A couple of weeks ago, an executive at a vendor politely took me to task for butchering an explanation of supply chain finance. I'll admit, even though I got most of it right, I could have been more explicitly clear in certain areas. If you're looking for a more specific definition of what supply chain finance is and what it involves, I'd strongly suggest you check out a recent edition of CPO Agenda, which published a byline titled Supply Chain Finance 101. Succinctly put, the article suggest that supply chain finance "looks for cash tied up in inventory, payment terms and days payable outstanding (an indicator of the average length of time it takes a company to pay its suppliers) and seeks to change processes that are using unjustified amounts of cash."

In a nutshell, with supply chain finance, "A buyer uses its company's high credit rating to get cheaper finance for its supplier and inject cash into the supply chain. The lender/factor (bank or financial institution) checks your business credit information and calculates the credit risk on your organization, rather than your supplier. Since the cost of financing for a large company is much lower than for a small supplier located in an emerging market, sourcing becomes financially efficient."

In addition to providing a good explanation of what supply chain finance involves, the author, Catherine Truel, opines that supply chain finance is growing, in part, thanks to the need for global banks to refresh their solution portfolio. To this end, historically, banks enjoyed healthy margins on letter of credit designed to facilitate the exchange of goods and services in developing markets while protecting buyers. But given the cost, many companies have moved to open book dealings with global suppliers. Now, "because an estimated 85 per cent of world trade is now done on open account, banks have responded to this shift by improving their SCF services." Bingo. Another way to line the bank vault with more bullion or Euros (who wants to hold dollars these days, anyway) ...

- Jason Busch

Nearly every procurement staffer -- from an entry-level buyer to the most seasoned global executive -- has dealt with the ramifications of commodity price inflation in the past 24 months. But rolling over and playing dead like a dog will never cut it with customers and shareholders, especially when top line growth is slowing or not assured. I found that a recent Supply Chain Digest piece from Herb Shields had some useful tips for companies to tackle commodity and raw material price inflation head-on. Written by one of my wife's colleagues -- they're in the same executive coaching group -- the advice holds true across industries. Most important, these are tactics that every company can and should deploy (e.g., they don't require advanced skill-sets and expert financial savvy to enable hedging or other tactics).

Among other pieces of advice in dealing with price increases, Shields suggest that delaying can be a good topic. Here, it's important to ask a number of questions to the supply base. "Can the supplier hold off until all materials that are in the pipeline are used up? Can we wait until our new standards are in place? Can we have 60 days to notify customers?" A lot can change in a couple of months, but at the very least, delaying can buy you time. Shields also suggests that "if the proposed increase is based on a raw material or energy price change that is part of the supplier's cost of goods, make them work through the usage content calculation for your specific item." Here, I'd argue that it's also critical to have in place baseline local information for raw materials pricing. For example, if a supplier is basing a metals price increase on the LME, they could effectively be passing along a higher than needed price increase, since local metals prices to do not always track the exchange.

- Jason Busch

For companies that are not ready to set up their own factory operations in China or other developing markets, it can make sense to partner with local companies that specialize in setting up "factories within factories." A recent article in Supply and Demand Chain Executive shows why. The above-linked story describes the case of a medical products company that despite the IP risks -- some medical device companies that I have spoken with still consider China too risky from an IP perspective -- decided to set up production in China by partnering with a local company specializing in these services, such as "cut-and-sew" soft goods production. Before embarking on the effort, the company "had neither the knowledge nor the resources to begin the process of single-handedly establishing a solid manufacturing base in China."

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As someone who has been guilty for creating more than his fair share of "top" lists over the years, I should not make fun of others who do the same. Still, the concept has certainly been overplayed, no matter how valuable the advice. However, if you can get past the clichéd approach, there are some decent pieces of advice in a recent Top 15 Negotiation Pitfalls list from Supply Chain Digest. What are my favorites from the list? Mixing contentious behavior with problem solving is certainly a top one. These approaches "will kill the problem-solving effort and erode trust." To avoid them, the author suggests "separate necessary contentious exchanges by assigning them to one person ('bad cop'), while a 'good cop' works on problem solving, or schedule separate meetings for the contentious issues if you are negotiating alone."

Another useful tip is to avoid taking an over-aggressive stance early in a negotiation as "this turns-off the opposing negotiator, so, if you are prone to this, let others open negotiations or practice toning down your opening positions and statements." In the world of e-sourcing, I've seen reverse auctions construed by suppliers as overly aggressive -- especially when used before a relationship is established. What are some tips around this? First, it's most important to explicitly spell out that further non-price vetting will occur after an event to allow suppliers the chance to differentiate on factors not in an RFQ (e.g., quality systems, on-time histories, etc.) It's also especially important in the case of sourcing in certain geographies (e.g., China and Mexico) to invest the time to get to know the suppliers that you know will make a shortlist before an actual event, if it's at all possible. A few days spent in relationship building activities with new suppliers in these markets will go a long way to ensure a supplier enters a negotiation with the sharpest possible pencil.

- Jason Busch

Kudos to Knowledge at Wharton, an online publication that does not require registration, for continuing with their excellent series on global sourcing. In their latest installment, the editors along with BCG tackle the concept of global commodity risk, examining how companies can create strategies to mitigate and manage risk. Spend Matters readers no doubt know that supply risk is a subject that I tackle with significant frequency on these pages. But Knowledge at Wharton and BCG together has much to add to what I've discussed on these virtual pages in the past. In particular, I like their practical advice for pursuing commodity risk management and risk mitigation approaches.

For example, I like the notion of picking a specific exposure number as the cut-off point to get serious about investing in commodity price volatility (BCG suggests 10%). But the one caveat here is that an organization must be able to quantify and model potential risk (e.g., how many companies forecast the possibility of $150 / oil 12 months ago?) Shortcomings like this aside, the concept makes sense. From a tactical advice perspective, BCG suggests that not all strategies for dealing with commodity price volatility are cut and dry. Take hedging, for example: "If it's done without a lot of thought it's really gambling." Rather, BCG suggests in the article that companies should look at hedging as simply an insurance policy, albeit one that has broad support and organizational involvement. In BCG's words, "a hedging program really requires a cross-functional approach. It requires senior management attention and careful thought around the accounting requirements to make sure that no one gets into any questions with the SEC."

- Jason Busch

Supply and Demand Chain Executive recently ran an op/ed by Charles Jackson, CEO of Quadrem, examining some of the opportunities and challenges of supplier enablement and development in second and third world regions. Last year, I had the chance to talk to a global sourcing executive from a mining company about their regional supplier development efforts. I learned that what he had to deal with from a supplier readiness standpoint would make most procurement professionals cringe. Jackson's op/ed hits home with this point, but also offers a solution to some of the challenges. According to Jackson, "the need to find and promote creative solutions to a diverse network of suppliers will intensify. Building 'digital bridges' within these markets can only be achieved by adopting solutions and strategies that meet local needs."

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While I'm not sure why any health conscience -- or gastronomically inclined -- individual would want to eat canned sausage and beans, Tesco has recently recalled just these items. I originally saw the story on Procurement Leaders, although the BBC has a few more details, getting to the bottom of the stinky cans. According to the BBC, "the supermarket giant said that pieces of plastic from the production line in Italy have been found in a small number of the cans." Putting on my retail sourcing hat, my key take away from this story is that as retailers continue to increase their private label sourcing initiatives -- as consumers shun traditional brands, thanks to inflationary pricing pressures -- eternal supply risk vigilance will be the cost of spend liberty. Indeed, many retailers don't have the quality and risk monitoring / management processes for private label products that branded product suppliers such as P&G and Nestle can claim.

- Jason Busch

Next time your Chinese supplier demands a price increase due to rising raw material costs, chances are they're not bluffing. Indeed, the China price is once again on a rise. But this time, only the raw material producers and the tax man are smiling. According to a recent Reuter's dispatch (hat-tip World Trade Magazine), "inflation is taking a toll on China's businesses, as two manufacturing surveys show that input prices are rising and weighing on commercial activity ... Rising prices and the patchy supply of raw materials were chief among the complaints of manufacturers surveyed in the official PMI. China has held down the cost of energy, from fuel to electricity, resulting in shortfalls as refiners and power companies rack up huge losses and cut their output."

But it's not just energy prices that are up. Other raw material inputs (e.g., metals and plastics) as well as transportation costs are also factoring into the rising China cost equation, making many companies I speak to think twice about whether they are actually saving money sourcing from the region, at least for various portions of their spend (certain categories of spend are still no-brainers). The other night at the dinner table, my wife recalled an article she recently read talking about how one company in the manufacturing world had embraced the concept of "best cost country sourcing" based on total cost and risk -- and that China was not always the best choice, given the move away from a unit-cost LCCS paradigm. Clearly, now more than ever companies need to think twice about whether China is right, not only for short-term bets, but longer ones as well.

- Jason Busch

If you've read the latest Spend Matters Perspective on the intersection of packaging sourcing and packaging engineering, you already have some practical tips that can save money and help the environment in the process. But this sort of thinking is not just an academic exercise -- it's already in practice today at some of the larger retailers and CPG providers. Still, not everyone is smiling -- at least not yet. A recent New York Times article suggests that changes in milk jugs at Costco might be good for cost and the environment, but consumers aren't happily chugging down the changes. I should note before digging into the article that my family has been buying the new Costco gallon milk containers for the past few months and have had no issues with them (though I'll admit they take some getting used to).

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From a global sourcing standpoint, the old Soviet Bloc doesn't always get enough credit. When it comes to precision parts and components (especially in the A&D world), there are suppliers in Russia who are not only competitive on the world stage; they set the standard. Many of these now private or quasi-private suppliers were born on the back of Soviet military spending. But just because they can produce items that are hard to find elsewhere does not mean that they're inexpensive on total cost basis, factoring in the logistics costs of moving goods within the region, not to mention exporting from it. According to a recent news story I came across in Russia Today, it can be challenging to find a single logistics partner, not to mention one that is cost competitive compared to other regions.

The story cites the case of an executive at a major beverage company who suggests "that they have to deal with several contractors and this drives up transport costs up to 40% of the final product price." One of the challenges is that "operators cannot link several transportation companies in the logistics chain due to different standards in documentation ... [and that] cargo owners complain there is no stable price tariff for transportation and storage as the market is fragmented." If there's any good news in this, it's that logisitics investment should continue to grow in the region. Still, talent is and will remain an issue as many local logistics professionals from Central and Eastern Europe migrate to the west searching for greater opportunity and higher salaries.

- Jason Busch