Situated in the southernmost part of the Brazilian state of Minas Gerais, nestled among green rolling hills, coffee plantations and dairy farms is the small town of Santa Rita do Sapucaí. A cursory glance shows Santa Rita as a charming town full of farms and churches but in reality, this picturesque little city has so much more to offer. In recent years, it has become known as “Vale da Eletrônica” or Electronics Valley because it is home to the highly respected technical school, Escola Técnica de Eletrônica Francisco Moreira da Costa and is also known as a hub for technological applications, from carpool and table service apps to toothbrushes with sensors that connect to children’s games. And Santa Rita isn’t the only city in Brazil ramping up their efforts.
Plagued by years of upheaval economically, Brazil is making a comeback and relying on the IT sector to help make their triumphant return. A $200 million joint investment with chipmaker Qualcomm, was welcomed in March by the federal government to build a semiconductor factory in the state of São Paulo where other major tech companies such as Samsung and Lenovo already have operations. Their hope for the investment is that this will be the first step for Brazil in becoming a noteworthy player in the manufacturing of high density semiconductors that are used in 4G and in the future, 5G devices, as well as IoT applications. The investment from Qualcomm is expected to bring in about 1,200 new jobs which only makes a tiny dent in solving Brazil’s unemployment rates—at 11% there is still a long way to go, but it’s a step in the right direction.
The Hackett Group, in conjunction with Symphony Ventures, recently published a whitepaper regarding Robotics Process Automation (RPA). (You may recall that Symphony Ventures conducted an excellent RPA proof of concept at the SIG 2017 Spring Summit with American Honda.) In this whitepaper, the authors provide a blueprint for selecting sourcing opportunities appropriate for RPA. Any sourcing professional worth their salt, should be considering RPA as a viable strategy after reading this statement, "Individual tasks of such processes may be fully automated with RPA, eliminating 100% of labor and up to 90% of cost. The total efficiency improvement achievable through holistic transformation using RPA across end-to-end transactional process can add up to 50% to 75% of baseline cost."
Mary Zampino, Senior Director of Global Sourcing Intelligence, SIG
Traditionally, one of the inherently daunting challenges in Procurement and Sourcing is to quantify and report on cost savings, cost avoidance and/or cost reductions, which can be collectively referred to as "added value." One very effective way that I have been able to successfully communicate added value and metrics to many C-suite members is by positioning it in a different way. I have found that by using the terminology and calculation for “Equivalent Revenue,” it is generally better received. Since it is a much more common business term and quantification, the C-suite can relate to it and it can be directly measured against the company’s overall revenue. As such, it is more widely accepted than trying to describe such value as only cost reductions or savings.
Perhaps most importantly, it is really as simple as taking the actual quantified “added value” and dividing that figure by the company’s overall net profit. A quick example: If the total aggregate added value amount is agreed to be $10 million, and the company’s overall net profit margin is 8%, the Equivalent Revenue needed to generate the same amount of that net profit would be $10 million divided by 8%, which equals $125M. By representing the figures in this light, C-suite members can readily identify and appreciate how much time, effort and expense would be needed to generate the same amount of sales revenue, and therefore clearly recognize the importance of an efficient and effective Procurement and Sourcing organization.
Guest Blogger, Dave Gallaer, Head of Procurement and Sourcing, NatWest Markets/Royal Bank of Scotland Securities, Inc.
Of the many laws that affect the international outsourcing space, one of the most important must be that of diminishing returns. At its heart outsourcing is about efficiency – a provider can only offer a decent value proposition, and turn a profit, if it can achieve a desired output more efficiently than can a would-be buyer of its services – and yet there’s only so much money in the hypothetical pot to invest in driving efficiencies: as a very basic example, if one can spend $x to achieve 10% savings, by the fifth investment of $x the savings made are only around 60% of what was achieved with the first tranche. The returns diminish. After a while, it becomes less and less worthwhile to invest $x in that project, when the same amount put into another deal can yield significantly more.
Finding the right balance between investment and returns (and knowing where is the line beyond which further investment will yield returns too paltry to justify) is vital in any business, but especially one as efficiency-based as outsourcing, where relationships have historically often featured buyers demanding constant and consistent efficiency gains and savings – and, moreover, where the necessary investments in technology and people can be gigantic. Hence the desire on the part of providers to share the value gained by any given investment across as many clients as possible – and the complications resulting from buy-side demands for bespoke work and customisation without a simultaneous understanding of why this of necessity means higher costs, which need to be passed on somewhere, somehow…
The digital era is creating new paradigms as it relates to commercial relationships between business and individuals. It's not a new concept, but it is getting stronger each day and changing the way people contract services and products. The sharing economy is a system in which its users share and exchange goods and services through digital platforms.
Uber and Airbnb are some of the most popular examples that are revolutionizing the market, with their respective target markets in the transportation and accommodation industry. Could this new business model also change how organizations contract services and products? Could the new sharing economy open up opportunities for organizations to achieve their constant search for cost optimization?
The benefits that emerging businesses in this space can bring include the provision of cost-effective services and products with reduced lead times. Additionally, these technological applications help to identify available resources in a certain geographic proximity that meets the needs of a company. Another benefit is to directly contract services eliminating the brokerage relationships characteristic of the truckload and 3PL Industry. The Uber model could change and replace traditional freight brokers. Right now there are some companies preparing to support this new business model which gives small truckers the opportunity to offer their spare capacity and resources.
"Price is what you pay. Value is what you get." - Warren Buffett So you think you've seen it all in sourcing and procurement? Have you tried to weed out real value beyond cost savings? Just because you are saving money doesn't mean you've driven value for your organization. It might seem to be amorphous and unaccountable, but the "value" of a deal or contract is definable by the stakeholders in your organization. Find out what they want, and you find what drives "value" in your company. When you know what someone wants, you can negotiate based on that. Maybe "value" is measured in time. Maybe it's measured in contract commitments. Maybe your supplier needs goods or services you have, that can be applied in barter or through profit sharing. Procurement has matured into more than just negotiating the best contract for the best price. The creativity and innovation that can spur both value and savings comes from doing deals that exceed the simple exchange of dollars for services. Here are a few things to consider when putting together a deal: Deal summary – create an overview of the deal: