What Will 2008 Bring in the Metals Markets? Earlier today, Lisa Reisman and Stuart Burns penned a thoughtful and lengthy post over on Metal Miner offering up their predictions for the metals markets in 2008. Among the metals categories they take their crystal ball to, the two examine where steel, stainless, nickel, aluminum, copper and zinc prices might be headed to on a global basis. In the same article, they also tackle the impact of a falling dollar and rising oil prices on global metals sourcing. What are some the assumptions driving the forecasts they present in their post? According to the metals blogging dynamic duo, “In the face of a slowing US economy, a mixed position for the European economies and a still strong Asian market, it is a particularly tough call this year to judge where prices will go. Our call is the US will teeter on recession. Europe though restricted by high ECB interest rates will still enjoy some (if reduced) growth providing the Euro/US Dollar exchange rate does not strangle exports. Asia in general and China in particular are still enjoying robust growth. China may well drop from the double digit growth of the last 5 years to high single digit figures but that is still a very significant driver for the world economy and particularly the world metal markets.”

Reading Stuart and Lisa reminds me about how much domain knowledge really counts in analyzing and covering specific commodities markets. Call me biased -- yes, I am married to one of the authors -- but relative to the price alerts and regurgitated crap that only mildly passes for journalism that the trades put out on metals, there's no substitute for the type of coverage that only true industry experience can bring to the table. Seriously, do we really want to know that the sky is falling and copper is up today, or do we care about why and where it might go tomorrow -- and what to do about it from a sourcing and trading perspective?

- Jason Busch

During Ariba's remarks on their call with Wall Street analysts announcing the Procuri deal last week, I counted the word "middle-market" in their presentation and Q/A at least half a dozen times. Clearly, Ariba is putting quite a bit of stock in pursuing this market opportunity. Personally, having had significant experience working with and talking to middle market procurement organizations in the past few years, I can tell you first hand that Ariba -- and everyone else for that matter -- is going to have a tough hurdle to overcome if they want to achieve their goals. Why is the middle market challenging? They're the classic software reasons: long sales cycles with smaller rewards, limited budgets, and customers who demand just as much from their solutions providers as larger organizations. But they're also unique reasons to procurement that make the middle market especially difficult to pursue.

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Last week as MFG.com's Fusion tour swung through Chicago, I had the chance to catch a presentation and panel discussion led by MFG's AJ Sweatt that offered up advice on helping smaller direct materials suppliers to better market themselves to procurement organizations. AJ -- who also happens to play a mean guitar -- is an absolutely gifted public speaker and one that you should seek out. If you take one part preacher, a second part politician and a third part manufacturing pundit and you gently shake the cocktail sifter, that's AJ. The man is absolutely dangerous with a microphone, and is probably the best speaker I've heard in the past year.

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While many would argue that North America has been the king of the middle market -- after all, the US was built primarily on small, regional businesses -- it appears likely that this title is likely to move to China or India as enterprising, young businesses flourish in these markets thanks to regional and global demand. Therefore, it's not surprising that you'd encounter sage advice for such organizations in local periodicals in these countries. Out of India, Business Express has sage advice for middle market organizations that need to hop on the supply chain bandwagon.

In the piece, the author argues that small and medium sized businesses are "often are not large enough to justify centralised organisations for supply chain management ... The result is a focus on individual facilities and, therefore, on a decentralised supply chain organisation." In addition, "SMEs often don’t have personnel who have knowledge of sophisticated supply chain strategy and operations. Most of them recruit people with strong operational distribution and logistics skills rather than those with a broader supply chain perspective and experience."

This results in organizations that create processes "site by site with an emphasis on internal local efficiency ... [often lacking] detailed process documentation." While these observations are coming out of a rapidly developing Indian manufacturing marketplace, I'd argue they hold for most similar organizations in North America and Europe -- not to mention China -- as well. Without question, the middle market is a different supply chain animal worldwide, and talent and skill sets typically lag those of larger companies.

- Jason Busch

This morning, I'd like to welcome Aptium Global's Lisa Reisman back to Spend Matters. A couple of years back, Lisa traded in her Fortune 500 consulting and trading past to focus entirely on working with small and middle market manufacturers on direct materials sourcing. In full disclosure, I have an economic interest in her firm, considering that she's my wife. Oh yeah ... and if you ever have an issue with something controversial on this blog, blame her, as she put me up to it.

The thought had not occurred to me until very recently that such a large gap could exist between the "best" and the "rest" in terms of the make-up of the skills, competencies and strategies of sourcing organizations within small and middle market companies. But exist it does -- and with probably far greater extremes than one usually observes in Fortune 500 companies.

The differences in business practices between what high performing companies (and sourcing groups) do and the "rest" is absolutely vast in the middle market. Based on the past few years of trekking into hundreds of facilities in the Mid-West, I can usually tell when I walk into a plant or headquarters just how they'll stack up through looking at their lobbies -- the high performers post not only their quality designations and awards but their press clippings which feature examples of their innovation, efficiency and overall competitive advantages in the market.

But once you walk through the lobby, the differences really start to show. What follows are nine observations that I've seen on a consistent basis of late:

1. The "best" are neither defensive, territorial or threatened by the mere presence of an outside party. They are open in admitting their sourcing philosophies, strengths and areas of opportunity.
2. High performers tend to be lean organizations -- few people managing many millions of dollars in spend. We have seen $400m companies with the same number of sourcing staff as $70m companies. And these larger organizations with greater spend per FTE tend to be more efficient and effective.
3. I won't even get started on the subject of talent. But think strategic vs. clerk at the extreme.
4. Only an analyst firm would know whether this point was true or not but from our vantage point, higher performing firms seem to have a better grip on the sourcing needs of all plant locations (including all global locations) and have deployed common sourcing practices across all plants and/or divisions. I'm not suggesting that decentralized purchasing functions are more common among lower performing companies but rather higher performing companies seem to bring various geographies into a similar sourcing philosophy.
5. The sourcing approach in high vs. low performers is markedly different. High performers look at categories and seek to award categories to fewer suppliers. Contrast this with low performers who take on a rule of three -- get three bids anytime an individual line item increases in price and award contracts by line items as opposed to categories.
6. This next difference may be just due to the size of the organization, but there seems to be a greater supply chain emphasis in higher performing companies vs. a purchasing department emphasis in other organizations. But this might be solely due to the size of the company.
7. Higher performing organizations tend to have more long term contracts and fewer handshake deals than their peers.
8. High performers also consciously seek to award more business to high performing partners -- they care that their suppliers are growing and profitable.
9. High performers look for their suppliers for competitive advantage and the means to create competitive advantages.

In this short post, we haven't even gotten into supplier performance management, risk management etc., but trust me! There are significant differences between the best and the rest here as well. Indeed, in small and middle market manufacturers, there's not a bell curve when it comes to sourcing and supply chain performance -- there's a steep cliff with a drop-off that is almost impossible to climb back up once you've gone over the edge.

Lisa Reisman is Middle Markets Editor of Spend Matters.

Earlier in the week, I had the chance to attend a gathering that my wife's consulting firm, Aptium Global, hosted for small and middle market private equity firms and bankers in Chicago at the University Club. The event, also attended by fellow blogger Michael Lamoureux -- who happened to be in town visiting -- discussed ten ways that investors can drive EBITDA improvement in their portfolio companies. Lisa Reisman started the discussion and was joined by two fellow speakers. The first was Mark Pruitt of the Energy Resources Center of the University of Illinois, a non-profit consultancy focused on energy cost reduction strategies. The second was Ara Surenian, a middle market lean and operational expert, who serves as President of Cadent Resources. Each presented real-world examples of cost reduction and EBITDA improvement in small and middle market organizations.

I'll leave the case study write-up and analysis to Michael -- and I'll link to them when he posts on his blog -- but what struck me most from the interactions I had during this event as well as other recent discussions with financial types is how private equity firms are getting more operationally oriented -- or at the least, working with advisors, consultants and operators who are. And this type of thinking is going down to the lower middle-market as well (even for firms with investments in companies with as little as $10 million in revenue).

In fact, even for a company at this level, it's sometimes possible to have a huge EBITDA impact merely by targeting a handful of category sourcing or lean initiatives, increasing valuations by as much as 1.5x-3x depending on given industry multiples. Even though many investors are not lean or direct materials sourcing experts, they get it. And they’re increasingly bringing in operational experts -- often ahead of new sales and marketing staff -- to help create new value.

Another interesting learning from this small to middle market segment is that within manufacturing, especially, direct materials cost reduction efforts -- either sourcing or inventory based, or both -- can have a disproportionate impact on overall profitability because so much of COGs and working capital is typically tied up in only a handful of categories. This is in contrast to larger organizations that typically have much more fragmented spend, even on the direct materials side, because they're producing a greater number of SKUs, part categories, and / or finished products. In addition, indirect and services sourcing in small and middle market manufacturing is often a much shorter cost reduction lever to pull than it is in larger companies. This is because overhead is typically a lower percentage of overall spend than it is in larger organizatons.

- Jason Busch

Lisa Reisman is middle markets editor of Spend Matters and our resident direct materials and global sourcing Spend Management expert. In full disclosure, Lisa is married to the editor of Spend Matters, Jason Busch.

There might not be too many lessons but a few laughs never hurt anyone. I'm wondering what Borat might say to software vendors who are seeking to deploy spend management solutions to the lower middle/middle market.

Again, for reference sake, we consider the lower middle market under $200m in revenues, the middle middle market $200-499m in revenues and anything over $500m as the larger middle market.

So Borat has been in the US for a little while and stumbles across SpendMatters ...

Borat: What kind of dog is this?

SpendMatters: It's SRM (Supplier Relationship Management).

Borat: Is it a cat in a hat?

SpendMatters: No ... it's an advanced sourcing tool used to monitor supplier performance.

It never ceases to amaze me how many software vendors announce their intent to go after the "middle market". We know why they say it -- they need to grow and the middle market affords them an "untapped opportunity". Though there are certainly some exceptions, Borat's first question, "What kind of dog is this?", is probably a more accurate question reflective of how middle market companies think of SRM technologies.

Seriously, these are companies that don't even regularly use supplier scorecards, or if they do, they might deploy them quarterly or yearly at best. That is not to say the middle market doesn’t need technology -- it does -- but software vendors really don’t know how to position their solutions for this market.

Borat: Spend Visibility! I no find you attractive anymore! ... NOT!

SpendMatters:OK, let's take the case of Spend Visibility (which is certainly no Pamela Anderson, although most lower middle market companies badly need it). My question is simple. Which vendor’s solution is most likely to meet the needs of this market? The answer: virtually no one's. And that's because middle market companies will never "outsource" the data to a third party who runs it through their UNSPSC taxonomy for a fixed fee per line item. The winning Spend Visibility tool for this market will be a very simple do-it-yourself model with a very low subscription fee for unlimited use. Always on – to be used anytime.

Outside of visibility, there are some very interesting solutions from sourcing vendors like Apexon with their APQP and PPAP automation solution. I believe that lower middle market companies would most definitely benefit from these types of applications, particularly when they are offered at $80/month per user. Providers like MFG.com also understand the middle market. Their "free" tools and supplier search capabilities make a lot of sense for manufacturers, particularly for categories such as machinings, fabricated parts and castings.

Borat: These are very niiice ... very niiice -- make sexy!

Lisa Reisman is Managing Director and Co-Founder of the Direct Materials Sourcing Advisory Firm, Aptium Global.

Lisa Reisman is middle markets editor of Spend Matters and our resident direct materials and global sourcing Spend Management expert. In full disclosure, Lisa is married to the editor of Spend Matters, Jason Busch.

I've often made presentations showing the "risks" of low cost country sourcing. These presentations contain pictures of containers sliding into harbors, cranes crashed, and cargo ships overturned. We add a few comments and the audience is always laughing. But today, when I saw this lead story on CNN showing the impact of the listing MSC Napoli near the shores of southwestern England, I had a very different feeling. I couldn't help but run a calculation that ran like this, "I'm a mid-sized manufacturer ordering one container a month of XYZ product and my container has gone overboard." For a mid to large sized company, this is certainly a hiccup but to a smaller firm that only orders a container a month, all sorts of problems ensue.

Risk management and scenario planning is not just for big firms. Firms of all sizes should have a contingency plan in place for precisely these types of disasters. Folks that source 80% of their requirements from low cost suppliers (often offshore) and 20% domestically are at a strategic advantage to firms that have made the shift to 100% offshore. I bet any manufacturer that has been sourcing offshore for 5 years or more has at least one “missing container story". Hopefully, none of you have any merchandize on this vessel.

Lisa Reisman is Managing Director and Co-Founder of the Direct Materials Sourcing Advisory Firm, Aptium Global.

I've always enjoyed sharing office space with my wife's middle market direct materials advisory firm, Aptium Global, but this week made for particular interesting discussion and banter given some of the challenges of a particular sourcing engagement they have going on. The event in question is one for an industrial products category where suppliers would purchase much of the content from distributors. Given the overuse of reverse auctions in this market, it made more sense to deploy a collaborative sealed-bid approach with reasonable target pricing to guide suppliers to the required numbers.

For nearly a month, everything seemed on track. The right supply base was identified and qualified, and incumbent suppliers were brought on board. But when they began to receive feedback from suppliers on the component pricing for one of the higher volume items in a critical lot, things took a different turn. The feedback for this critical part was that the target price was near the suppliers component price cost! Yikes, we all collectively thought.

Not to be deterred, everyone in the cramped office -- including the ex-sourcing geek typing this blog -- put on our thinking hats and decided to reach out to the supply base for detailed feedback. What we learned is that the suppliers had called the manufacturer of the components in question who had then directed them to a specific distributor. And it turned out that this distributor had the least competitive prices!

But we only learned this after we suggested that the suppliers call three other specific distributors and to tell these distributors which OEM and tier one would be the ultimate consumer of the components further up the supply chain. Fortunately, this strategy paid off, and the suppliers were able to obtain far more aggressive component pricing by leveraging, in this case, the tier one's preferred relationships with the distributors.

The moral of the story is that when it comes to direct materials strategic sourcing where distributors are involved in providing a significant component of a bill of material to the supply base, it's actually possible to obtain better results by leveraging different distributor pricing agreements and reaching out to a group of distributors rather than the one the manufacturer recommends. And in most cases, the best answer or distributor mix will not always be the same -- potentially even across a set of parts. In some cases, it might be the OEM's relationship which yields the best component pricing. In others, it might be the tier one's relationship (as it was in this case). Above all, it's critical to try all of these options if the pricing feedback that you're getting back from your supply base is not what you expected, especially on critical volume items that could make or break a sourcing program.

- Jason Busch

This morning, I'd like to welcome a guest blogger to Spend Matters. Lisa Reisman is Managing Director and Co-Founder of Aptium Global. She is also Spend Matters' middle market guru. For this guest post, I asked Lisa to jot down some of her thoughts on Aberdeen's recent survey of direct materials sourcing in the middle market.

Jason, thanks for giving me the opportunity to comment. Sudy's study is spot on! In this post, I'll bring up three key points to reflect on.

First, many middle market companies believe they are not large enough to engage in process consulting assistance or technology and that they don’t have enough complexity, line items, suppliers, locations from which to squeeze out additional savings. Obviously, this is false! But Sudy's findings ring true, but I would also add that this is largely due to the fact that the procurement organization often doesn't know what it's annual spend is by category or the number of line items it sources within those categories.

The notion of a "spend analysis" is particularly foreign to these types of enterprises. But let's illustrate this with an example. A mid-market automotive supplier purchases a couple of dozen bushings, levers, shafts etc. The purchasing agent begins to notice price increases on a limited number of parts (say 4-5). What strategy does the purchasing agent deploy? Quite simply, get the 3 perfunctory bids and threaten to re-source that part with a new vendor in order to keep the spend with the incumbent. What you observe it that each "category" is never sourced or – re-sourced. Rather, only bits and pieces are partially negotiated on a periodic basis.

Second, Sudy talks about how "process" can be embedded inside of organizations and that establishing a company wide process is the first step to sourcing success. Agreed but here too there are some significant short-comings in many mid-sized companies. In particular, we find huge differences in purchasing professionals' understanding of latest strategic sourcing and purchasing processes and subsequent openness to looking at sourcing in new ways. Whereas most large company purchasing departments are staffed with MBA's and analytical thinkers, most mid-sized companies are staffed with purchasing clerks that have worked their way up the organization or were in other positions such as Materials Manager roles or other shop floor roles.

In addition, middle market companies typically don't send these individuals for training with organizations such as the Institute of Supply Management but instead reward them with a purchasing "desk job". The resistance to change can stifle the company's ability to extract cost savings if the company executives aren’t pounding their fists.

Third, regarding Aberdeen's contract compliance conclusion that middle market firms lag behind both their smaller and larger brethren probably has a lot to do with what specific activities middle market company purchasing departments undertake on a daily basis. Most of the individuals in these departments are "drinking out of the fire house" processing purchase orders (some are doing over 30 per day), making sure the right goods are coming in, expediting orders etc. In short, their focus is on operational tasks and not strategic sourcing. We see this in nearly every company that we work with.

I'd like to thank Aberdeen for taking the time to dive into the middle market direct materials sourcing opportunity with their latest research. Only through analysis like this will the majority of middle-market owners / CEOs begin to understand the massive opportunity they're leaving on the table by not transforming their procurement and sourcing function.

Lisa Reisman, Managing Director of Aptium Global, implements direct material cost reduction programs for small and middle market industrial companies.