Friday, June 23, 2006

Demand Management At American Airlines...

Last night after missing a family dinner at my Mother-In-Law's house because I was sitting in traffic slowly consuming $3 gas, I had the pleasure of catching the end of the NBC Nightly News, and wouldn't you know it, the one piece I saw was on a company-wide spend management effort at American Airlines to manage the consumption of jet fuel by Tom Costello. The report shows the impact that focused efforts to manage spend can have, even when the commodity trades at a market price.

Some highlights from the report:
  • American Airlines consumes about 3 billion gallons of jet fuel each year, more barrels of jet fuel than Ireland consumes of oil.
  • Every $0.01 increase in the price of jet fuel costs American Airlines $33 million.

In an industry where many players go back and forth between bankruptcy and the edge of bankruptcy, managing the demand for jet fuel -- limiting its consumption -- can literally impact the survival of the company.

Many business travelers are familiar with the fact that American Airline's polished steel planes are kept that way to save the fuel required to carry the extra weight of paint. This report highlighted things you may not have known:

  • American saved $4m by implementing a procedure for pilots to taxi back and forth to the runway using a single engine.
  • They saved an additional $3m by cutting the amount of water in half.
  • They have removed unused galleys and asked passengers to lower window shades when planes are on the ground.
  • Their operations center studies weather to route planes through the most favorable winds for fuel consumption.
  • The airline is retrofitting planes with winglets. Installing winglets on 20 transcontinental 757s will reduce American's fuel consumption by 3 million gallons. (The winglets, recently featured in this USAToday article cost about $725,000 a pair).

At American, conservation and profitability go hand-in-hand. For all of its efforts, American claimed to have reduced it's fuel consumption by 84 million gallons last year, enough to save $161 million dollars.

The report is available to view on MSNBC's website. Go to MSNBC Video and look for "Airline cuts cost in little ways."

Thursday, June 22, 2006

Celebrate Incoterms!

The International Chamber of Commerce sent a reminder today to celebrate the 70th anniversery of INCOTERMS! Pardon me while I go grab a $0.25 pop here at Ariba, Inc.'s Pittsburgh tower (the one that watches solemnly over centerfield in PNC Park as the Pirates blow game after game season after season).

According to the ICC's release on the anniversary, International Commercial Terms have been keeping "the bricks of world trade contracts together" since 1936. The ICC also took a moment to recognize "the best known Incoterms are: EXW (Ex Works), FOB (Free on Board), CIF (Cost, Insurance, and Freight), CPT (Carraige Paid To), and my personal favorite, DDU (Delivered Duty Unpaid).

As we speak, the ICC is having a blowout in Venice, where in addition to the wine flowing, guests are being treated to presentations on the birth and evolution of INCOTERMS and "the role of INCOTERMS in jurisprudence."

Sadly, my tux remains in the closet because I could not get the travel approved by Ariba or GSully.

Wednesday, June 21, 2006

Not everyone loves Sandra Bullock...

Sandra Bullock is widely considered one of America's sweethearts, perhaps the acting profession's version of Katie Couric.

Recently she has been in the news for reuniting with Speed co-star Keanu Reeves in a time-travel romance that is decidedly different than Bill and Ted's Excellent Adventure.

This attention on Sandra Bullock reminded me that The Ambassador, my Seattle based driver during a January client visitor once had an encounter with her that he didn't consider all that positive. Then again, my colleagues and I didn't consider him to be all that positive.

Link: 25 days of rain and Sandra Bullock is ugly, a Seattle story.

Why Procurement Outsourcing is coming to a company near you

First, let me start by saying I should have outsourced my blog this month. I'm frankly astonished by how well the traffic has held up despite this only being the 3rd installment of the stuff this month. Thanks for hanging in there.

While I haven't been writing, I have been doing some reading, which has caused me to think about the procurement outsourcing business. Procurement BPO has recently been discussed in in Spend Matters, Supply Excellence, and e-sourcing forum among others. IDC is expecting 22.3% compound growth over the next 5 years. A lot of these posts have focused on the rate of adoption, the fundamental question of whether or not its possible, and opportunities and shortcomings of the marketplace.

In my opinion, the rise of outsourcing solutions like Ariba, Inc.'s Managed Procurement Services is inevitable and in progress and here's why...

1. Companies have already outsourced sourcing and procurement for some of their most complex direct materials, proving that outsourcing works and is effective. The tiering of the supply base by OEMs has effectively outsourced sourcing and procurement of a large percentage of the material content of products to a handful of "systems" suppliers. They've pushed the risk of component availability and pricing for these system's to their outsourced provider. Sure, Dell's supplier produces the components they sell, but it's not just component manufacturing they've pushed out the door, it's sourcing and procurement as well.

In these cases, the product delivered to the end customer serves as a proxy for the service level agreement. Dell knows exactly what it will receive and when it will receive it. For non-product spend, many companies lack that SLA or a proxy. Their procurement processes are relatively immature or undefined. The development of centralized or center led procurement organizations is a stepping stone to the maturity of process understanding that is required to establish the outsourced relationship and govern it.

2. Value proposition. Like other outsourcing markets, there is opportunity to save money through labor arbitrage or the application of technology that a company might not otherwise invest in. Unlike most opportunities there is the lever to influence the cost, price and value of the goods and services received. The value proposition does not rely on merely being able to do the same thing more efficiently, but by being able to focus leveraged resource in a way that delivers more effectively.

3. Accountability. In technology and consulting relationships, they're is occasionally some tension between what the consultant estimates as the benefit produced by a recommendation and the benefit that the the company perceives that it actually realizes. Is it the strategy that didn't fulfill it's promise, or the employees of the company that implemented the strategy? Theoretically, an outsourced procurement relationship should give you access to the best practice methodology and knowledge that attracts you to the consultant with the added benefit of accountability -- the ultimate in "you think you can do it better, then prove it." The best part is because of the magnitude of the relationship and the long term duration, this accountability should come at a discount to a consultant's day rate.

There you have it 3 factors that are going to have companies plugging into the capabilities of procurement service providers -- and I didn't even have to fall back on mentioning all of the other things that are already outsourced.

Later on, I'll talk about what companies can do to prepare to outsource...

Thursday, June 15, 2006

Where'd You Go?

It's been a long time between posts to the site, but I've been busy. (If you were expecting a post about Linkin Park's Mike Shinoda's new project Fort Minor, well sorry.)

I closed the sale of my house yesterday. So, if you were interested in living here, its too late. That's 44 days from listing to closing without using a realtor or the multi-list.

GSully and I are now working on moving most of our stuff into storage and the family into temporary quarters with gsully's parents over the next couple of weeks. Fitting all of that in around "spend managing" has left little time for chit chat.

There's more to come, I've been accumulating some thoughts that I'll share when I get a chance:

Selling your home without a realtor
Procurement outsourcing
On demand spend management
Big Ben vs. the pavement

Thursday, June 01, 2006

Private Equity Firms Do It For The EBITDA

Jason opines on the growing relevance of Spend Management to companies pursuing mergers and acquisitions on SpendMatters. He's right. Cost reduction drives the achievement of merger synergies, and sourcing and procurement initiatives in the 1st hundred days following a merger can set the tone for a successful transaction.

We have even begun to see acquisitions where the acquired asset's spend management technology and operating model were a key piece of the value proposition. There are even private equity firm's that have set up their own corporate entities to execute strategic sourcing on behalf of their portfolio companies, and to evaluate opportunities as a part of the acquisition's due dilligence.

In 7 years at Ariba Inc. I've had the opportunity to work with several private equity firms. Without question, PE firms do spend management for the EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization. To the PE firm, the ding associated with every downward bid in a reverse auction is the sound of EBITDA going up.

The private nature and concentrated ownership of PE firms does give them some advantages in implementing a sourcing initiative, particularly in the area of commitment. These are not organizations where a lot of people have to "buy-in" to go forward. However, sourcing in the PE firm is not without its challenges:

First, while they are able to make decisions based on an owners right, PE firms are often seen as outside meddlers by their portfolio companies, and not particularly knowledgeable about operating the business, particularly in the early days of an acquisition. This is especially true if the PE hasn't yet installed its own leadership. Brokering this relationship between buyer and bought buyer can be delicate.

Second, when leverage is sought across portfolio companies, these companies often have no direct operating relationship, adding another layer of complexity to the first challenge.

Third, many of the companies purchased by PE firms are "distressed" maybe even coming out of bankruptcy. This results in extra effort being required to build trust with suppliers.

While PE firms have been relatively less interested in more operational procurement, this may change in the future, especially for firms that are more committed to operating their companies rather than repairing and reselling.