Quaestor Equity Partners LLC
The Niche Industry Brief: Highlights for $5 to 50
million makers and marketers of
industrial products.
Fourth Quarter 2005
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Articles:
Outsourcing: The Challenge
of Finding the Best Supplier
Collaborative
Effort Can Avoid Unexpected Bad Debt Losses
Relationships and Supply
Chain Excellence
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Outsourcing: The Challenge of
Finding the Best Supplier
By Richard Gibb, dick@quaestorequity.com
In the last article, we
focused on the importance of making the right decision as to what
product, subassembly, or
part could benefit from outsourcing, as well as those that should
not be considered. That decision must be made within the context
of the enterprise’s
strategic plan. What core
competencies are important for internal development? How will
you enhance
competitiveness through product design, option variability, speed of delivery,
customization, etc? Once
you've selected items to outsource, it's time to investigate the
routes you can take to
find a supplier.
You can work with your
own internal resources. Alternatively, there are many firms,
domestic and foreign,
that can help you locate an outsourcing candidate. Either route can
work as long as the
proper resources for success are deployed. Defining those resources
upfront is important.
When a company is staffed with the required talent, and they are made
available, an outsourcing
project can be handled internally. If external resources are needed,
an understanding of the
skill sets required will help you draw up a Request for Proposal,
evaluate the quotations,
and select the most qualified vendor.
Availability of internal resources
It's critical to
understand the in-house availability of the talent required for success. The
time
required is significant.
Ideally, personnel can be assigned full time. It's important to have the
right mix of talent.
Engineering talent is essential to prepare product specifications.
Manufacturing people are
required to confirm that the vendor has the right manufacturing
capabilities, and to work
out scheduling details that ensure product availability at critical
times. Purchasing and
legal talent are required to resolve contractual issues. Travel to qualify
and compare potential
vendors should be budgeted. Organizations typically underestimate
the resources required to
outsource successfully. If the in-house talent is not available,
external resources should
be recruited to maximize chances for success.
Communication and analysis skills
Communication
difficulties can add significant cost and delay. One needs not just language
skills, but also the
technical ability to talk product specifications, quality criteria, contract
terms, etc. Anticipate
that different time zones will make it tough to wrestle through the
myriad of details in
developing a supply relationship. The ultimate test of communication
skills will come when a
dispute arises.
Vendor quotations require
considerable analysis, as do the vendors themselves. Do they
have sufficient expertise
to deliver a quality product on time? At a minimum, review the
supplier’s
Manufacturing capabilities
Quality assurance system
Planning systems
Purchasing process
Current and potential production capacity
Engineering talent
Documented on-time delivery statistics
Employee training, turnover, and absence statistics
Ownership structure and system for management continuity
Commercial and legal skills
Are you set up to handle
transactions in foreign currencies? Are you prepared to handle
tooling charges, advance
payments, Letters of Credit, currency fluctuations, currency
hedging techniques, site
drafts, performance bonds, logistics, shipping insurance and the
many other instruments
that are used to facilitate international transactions? If not, you may
want to select a firm to
assist you in your outsourcing efforts that brings these skill sets to
the party.
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Richard Gibb served as
Executive Vice-President of Federal Signal Corporation, a $1.2
billion producer of
products for industry, commerce and government. He had responsibility
for strategic outsourcing
and established relationships with suppliers in
Partner of Quaestor
Equity Partners and engages in Strategic Consulting assignments for the
Outsourcing Network. Reach him at dick@quaestorequity.com.
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Collaborative
Effort Can Avoid Unexpected Bad Debt Losses
By Joseph Ketzner, joseph.ketzner@eulerhermes.com
Even
in today’s strengthening economy, losses from non-payment of trade debt or
bankruptcy
occur. It’s better to avoid them through proactive intelligence than to react
afterwards.
Trade credit insurance can help. More
than just indemnifying losses, it can help
the
insured avert catastrophic losses and grow profitably. The key is having the
information
and
analysis to make informed credit decisions, and then monitoring risk after
shipment.
Insuring
a company’s accounts receivable involves understanding the company’s trade
sector,
risk philosophy, business strategy, financial health, funding requirements, and
credit
management
expertise. Trade credit insurance does not substitute for sound credit
management.
Other
types of insurance are often purchased and filed until renewal time. Trade
credit
insurance
is different. It is as dynamic and unique as the business it is protecting. A strong
relationship
between the policyholder’s credit management department and the trade credit
insurer
makes certain that the policyholder derives maximum benefit from their
investment.
Policyholders
should understand what happens “behind the scenes.” The best trade credit
insurers
invest heavily in developing proprietary credit and financial information. They
employ
risk analysts and industry- and country-based underwriters in many locations to
stay
close
to its policyholders’ buyers. This closeness leads to higher acceptance rates,
generating
more
sales and lower losses. They form a global network that monitors the
creditworthiness
of
companies, capturing and analyzing payment information to identify early signs
of
trouble.
Risk analysts gather and evaluate information
about each buyer and prepare a comprehensive
assessment. Risk underwriters review it and approve
or decline coverage for the
policyholder. Access to this information allows
companies to make more informed credit
decisions, generating additional sales and
averting losses through close customer monitoring.
The
policyholder’s larger buyers will be analyzed individually by a limits
underwriter. For
these,
it's imperative that the insurer and the policyholder’s credit department work
together
to
watch closely for any changes to the buyer’s creditworthiness.
Dedicated
risk industry managers monitor industry sectors such as retail,
pharmaceuticals,
textiles,
food, furniture, metals, automotive, lumber, building products, paper,
computers,
consumer
electronics, transportation, chemicals, and energy. When a policyholder
requests
additional
coverage on a buyer, ongoing monitoring allows for a decision quickly and
effectively.
When
a policyholder requests coverage on a potential new buyer, the risk
underwriting
department
gathers information from a variety of sources, including visits to the buyer,
public
records, past-due information supplied by other policyholders, and financial
statements.
When
a risk analyst discovers a company in financial difficulty, they notify all
policyholders
who
do business with that buyer of the increased risk, and an action plan is
initiated to avert
or
mitigate loss.
Over and above risk
assessment and monitoring, the best trade credit insurers also provide
collections services.
And ultimately, if an unexpected loss occurs, they will indemnify you
and protect your bottom
line.
Trade
credit insurance, if used properly, offers more than just a claim payment in
case of
loss.
With a strong relationship between the insurer and the credit department, trade
credit
insurance
is a wise investment to protect your profits.
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A 33-year veteran of Euler Hermes ACI, Joseph
Ketzner has spent nearly his entire career
with the company. In his role as Executive Vice President, he is directly responsible for
the
Commercial Underwriting,
Sales, Marketing, and Service departments. Reach him at
joseph.ketzner@eulerhermes.com.
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Relationships and Supply Chain
Excellence
By Tom Melzer, ta_melzer@yahoo.com
Favorable supplier
relationships lead to continuity of supply and lower costs, two critical
components of Supply
Chain excellence. People often confuse relationships with
friendships; they are not
the same thing. Both require honesty, trust and respect, but that is
where the similarity
ends. Simply put, friendships are emotional while relationships are
based on the quest for
mutual benefit.
All relationships should
provide mutual benefits, which should be periodically reviewed with
an un-biased eye.
The most common benefit (and most measurable) is price reduction.
Most price reductions
originate from either leverage or cost reduction. An extreme example
of leverage is GM’s
Lopez. Examples of cost reduction are throughout Goldratt’s book, The
GOAL.
Leverage is the balance
of power; with the power goes the price. Although environment
plays a large role
(buyers vs. sellers market), it is in your power to influence the
balance.
Competition can be
stimulated by adding new supply sources or creating different
alternatives. Price
negotiation can be improved through rigorous tactical planning. Such
strategies can yield
impressive results, but they can quickly reach the point of diminishing
returns, and even become
a liability. Price reduction without cost reduction simply moves
more of the margin
towards the side with the leverage. When
the profit stops, so will the
business.
The other way to reduce
prices is cost reduction, which requires far more time, effort and
expertise. Cost
modeling or mapping and competitive benchmarking are tools that identify
waste or quality
problems. Lean Manufacturing and Six Sigma are tools that attack these
problems. This is a
sustainable process; the more it is pursued, the more opportunities
arise. It is a collaborative
process; it strengthens the relationship with the supplier. The use
of leverage is
adversarial and strains the relationship.
Relationships are
critical to Supply Chain excellence. The business cycle shifts the power
between buyer and
seller. In a buyers market, leverage drives down prices; in a sellers
market, factory capacity
goes to the highest bidder. Relationships built on mutual benefit
generate long term
profits that exceed cyclical short term gains. But relationships based on
mutual profit are not as
colorful as adversarial encounters. It's human nature to want to
look good and defeat “the
enemy” -- wars need heroes and heroes need wars.
Most organizations desire
strong relationships, but they don’t commit the time and energy to
create them. In
place of long term commitment, they use "magic pills": supplier
appreciation
day, gifts to executives,
or lobby plaques. All are shallow ways of buying short term
relationships. For
long term success, both sides must commit as equal partners that know
the competition, the cost
drivers, the margins and their capabilities. Identify "Best in
Class"
performance and help your
partners achieve it.
Respect for the
individual is the key. The golden rule works. If you each strive to
understand each other's
motives, fears and concerns, the mutual focus can be toward
improvement, with no
downside price. You build an account of personal equity that
smoothes the bumps in the
road.
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Tom Melzer is a
recognized leader in supply chain management who is known for his action
oriented common sense
style. At Motorola he specialized in generating favorable supplier
relationships founded on
the principle of continuous improvement. He continues to be a
strong advocate of
competitive benchmarking and believes that when looking for ways to
expand mutual benefits,
persistence is crucial. Reach him at ta_melzer@yahoo.com.
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Edited by Mark Gibb, Quaestor Equity Partners LLC, mark@quaestorequity.com
Mr. Gibb is a Partner of
Quaestor. Prior to Quaestor, he was President of SINCO, Inc., a
$20 million provider of
safety netting solutions. Before that he was President of Safety
Storage, a $20 million manufacturer
of pre-fabricated HazMat buildings. He has also been a
Strategy Consultant for
Accenture, and held senior sales and operations roles with Stewart
Warner and Federal
Signal. Mr. Gibb has a BA from the
from the
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Copyright 2005 Quaestor
Equity Partners LLC,
The Niche Industry Brief
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