Sourcing The Day After Tomorrow … Part II

In Part I we recapped sourcing today, a multi-step process where each step had multiple sub-steps that were typically done sequentially in a long, manual, process that typically took too long, delivered too little, and still kept steps. Why?

Let’s take our seven-step sourcing project step by step:

Review:

In this step, the sourcing team reviews the product requirements, which hopefully were developed in consultation with marketing, sales, and other affected organizational units, in order to determine what needs to be considered when identifying a supply base, assessing baseline pricing, and determining if there are alternative options.

Supply base identification will typically involve analyzing the current suppliers, other organizational suppliers that may be able to provide the product, and searching externally for new suppliers (which could involve asking peers, going to trade shows, searching networks, etc.), and then creating a short-list to vet in a multi-stage RFX process.

Baseline pricing will be based off of historical pricing, adjusted for any perceived market factors, cross-checked with public pricing if the product is a commodity, and compared to should-cost models if the organization understands the cost-breakdown and relevant material and overhead costs where the product is being produced.

Identifying alternative options will involve diving into the product specifications, working with engineering to determine which are absolute and which are malleable, and whether the requirements are design driven, reliability driven, or customer driven. Then the sourcing team can determine if alternative options are reasonable to pursue or not.

This will often take a long time. Chances are that the sourcing team:

  • will not be product experts, and it will take time for them to understand the product(s) and/or
  • will not have easy access to a deep qualified supplier network enriched database and will have to manually spend a lot of time searching for a supplier list and/or
  • will not have easy access to integrated market feeds or detailed should-cost models or the knowledge of how to build them and/or
  • have the deep knowledge of product and design to identify reasonable alternative options and how to source them, or design a sourcing event that considers both but chooses the best

And sometimes, all four of these options will be true. And in these situations, the buyer will take too long identifying suppliers and product options and continue without enough knowledge of baseline market pricing or alternative options. This means that they will likely miss potentially good suppliers, accept a baseline higher than it should be, and not include the absolute best products for their organization and customers in the mix. And this is just step 1.

Sourcing The Day After Tomorrow … Part I

Will not be anything like sourcing today. But, contrary to popular belief, it will NOT be accomplished by robots buying from robots to help your robots make your goods and deliver your services. (That will be the day after the day after the day after tomorrow. Which will be the day after the earth’s next massive extinction event when humanity will have to rely on robots to survive, for better or worse.)

To recap, this is sourcing today:

  • An organizational stakeholder (like Engineering) identifies a need for a non-catalog product or service and makes a request to Sourcing.
  • A buyer reviews the request and determines if a strategic sourcing event (negotiation, e-negotiation, etc.) needs to be conducted and a contract created or if it can be sent to Procurement for spot buy (and we are assuming it can’t, so)
  • The buyer conducts a detailed needs assessment
  • A strategic sourcing event format is conducted
  • Notifications / RFXs / Ts&Cs are sent out
  • Responses are analyzed
  • A preferred supplier is selected and negotiations begin
  • A contract is awarded

As part of this rather long and involved process there will be dozens of steps under the seven steps that sourcing does above. For example:

Review:

  • Product Requirements
  • Current Supply Base
  • Known Market Pricing
  • Alternative Options

Needs Assessment:

  • Detailed Use Case Review
  • Exploration of Alternative Options
  • Production Requirements
  • Support & Service Requirements

Strategy Selection:

  • Supply vs Demand Market Dynamics
  • Geographic Needs and Impediments
  • Known Supply Base Strength and Weaknesses
  • Required Speed

Communication:

  • Standard Protocols
  • Supplier e-Communication Capability
  • Level of Detail Required
  • Response timeframes

Analysis:

  • Market Pricing Data
  • Historical and Projected Spend
  • Cross-Category Materials Spend
  • TCO / TLC (Total Cost of Ownership, Total Lifecycle Costs)

Negotiations:

  • Format (online, offline, hybrid)
  • Fact Prep
  • Audit Trails
  • BATNA fallback

Contract:

  • Standard Terms and Conditions
  • Modification & Risk Mitigation to Supplier & Country
  • Key Metadata definition and obligation specification
  • Contract Analytics

And depending on the type of sourcing event, market dynamics, and complexity of the intended buy, under a current sourcing process supported by a current sourcing system, instead of dozens of steps, there could be hundreds. Is this really sourcing?

How Do You Identify The Day After Tomorrow’s Supply Chain Paupers?

Well, assuming the day after tomorrow comes and they are still around the day after tomorrow, they will be easy to spot. Not only will they still be trying to use Excel, but they will still be using Excel and will only recently have started exchanging documents using XML, using last decade’s e-Procurement technology.

They will not have advanced to modern e-Procurement applications, yet alone modern sourcing or supply chain visibility solutions. They will be in the process of simply moving from paper to e-Paper, trying to still conduct RFIs through e-mail with Excel (and just uploading the results to the first generation decade(s)-old e-Procurement solution), and generally trying to keep their outdated procurement processes in tact.

However, as we now know, first generation procurement and sourcing, focused primarily on e-document exchange, simple RFXs, the odd auction, and basic reporting is not enough. You need modern e-catalog management for procurement spot buys, analytics for opportunity identification, optimization for at least TCO management (if not TVM), and SRM for supplier information, relationship, and performance management.

But this is not enough. These day’s, there’s never enough time to sift through all the data to identify the opportunities, never enough time to collect enough market data to qualify even the ones you have identified, and certainly never enough time to construct category specific models on even a fraction of those to determine if they opportunities will be realized with an appropriate sourcing event — which can take years of experience to properly identify.

You need a next generation solution that can automatically collect, maintain over time, and trend market pricing data; run all your data through multiple types of automatic analysis and compare your spend against historical spend and market data (and look for variances); pull out the categories with opportunities; run trending algorithms to project your demand against expected contract prices based upon projected market demand, supply / demand (im)balance, and economic factors; calculate the potential savings if nothing was done; use historical data and automated reasoning (enriched with context) to (probabilistically) identify the best sourcing or procurement strategy; and then use appropriate workflow automation to automate as much of the event as possible (and if it is a spot-buy under a threshold, automatically procure from a catalog, an approved supplier under contract, or a three-bids-and-a-buy RFQ against approved suppliers).

In modern terms, the next generation solutions will be Cognitive Sourcing or Cognitive Procurement solutions. While they are not true artificial intelligence, with enough data and great models, you don’t need true AI to automate acquisitions where there is no strategic value and no significant value to investing human time. Good examples are office suppliers, janitorial services, and sometimes even laptops. Yes, replacing laptops across a large office can be in the millions, but laptops against a standard config are commodity. Just do an automated auction [with ceilings and floors] against a set of approved suppliers and let the most aggressive supplier win.

How Do You Identify Tomorrow’s Supply Chain Paupers?

They still use paper today!

This is another entry in our continuing The More Things Change … series that w began last month. Except this week we’re going back five years instead of the ten years we went back last month.

Although I don’t understand how any supply chain focussed business, and a logistics carrier in particular, could still be paper-based. It blows my mind that just five years ago the WT 100, in their recent article on Rounding the Optimization Curve, reports that there are still a significant number of carriers that keep their records on paper. How can you survive in today’s cost-competitive, just-in-time, value-conscious supply management landscape and work on paper?

And, more importantly, if you are a logistics provider or CPG distributor, how can you effectively still keep running on paper when Amazon is investigating drone delivery? Five years later there are *still* carriers and distributors running primarily on paper. And we’re not pranking you either, like South Park pranked your Amazon, Apple, and Google devices. This is a fact!

And while we’re at it, let’s talk about how you can identify the dead men walking of the day after. They use Excel. We’ve known for years that errors in spreadsheets are pandemic. Needless to say that it boggles my mind that Microsoft Excel continues to be the application of choice for supply chain and logistics management around the world. Fidelity lost 2.6 Billion as a result of a spreadsheet error, Fannie Mae made a 1.13 Billion honest mistake, and RedEnvelope lost more than a quarter of their value in a single day after they warned of a fourth-quarter loss due to a budgeting error that resulted in an overestimate of gross margins. How long is it going to be before someone accidentally uses a plus sign instead of a minus sign in a profit formula and forgets to uncap an inventory calculation and instead of ordering 100,000 units of a profitable product, instead orders 1,000,000 units of a product that actually results in significant losses at the target sale price, for which the market demand is weak, ties up all of the organization’s working capital, and essentially bankrupts the company? My guess, with the steadily increasing complexity of S&OP, JIT inventory management models, and supply chains, not much longer. But, maybe after a few companies are brought to their knees from spreadsheet errors, we’ll see the day when Excel is sh!tcanned along with the dinosaurs who still think it has any more use than a HP or TI calculator.

It’s time for anyone still on paper or Excel to wake up and realize we don’t live in Walt Disneyland and that the story of the prince and the pauper is a fairytale. A pauper is not going to become the benefactor of princely riches just by looking like a bigger, richer, company. In today’s uber-connected world, appearances don’t account for much. It’s not long before someone digs deep and uncovers the truth.

There’s a reason why customers are demanding end-to-end visibility of their supply chains, including those of their supply chains logistics’ partners. And a reason customers now expect all of their suppliers and business partners on the supply chain (including logistics providers) to participate in a supply chain network. It’s because they know that the only way they can accurately manage their supply chain is to keep on top of it, that the only way they can build accurate models is with accurate data gathered from partners, and that the best reports they are going to get are going to come from supply chain visibility and planning software plugged into these “networks” (where, in reality, these are “enterprise communities” that allow the necessary collaboration, not “consumer social networks” where you can poke, prod, and shake your buddy for no apparent reason).

In other words, paper is dead, and Excel will be the new paper, and then, someday, it too will be dead. So if you don’t want to be the pauper, move off of these technologies and onto solutions designed for your supply management needs. With a plethora of Best-of-Breed solutions on the market, designed for large and small providers, it’s extremely likely that there’s at least one solution that meets your needs almost exactly with minimal tweaking. If you look hard enough, the doctor would bet that there’s at least three, or will be before you can look twice.

Why Bother Classifying Spend? 3 Ways Spend Analysis Will Improve Your Life … Part II

Today’s guest post is from Brian Seipel, Spend Analysis lead at Source One Management Services focused on helping corporations gain a clear view of their spend data to derive actionable budget optimization strategies.

Yesterday we began our tale of two VARs that have a lot in common. Both serve the same North East region, both offer stellar customer service, and so far the relationship has been good on all sides. Each of your offices comes away satisfied after reviewing their VAR’s track record. But, as we started to discuss yesterday, that’s not all there is to the story. Today we discuss the next two ways spend analytics can change your life … for the better.

Improve Efficiencies

Beyond hard dollar savings, companies stand to save money by building a leaner, more efficient Procurement department. From the benefit described above, we can already see how our total vendor pool will be reduced through consolidation, and fewer vendors to manage means less time devoted to the procurement process. However, we will also learn more about our vendor landscape through the analysis.

Continuing the example above, let’s consider those two VARs a bit more closely. All else equal, we may find out that New York’s VAR offers a vendor-managed inventory program, centralized billing, and an online customer ordering portal. Each of these value-adds will help Procurement be more efficient, even if no hard dollar savings are generated. By properly researching the landscape, we can determine what value-adds are truly important and focus on building up these efficiencies.

Clamp Down on Maverick Spend

So far, we’ve consolidated spend to a single VAR (generating hard dollar savings via negotiated rebates and unit pricing using our newly consolidated spend as leverage) and improved our procurement process (generating soft dollar savings by understanding and implementing best practices).

We haven’t, however, talked about specific items being purchased. As the saying goes, “the devil is in the details,” and the very best supplier relationships can fall prey to maverick spend if employees are left to their own devices.

Consider all of the non-strategic, commodity spend that will pass through our VARs; items like cabling, computer peripherals, office equipment and a whole host of other small purchases are often included in contract pricing lists. But what about an employee who goes off the reservation, and orders off-contract? Your negotiated rates become meaningless. Would the purchase of an off-contract mouse by a single employee that is $5 more expensive break the bank? Likely not – however, this problem can get out of hand quickly if large groups of employees routinely ignore the on-contract equivalents. Analyzing spend and comparing it to negotiated on-contract items allows us to identify the problem and either reign in employee behavior, renegotiate the contract price list, or a combination of both to solve it before it gets out of hand.

Which Camp are you in?

If there’s one thing our tale of two VARs has taught us, it is that “you don’t know what you don’t know.” Neither VAR may look like a poor partner at the outset. However, when you look at the entire picture, room for improvement becomes more obvious (especially if we’re willing to change it up). We simply can’t see that entire picture without performing a spend analysis in the first place.

By performing our spend analysis, we put ourselves in the position of moving between the three-foot and 30,000-foot view quickly, enabling us to look at our spend and supplier relationships from all sides. Only then can we effectively manage our spend.

Thanks, Brian.