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Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

One of the most common tags and keywords in this blog is Total Cost of OwnershipIt is usually applied to private sector businesses as the underpinning principal of professional procurement.  However, governmental units, including the Pentagon and most recently, the State of Nevada have used TCO as the basis of awarding publicly bid construction projects.  This win of TCO is likely to herald many more victories of concrete over asphalt pavements.

According to a story published 23 February, 2015 in ENR  , the leading periodical in the construction industry, Nevada awarded a major paving contract to a higher bidder because it offered a lower TCO.  “Citing long-term life-cycle costs”, Nevada DOT chose a contractor whose $83 million price was $3 million (3.5%) higher than the lowest bidder.  Concrete pavement is superior to asphalt in reducing rutting and potholes. 

TCO, Concrete, and Asphalt Pavements 

Mary Martini, NDOT District 1 engineer is quoted in another press report as saying, “We opted to use concrete, which federally funded studies show costs 13% to 28% less in the long run than using asphalt.” The concept of life-cycle costs has long been known to state governments but they have been slow to adopt it.  

The cement industry  and concrete industry  have long maintained that concrete roads and highways are less expensive in term so TCO.  Some folks confuse cement with concrete.  Cement is the ingredient (about 15%) that binds together and, aggregate, water, and additive to form concrete.  concrete does not exist without cement.  Understandably, the asphalt pavement industry has an opposite view.  Based on the federal studies, it is fair to assume that concrete pavement will continue to make gains at the expense of asphalt. 

There is also an argument raging over which material is more sustainable.  Both sides mount formidable arguments but the concrete position is more persuasive.

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Pamela Yip is the MONEY TALK writer for the Dallas Morning News.  Her 09 February 2015 story  introduced a man with a high (above 760) credit score who was driven to overtop the 800 plateau.  Yip wisely pointed out that since he had already attained the 760 “gold standard” rating, it was not worth hiring a consultant to drive him over 800.  

I could not agree more.  We have often discussed credit rating as it applies to the purchase of automobiles.  My online course, “How to Buy a New or Used Car”  stresses the importance of good credit.  The higher your credit score, the lower your interest rate and the more favorable the terms are.

So how do you increase your score?

The story point outs the most obvious path, that of paying your bills on time, better yet, early.   Here are some others that may or may not be common sense.

Credit Cards          

  •  Pay off the balance in full every month

The interest rates charged are the highest allowed by law and the card companies move their offices that allow the highest rates.  If you cannot pay the balance off every month, you have a spending discipline problem, not an income problem. Borrowing money on your credit card is a bad idea and an expensive practice.

  •  Do not obtain multiple card accounts

You are not increasing your credit availability so much as depressing your credit score.  The ratings companies look at the total credit available to you and will penalize your score if you have too much debt available that can be serviced by your income.

Further, each card introduces the chance for late payment and default.  If you only have one (two max) card, you are far more likely to pay the balance off every month on time.  Besides, doing so will convince the credit card company to grant our request for credit line increases.

Home mortgages            

  •  Do not buy more house than you can afford.

Bankrate.com states, “As a general guideline, your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, should not exceed 28 percent of your gross monthly income.

  • Pay half of your monthly mortgage every two weeks

This will amount to making 13 months’ worth of payments per year.  For instance, assume your monthly payment is $1,000 and is due on the last day of the month.  Pay $500 on the 15th day and another $500 on the last day of the month.  Since there are 26 two-week periods, you are effectively paying.                      

  •   Apply the excess to principal

Talk to the mortgagee about your plan to pay every two weeks and specify that you want the excess to be applied to principal, not prepaying the mortgage.  According to interest rate.com,  “A $200,000 30-year home loan with an interest rate of 5% would cost $186,512 in interest with the traditional 12 payments a year. Make the equivalent of 13 monthly payments every year, and the loan will be retired in 26 years and you pay only $153,813 in interest — a savings of $32,699.”

Auto loans                Bankrate.com  claims that , “Not more than 20 percent of monthly income, say experts. And that should include payments on all the cars you own, whether you have one vehicle or six. And we’re talking about your take-home pay, not your gross income.”

Following this advice will drive your credit score very high.

 

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Readers may recall a blog post in August 2014 that referred to the dangers and borderline illegal practices of subprime auto loans by Jessica Silver-Greenberg and Michael Corkery of the New Your Times.  They are at it again, shedding light on the sleazy title loan world in their collaborative story “The title loan conundrum”.   

These title loans usually come with usurious interest rates, so high in many cases, that the borrower never gets out of quicksand of debt.  The story mentions a woman who needed $1,000 to cover debts so took an auto title loan.  Two years later, she was $992.78 in debt and her vehicle was repossessed for non-payment.  Due to the 171% annual interest rate, she still owed virtually the entire amount and had lost her car.   

A NY Times investigative study found that interest rates ranged between 80% and 500% including fees.  When customers are unable to pay off the debt on time, a new round of fees is triggered as the debt is refinanced.  Another study reported in the story was done by the Center for Responsible Lending in Durham, NC.  It found that 1 of every 6 title loan borrowers will have their vehicles repossessed.    

The moral of the story 

The sad tales related in this story testify the sinister underbelly of commerce, organizations preying on the vulnerable and under educated.  What is worse, the victims are almost exclusively economically disadvantaged.  While some states are cracking down on title loans (and pay day loans as well) we all have an obligation to protect ourselves. 

Learn about your personal credit and how to buy and finance carsBe a responsible buyer so you do not depend on feckless well-meaning but generally incompetent bureaucrats to protect us.

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

The subject of subprime loans for automobile purchases continues to be troublesome.  A recent press account sounds the alarm.  Susan Tompor of the Detroit Free Press authored “Miles to go on car loanswarned against expensive six to seven year car loans The Tompor story cites a 28 year old auto worker trying to buy a $33,000 Dodge Charger using $10,000 down and no more than a 5 year loan.  She writes that Experian the credit bureau, that 40.3% of new car loans ranged from 61 to 72 months and that another 25.7% range between 73 and 84 months.  The average term for all new car loans was 66 months or 5.5 years.   

According to the story, a three year car loan for $28,000 at 4.5% accrues about $2,000 in interest but the same loan at six years rings in at about $4,000.  Car loans are available around 3%, lower for high credit scores, on short term loans of three years.  Since the risk of default is inherently higher on loans of five years or more, the interest rate is likely to be higher.   

That same $28,000 loan at three years carries a $832.91 monthly payment but the six year loan falls by almost half to $444.47.  So you pay half the monthly rate but rack up twice the total interest.  That would not seem to be much of a bargain and probably would not be done if more car buyers recognized the financial impact of poor decisions.   

What is the allure of the long term loan? 

The long term loan depresses the monthly payment so an unwitting buyer can be persuaded that the lower payment “buys more car.”  This is utter hogwash but many buyers proudly proclaim this mantra as justification for their ill-advised purchase.   

What is worse, no matter if the interest is simple, compound, pre-computed, or almost any other form, the interest curve is steeper in the early years when most of the monthly payment applies to interest.  It is generally about half way through the term of the loan when most of the payment applies to principal. 

In the online course, How to Buy a New or Used Car,we speak of “being upside down” on a car loan.  This happens when a borrower owes more on the loan than the car is worth.  We also cite the average statistic that a new car loses half of its value to depreciation in the first three years. This means that if you finance a purchase for six years, not only will you be upside down, but you will be much worse off because the steep interest curve in the early years keeps the loan value much higher than would the three year loan.  

Is the rising price tag on vehicles forcing buyers to seek longer term loans?

Of course not.  No one is forcing anyone to buy a car they cannot afford.  If you cannot pay off a car loan in three years, do not buy the car because you cannot afford it and you are putting yourself at financial risk.   Buy a different vehicle, including a used car, which is more in line with your budget, cash flow, and ability to service the debt.

 

 

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

In my public seminar days of the 1990s, my “hook” opening began with, this spoof question, for which I requested a show of hands. “How many of you, when you were young, grew up dreaming that when you got big, you were going to be a purchasing manager?”  The rooms filled with chuckles and guffaws.  On very rare occasions throughout the two thousand or so seminars, someone would raise his/her hand to spoof me!

The majority of “purchasing” practitioners fell into the job (back then it was considered a job as opposed to a profession), mostly by circumstance rather than by choice.  I liked to tell the audience that “Their reward for hard work and accomplishment was a sentence to purchasing! 

I would then go on to tell them that purchasing was the Rodney Dangerfield of business.  Despite the fact that purchasing represents 90% of operations for a firm that earns 10%, and that purchasing is the most efficient and largest generator of profitability in all of business, “I tell ya, we just get no respect.” 

The purchasing profession has changed radically since then.  I began doing education and training seminars two decades ago.  It was a great proving ground for sharpening public speaking skills.  The American Management Association (AMA) recruited me to write and deliver a Negotiation program.  It must have been good as it is still in use today at the seminar company which bought out the Kansas City subsidiary.

Since I was a purchasing expert, AMA also asked me to write and deliver a two day Purchasing program.  Since my style was energetic and zany, my resemblance to Mel Brooks was a daily comment which I took as a complement.

There was general resentment and disregard of purchasing because the internal customer did not understand or appreciate what value purchasing brought to business.  Attendees would volunteer that coworkers thought that anyone could do purchasing.  “What’s the big deal?  Just get three prices, do the bump and grind, and off in a cloud of smoke!”  Yeah, just like that.

I am proud and happy that the view of procurement has changed.  Leadership from within the profession is largely responsible for its own ringing successes.  One of the economic facts in our favor is what I previously contended, that purchasing is the most efficient and largest generator of profitability in all of business.

A story by Susan Avery entitled Procurement Changes in Past 10 Years cites these stats from a 2013 industry survey:

  • In 2013, 67% of procurement professionals have college degrees; the majority of which are business degrees
  • In 2003, just 67% held degrees
  • In 1993, the figure was 61.2%, mostly in business.
  • Procurement professionals are roughly the same age on average. In 1993, the average age was 44 years. In 2003, it was 46 years.
  • 70% of procurement professionals in 2013 are 45 years or older
  • In 2013, 40% call the CFO their boss
  • In 2003, just 6% worked for companies with this reporting structure

The inescapable conclusion is that purchasing pros are profitability leaders.  It is equally important that we pursue professionalism as demonstrated by certification designations.

January 23rd, 2015 | Tags: , , ,
Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

My consulting business largely depends upon clients reaching, by whatever means, the conclusion that the supply chain is the most fertile source of profitability. It is true that efficiency and cost cutting demand more attention in economic downturns but such should always be front of mind inn an enlightened business organization.

When economic times are good, management’s temptation is to keep growing the top line (revenue) while simultaneously neglecting embedded costs. When the “Musical Chairs” commercial tune inevitably grinds down, attention turns to the supply chain, where it always should have been, whether good times and bad.

My company slogan is, “Sell for a dollar, save a dime; save a dollar, earn ten dimes”. The math and economics are straight forward and simple as shown in this graphic, which demonstrates the effect of both purchasing and sales on profitability.

There are two ways to increase profits; increase sales or decrease costs.  Assume a business grosses $1 million per year as shown in this graphic. It is scale-able for $10 million, $100 million, $1 Billion, $10 Billion, etc. For simplicity

• The components of sales are Material and Labor shown in the first column

• In each of the next three columns, add those two together to compute the Total Cost

• Subtract the Total Cost from the Sales to compute the Profit in the bottom row

• The Effect line in the bottom row shows the impact on savings

The second column is the Base. We will measure results compared to the Base. The third column shows the effect of increasing sales by 10%. Material and Labor rise a proportional 10% (neglecting minimal savings from leverage). The net effect is a 10% increase in Profit.

But, look what happens when Costs are reduced by 10%. Material and Labor drop by the proportional 10%. The net effect is a whopping 90% increase in profitability! There is no razzle-dazzle here. It is straight forward economics and arithmetic.

Back to Efficiency and Reducing Costs

Of course efficiency and cost cutting should be addressed by management in good times and bad. The undeniable truth is the same for the supply chain as famed bank robber Willie Sutton once observed, “That’s where the money is.”

January 16th, 2015 | Tags:

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

We have noted the importance of a good credit score in the purchase and finance of new or used cars.  A good credit score is also an advantage in applying for credit cards or mortgages.  The rule is that the higher your credit score, the greater amount of credit and more favorable rates and terms is available to you. That does not mean you have to use your available credit.

The gold standard is a score of 850.  Five criterion affect the calculation and each has a different weighting.  These are:

  1. Payment history                   35%
  2. Amount you owe                  30%
  3. Length of credit history      15%
  4. Types of credit used            10%
  5. New credit                             10%

 Payment history is the most important criterion because how you paid your bills in the past is the best indicator of the future pattern.  It helps to pay off installment credit early (cars and mortgages).  You can do this by making supplemental payments each month.  For example, if your mortgage payment is $1,500 per month, pay $1,750 and apply the supplemental $250 to principal.

 The amount you owe deploys a “credit utilization ratio”.  It divides the mount of credit you have by the amount outstanding. The closer to 100%, the worse it is.  Another example is credit card debt.  If your credit card limit is $20,000 and your average monthly balance is $4,000, your 20% credit utilization ratio drives up your score.  To be explicit, never charge more on your card than you can pay off by the due date.  Carrying a balance will cost you huge interest charges and damage your credit rating.

 The length of credit history is straight forward; the longer the view, the more comfortable the risk assessment.  If you are a college aged person or parent of one, take on a credit card and use it carefully.  It will help to build your credit history so you will be ahead of the game when you apply for a loan.

 The type of credit used demonstrates management of your debt load.  The various types of loans you have, or have had, are examined.  Do you pay the mortgage and car loans because they would otherwise be repossessed, while not paying debt like college loans or the full balance on credit cards.  This would lower your score.

 New credit taken on has a deleterious effect on your score.  If you are constantly in search of new credit sources or have many credit cards, this will depress your score.  I have one corporate and one personal credit card with large limits that I almost never approach.  The closest it ever came was when I put the purchase of a new car on my credit card because the dealer could not give me the title.  Although rare, failure to provide a title does happen.  I wanted to be certain that he did not have my money and my car! 

You might not be able to accomplish everything at once, but begin working on improving your credit score.  Minimize credit that you use and pay it off as soon as you can.

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

A recent story authored by Kelly Barner drew my attention.  It appeared in Professional Purchasing, a publication of the American Purchasing Society.  Kelly is the Managing Editor of Buyers Meeting Point, an online resource for procurement and purchasing professionals.  She has some education and experience chops in the profession so I always read her material. 

Kelly writes that that interest in supply chain visibility is on the rise.  She cites an Aberdeen Group study published in 2013 which found” 63% of companies surveyed see visibility as a high priority activity.” The drivers were documented to be “operational benefits such as resource efficiency and cost reduction.”    

So what is supply chain visibility? 

According to Jeff Dobbs, Global Sector Chair, Diversified Industrials and a partner with KPMG, “obtaining real-time visibility across all tiers in the supply chain can significantly increase speed to market, reduce capital expenditures and manage risk.”  

Well, this is not a definition.  Indeed, definitions of this relatively new concept vary wildly.  I see divergent concepts in virtually all of my consulting clients.  Here is another one.  The track-ability of products in transit from the contributing suppliers at all tiers to the end customer.  It follows that visibility encompasses the increase of available data that can be analyzed to make recommendations, determine strategies, reduce costs, and drive risk out of the supply chain. 

Most supply chain pros seem to agree on these three goals, if not a definition. 

  1. Reduce business and supply chain risk
  2. Improve lead times and performance
  3. Identify shortage and quality problems along the supply chain 

We will be hearing much more about supply chain visibility going forward so let’s learn about the three concepts that will accompany any visibility initiative. 

  1. Processes – No matter the process (supplier evaluation, tracking until delivery, SO&P, to name but a few), it must be more collaboratively discharged with internal and external customers.  Organizations need to develop specific data requirements that can be shared between internal and external customers to improve demand planning.  Especially for overseas suppliers, mitigating supply disruptions must become a priority. 
  2. Information and Data – Both must be shared and available across the supply chain and with customers.  This will generate more “Partnering” relationships, which in itself, is a good result. 
  3. Technology – This is always an evolving problem.  Disparate information systems must be homogenized.  Cloud computing, data collection, and analysis software will make it easier for partners to cooperate and literally have the visibility they need. 

Write to me with how you see visibility.

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

One of the benefits of a long tenure in our profession is the uncanny ability to spot gimmickry.  This approach is not new to the purchasing and procurement world.  About 20 years ago, an egregious negotiation marketer touted his concept of Win-win negotiation, where the capital ‘W’ indicated that the Winner would do better than the winner.  Clear?  It was hokey and flamed out soon as it had not substance. 

In similar fashion, a recent blog post from a self-promoter in the purchasing world grabbed my attention because he tried to make the point that “value” was to this decade what Total Cost of Ownership (TCO)  was to the 1990s.  The distinction is bogus because value has always been an important factor in the procurement decision.  

He used the example of buying a car for a corporate exec and swiftly blew off the price only argument.  So far, so good.  He then he took on the TCO argument, correctly pointing out how gas mileage, maintenance, consumables, etc. factor into the TCO decision.  

Chevy  SparkBut his value argument goes off the rails when he brings the Chevy Spark into the analysis.  Clearly, a Chevy Spark would be an inappropriate choice for a corporate exec but because it goes to the price argument, not value.  Yeah, the Spark is inexpensive at an average price paid at less than $11,500 for a 2014 model but it also lacks the basics, let alone the luxuries.   

In this and many, indeed the majority of other cases, the concept of value is elusive and subjective.  While this truth is acknowledged in the blog post, it is also diminished.  Further, the author goes on to explain that it is usually difficult if not impossible to identify the best value without resort to subjective factors. 

HUH? 

Of course value is subjective.  In this case, consultation with the end user, the corporate exec, will determine value.  Does he want a roomy upscale sedan to ferry around prospects?  Does he fear ostentation and prefer a plain Jane car?  Is an SUV more appropriate?  The price difference among all of these is not likely to be substantial but will be about triple the bargain basement price of the Spark.   

The lesson here is an old and proven principle.  Consult with the end user.  Other, it is impossible to provide what he wants, let alone price, TCO, or value.  This fact is still true:

Best Value is defined as the lowest TCO. 

The sophistry of the value argument is about as worthy of consideration as the specious Win-win publicity stunt.

December 26th, 2014 | Tags: , ,

 

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

In 2012, a consulting client hired me for the purpose of professionalizing their purchasing department.  Except for capital expenditure (CAPEX) authority exercised by executive management, there was no purchasing structure – everyone and anyone bought anything they wanted, irrespective of authority so the result was an expensive mess.  Predictably, a disaster developed involving an unqualified supplier that cost them a major customer and millions in losses. 

The client was a profitable $1 Billion (US$) a maritime services company with a maritime oil field services unit.  It competed with giants in the industry who were also clients so while I was familiar with the challenges of their industry.  One of their initial questions concerned the difference between “purchasing” and “procurement”.  Since they were only remotely acquainted with the purchasing profession and their customers were demanding compliance with their systems, the matter required immediate attention. 

Definitions from various authorities yield almost as many definitions as authorities.  Most insist that procurement is an overarching term encompassing sourcing, negotiation, contract & supplier management.  While this is generally true in current practice, there is no hard rule. In the manufacturing sector, epitomized by Toyota  procurement refers to direct spend for manufactured items and purchasing encompasses all indirect spend. 

In the oil & gas sector, the definitions are opposite those of manufacturing.  Purchasing traditionally refers to goods and services consumed in exploration and production of wells.  This practice follows the U.S. tax code which allows 100% deduction of all goods and services in the year consumed.  This means labor, fracking fluids , cement and steel casings, rig rental, fuels and utilities, mud logging, consulting fees, and so forth.  Procurement refers to CAPEX items such as well heads, line heaters, tanks, and other items that are not consumed and generally available for resale and reuse.  These items can be depreciated under the tax code, not deducted. 

So what is the purchasing/procurement professional supposed to believe? 

I advise most clients to use the terms interchangeably unless their customers have definitions they demand be propagated down throughout the tiers of suppliers.  As we have seen, industry standards vary, so advice in these sectors is to follow the conventions of that industry. 

 There is no uniformity and you can find varying definitions but these definitions are in common usage. 

Procurement                        Procurement is the overarching function encompassing the activities and processes to acquire goods and services.  In some cases, related activities such as strategic sourcing and supply intelligence are included in the definition.  Many definers see purchasing as a subset of procurement.  Others exclude Sourcing but include the short and medium term issues of supplier management.  The in vogue trend is to use the term Procurement to cover all supplier management activities. 

Purchasing                Purchasing encompasses the process of ordering and receiving goods and services. It is a subset of the wider procurement process. Generally, purchasing refers to the process involved in ordering goods such as request, approval, and creation of purchase order documents.  In common practice, purchasing includes sourcing, negotiation, and supplier/contract management.  It necessarily involves supplier qualification and evaluation systems. 

Sourcing                    Sourcing is the strategic management of external resources, which necessarily includes sources.  It is often envisioned as the strategic management of the supply chain to ensure adequacy of resources and quality of sources for the long term.   

So that settles the question, right?