutions providers aiming to extend their reach by getting into the new product design process. Manufacturers stand in the middle – looking for the best way to keep their unique components and supply base low while innovating quickly to deliver value to their customers.

CSM – should it re-emerge as a pure category? Time will tell.

It’s an open question whether buyers will continue to have the upper hand with suppliers over the coming years. Some professionals I’ve spoken to recently are being very, very careful – playing nice now just in case inflation and capacity constraints lead to a shift in the balance of power from buyer to supplier. And should the shift occur, buyers should beware the same technology they’ve used to pound away at supplier margins could ricochet to increase the pace of inflation through the supply chain. Can you picture forward auctions for reserving the capacity of component supply across your key components?

Suppliers don’t hold grudges, do they? I mean, after all, it’s just business…

I own stock in a company called CVRD (NYSE:RIO). Besides being a huge Oracle customer, they are an absolutely enormous mining company. Their headquarters are based in Brazil though they are effectively a global company. And they’ve had an amazing run – check out their recent stock performance.

Last year, CVRD and other iron ore producers really “stuck it to the man,” increasing prices by over 70%. Now China has introduced a not-so-secret “secret price cap policy” in an effort to exert some pressure on the producers to keep prices down. But it’s not clear what leverage they have as demand has been outstripping supply for some time.

It’s an interesting story. Higher prices this low down in the food chain spell worry for inflation watchers worldwide. Either higher prices pass through, or corporate profits will get pinched. That is, unless China gets the iron ore producers to blink first.

As the saying goes, there’s nothing wrong with being Perfect. :) Sandy Kemper, the venerable leader of Perfect Commerce, has drawn criticism from different quarters on his strategy of acquiring “damaged” VAN technology and customers. But the smart former banker knows his annuity businesses when he sees them. Could he pose a challenge to the Ariba Supplier Network in a few years time? Maybe so.

Ariba is in the midst of launching it’s new, lean SaaS initiative. Insiders say Ariba took a hard look at their ability to sell additional Procurement systems in the Fortune 500, and the pace of their installed base losses to SAP and Oracle and decided to “tack” down-market. Calderoni has explained to Wall Street that Ariba is going to be just like salesforce.com, et al – a smaller direct sales force, lower G&A, etc. and that the transition is going exceptionally well. And look at their 6-month stock chart; you can’t argue against its recent rise. But what is really going on?

Once the Freemarkets acquisition closed (David McCormick, did you really join the Bush administration?) Ariba faced an identity crisis. And to an outsider like me it still does. What does it want to be when it grows up? A products company or a services business. Was the business about having a category expert for buying high-tech components in China available for spot checking factory locations and being “in the pit” during reverse auctions? Or would Ariba continue to stick to its knitting and be the “grease” enabling easier e-commerce between corporate buyers and their far flung supply base? By going SaaS, Ariba may just finally figure out how to do both. Maybe it will finally fuse its huge sourcing practice with the rest of its business. Ariba has “opened” their VAN to non-Ariba buyers, a smart move intended to strengthen that business’s cash flow.

Meanwhile Sandy stands apart. Now the question is will he stick to his VAN business, or try and bulk up his on-demand, add-on products (and fly with the high flyers)?

Assuming Perfect stays conservative, many may choose to “bank on it.”

Just last month the Department of Energy published it’s Annual Energy Outlook. Though quite lengthy, it’s an interesting read (ok, some of it interesting).

Predicting the future is a tricky business. The government’s 3 reference cases for world oil prices are:

1) it kind of goes down some then slowly goes back up to where it is now by 2030

2) it goes down more than we thought and pretty much stays pretty low until 2030 –and-

3) the thing just keeps on climbing to $100 by 2030.

Here, take a look:

Oil prices are a great example of where Procurement meets the gambling hall. Depending on where you expect prices will be, you’d take radically different actions.

Consider a company like Air Products. They make liquefied oxygen and nitrogen by sucking air out of the sky, pressurizing it, and separating it. They don’t have any raw material costs – just massive energy costs. The price of energy directly impacts their margins, assuming they can’t pass the price through to their customers.

An aluminum producer like Alcoa is subject to swings in energy prices in the same way. It simply takes a lot of energy to make their product. And we’ve all seen how airline losses have amassed as jet fuel prices have stayed in the stratosphere while airline ticket prices have remained low.

The world’s biggest companies employ literally “teams” of economists to develop an informed view of where key commodity prices (such as oil) are heading. From that, they formulate a strategy – either locking in long-term contracts for 100% of expected demand, riding market prices, or hedging by locking in a % of expected demand while accepting market pricing for the rest.

It’s world class wagering – and the stakes are high. An airline like Qantas bet on high oil prices and locked in great prices early enough to sustain profitability. Some of their sister airlines here in the U.S. should have made the same bet.

So where are oil prices going now? The DOE primary scenario for 2006 says down – but with emerging markets continuing their rapid expansion, and with quasi-open markets in South America and Russia making it risky for foreign oil investment, it sure doesn’t feel like it.

Sometimes serendipity prevails and you get to meet someone really amazing through a twist of fate. Bill Gress at Brunswick definitely qualifies. I met Bill at an SRM conference sponsored by Peoplesoft in Chicago a few years ago. At the last minute, my good friend Greg Tennyson (Procurement VP at Oracle) asked me to stand in for him and I agreed. I presented at the conference just before Bill. After the event we shared a cab ride back to O’Hare.

Bill spoke at the conference about his tenure at Brunswick. Brunswick, for those not familiar with the company, runs a variety of seemingly unconnected enterprises. They make billiards and bowling products (Brunswick), fitness products (Life Fitness), boats (Bayliner), and boating engines (Mercury Marine).

Bill managed indirect procurement, and if memory serves offered to hit key financial targets for his management (including the CEO). Long story short, by doing the basics – standardizing IT equipment choices, re-negotiating contracts, etc, he hit his indirect savings goals on schedule.

He was traveling in Europe when he got the call from his CEO.

CEO: “You hit your number.”
Bill: “Yep.”
CEO: “When can you be back in the office, we need to talk..”
Bill: “I can be back in a week once my meetings have finished here in Europe.”
CEO: “No, seriously, when can you be back?”

Bill met with the CEO and was tasked to take on a portion of Brunswick’s direct materials problem in the same data-driven, nuts and bolts kind of way. He treated Brunswick-made components for products as just a potential source of supply, and actively re-analyzed make vs. buy decisions.

Bill talked about how Brunswick had “blind spots” – things they thought they did well that they really could have done better through buying. His best example was boat seats on their Bayliner. They had made the seats at a Brunswick factory for years. Everyone thought customers loved them, but a little digging and customer surveying showed quite the opposite. Bill helped Brunswick switch from the homegrown 1980’s-technology of plywood upholstered seats to new age formed plastic framed seats using the world’s leading suppliers. Customers loved the new seats, and Brunswick saved money on the switch.

Bill was vital in Brunswick’s efforts to produce their first boat at an MSRP below $10,000. He helped their Life Fitness division find a better source for the metal components so intrinsic to their exercise products.

Bill is a great example of the power of effective procurement practices, and how they can dramatically improve a company’s competitiveness. No doubt Bill did not lead these initiatives solo – he obviously works with a world class team. If you get a chance to meet one of them, or Bill himself, ask for their latest accomplishments. And by all means, email me the scoop!

His company bio is on Brunswick’s website here. Kudos to all he’s done to move Brunswick (& the cause of Procurement) forward.