Wednesday, January 18, 2012

Supplier Risk Management 2012 – Supplier Profiles - Increased focus on Supplier Financials & Qualitative Information – Procurement BPO Vendors

Supplier risk has emerged as a key focus area for some of the businesses like personal Computers, automobiles, retail, etc in the past year due to the natural disasters like Japan earthquake, subsequent tsunami and Thailand Flooding that not only shut down the manufacturing facilities but also had affect on the components supplies to the manufacturers. Another concern is the on going Euro Zone Sovereign Debt crisis that is having affect on the global economy as the effects are being felt in low cost production countries like India and China where economic indicators like rising wages and commodity inflations, falling production numbers and governments expecting lower economic growth when compared to previous years. Most of the countries are seeing their respective currencies depreciate versus US dollar and Japan Yen and despite US and Japan economies struggling to keep up their economic growth rates, but dollar and Yen are appreciating as investors perceive them to be safe bets. Natural Disasters, Macroeconomic uncertainty, currency volatility, inflation, etc have made businesses focus on the supplier risk even more this year. Procurement Outsourcing Service Providers have been working with their clients on the Supplier Risk Management by monitoring the supplier financials and qualitative risks for the larger vendors but the smaller privately held vendors are difficult to monitor. PO BPO vendors have an excellent opportunity in Supplier Risk management and vendors have an opportunity to earn more billing compared to transactional work.

Financial Metrics
Supplier profiles are part of initial process of identifying the suppliers and complete profile of each supplier is made which has all the financial, operational, legal, management & leadership, compliance, etc information and based on this information buyers select their suppliers. These profiles have to be updated quarterly as and when the suppliers declare their financials and the quarterly financials have to be analyzed and look out for any specific information that may have a drastic effect of the supplier performance. There is lot of financial information available on the internet and third party sources and it may be difficult for the procurement executives and leadership to comprehend all of it. Hence a report template has to be developed which will have the necessary relevant information that is critical with analysis to understand the supplier financial capability. Information related to liquidity, profitability, solvency, days sales outstanding, capital, cash flows and other operating metrics are must to know for the procurement organization. Various financial metrics have to be analyzed and compared with the relevant information and reported to the procurement and other stakeholders. Financial metrics will not only provide information about the financial capabilities but also helps buyers in negotiating discounts or seeking financial support or involving them in the innovation and product development process.

The objective of Supplier Profile with financial metrics is to provide the procurement, finance departments and other stakeholders within the organization the relevant updated information so that they can assess the inherent risk involved in dealing with the particular supplier, financial stability and capability of the supplier, whether supplier can collaborate with buyer in the innovation process, how well the supplier is equipped to face the uncertainties and what will be the effect of the supplier failure on the buyers business. Along with financial information the profile should also provide other information like whether the supplier is a target of acquisition, involved in litigations, etc and the subsequent effects of these on the suppliers and buyers business. Supplier profiles should be easy to understand and accessible to the procurement department and other stakeholders in the organization so that they can be used in the decision making process. These profiles are critical in times of crisis and economic uncertainty like the present business environment and help the businesses to make decisions and develop the necessary counter strategies.

Collaboration between the buyers and suppliers have become critical for the success of innovative organizations that are constantly involved in developing new products as suppliers also play a key role in the manufacturing the product. Suppliers should be in a position to revamp their production capabilities, source the raw materials at reasonable costs, maintain the production facilities & quality standards, invest in people and technologies, etc and they need finance to do this. Suppliers too have to invest and foresee the technological shifts and innovations that are happening in the industry and should look to equip themselves accordingly. Supplier’s failure has direct impact on the buyers businesses in terms of revenues, profitability, reputation and buyers have to keep track on all the major and critical suppliers. Based on the impact of the shortage of particular supply on the business, buyers have to prioritize which suppliers to keep track of. Suppliers should be financially sound to not only run the existing operations but also be able to comply with the buyer’s policies and regulations. Suppliers on the verge of bankruptcy and M&A target have to be identified and the procurement and other stakeholders have to be intimated immediately and analyzed to understand the repercussions and formulate the strategy. Financially stable suppliers are must for the businesses to survive and offer innovative products and services to their consumers.

Natural Disasters like the Japan Earthquake subsequent Tsunami and Thailand Flooding has severe affect of the suppliers. Suppliers had to shut down the manufacturing for significant periods of time leading to supply shortages, loss of revenues leading to loss of profitability and rising costs in terms of cleanups, repairs and maintenances. Natural disasters lead to huge financial strains on the businesses and it will take time for the affected businesses to recover and buyers will be forced to announce shortages and subsequent loss of revenues and profitability. Buyers have to assess the financial and other implications as soon as possible and formulate the alternate strategies. Macroeconomic uncertainties like the Euro Zone Debt crisis, countries failure to repay debts, widening budget deficits, rising inflation of commodities, raw materials and wages, unemployment levels and subsequent fall in production and growth rates have significant affect on both the suppliers and buyers. Buyers have to keep a close eye on the country’s macroeconomic indicators where the Supplier’s manufacturing is located and make sure there won’t be any surprises. The economic data is available and it has to be analyzed and the necessary reports have to be provided to all stakeholders. Poor & uncertain macroeconomic situation often lead to civil unrest, rising input prices & shortages, etc which will affect the supplier’s.

Qualitative Information
Apart from Supplier Financials other factors that impact supplier performance are the leadership and management issues like change in the CEO, departure of key management & operational people, Labor problems like strikes, unrest among the workers, legal & regulatory problems like environmental compliance issues, intellectual property rights issues, litigations and legal disputes, failure to comply with agreed standards, subsequent closure of the production facilities, accidents like fire, breakdowns, etc, fines and penalties imposed by regulatory authorities also have effect on the Supplier performance and finances. A close watch have to be kept on the suppliers, all the rumors, news and alerts have to be verified, failures, accidents, issues have to be documented and information have to be provided to the procurement teams and other stakeholders immediately. All these issues will not only affect the supplier capability both operational and financial but also affect the buyers as some times buyers are also dragged into these disputes and are forced to pay penalties which have an affect on the finances and brand reputation. Supplier’s failure to comply with specified standards set both by the buyers and regulatory agencies have serious direct implications on the buyers business and reputations. Procurement executives have to do regular audits and check for the compliances and present their reports to the management.   

Opportunity for Procurement BPO Vendors
Developing and maintaining Supplier profiles is one of the processes that can be outsourced to procurement outsourcing service providers. Procurement BPO vendors can recruit people who are trained in financial research, experienced with using the secondary data sources and company investor relations and SEC or other regulatory sites and utilize them in maintaining Supplier profiles. A Supplier Profile should have brief history of the supplier, Historical and current financial data related to revenues, costs, operating margins, Buyer spend with Supplier, type of spend and products and services, M&A, Tools & Technologies used, contact details, etc. Liquidity, Solvency, Profitability, Capital Ratios, Accounts Payables/Receivables, Day Sales/payables Outstanding, etc are some of the common financial metrics in the supplier profiles. Most of the financial metrics data is easily available on many financial websites for free and both vendors and clients have to agree on the data sources from where the data will be taken.

Apart from the financial metrics Supplier performance metrics or balance score cards related to the supply of the product/service to the buyer which highlight whether they meet the agreed standards and comply with the policies. The profile should also highlight the recent transactions the supplier has done and also the news related to supplier should also be there. Based on the client’s requirements Vendors have to develop the report template and after agreeing on the template, profiling of the major critical suppliers have to be started first. Small & medium suppliers profiling has to be done based on the criticality of the supplier in relation to the core product offering or smooth running of the businesses. The profiles have to be updated as and when the financials are announced by the Suppliers and specific information if any has to be reported immediately. Small privately held suppliers data is a challenge and often difficult to get and the best option will be the buyers asking the suppliers to provide the financial data. Supplier Profiles are very important for buyers in the present scenario and Procurement BPO vendors can play active role in providing the necessary information to the buyers.

Sunday, January 15, 2012

Procurement Outsourcing (PO) Service Providers/Vendors - 2012 Growth Opportunities & 2011 Challenges

Major Procurement Challenges 2011
Natural Disasters: 2011 was the most challenging year for the procurement departments; first it was earthquake measuring 8.9 in Japan (March 2011) and tsunami which wiped out towns, ports and damaged manufacturing facilities, nuclear reactors and infrastructure. The shutting down of the Japan's manufacturing industry led to electronic component shortages and prices of microchips rose, supply of cars to US consumers also affected as automobile manufacturing was shutdown and the affect was felt globally.  In late July 2011, major flooding occurred due to monsoons in Thailand that submerged not only manufacturing facilities that produced Hard Disk drives, electronic components, etc but also agricultural lands and also affected the tourism industry. Both the natural disasters have wrecked havoc with manufacturing faculties and led to shortages of critical components supply which subsequently led to the rise in the prices (10% to 40%) of the products like Personal Computers and Cars. Natural Disasters forced businesses to cut their revenue forecasts, increase prices of their products, due to supply shortages as businesses could not source from alternative production locations and were unable to relocate their manufacturing facilities to new locations. Natural Disasters have also highlighted the critical issues in global supply chains, lack of alternative sourcing strategies and how businesses overlooked this risk in their overall business strategy. Earthquakes in Japan and Flooding in Thailand are not new risks and these risks existed for the past hundreds of years.

Currency Volatility: In the calendar year 2011, the rupee has crashed by 18.79% vs. US Dollar and the fall is attributed to euro zone debt crisis as investors preferred dollar as a safe investment. Euro was worst performer among 10 developed-nation currencies in 2011, declining 1.7%, according to Bloomberg Correlation-Weighted Currency Indexes due to the sovereign debt crisis in the euro zone. Japanese Yen and China Yuan appreciated about 5% in 2011 against the dollar. Singapore dollar and South Korean won slipped against the US Dollar in 2011. The Japan Yen and US Dollar strengthened against most of their major currencies despite the earthquake and tsunami in Japan and US Economic slowdown, as demand increased for safer currencies. Japan and China Governments have been intervening to keep their respective currencies under control.

Euro Zone Sovereign Debt Crisis is having global effect with no solution in sight. Greece, Italy, Spain, Portugal, Ireland have huge debts which they cannot pay that led to credit ratings downgrade. The deficits in these countries are also high that forced the governments of these countries to adopt severe austerity measures and drastically reduce their public spending and increased taxes. Most of the nations in the Euro zone have seen their credit ratings downgraded by rating agencies which increased the cost of borrowings for these nations. Euro Zone nations have set up a bailout fund for the distressed nations and provided the troubled nations billions of Euros with little or no affect but has weakened Euro currency. After US, UK, France and Germany businesses outsource procurement operations. The crisis is also affecting the currencies world wide and businesses in Europe are also drastically affected which will force them to look for cost reductions and use procurement outsourcing for this purpose. The worsening euro zone debt crisis is a major concern but provides the PO Service providers opportunity for reducing costs through streamlining the procurement costs of the businesses and governments and helps them during the crisis.  

Other challenges in 2011 were wage inflation and talent retention issues in countries like India and China where suppliers and PO Service providers have operations, rising input and component costs, political uprising in Arab nations like Egypt, Libya, Tunisia, Yemen, Syria, Bahrain that has affected the crude oil prices and subsequent political uncertainty in Arab nations which is still ongoing as Egypt, Libya, Tunisia do not have democratically elected governments. Some of the clients who have outsourced their procurement operations in early-2000s and enjoyed cost savings and other benefits are asking the PO Service Providers move up and provide them with services that provide more benefits and take the procurement process to the next level. PO Service providers are seeing the PO process mature and they are looking to innovate and provide more unique services to keep the existing clients satisfied and attract new clients. Technology adoption has increased as cloud computing, real time data analytics, ERP related software products, reporting tools and applications are being used by small and niche procurement service providers to develop innovative service offerings. Large players are facing stiff competition from such small players and are partnering with small players and use their tools or acquire them and integrate their technologies.

Opportunities for PO Service Providers/Vendors 2012
There has not been much recovery in the global economic climate as the euro zone crisis is still going on with the European nations are struggling to find the solution. Currency volatility is expected to continue in 2012 and most of the businesses are well equipped to face the scenario. Japan is still having earthquakes but the manufacturing has resumed and in Thailand the floodwaters has not receded yet and manufacturing facilities are still under water and it will take time for clean up and restarting the production. The supply shortages are expected to continue in the first half of this year and production will recover in second half and supply will improve. With this backdrop the Procurement Outsourcing market is expected to see 20% YoY growth. Everest predicts the global PO market will reach an ACV of $1.8 billion in 2012, representing managed spends of US$250 billion. Since mid-2000s, PO has seen good growth as businesses were looking for cost savings and PO helped them achieve cost savings that had direct impact on bottom line. Manufacturing, CPG, retail, high tech, telecom, energy and utility verticals are driving the PO market. US followed by UK and Continental Europe dominate PO adoption but Asia Pacific and Latin America are seeing rise in adoption. . Major players in PO market are Accenture, IBM, ICG Commerce, Global eProcure, Xchanging, CapGemini, Corbus, Genpact, Infosys, etc.

Technology based: Most of the large PO Service Providers have significant IT capabilities and they are offering the clients cloud based platform offerings. Cloud based platform offerings not only provide cost savings but also drive compliance in the organizations and increase collaboration. Large PO providers are also collaborating with niche and specialized procurement solution providers and offering advanced procurement technology solutions which makes outsourcing process easier and substantially increases procurement efficiency, effectiveness and ROI. Technology also helps in tracking the suppliers, maintain relationship with them and make sure they are complying with the agreed benchmarks. Another area where technology is going to play a critical role is the Data Analytics as data that is collected has to be analyzed and provided to the procurement team in the form intelligence and reports. There are most advanced real time data analytics, spend management tools are available that provide procurement executives the necessary information needed to make decisions and reduce costs. Clients are looking for single IT platform that provides end to end solution focused on either procure to pay or source to pay and provide process efficiency, improve compliance and maintain relationship with suppliers. With the rise in use of high end smart phones like Apple iPhone, RIM BlackBerry, and Android Smart phones by the executives in the organizations applications that help them in tracking the spends, suppliers and real-time data  are being developed.

Focus shift to Direct Spend: Since Past year Chief Procurement Officers and Procurement executives are forced to focus on core direct procurement such as sourcing raw materials, components. Non core direct procurement spend related to maintenance, repairs, etc can be outsourced to PO service providers as procurement executives want to focus on the core direct spend that has more direct impact on the company profitability, more complex process and involve long term procurement cycles. Till now most of the indirect spend like IT, HR, Marketing, Facilities related spend is only outsourced. Most the PO services providers deal with this indirect spend as these spend categories are easy to outsource and involve short term procurement cycles with less complexity and this market has matured. Some of the companies that has outsourced their indirect procurement spend are moving a level up and are looking to outsource their direct procurement spend and this trend of outsourcing more direct procurement spend will pick up this year. Supplier risk has considerably increased for businesses due to the natural disasters, economic uncertainty, inflation and currency volatility, etc which provide the PO service providers an opportunity to work with clients on their direct spends. In early 2000s, the initial days of PO focus was only on direct spends (80%) but the focus shifted to indirect spend as buyers and service providers could not implement sourcing & procurement strategies in direct spends due to high volatility in raw material prices and long procurement cycles.

Business Organizations are expanding globally and setting up manufacturing facilities in various part of the world. They are finding difficult to manage the centralized procurement department alone at the company headquarters and they need to have specific expertise to manage their procurement operations in those geographies. PO service providers can be used and their specific expertise will definitely help in managing the procurement operations smoothly and the necessary cost savings can be achieved.

M&A in PO Service Providers Market: Past couple of years saw some M&A happening in this market as the source-to-contract and procure-to-pay focused providers are collaborating and other players like FAO service providers, sourcing advisory firms, supply chain management firms, and procurement shared services organizations are entering the PO market. Some of the recent M&A deals in 2011 are Infosys acquisition of Australia’s Portland group, IBM acquisition of Emptoris and Cap Gemini acquisition of IBX in 2010. Consolidation is expected to continue in 2012 where the large PO service providers looking to acquire small, niche and specialized procurement solution providers and integrate their offerings into the core offerings. Collaboration partnerships between the large and small players in terms of large PO service providers are using tools and technologies developed smaller niche players and offering them to their clients. Some of the partnerships include ICGC-Genpact, HP-GlobaleProcure, TCS-Denali, and Steria-HPI. With demand for PO increasing this year outsourcing vendors who do not have a proper sourcing and procurement offerings are looking to acquire smaller players and jumpstart revenues, acquire new clients and offer services to their existing clients.

Invest in People, Process and Platforms: PO Service providers have to acquire and retain the experienced talents that are critical for the sourcing and procurement process. Good quality people with sourcing and procurement experience particularly in niche areas like negotiations, experience in sourcing and spend analytics tools, etc are hard to find. Necessary training should be provided to the employees in the specific tools and technologies. PO Service providers have to invest in technologies and build platforms that provide clients an attractive solution for outsourcing their sourcing and procurement operations. Cloud based platform offerings are being offered by all the major vendors and clients are adopting this platform as evident from the increase in the number of deals signed in the last year. Standardization of the process and offering the same service to multiple clients is another option and Genpact Smart Enterprise Process is one example. Some of the Indian Vendors like Infosys and TCS are focusing more on the procurement outsourcing and Infosys has set up a Joint Innovation Board and TCS is offering platform based procurement outsourcing services.

Procurement has transformed from a mere functional role to a more strategic role and Chief Procurement Officers have gained prominence in the organizations and are working closely with the Chief Financial Officers in PO decisions as there is direct impact on bottom line. CFOs are actively involving in PO negotiations, leading to deals with FAO-PO bundling around procure-to-pay. Some of the businesses that have strong internal procurement organizations are also looking to outsource certain procurement operations to third party service providers in low cost countries as there are cost benefits. Procurement executives want to focus more on the core direct spending that involves buying the raw materials etc and source them at low cost and maintain a relationship with suppliers that ensure sustained availability of resources. All the indirect spending and some non core direct spending can be outsourced to PO service providers who have the necessary capabilities to streamline the processes and generate immediate cost savings. PO services providers are looking to offer buyers’ innovative services, tools and platforms that will help them reduce cost and improve bottom lines and with uncertain global economic and business climate clients have increased their focus on the global sourcing management and consolidation initiatives and are looking to profit from their existing sourcing channels. Businesses have realized that there are significant benefits in outsourcing the procurement as evident from the many success stories of businesses that profited from PO and this will lead to increased adoption of Procurement Outsourcing in 2012.