Strategic CIO // Executive Insights & Innovation
Commentary
7/14/2014
09:26 AM
Kate Vitasek
Kate Vitasek
Commentary
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Suppliers Held Hostage To Procurement Platforms, Services

Pricing models penalize suppliers for increasing their business with retail, other customers.

You closed that big deal you've been working on for the last six months! Your company is now a designated supplier, which means it will have to get on board the new customer's procurement platform or get with its EDI network provider to exchange data.  

The bad news? Your company is now locked in to that platform/provider, subject to transaction fees that escalate based on how much your company does business with the new customer. There are many examples of this "activity trap," as I call it. I'll focus on a few making the rounds on discussion boards as suppliers complain (rightfully so) about being locked in with no say in the prices they're paying.  

For the record, I have no personal ax to grind here -- I've picked these examples because they're already public.

Target
Target's indirect-spend suppliers are required to use Ariba's eProcurement platform. While it's fairly easy for a supplier to get up and running, the supplier is forced to subscribe to Ariba's practices, pricing, and technology. The "pricing perversity" here is that the supplier is penalized for its success as a Target supplier by having to pay Ariba a percentage of sales, not pay for the cost of the technology it's using. For example, if I'm a successful supplier and increase my revenue from Target 10 times due to volume increases, my bill from Ariba (now part of SAP) goes up 10 times, even though Ariba didn't have to work any harder or face added costs to process the transactions.

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Companies such as Target don't really care how much Ariba is charging because the suppliers are footing the bill. This is a fabulous model for companies such as Ariba, because suppliers are basically held hostage to their platforms if they want to remain Target suppliers.

JC Penney
More than a decade ago, JC Penney started using EDI (electronic data interchange) to order products from suppliers. The JCP model for direct-spend suppliers is more "open" than Target's in that the supplier isn't required to use a specific third party to support information exchange. However, it's required to exchange specific types of documents via an EDI value-added network. Although the supplier can shop for a VAN provider, its charges are typically "per transaction."  

The pricing perversity comes because JC Penney (and other retailers) find great value in collecting more data from their suppliers, resulting in escalating charges by the VAN provider. For example, JC Penney implemented a Transportation Management System and began requiring suppliers to begin to use an EDI 753 transaction (carton counts, dimensions, and weight) document and to accept an EDI 754 response document that tells the supplier how the shipment must be broken up (if needed) and which carriers will handle the shipment.  

On the surface, this system seems simple enough: It reduces the number of trucks needed, amount of fuel used, and so on. But the financial benefits overwhelmingly favor JC Penney. In addition to having to pay the higher VAN transaction fees, suppliers often incur increased costs to create customized processes to capture the information, along with custom integrations to manage and send the messages. If suppliers fail to follow JCP's requirements, they incur fines.

West Marine
Boating retailer West Marine was looking for a new EDI provider, a company to liaise between its IT/integration staff and its suppliers. West Marine settled on SPS Commerce. Part of the SPS message is that it will manage, educate, and support a company's trading partners, even if they use a competing solution. Part of the switchover included testing all suppliers' EDI capabilities.

Some of West Marine's trading partners had to pay hefty testing fees to SPS Commerce.
Some of West Marine's trading partners had to pay hefty testing fees to SPS Commerce.

The EDI message boards were abuzz about a letter West Marine sent to its suppliers saying that SPS Commerce would be managing its EDI going forward and that EDI was required for all suppliers. The letter included contact information and a deadline for action. Suppliers forwarded the email to their IT people (either outsourced or internal), who then called SPS to set up testing. Suppliers that didn't want to switch to SPS but instead wanted to use another EDI provider would be charged $500 per test -- verification of each required EDI document for data integrity and accuracy. So if four documents are involved, that's $2,000. Testing fees vary based on the retailer's requirements and the deal it cuts with the VAN provider, but the fees add up quickly.

So much for the pricing advances of software-as-a-service. While West Marine saved money by handing a large community of suppliers to SPS, each of the suppliers had to either pay out significant fees for testing services or be left out of the mix.

I don't mean to slam Target, JC Penney, West Marine, Ariba, or SPS. Other companies and providers use these activity traps in their pricing. My beef is with transaction-based pricing models. These companies and their suppliers assume that transaction-based pricing models are the only way to think about paying for basic services such as data exchange. They don't stop to challenge their customers or the service providers about the true value -- and impact -- of their services across the entire supply chain. The winner is the service provider.

There's a better way.

A recent University of Tennessee and Sourcing Interests Group white paper, "Unpacking Pricing Models" (a free download), recommends a collaborative, shared-value approach that looks at total costs, not just the price per transaction. It's time for companies to challenge the conventional approach to paying for data exchange services and switch to a more transparent understanding of actual costs and benefits.

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Author, educator and business consultant Kate Vitasek is an internationally recognized innovator in outsourcing. Vitasek's approaches and insights have been published in more than 200 articles and five books, including Vested Outsourcing: Five Rules That Will Transform ... View Full Bio
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SupplyChainAdvocate
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SupplyChainAdvocate,
User Rank: Apprentice
7/14/2014 | 2:59:49 PM
There is not enough data being shared throughout the supply chain.
With all due respect you have clearly not done your research before sharing your thoughts and opinions. Most of the above information is entirely false and was more than likely heard from another supplier rather than experienced firsthand. Are you familiar with the benefits of EDI? Is this a joke? Do you understand what EDI is? Do you understand the benefits of EDI for BOTH the retailer and the supplier? Have you read the book The World is Flat? Do you have any supply chain experience? Any company who is resistant to collaborate with their retail partners and resistant to automate their own processes to ultimately decrease their own overhead (not just the retailers) should consider selling their business to a company that understands the supply chain today and how it is continuing to evolve. Or perhaps we should just all resist these changes and go back to fur trading posts since you do not seem to see the value in improving communications across the supply chain.

As for the transaction based pricing models... the data being exchanged is actually very valuable. Everyone is trying to gain more market share and also compete with Amazon. How can you complete with 2 day shipping when you do not even know where your goods are or when they are arriving? How can you win when your trucks are traveling around the country half empty with increased gas prices? Data isn't free... you pay for your cell phone usage, you pay for high speed internet, you pay per page for faxes. If you can step back and look at the supply chain as a whole everyone wins when we can communicate more information and improve visibility in the supply chain.
Kate Vitasek
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Kate Vitasek,
User Rank: Apprentice
7/14/2014 | 8:12:21 PM
Re: There is not enough data being shared throughout the supply chain.
Dear SupplyChainAdvocate

Thank you for your passionate reply to my IW blog.  

I violently agree that EDI and other procurement platforms can and do add a tremendous amount of value to driving efficiencies in the supply chain.  While I might be an academic now - I have 20 years of experience as a practitioner on both the buyer and supplier side and was on the Board of Directors for the Council of Supply Chain Management Professionals for 5 years.  My work on creating highlighly collaborative relationships through "Vested" sourcing business models won the Supply Chain Council's Academic Advancement Award and has led to 5 books.

In all of my books I openly advocate that more companies need to do MORE to collabroate with their trading partners - including automate their supply chain exchanges and using data to help drive better analytics.   

You suggest if I "can step back and look at the supply chain as a whole everyone wins when we can communicate more information and improve visibility in the supply chain."    I have stepped back - and what I see is tremendous gains in efficiencies where supply chains ARE becoming more streamlined and efficient.    YEA!  The point to this article is that the way that platform service providers charge for data exchange, the BUYERS are the winners in the efficiency gains much more than the suppliers.  And the real winners?  The platform service providers.   Yes - data exchanges are NOT free...but let's be transparent about the value of the improved exchanges and how allocate that value in way where suppliers don't feel locked in without a choice.  

Thank you again for your passion.  I am gald you have shared the power of automated platforms.  The more we can educate companies about the value of procurement platform services - the better.   As a professional edcuator, I also feel passionate about helping business professionals understand that sometimes a  "winning" decision may have perverse impacts that need to be explored.  

Kate Vitasek

 

 
SupplierAdvocate
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SupplierAdvocate,
User Rank: Apprentice
7/15/2014 | 12:34:25 PM
Re: There is not enough data being shared throughout the supply chain.
SupplyChainAdvocate - you're spot on with 90% of your response, however why should suppliers be forced to pay for this exchange of data? I can understand that line of reasoning years ago, however today there are a number of great eInvoicing providers that do not charge suppliers to exchange very basic data that you refer to. Yes, the data is extremely valuable, I agree. So why would you force suppleir's to pay when ultimatley you want every single supplier to adopt such methods. Too many Buying organizations are taxing their supply chain to death, and companies like Ariba and OB10 wonder why they're solutions yield such low adoption rates of eInvoicing or why Suppliers hate their supplier fee networks. Truth is that there is other ways to offset the cost of this miniscule data being exchanged...find a much more sophisticated cloud based solution and look into a platform that provides functionality that leverages the efficiencies created by a highly adopted "FREE" eInvoicing program. The obvious functionality would be an early payment solution such as Dynamic Discounting. There is such a way to create a Win-Win for both the Buyer and the supplier. Provide the supplier with highly effective eInvoicining options that are FREE and congruent to their IT capabilites, which then creates a much more efficient process internally for AP, invoices get approved faster, then give the supplier the option to be paid early for a reasonable discount. The buying organization drives substantial discounts, becomes much more electronically efficient, and the supplier is incredibly happy because they did not "pay to play" and now have a reasonable way to unlock working capital that was previously tied up in AR.  Seems like a no brainer!

All in all, I completely agree with everything else you pointed out, however there are increadibly successful vendors out there that do not charge suppier fees and provide outstanding additional functionality. I have no idea why anyone would deploy a "Supplier Fee" solution in 2014. Technology and better business models have left the supplier fee model in the past.
anon2987119318
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anon2987119318,
User Rank: Apprentice
7/15/2014 | 3:53:51 PM
Fees Correction
Hi Kate,


Thanks for your post. This is an interesting article.
In response to: "Suppliers that didn't want to switch to SPS but instead wanted to use another EDI provider would be charged $500 per test -- verification of each required EDI document for data integrity and accuracy. So if four documents are involved, that's $2,000. Testing fees vary based on the retailer's requirements and the deal it cuts with the VAN provider, but the fees add up quickly."

I wanted to note tha $500 is a flat fee, applicable to all document types for a certain retailer. So whether it's 2 or 14 document types, same price.

In addition, any other costs associated are for a suppliers existing EDI provider, and are totally variable, as you've stated. But these are not costs that are unexpected when adding a trading partner.

Thanks.
Supply Chain Pro
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Supply Chain Pro,
User Rank: Apprentice
7/16/2014 | 11:36:48 AM
Add value to integration, not cost.
There's no question data integration can deliver huge efficiencies to a company. But the article makes a great point: finding a collaborative way to approach integration is the way to go.  All too often integration that should deliver value does so at the expense of the supplier.  

Can this be avoided in all instances? I don't think so, but it can be made more equitable than it typically is.  Buyers and sellers collaborating more openly is critical to the process. Both should be open about the solutions or methods being considered and how to best address an integration opportunity. Failing to do this can put an integration method in place that costs more than the data is worth.

Certainly a cautionary note for solution providers as well... make sure you add value to the process.    

 
zerox203
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zerox203,
User Rank: Ninja
7/16/2014 | 2:01:06 PM
Re: Suppliers Held Hostage To Procurement Platforms
Wow, cool to see some new faces here in the comments! I guess this is a topic that is close to many of you - I get the impression we have a lot of people who work directly with the supply chain here, and that says a lot about your dedication to your jobs. I hope some of you will stick around for all the other great content on the site, though - there's tons of great sutff on a huge range of business/IT topics on the front page every day! As for the topic at hand, well, I'm in the opposite boat - I don't work in an area that's touched at all by this issue (and never have), but maybe that will allow me to offer a bit of a different perspective.

Someone mentioned modern suppliers needing to compete with Amazon, and the importance of EDI in doing so. Now, that's certainly true, but at the same time there are some caveats to that.  Does Amazon pay a per-transaction fee to a third party EDI service provider for each order it ships? I doubt it - and, if they do, I bet they get a very good rate. In fact, it's very possible that a lot of these processes are internalized at Amazon (etc.) because their scale allows them to do so, capturing even more value for them. If I'm already a little guy thousands of times smaller than Amazon, can I really afford extra fees in an area that's supposed to save me money? Ultimately, it's a complicated web that requires give and take on both sides, but I think it's fair to say that service providers are milking the  cash cow a bit where it looks like they can get away with it.

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