Just the other day, I was catching up with a few of my university mates. After addressing a host of topics, we somehow stumbled on the topic- ‘Is Procurement that important for businesses?’ (Since the majority of us were Supply Chain graduates), to which I almost instantaneously responded, “Well, our jobs could be outsourced to India/Philippines almost any instant”. This statement sparked a heated conversation among us and we started to make our points. During the conversation, I firmly believed that procurement or certain aspects of procurement can definitely be outsourced. At the end of the conversation, we were happy our ‘Chai Latte’ was hot enough.  This conversation left me insecure in a way and made me think deeply about the hows, whens, whys and which’s aspect of the topic of discussion-Can the Procurement department be outsourced?

The global Business Processing Outsourcing(BPO) market is estimated to be USD 343 billion by 2025 with a CAGR of ~7.5%, according to the study by Grand View Research.

The key driver for the rise in this industry is the continuous increase in the operational cost of businesses. Any cost that is not directly associated with the core competency and the core area of the business is considered ‘operational’ cost.  That could be hiring an external consultant to advise of XYZ aspect of business or looking for caterers to host an annual event for your organization. Organizations are really coming down on all activities not associated with the actual business they are in be stripped down.

This has resulted in business giving a section of their daily operations to a service provider who excels in that area of operations. In the pursuit for these service providers, organizations figured that paying low labor/employee cost for the same services would be a more strategic move and hence, outsourcing the operational activities became a norm.

So here is the big question-

Does your organization view procurement as an operational activity or a strategic activity?

The answer to the question indicates if the organization view procurement as a core functionality or more of a transactional functionality.

References

https://www.grandviewresearch.com/press-release/global-business-process-outsourcing-bpo-market

More Articles about Supply Chain & Procurement

BLOCKCHAIN IN LOGISTICS & SUPPLY CHAIN

AREAS OF LOGISTICS TRANSFORMATION

Forward & Reverse Supply Chain of Book Publishing Industry

SUPPLY CHAIN RISK MANAGEMENT-Are your Suppliers/ Contractors safe to work with?

STRATEGIC SUPPLIER SELECTION

Fiver Profile: https://www.fiverr.com/rohanpatil578

In a nutshell, Block Chain is a Distributed Ledger Technology. This distributed ledger helps in acting as a single platform of record-keeping of any sorts. Anyone who has access to this platform can see this record. Any manipulation is the record can be implemented only when majority of the systems in the network agree and approve of it.

Block Chain is still in the phase of – ‘explain this to me’ for majority of the population. The tech- savy population is in the phase of – ‘Prove this to me’.

With distributed ledgers, manufacturers, retailers and all the nodes within the value chain are looking at a digital and/or a physical product within the supply chain, and they can be looking at the same information, which assist in cutting down the steps in shipping and payment reconciliation.  The sooner the manufacturers and distributors agree on shipments and receipts, the sooner the manufacturers are paid for the goods. Getting paid faster helps in financial liquidity across the supply chain.

Block Chain can therefore, seriously reduce the transaction costs which is an aggregation of inefficient processes like mirroring, emailing, time delay due to reasons of information discrepancy, un-updated information, and manual error and delays. This distributed ledger can solve the problem of record keeping and maintaining.  Not just that the costs drop to zero but there is an increased surge of efficiency and digitization.

Add this efficiency to another aspect of supply chain – Contract Management. It is one aspect which requires a lot of manual decision-making. E.g. When a new record is written, the distributed ledger checks whether there is an out of record condition. If ‘Yes’- the systems stop the record being entered.

If a partnering company tries to add a duplicate invoice to the shared ledger,  the block will go through all the elements on the contract, open PO’s and if it does not match the set conditions, then the block of invoice which the partner tried to enter is ‘Not Verified’ and hence cannot be added or written on the distributed ledger.

The key here however, is to build a shared record system which would be harder for supply chains with multiple nodes. Big organizations can come up and start implementing this technology on a smaller scale of things and then build on it. Maersk and IBM have announced a joint venture of deploying a block chain based electronic shipping system which will digitize the Supply Chain and help them track cargo in real-time. Replacing the current EDI systems which is about 60 years old is on the cards as it leaves the containers in yards for weeks.

Failure to strategize and to consider wider range of design possibilities for individual businesses could prove fatal for many businesses. The combination of new technologies AI, IoT, 3D Printing, mobile money etc. are poised to seriously disrupt the underlying processes within supply chain & logistics. It is possible to convert the supply chains to demand-chains with the implementation of these technologies across various nodes in symphony. Symphony-being the keyword.

When supply chain managers come up with block chain solutions for their problems, we need to understand which node of the supply chain the solution is coming from. Each node within the supply chain are more often than not an ‘Individual Enterprise’. So, when the mean solution, they mean the solution to the problem of their specific node. This could very easily put you on the wrong side of technology and convey a very static vision. The future of supply chain is a more dynamic and customer responsive and hence a need for most open and ‘Permissionless’ operating model.

 

Logistics is one of the few industries that is still very traditional and fragmented. It would not be air to compare the developments of Amazon in its logistics and supply chain with other core logistic players in the industry. Logistics is still plagued with the age-old traditional issues and no thanks to its unglamorous and dull image. The scenario is quite similar in countries like Singapore, which is considered Asia’s top logistics hub by World Bank.

1. USE OF TECHNOLOGY

There are 2 basic reasons for logistics companies not implementing technology as rapidly:

-In the race to provide cheap freight cost, firms across the logistics ecosystem are reluctant to invest in more innovation and technology as this drives the prices up especially in the initial few years. Firms are almost not willing to exploit the advantage of first in market due to associated risks involved with executing technology in logistics systems.

-Another reason logistics firms are not willing to implement technology and innovation in logistics environment is because, even if they implement the innovation, the advantage could be exploited when all the partners and associated nodes with their operating supply chain have the synchronization with the implemented technology. the moment the critical nodes are not compatible with the technology, the information sharing is hampered and in this digital age when the information sharing is restricted, the industry just cannot operate in a seamless manner.

2. INCREASED TRANSPARENCY

Another area where Logistics as an Industry can improve on is the ‘transparency’. The holistic experience of a customer getting a quote, to making a booking and tracking the shipment is filled wth flaws and inconsistency. Different firms have different quotes for people is different region; wanting to ship different kinds of products in different ways. There are a lot of variable factors to consider before providing the customer with the right quote and hence, with so many variables involved it has led to lack of transparency and increased mistrust among the customers. Visibiliy can also be a subset of transparency issues. As each country has its own regulations and languages and operational complexities, standardizing procedures for smoother shipments to all markets in the regions will only improve trade and commerce.

3. CROSS-BORDER SHIPPING

Cross-Border Shipping can be a very complex and expensive proponent for logistics service providers and also for the end customers and business owners. With the rise of e-commerce and websites that provide shipping of products internationally and with businesses open to outsourcing the products from cross borders, this section of logistics is a future business prospect for anyone wanting to enter the industry. But this goes without saying that it has a downfall of increased investment cost with a huge opportunity to get a good market chunk provided the first two issue addressed. With multiple nodes in a cross-border shipping supply chain, it is bound of have tons of legal and operational constraints. The amount of paperwork is almost an occupational hazard. Hence, development of a more integrated service that provides merchants with express shipping quality at an affordable cost with reduced risks is the area to turn the eye to.

LOOKING FORWARD

Implementing technology like Big Data, Augmented Reality, AI & Blockchain at a mass level across the nodes of supply chain is the next wave of improvement in the logistics ecosystem. Mass implementation of technology will do what ‘Containerization’ did to logistics in 1956. It is about time that the next wave of development in logistics is practiced.

According to a KPMG report in 1998  on supply chain of book publishing industry in United Kingdom(KPMG PPT),  publishing is costly ang generates more waste than consumer goods sector. The logistics costs of publishing are about 13% while the logistics cost of consumer goods manufacturer is 6%.

Fig 1. Forward and Reverse Supply Chain Flowchart in Publishing Industry

(Ref. Reengineering the Book Publishing Supply Chain March 4, 2015 by Thad McIlroy)

Presently, we seem to have entered a new era in supply chain management and operations management in publishing industry due to 2 key reasons:

1)Digitalization:

Publishers presently treat the manufacturing, distribution and marketing of digital content as important or probably more important than the hard copy publishing content. Integration of print and digital offers the publishers a big advantage in terms of easing the pressure off on the supply chain of the print publishing content.

With consumers getting used to digital content, the supply chain problems for the publishing companies has dropped considerably.

2) Inventory Management Systems

This has facilitated the publishing companies to negotiate better and drive down the cost of managing and running a warehouse with distribution center. The publishers can now pass on the responsibility of managing the inventory levels to its immediate supply chain partners of suppliers, distributors and wholesalers. Hence, the token of efficiency has been taken off my publisher’s supply chain to specialized distribution vendors and wholesalers.

The result is reduced operating cost and lower risk points.

Two major problems in the supply chain of the ‘Printed’ books are:

1) Number of books to be printed and the cost associated with it.

2) Movement of the finished printed books to specific distribution points and consumers.

2 Key Reasons for new era supply chain: Digitization & Supply Chain Management

2 major problems in traditional publishing Industry: Number of Copies & Logistics Movement of Finished Product

Both the major problems in the supply chain of the publishing printed books is addressed aptly with the rise of digital publishing industry. Now the books to be printed and the quantity to be printed and delivered has reduced and hence low supply chain stress on the printed publishing industry. At the same time, they can focus majorly on meeting the needs of traditional readers and book collectors.

Another advantage is the storage of books once they are obsolete. The printed books need physical space and care to preserve limited editions. However, with digitization, the collection of archives is simplified to a whole new level, thereby reducing the fixed and variable costs associated with physical storage of the books.

Large publishers will still stuff a lot of inventory in to the supply chain but now this supply chain has a word ‘Reverse’ attached to it and hence is more efficient and well planned.

 

Imagine the advantages of having a specialized organization available to assist on the tasks of qualification and management of supply chain risks. This platform can act as an Amazon to simplify the vulnerabilities in the various nodes of supply chain.

……………………………….”Avetta is like the tinder of businesses where businesses can pick and choose suppliers based on their requirements and filtering the suppliers with the help of their updated skill sets and management expertise”……………..

The industries of FMCG, Oil & Gas, Manufacturing, Construction, Health care all are in search for an efficient and effective supply chain. Optimization of processes in an upstream or downstream supply chain is the need of hour for high risk based activities. These requirements have given rise to a special category of business – Supply Chain Risk Management.

Avetta (www.avetta.com) benefits the member of the company’s network by saving them time and money on the services and products that they use in high volume and high frequency, Avetta not only helps the suppliers grown their skills and businesses but also ensure that the annual certification and compliance requirements of the industries are met.

Each client wanting to procure the products and services have its own qualification criteria. The suppliers within network are made aware of these criteria and given a chance to connect and grow their business. Avetta is like the tinder of businesses where businesses can pick and choose suppliers based on their requirements and filtering the suppliers with the help of their updated skill sets and management expertise.

Such an online platform increases visibility into the sustainability, reporting and effectiveness of the supply chain.  It therefore, would address the most major supply chain risk issues and hence, this category of business is destined to grow. Any industry which grants critical part of its operation to 3^rd party contractors, like drilling contracts in the Oil and Gas sector, know the far-reaching repercussions of choosing an inefficient and unwanted suppliers. Accidents or errors from unqualified 3^rd party contractors either due to lack of training or lack of certification can result in million dollar law suits, so ensuring proper qualifications and training is the key.

Avetta combines different elements associated with supplier risk management viz. suppliers on-boarding, contract management, and supplier data aggregation. The online platform will specify what contractors are certified to do and compliance certificates do the suppliers specialize in. To take it a step further, Avetta like online platform can even tag what supervision and compliance certificates are necessary before the begin collaborating with the clients.

They not only provide the suppliers access to the requirements of clients businesses but they also give the suppliers an opportunity to meet the standards of doing business with the high-profile clients. The online platform of risk management can also help them identify the technical gaps and provide them with an opportunity to meet the technical expertise before starting business.

Other companies that offer similar kind of services are:

PEC Safety

SciQuest

SAP

Oracle

Zyrus

Coupa

Browz

GEP

The world of supplier networks, supplier management and services procurement is converging rapidly and hence the need of an expert online platform is the need of hour.

“Avetta like online platform can even tag what supervision and compliance certificates are necessary before the begin collaborating with the clients.”

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The base of any supply chain-technology or FMCG all require selection of right suppliers at the right time to provide the services and products to its maximum efficiency in an efficient manner.  Improving the day to day operation and customer satisfaction are equally significant as reducing the purchasing cost.

However, in the real business world decisions like the number of suppliers, kind of supplier, type of contract with suppliers, make-buy decision have answer much more than a simple YES-NO. There is no magic formula that could fit all the procurement cases. A mix of qualitative and quantitative criteria helps in getting closer to being efficient and effective.

Below are the steps to creating a robust framework for supplier selection

1. Forming a decision unit

 This team comprises of the subject matter expert. The expert who knows what the business needs and the specifications of those needs. Setting the decision team with precise requirement and time lines help in the future steps

2. Compiling a list of criteria and questionnaires:

A list of criteria: Price, Quality, Delivery lead time, Financial Capability, Proximity to suppliers, production Capacity, Technological capacity, Service Quality, Debt/equity ratio, procedural compliance, Adaptation level, Integration ability etc. are just a few examples.

Different product/services needed by the business would require different set of criteria and the weightage of the each of these criteria would vary not just depending on the kind of product/service but also on the real time global market situation, customer reaction, operational efficiency and the criticality to the business.

For e.g., price of a product/service might not be the key criteria while selecting the suppliers in the first quarter of the financial year. However, by the 4th quarter, the present situation of the company-KPIs, spend under social traders, Savings target etc. affect the decision making while selecting the suppliers and hence, the objectives all effective and efficiency takes a back seat and the suppliers are selected purely on the basis of meeting short term goals. To avoid this emotional decision making- a smore strategic and documented approach needs to be implemented.

Hence, questionnaire and criteria of all the experts are compiled and an exhaustive list of criterias is complied.

3.Weightage

Weightage given to the set of criteria should not be manipulated by factors other than business unit which require the product/service. Once the suppliers are evaluated on the basis of these criteria and given grades on the basis of weightage for each criteria’s, the ground work is done. The process of supplier responses us a repeated and continuous process and the median and quartile ranges are calculated again before the final revisions are requested from the experts.

4. Corporate Objectives

Once the final revision is done by the experts, we would also want to evaluate the criteria not from the business unit point of view but from an organizational objective point of view. There is a high chance that a supplier has high rating based on the criteria however, they don’t meet the organizational objective of establishing long term relationship or organizational objective of collaborative development. In situations, like these organizations can pick on the suppliers that does above average in ratings while fitting the organizational objective scheme of things.

These things are easier said than done but selection of suppliers that meet organizational objective along with operational business needs should comprise the top 75%-80% of the total spend. Strategic business units require strategic supplier selection. Strategic supplier selection reduces the supply chain risks considerably.

P.S: http://www.avetta.com is a platform which helps in  supplier prequalification and supplier selection

Formation of Crude Oil & Natural Gas

Crude Oil & the Natural Gas are the resources formed naturally amid the Earths Crust. These are organic resources and are formed from the remains of plants and animals.

If that is the case- Why do we not find Crude Oil & Natural Gas in our backyard?? Well,

If your backyard has tens of millions of layers of plants and animal remains compressed under a rock, you could potentially have a crude oil reservoir in your backyard. As layers of sediments get deposited on each other, the decaying of plants and animal remains results in the formation of gases. These gases are then exposed to a varying degree of temperatures and pressures due to changing climatic conditions and natural phenomena within the Earths Crust. The above phenomena could happen under the Ocean, under the mountain, under a desert and of course under your backyard but beneath Earths Surface.

Since Oil & Gas are less dense than water, they try and find a way towards to Earths Surface and passage their way through the pores of rocks.  When these Hydrocarbons are trapped beneath less porous rocks, an Oil & Gas reservoir is formed.  These reservoirs are the sources of Oil & Gas. Now, the task of the OIl & Gas industry is to bring the oil from these reservoirs to the surface by drilling a well into these reservoirs. Just like a hand drill into the wall.

Supply Chain of Oil & Gas

First Node in the Supply Chain: Exploration & Production Companies

These companies are famously known as E&P. Hundreds of Exploration and Production Companies are listed in the US Stock Exchange. These companies using varying levels of technology to explore the oil reservoirs and drill out the crude oil and gas from the reservoir. It is a very high capital extensive area of operation and the returns are not immediate. Exploration and Production Companies keep looking out for more petroleum reserves as their future source of revenue as the resource in the existing reservoir is limited. In a nutshell, these companies are essentially mining oil. Exploration companies contract the process of drilling and the drilling companies are paid with the duration of drilling and not on the amount of crude oil in the reservoir hence, they do not fall under Oil & Gas.

2nd Node- Oil Refineries

This the most value-adding aspect of the value chain. The Crude oil that is pumped out in node 1 is moved to il Refineries where the petroleum products are segregated based on the complex chemical structure and variety of hydrocarbon products are formed. The node directly impacts the prices of petroleum products significantly. This is the minefield that generates a lot of income.

3rd Node: Haulage & Storage

Transporting the finished petroleum products in a safe and convenient manner is more complex than what meets the eye. Introduction of a more organized system to tackle this node within the value chain can help businesses in this node earn money. Having a tank farm is of critical importance for the refineries or 3rd party logistics providers wanting to operate in this domain. Although not greatly exposed this node is quite critical within the Industry.

4th Node- Retailers & Resellers

This is where refineries acting as retailers and oil companies make huge money as the money they make is purely on the volume they sell. Even $1 profit/li accumulates to a huge sum of money as oil companies operate in barrels of oil. Although this node needs some technical experience, it comes with a huge Return on Investment. Retailers and resellers also form a part of this node.

Find the niche you wish to explore and pick the domain your business could improve on.

References:

Chima, C. (2011). Supply-Chain Management Issues In The Oil And Gas Industry. Journal of Business & Economics Research (JBER), 5(6), Journal of Business & Economics Research (JBER), 02/07/2011, Vol.5(6).

Wan Ahmad, W., Rezaei, J., De Brito, M., & Tavasszy, L. (2016). The influence of external factors on supply chain sustainability goals of the oil and gas industry. Resources Policy, 49, 302-314.

https://www.accenture.com/au-en/service-tomorrow-oil-gas-supply-chain-solutions

https://www.mckinsey.com/industries/oil-and-gas/our-insights/five-strategies-to-transform-the-oil-and-gas-supply-chain

https://www.inboundlogistics.com/cms/article/news-and-trends-impacting-oil-gas-supply-chain/

 

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Good company in a journey makes the way seem shorter. — Izaak Walton