Written by Helene Abrams Wednesday, December 10 2008
When companies originally set up multi-org in Oracle’s E-Business Suite, security and control were the primary drivers for separating data into different operating units. Plants wanted to run their own operations, negotiate their own contracts with suppliers, and set up their own invoicing, inventory and receiving practices. Moreover, there was a competitive environment among different divisions, product line operations, and general managers. One part of the company did not want another part to see the transaction detail. Little attention was paid to maximizing the purchasing power of the entire enterprise to negotiate better terms and discounts with common suppliers. As a result, companies often set up hundreds of operating units, each with its own freight carriers, matching tolerances, approval hierarchies, supplier terms, and contracts.
It was difficult to determine how much business was conducted with a particular supplier, difficult to determine the enterprise cost of managing and maintaining different supplier relationships, and the burdened costs of different inventories.
Within a multi-org environment, much of the data must be set up by operating unit. While there are some advantages to having a multi-org environment, especially in regard to security, there are limitations that prevent obtaining an enterprise view of the data, especially the ability to leverage supplier relationships. There are three primary areas that can be negotiated with suppliers that contribute major amounts of money to the bottom line for an enterprise:Obtaining larger discountsChanging payment terms Reducing the number of suppliers.The following examples illustrate the benefits of executing each of these strategies. A spreadsheet is included with this document so that the key variables can be adjusted to reflect your own operating environment. In order to recognize the savings discussed, operating units need to be consolidated to provide an enterprise view of the data.
Obtaining Larger Discounts
If you are able to determine how much you spend with each of your suppliers, you may be able to renegotiate your discounts. Many suppliers will provide volume discounts if you commit to certain spending levels. By looking at your total spend across all operating units, you may be able to reach the thresholds required for greater discounts. The following chart examines potential savings for increasing the supplier discounts by 0.5%, 2%, and 5%. As you can see from this chart, even averaging a half percent additional discount results in millions of dollars in annual savings.The data in the following table include an assumption that 25% of COGS is attributable to MRO.
Changing Payment Terms
By increasing the number of days a company holds on to cash, additional interest will accrue, whether using a daily sweep checking account or another instrument for cash management. The chart below analyzes the benefits of extending the payment terms with suppliers and calculating the value of having the cash on hand for an additional “float” period. Again, negotiating an additional five days for payments results in hundreds of thousands of dollars in annual savings. This chart has the following assumptions:
- MRO portion of COGS is 15%
- The annual Cost of Capital is 5%
Reducing Number of Suppliers
There are a number of additional savings that might result from consolidating operating units or inventory organizations. Some of these are not as easily quantifiable, but result from obtaining an enterprise view of the supply chain operations when working with fewer suppliers in the enterprise. If you and your suppliers are closely aligned, operational savings occur because:
- You are able to consolidate distribution logistics (freight, receiving, inspections).
- There are fewer catalog items to maintain and reconcile among suppliers (Part # 100 from Supplier A is equivalent to Part # 357 from Supplier B).
- You work closely with a supplier so that the supplier knows what you need and when you need it. The supplier is tied into your system so that goods arrive on your production schedule. Handling just-in-time ordering through blanket purchase orders also saves time and money. The supplier, in effect, bears the inventory cost (both the value of money and the costs of physical storage, insurance, etc.).
- You can reduce inventory costs by eliminating duplicate or “dirty” data across operating units.
- Operational costs of working with a supplier including approvals, sending out RFPs, reviewing quotes, completing background checks, and making payments can be streamlined and result in significant savings.
- There are reduced legal fees since there are fewer contracts to negotiate.
In sum, there are many advantages to consolidating operating units. The financial benefits of having an enterprise view of the supply chain may outweigh the security factors that prompted the initial setup of E-Business Suites in a multi-org environment.
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January Puzzle
A traveler gets lost on a deserted island and finds himself surrounded by a group of n cannibals.
Each cannibal wants to eat the traveler but, as each knows, there is a risk. A cannibal that attacks and eats the traveler would become tired and defenseless. After he eats, he would become an easy target for another cannibal (who would also become tired and defenseless after eating).
The cannibals are all hungry, but they cannot trust each other to cooperate. The cannibals happen to be well versed in game theory, so they will think before making a move.
Does the nearest cannibal, or any cannibal in the group, devour the lost traveler?
Solution
The short answer is the traveler’s fate depends on the parity of the group. If there is an odd number of canibals, the traveler will be eaten, but if there is an even number, the traveler will survive.
To prove this, we will consider small groups and use mathematical induction to explain the solution for larger groups.
Case n = 1: this is an obvious case. If there is one cannibal, the traveler will be eaten. It doesn’t matter that the cannibal will get tired because there are no other cannibals around as a threat.
Case n = 2: this is a more interesting case. Each cannibal wishes to each the traveler, but each knows he cannot. If either cannibal eats the traveler, then he will become defenseless and the other one will eat him. So each cannibal uses backwards induction to realize that the only strategy is to not eat the traveler. The hapless traveler finds a bit of luck, therefore, and actually survives.
Case n = 3: this is where the problem gets interesting. The best strategy is for the closest cannibal to make a move and eat the traveler. The cannibal will be defenseless after eating, but ultimately he will be safe. Why is that? The reasoning is due to induction: once the cannibal eats the traveler, the resulting situation has 2 unfed cannibals and the 1 defenseless cannibal. But as we just showed above, when there are 2 unfed cannibals, neither will make a move for fear of being eaten by the other! Thus the first cannibal to make a move will be safe as the remaining 2 cannibals block each other.
We can prove the higher cases using mathematical induction. If the number n is odd, then the closest cannibal can safely eat the traveler because the remaining number of unfed cannibals is even (and by induction, with an even number of unfed cannibals no one makes a move). If the number n is even, then no cannibal will eat the traveler, for if he did, the remaining number of cannibals would be odd, meaning he will get eaten by the induction hypothesis.
Success Tips for Oracle Project Management
- Create a standard for documentation at the beginning of your project, and hold team members accountable for completing documentation requirements as well as keeping them at and above the standards required.
- Before promulgating user documentation or training, it’s also a good idea to choose a representative from the among the business users base to review materials first.
- If you are not sure about the resources and budget required, obtain several estimates from people that have experience with the same size and scope of your project.
- Be explicit, before beginning the project, what internal resources are required for execution. This includes people, infrastructure, hardware, and software.
- Help the project champion understand the impact your project will have on the organization and how its successful completion will make him or her an internal hero or heroine for supporting it.
- Break up your project into smaller projects (try for projects that can be completed in 4-6 months, especially early on) to get success and demonstrate momentum.
- Make sure that your testing includes reports, upstream and downstream interfaces, customizations, enhancements, and workflows.
- Ensure that comprehensive transition reports and meetings between departing and incoming personnel are completed.
- Instead of spending time and resources implementing third-party reporting, consider consolidating multiple instances, moving to a global chart of accounts (CoA), and/or standardizing on a consistent calendar.
- Include governance, risk, and compliance management as part of the project plan.
- Finally, celebrate the successes. Too many projects focus on defects, failures, or small cost over-runs without looking at the big picture and what was accomplished.
The Analyst Corner
John Van Decker, Research VP of Gartner, states:
"A single chart of accounts allows consistency in financial reporting across the enterprise by standardizing on common metrics and reporting structures, reduces dependencies on a separate financial consolidation system, and significantly reduces the costs incurred with ongoing, complex conversions and translations."
