1. Scaling out not scaling up: Economies of scale have long been viewed as the key driver for price but many products and services are not as sensitive to volume increases as once thought. Scaling out involves the use of disparate resources to deliver consistent quality products and services and high throughput with lower distribution costs. e.g. franchising the production of fortified food for malnourished children to groups in rural Kenya.
2. —snip—
3. Mass production of services (Scaling up not scaling out): Building expertise in a certain vertical by pumping through thousands of similar transactions e.g. heart surgeons that conduct 10,000 to 15,000 similar operations.

The keen observer will note that 1 and 3 are countervailing forces. The key to determining whether to scale out or scale up is to understand how sensitive the production cost of the product is to volume fluctuations and how sensitive the distribution cost is to the location of the consumer.

In the first example, franchised food production, the product is probably reasonably sensitive to volume increases but the distribution costs in rural Kenya are much higher.

In the second example, heart surgery, the cost is highly sensitive to volume whilst delivering the product to the consumer can be done anywhere.

It’s a pretty simple dynamic but one that is regularly misapplied – Yes, Boeing, I’m talking to you!

This is simply not true. There’s no correlation between employee engagement and outsourcing, either positive or negative. Sometimes outsourcing brings in more engaged employees, sometimes it does not.

The strongest predictor of employee engagement is the how respected an employee feels when he or she is at work. If you can show an employee that the work they are doing is valuable and the employee believes that others understand it too then the quality and output of their work will improve.

This is all about leadership – not whether the function is back office or front office.

I started my career as a lawyer reflecting on contractual nuances and I now find myself at the rock face attempting to extract the waste nuance from the ore. I’ve always known that decisions made at the outset of a supplier relationship can increase the cost of transacting with a supplier by ten-fold but now I really know it!

I said in the post below that I would “recommence when I again have something to say” and I now feel that I do: As I indicate in my note on the right, I now view HR as the best model for a P2P function to use when describing their role within an organisation; the only difference being that HR professionals deal with staff and P2P professionals (or Contract Capital Managers as I indicate in the updated title of my blog) deal with third party suppliers.

I’ll explore this topic in greater depth over the next few weeks.

I’ll re-commence when I again have something to say.

Thanks for your time over the past three years. I’ve greatly enjoyed the ongoing dialogue I’ve had with you and I feel honoured that my missives, coherent or otherwise, have informed and entertained.

All the best,

Doug

Tim’s objection is that buyers use auctions to impose terms on suppliers rather than engage in dialogue.

As a data guy, I’m a big fan of auctions because they provide a controlled environment to collect and disseminate information – sellers see what their competition is willing to do and buyers get an overview of the market.

Nevertheless, I agree with a lot of what Tim says because auctions create information flow in only 2 of the 3 possible directions. Data flows from supplier to supplier and from supplier to buyer but it does not flow from buyer to supplier.

This can create a situation that I will call the Incumbent’s Curse. It’s the other side of the coin from the Winner’s Curse. In the winner’s curse, the winning respondent in a tender finds that, in the heat of the auction, they have paid way too much. In the Incumbent’s Curse, the incumbent supplier cannot win the tender because they know how damn expensive this buyer is to service.

Imagine a supplier who delivers products to offices. In the spec in the tender, the buyer has not mentioned that it takes 30 minutes to get through security and that deliveries can only take place between 7:30am and 8:00am. The incumbent knows this and knows that this adds 1.5% to the cost of servicing the contract. The other respondents do not know this and have a 1.5% “advantage” in the auction. The incumbent loses the contract. The winner unwittingly shaves 1.5% from their margin.

Perhaps we need an auction facility that encourages a three-way dialogue.

• 13:12:30: Secret weapon of the Chinese BPO industry “Because their customers are Chinese they [have no] labor cost differential.” http://bit.ly/TIHuP
• 13:17:26: reportonbusiness.com: Reviving the shadow banking system “I highly recommend we put brakes on it” http://bit.ly/r4n06 Yep.
• 23:01:18: Dyson on climate change: “inductive science is of limited utility when the object of study is an extremely rare event” http://bit.ly/oYGlD

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• 20:15:27: The Pros of Planting Startups in Smaller Cities – BusinessWeek This will be a long term trend, I bet. http://bit.ly/yX5K

The important factors in supplier selection

• 20:27:54: The…fall of global sourcing “market prices, expected quality and supply chain flexibility [matter]“. Location does not http://bit.ly/un7H

Supply chain ownership

• 21:12:04: Fabindia Weaves in Artisan Shareholders – BusinessWeek http://bit.ly/DAl7T Joint supply chain ownership – great to see this implemented!

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• 21:36:06: “The Strategic Sourceror: Government Goes Open Source – the Wrong Way.” http://bit.ly/3IbTn
  I disagree with this article.
• 21:37:57: SS says “US Government could [not] be … the poster child for best practices … so I am not very excited about seeing the final products.”
• 21:39:56: But why couldn’t they be? There’s a lot of people in the US govt. Surely some must be doing something right! Why write them off so glibly?
• 21:45:12: SS contrite comment: “Perhaps I was being a bit rough … a step in the right direction is better than nothing at all.” http://bit.ly/7vUI6

US Housing Crisis

• 22:04:19: Solving the US Housing Crisis “give foreigners who…come to the US and buy a home … a [green card]” http://bit.ly/14cRew Why not?

Risk v. Stability

• 22:08:59: Taking Risks Is More Important than Stability Right Now – BusinessWeek http://bit.ly/GoSdE Are these opposite business states? I think not.

Divvying up Equity in startups

• 22:13:18: Seth’s Blog: Advice on equity “A friend asked me to help him … split the equity in a [startup] company.” http://bit.ly/ubiIj Great advice

Cloud computing: Making technology available to the masses

• 22:29:54: HowTo: EC2 for Poets “The easier it gets, for more people, the more interesting things we’ll be able to do, together.” http://bit.ly/r7S0e

Importance of incentives

• 22:36:08: Thank you netbooks! Microsoft placed in an environment where they are motivated to deliver what we need. http://bit.ly/6EUoL

Spend optimisation bake-off

• 22:51:37: SpendMatters: Let the Optimization Bake-Off Begin! http://bit.ly/Fofta This is the best use of the new media I’ve seen in Procurement!

AMEX and Harbour Payments

• 22:57:43: SpendMatters: Amex: No Safe Harbor http://bit.ly/cKVk This seemed like such a good idea two years ago. Why can’t AMEX make this work?

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• 21:28:49: Finextra: ING launches pension peer comparison Web tool: http://bit.ly/lKc7w
• 21:26:00: There’s unacknowledged cross-over between marketing and procurement. INGs app shares common features with supplier comparison apps.

Corporate sustainability reporting

• 22:01:14: Corporate Sustainability Reporting: The Executive Disconnect But there’s a major gap between understanding and action, according to a survey released this week. http://bit.ly/3Y55HP
• 22:03:28: Survey says 90% executives say sustainability reporting is important. 50% say they do it. My bet: 10% actually do it. http://bit.ly/3Y55HP

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…For all the recent grim news and economic forecasts, 2009 is shaping up to be one of those years where anything could happen. The current set of economic conditions provides a huge opportunity for procurement to demonstrate how the function can deliver value.

Why do we use such navel-gazing, foot-shuffling, back-of-neck-rubbing language when we talk about the role we play in business? Why not just say “There’s some cracking opportunities to lower your company’s operating costs and ensure continuity of service!”

When we talk to suppliers, we talk straight. Why not elsewhere?