Monthly Archives: September 2007

Spend Analysis Today

The state of spend analysis today, despite all the frenzied M&A activity between 2003 and 2005, is still a fractured and confusing one. There are about thirty (30) vendors selling solutions in the market-place, and only a handful are reselling or repackaging someone else’s solution. However, the big difference between today and a few years back is that there are only a couple of true stand-alone vendors left on the market, notably BIQ and Zycus, as most of the stand-alone vendors were swallowed up by the Big 6.

What makes it even more confusing is that, even though most of the vendors have their own solutions, it sounds like the vast majority are selling the same type of solution. Furthermore, based on all of the overlapping marketing, it appears that most of the vendors are trying to differentiate themselves based upon either the “intelligence” in their data classification algorithms, or the number of canned reports their application comes with – not on any obviously unique capabilities.

Although it is true that it’s impossible to do spend analysis without good data, and this requires your data to be as complete and as accurate as possible (at least 90%, but preferably as close to 99% as possible), which means that any good spend analysis solution needs good ETL (extract, transform, load) and automated classification capabilities, it’s also true that spend analysis is more than just classification and baseline reporting. Spend Analysis is about uncovering previously unknown savings opportunities. Such opportunities are not likely to be found with standard reports, since obvious opportunities are likely to have already been found and addressed by in-house analysts using basic SQL queries and simple reports. Thus, spend analysis must go beyond what a simple reporting engine can do or what your average analyst can do with SQL in order to be truly useful and find genuinely new savings opportunities.

In other words, creating an OLAP database on cleansed spend transactions will be a worthwhile effort the first time you do it, because you will be able to identify most of the obvious savings opportunities by way of variance and non-compliance. However, once you have addressed those “low hanging fruit” opportunities, there will be little residual value to the effort as it will simply report the success you have already achieved and fail to identify any new opportunities. In order to realize the true power of spend analysis, a user needs the ability to “play” with the OLAP database the same way she can currently “play” with the standard reports in Excel spreadsheets. It’s not about pivoting around the standard cube, but being able to create your own cube with your own data and your own dimensions and slice and dice those dimensions in any way you can dream up in your quest for that next savings opportunity.

When you find that opportunity, it’s about capturing the process used to derive the opportunity and re-applying it in an automated fashion to similar commodities and categories and to the same commodity and category again in the future to make sure that the identified improvements get implemented and stay implemented so that you realize the savings. This certainly requires that you have an instance of the application running a standard cube that is integrated with your contract management system and your procurement system to make sure you are continually buying on contract – but it also requires that you have the ability to build multiple cubes to address commodity-specific analyses and to address datasets that originate from sources other than the ERP system.

When you get right down to it, only two solutions on the market stand out – Zycus and BIQ. The two last independent players. Zycus stands out because, in addition to the advanced extraction, cleansing, aggregation, and enrichment capabilities that you will find in the other Big 4 players (Emptoris, Ketera, Procuri), it has built a first generation opportunity finder that goes beyond just pre-packaged standard reports to integrate variance analysis and market intelligence to automatically identify all of your “low hanging fruit” opportunities and included a pipeline-based workflow management process to attack and manage your initiatives.

BIQ (also available as part of Iasta Smart Analytics) stands out because it is the only product on the marketplace that truly gives the user the ability to “play” with the OLAP database. In BIQ, each user has the ability to define their own cube, either on any of the “standard” dimensions in the centralized data warehouse (which could be another spend analysis platform or an ERP system) or on any dimension they want to define using BIQ’s capability to define new dimensions in near real time. Plus, the user can re-order the dimensions of the cube for reporting purposes at any time, dynamically create their own reports, and even analyze multiple dimensions simultaneously using treemaps (based on Shneiderman diagrams) and multidimensional extract capabilities. Finally, there’s BIQ’s unique ability to allow users to define and re-define the classification rules dynamically using a very powerful rules engine, and their forthcoming meta-rollup capability (programmatic rollup of rolled-up data).

In short, spend analysis is about the analysis, and, currently, with the exception of BIQ, that’s a point that the current (leading) vendors are failing to grasp. Like Aberdeen, they’re Lost in the Trees. Now it’s true that BIQ does not come with built-in facilities that will automatically classify 95%-plus of your spend, but spend classification is fundamentally not that hard to do. The secret sauce to do that has been known by your leading consulting firms for years: map the vendors, map the GL codes, map the vendor and GL code combinations and then create exception based rules for whatever is left or whatever doesn’t map properly. This is something that can be done by a tactical procurement agent or accounting clerk in a short time frame in even the largest of Fortune 100 companies – at a very reasonable cost. (So why are you paying hundreds of thousands of dollars for technology to do it for you?)

There’s no excuse not to look at any tool that gives you better analysis capabilities when even a basic ETL tool can do what you need to do with a little bit of elbow grease up front. Especially since I’ve heard good arguments that automated classification does not really exist. After all, what are automated classifiers doing? They’re applying rules. Where did those rules come from? A human being. The only real difference between the big solutions with enhanced classification capabilities and the little solutions with basic classification capabilities is that the big solutions have rules that have been defined, or in the case of automatically derived rules, checked by experts based on years of doing manual spend analysis projects for their clients. (Furthermore, I haven’t seen a classifier yet that has not required heavy human intervention on the back end to correct mistakes – especially during the initial implementation. And, despite what the sales people would have you believe, this often takes just as much effort, if not more, than simply having a knowledgeable human define the rules in the first place.) The underlying technology, fundamentally speaking, is not that different. It’s true that some of the algorithms employed by the big players are a lot more advanced, but they are still based on rules and knowledge derived originally from a human. As I’ve said before, computers are not intelligent. They are just very good at doing the calculations they’ve been programmed to do.

Furthermore, even if you have a spend analysis tool already, there’s nothing stopping you from employing a dual-tool approach – a standard Big 4 (or Big 6 when you throw Ariba and CGI into the mix) solution to automatically extract, cleanse, classify, amalgamate, and track all of your spend data from your various data sources in a standard cube setup and then a BIQ (-like) solution that can be delivered on-demand to the members of your strategic sourcing team to help them find the next great savings opportunity. The standard solution will be able to automatically create all of the reports that finance and the executive team want to see while the BIQ (-like) solution will give the power users on your strategic sourcing team the tool they need to uncover the next level of savings opportunities. Plus, a BIQ (-like) solution is on-demand and relatively inexpensive (for example, BIQ only runs your average organization between $3K and $6K a month for the sourcing team), especially compared to the realizable savings it will identify. It’s certainly something that should be considered.

Up Next: So You Want To Do Spend Analysis (7 Starting Steps)

Note that this isn’t to say that suite-vendors like Ariba, Emptoris, Ketera, and Procuri (etc.) don’t have valuable solutions – they do (and I’ve even written about some of them on this blog in the past), just that, on their own, their spend analysis solutions don’t truly achieve the analysis necessary for your sourcing team to go beyond the low hanging fruit – which is the key to achieving year-over-year savings (even if these systems do work great the first year). From a finance perspective, they are pretty good – centralized cube, standard reports, automated feeds, automated classification, etc. etc. – they just don’t have everything the power hitters on your sourcing team need today!

I have an opinion. How ’bout you?

Great Supply Chain Partners Have What Customers Want

This summer, as reprinted on the companion Supply Chain Brain site, Global Logistics & Supply Chain Strategies ran a special report on the 100 Great Supply Chain Partners that also included an overview of what customers want from their partners that is worth reviewing. According to the article, the 10 most common qualities that buyers looked for in their vendors were as follows:

  • Reliability
    A buyer’s customers will not accept excuses for service failures, so neither should the buyer. Furthermore, when a vendor has proved itself to be rock-solid, an enduring partnership can ensue.
  • Repeatable Excellence
    While good performance is expected, vendors who go above and beyond what is required are the ones getting accolades – and repeat business.
  • Value and Cost Savings
    The key motivation these days for any new technology or outsourced service is cost savings and the most important financial measure is value in terms of increased sales, production, or other revenue-related metrics.
  • Expertise and Knowledge Base
    Manufacturers and retailers increasingly look to their technology and logistics providers for best practices specific to their industry, market or product. Vendors that have this expertise quickly become trusted advisers.
  • Problem-Solving Ability
    Partners able to deal effectively with unexpected events without missing a step earn the eternal gratitude of their customers.
  • Continuous Improvement
    Buyers want to see a plan for product development, so they know their needs will be met in the years ahead.
  • Support
    Rampant industry downsizing means that most companies must rely on their vendors to implement, train, maintain, and support the technologies and services provided.
  • Positive Culture
    Companies want to do business with vendors that are positive about what they can accomplish.
  • Global Capabilities
    Companies of all sizes are looking for technologies and services that allow them to operate with trading partners all over the world.
  • Strong Management
    Nothing can damage a relationship between a company and its partners faster than an erosion of commitment from the partner’s management.

All of these capabilities can be easy to forget at one time or another, but all of them are important and all of them must be consistently applied in order to win and retain your customer’s business through the ups and downs of the market.

Knowing is half the battle … and we’ll use it to win the war!

The 2nd Sourcing Innovation Series – Let’s Get Analytical!

Spend Analysis. Decision Optimization. Cost Modeling. Almost since the beginning, these have been the six dirty words of strategic sourcing. Study after study has found that these techniques easily save 8% to 15% for just about any organization that spends more than 500M a year, but yet, on average less than one fifth of companies out there have tried these technologies, and less than one tenth are using them. It’s like they’re taboo. Well, in the not too far off future, the tables are going to turn, and instead of being the six dirty words, Spend Analysis Based Cost Modeling Decision Optimization are going to be the seven words of saving grace for tomorrow’s sourcing organization that wants to survive beyond the next decade. But the technology of tomorrow is not going to be the technology of today. But first …

Why? There are numerous reasons that this will happen, including negative returns from reverse auctions from early adopters, the forthcoming fall-out of the majority of first-generation supplier networks and marketplaces that still remain, and the eventual realization that contract management is not the holy grail if you don’t have a good contract in the first place, but the primary reason this will happen is the G-Word. Globalization. The effects we’re starting to see now are nothing like what’s going to come, especially since the majority of companies are unprepared!

Tactical job loss to outsourcing, rampant inflation in raw materials due to skyrocketing demand from developing countries, quality issues, and CSR (Corporate Social Responsibility), or should I say CSI (Corporate Social Irresponsibility), issues are only going to compound in the coming years. And, without recourse, this is only going to push costs, as they say, through the roof of the nearest skyscraper!

The only way companies are going to be able to maintain costs, yet alone achieve savings, is by getting a firm handle on costs and, more importantly, by identifying and achieving savings opportunities not previously explored. This is going to require an improved understanding of the cost drivers of what you are buying (cost modeling), and understanding of where variability exists, either within past buys or against market indices (spend analysis), and what the best award scenarios are (optimization).

But it won’t be three applications at three different stages of the sourcing process, it will be one, and it will be at the beginning, center, and end of the sourcing process. Think about what CoExprise is doing for the management of contract manufacturing – integrating the important PLM, Sourcing, and Procurement aspects of complex assembly sourcing – it will be something like that. But instead of an Aravo–Iasta–Ketera union for a specific domain, it will be an Apriori–CombineNet–BIQ–Akoya union for the generic product domain. And it will look like nothing you’ve seen before. Sourcing tomorrow will be quite different than sourcing today. The only question is, who are the brave souls that are going to lead the way?

The future’s coming hard and fast … and I’m gonna be on the freight train that meets it head on!

Sustainable Procurement Supply Management Style: Part II

In June, SupplyManagement.com ran a special supplement on Sustainable Procurement that had a number of good articles. In this post, I’m going to summarize some of the more relevant points from the rest of the articles.

This is because sustainable procurement is part of corporate social responsibility – and corporate social responsibility (CSR) contributes positively to a company’s bottom line. According to a recent survey by Sirota Survey Intelligence, if employees are satisfied with their employer’s CSR commitment, then 86% have high levels of engagement, 82% feel their organization is highly competitive, 75% feel their employer is interested in their well being, and 71% rate senior management as having high integrity.

In Sustain or be obsolete, Shaun McCarthy points out that sustainable procurement can boost the economy and bring wider benefits to society. Furthermore, it can build – and sustain – your brand.

In Making a Difference, Siobhan Cameron overviews how five organizations – including HSBC, the Department for Work and Pensions, the Environment Agency, and Legal & General – are tackling corporate social responsibility.

HSBC, by requiring its suppliers to adhere to socially responsible and sustainable business practices, providing them with a code of conduct, encouraging diversity, adopting new technology, and switching to clean energy was the first major bank to become carbon neutral in 2006.

The Department for Work and Pensions obtains 45% of its electricity from renewable sources, made an upfront investment of £1.68 million in 2004-5 to improve energy and water efficiency in order to obtain an estimated annual savings of £966,000, recycles 51% of office waste, and uses fair trade and organic food in its staff restaurants and catering outlets. Furthermore, it was able to make all of these changes without any additional costs to taxpayers, illustrating that sustainability can be a benefit and not a cost.

The Environment Agency, which launched its CSR program in 2002, has been focussed on improving the green performance of its suppliers. In 2006, it audited its top 20 suppliers and found that not only have its suppliers made energy savings, but they have also seen an increase in business as a result of new and improved CSR credentials. Not only has this effort reduced carbon dioxide emissions by 220 tons, but it has resulted in £19.8 million cash savings in one financial year.

As a result of changes made to paper used in marketing material, together with the 210 tonnes of 100 per cent recycled copier paper they buy every year, Legal & General annually saves: 11,000 trees from being cut down, 2 million Kwh of electricity, 22 million gallons of water, 1,800 barrels of oil and 122 tonnes of waste going to landfill.

In Green building blocks, Emma Crates note that the building sector is lagging with respect to sustainable procurement, even though it has a huge opportunity to make a difference.

According to the article, construction is responsible for 52 per cent of the world’s CO2 emissions. In the UK, 17 per cent of all waste is created by building work, with a further 10 per cent coming from manufacturers of building products. And it soaks up 16 per cent of the country’s water.

However, in order to make change, the industry has to stop looking at upfront costs and instead look at the long term savings that sustainable options will generate. For example, biomass boilers are initially more expensive, but are expected to have lower running costs in the long run.

The article also overviews some best practices that the construction industry can deploy to improve their operations. This includes the use of consolidation centers to streamline logistics and reduce the need to store materials on work sites where they can be damaged, the use of video conferencing to reduce the need for managerial travel, the use of eco-friendly site cabins that reduce energy use by up to 40%, and the selection of products using environmental performance.

The article also lists some resources that professionals in the sector can adhere to, including the code for sustainable homes, energy performance certificates, and site waste management plans.

Finally, in A worldwide view, Helen Walker and Stephen Brammer report that sustainable procurement is becoming increasingly encouraged in countries around the world. There’s still a wide degree of variation in the extent to which different countries are adopting particular aspects of sustainable procurement, such as procurement from local suppliers, buying from SMEs, and ensuring the safe movement of a purchased product, but at least it’s a start.

Supply Chain Humor This Week VII

Today I bring you three more spendalicious stories from the hat of The Satirical Sourcerer

Do you know where your components are?
While it’s nice to have a strategic sourcing effort to get you the best possible deal for your components, it would seem to be moot, if you end up “misplacing” the components. I would imagine the problem is that much worse, when your components are…. Ummmm… components for building Nuclear weapons.
Audit finds U.S. nuclear weapons parts misplaced

I feel sooooo safe now.

Mee liikee Beeere Awksions!
The importance of having a detailed and accurate RFQ/RFP when conducting an online auction was never more evident than in this story: “…a typing error of one person on eBay turned out to be a profit of $500,000 for another savvy eBay trader.”
Bonus: The auction was for a museum quality bottle of beer.
$500K EBay Typo – One Man’s Mistake Another’s Gain

Who needs quality control?

Labor rates, and the list you don’t want to be on:
Ten most overpaid jobs in the U.S.

High School Dropout doing basic data entry into a computer $136,000
PhD Blogger who toils to bring you great posts on a daily basis $      0

I think it’s time I give this up and take a job working with the longshoremen down in San Francisco. Seriously.