Monthly Archives: October 2007

Spend Management – More than an ERP Boost

This summer, Ariba put out a decent white paper titled Spend Management – A Great ERP Boost that Lowers Costs and Increases Margins that pointed out that Spend Management complements, enhances, and seamlessly integrates with ERP to enable people, processes, and technologies to improve profitability while reducing risk, optimize the management of global resources, and increase overall competitive advantage while achieving significant operational savings.

The paper pointed out that while ERP may provide the tools to manage transaction processing and financial reporting, it lacks the forward-looking visibility needed to manage costs, support business unit decisions, or plan, budget and forecast spend properly. In comparison, Spend Management fills the gaps and extends the practical uses of ERP to make every day a good day for business. Furthermore, Spend Management is strategic, addressing the larger, mission-level issue of how to spend less as an organization in comparison to ERP [which] is more tactical, addressing the more granular issues of making more efficient spending decisions using control tracking mechanisms.

The paper then states that Spend Management and ERP belong together, and for a simple reason that any organization can easily understand and accept – the unequivocal, incontrovertible need to achieve year-over-year cost savings and increased profitability. Spend Management solutions provide spend data to ERP systems, enabling companies to get a clear, consolidated view of all their spend data, which they can leverage to make better business decisions that drive business improvements and enhance financial performance.

Not bad, but there are at least three obvious problems with this paper:

  1. Spend Management solutions don’t provide spend data to ERP systems, e-Procurement systems and e-Commerce systems do. e-Procurement systems are simply a component of Spend Management.
  2. Neither Spend Management systems, ERP systems, nor their union guarantee year-over-year cost savings, and thus implying that their union addresses the need to achieve year-over-year cost savings is misleading. Remember, there ain’t no saving in a perfect world, and if you’re already more-or-less getting the best price for a commodity, you’re not going to negotiate a better price, especially when energy and raw material costs are spiking.
  3. You don’t need ERP at all for proper spend management!

Let’s address each of these in turn:

  1. Spend Management is the holistic process of managing your spend. It is usually implemented using a set of appropriate supporting technologies, including spend analysis, e-Sourcing, decision optimization, contract management, e-Procurement, etc., but could (theoretically) be accomplished without one or more technological components. Spend data is derived from spend transactions, which are usually accomplished by e-Commerce, e-Procurement systems (also known as P2P or EIPP), or e-Payment systems.
  2. You’ll only get cost savings where there are savings to be had. This is generally true in any category that has not been strategically sourced before, or any category that has not been strategically sourced recently, but not necessarily true in a category that was just strategically sourced for the second or third time. Once you’ve taken all the fat out of the supplier’s margins, built an accurate should cost model, and leveraged all you can get out of your volume, you might not be able to get a better price. Then Spend Management is all about cost avoidance – avoiding, or at least minimizing, the eventual cost increases due to raw material price increases, energy and production cost increases, and plain old inflation.
  3. The paper indicates that the role of the ERP is to make more efficient spending decisions, manage transactions, track information, provide aggregate reporting, and enable visibility. However, efficient spending decisions are made by knowledgeable sourcing professionals enabled by the right technologies that give them the right visibility and decision support, transactions can be managed and tracked by your standard relational database engine, aggregate reporting can be provided by any decent business intelligence tool, which can work off a plain ol’ database just as easily as it can off an ERP, and visibility is enabled by having all of your data in one place, which can be accomplished with any database, business intelligence, or spend analysis tool that supports a data warehouse or OLAP cube.

In other words, Spend Management is an ERP boost, but you don’t need an ERP to get the benefits out of spend management and the tools and technologies that support it. You can not only run all of today’s supporting e-Sourcing and e-Procurement tools stand-alone, but you can even run them on-demand. If you have an ERP, great – you’ve already taken a step to centralizing and normalizing your data in a central repository and you can use that – but if you don’t, no problem. Just get a full suite and use the capabilities of the tools to build your data warehouse. The only pre-condition to adopting spend management is that you have a mindset for cost avoidance. If that’s you, you can start today. Have fun!

Coupa + Amazon EC2 = Energized Procurement!

One of the great things about the blogsphere is we don’t have to wait for them to stop the presses to get a great story in at the last minute. We just type, save, publish – and presto! – you get the latest news as soon as we get it, as it happens, and, when you’re really lucky, before!

Tomorrow, the latest press release from Coupa will blanket the wire, traditional e-Procurement companies will cringe, and new age technophiles will rejoice. For tomorrow, the world’s simplest e-Procurement system will be available on-demand to enterprises of all shapes and sizes at a fraction of the cost of traditional e-Procurement systems. Just like SalesForce.com revolutionized the CRM world, Coupa is revolutionizing the e-Procurement world – and then some! By basing their new services on Amazon’s EC2 Virtual Grid Computing Cluster, they are ensuring that they’ll always have the computing power required to ensure rapid response times, regardless of how many users decide to use the system at exactly 4:55 p.m. to get that last order of the day out before they leave.

Normally it takes a big merger, acquisition, or introduction of a brand-spanking-new technology to shake-up a market – but Coupa has achieved puree with nothing but open source and a revolutionary pricing model. They don’t know it yet, but I’d say at least three quarters of the e-Procurement companies I track over on Sourcing Innovation are in dire straits once procurement professionals realize everywhere that it doesn’t cost in the high six, or even seven, figures for basic enterprise e-Procurement anymore – and that it doesn’t require a six month roll-out plan either! Specifically, I predict that any company trying to make a living just selling decade old order management, e-RFX, e-Invoicing, and catalog management technology is headed for extinction. Unless they are also providing advanced payment solutions, supply chain finance, inventory visibility, or other advanced service offerings – they’re going to have a very tough time competing with a true multi-tenant on-demand e-Procurement platform with unlimited scalability and exponentially decreasing costs on a per-user basis as your organization grows.

This brings us to their transparent four layer pricing model – the first of its kind – that is designed to make the Coupa e-Procurement system affordable to even the smallest 3-guys-in-a-garage start-up while simultaneously making it best-value for your large enterprise who’s still struggling to embrace the 21st century and just needs a basic e-Procurement system. How affordable? How valuable? Although the exact prices won’t be available until tomorrow, I have it on good authority that a 10-user organization can get started for as little as 3K a year (and maybe a little less)! And – you better be sitting down for this one – a 1000 user organization can get started for under 50K per year! That’s less than $50 / user / year! And the enterprise package also includes their new “Quick Start” program which gives you a dedicated solution delivery expert, guidance on collection of key company information, and assistance in configuring your Coupa-On-Demand instance – including chart of accounts, users, suppliers, contracts, catalogs, approvals, and integration advice.

Coupa has also been working hard since their last release to extend their functionality, and now supports a number of common office supplies and electronics vendors using punch-out and cXML order delivery (including Office Depot, Office Max, Dell, and VWR), direct quickbooks order import via Traxian for small businesses, and an integration web services layer that automates the movement of data in and out of Coupa-On-Demand using XML and an open API that supports seamless integration with accounting systems and ERPs.

And I’m sure there’ll be goodies aplenty on their newly designed web-sites that will be live tomorrow. That’s right – Sites! In addition to Coupa.com, there’ll also be a new Coupa.org site as well that will provide a dedicated home for Coupa Express, the world leading open source project for e-Procurement that has already surpassed 9,000 downloads and will probably pass the 10,000 mark before the month is up!

So watch the wire – and check out Coupa*! The e-Procurement revolution is at hand!

And, for those of you still wondering, this post fits in perfectly with the Sustainable Sunday theme : On-Demand e-Procurement that uses Amazon EC2 Virtual Computing Grid to only consume as much resources (and energy) as is required to support your needs and keep your costs low helps you sustain your procurement initiatives!

*Wouldn’t Coupa make a great sponsor of Sourcing Innovation? They’ve been pretty innovative lately.  Feel free to leave any comments – including dissenting ones! – below. I know they read this blog from time to time.

I Haven’t Forgotten About The Oompa-Loompas …

I know it’s been a while since my last Oompa Loompa update (a couple of months, actually), but I assure you I haven’t forgotten about the little guys … how could I? Without chocolate, there’d be no chocolate chips. And without chocolate chips, there’d be no chocolate chip cookies. And without chocolate chip cookies, there’d be a world-wide protest! I know – because I’d be leading the charge against the capitalistic chocolatiers who prevented the oompa loompas from unionizing and kept them away from the cocoa beans they live to process into yummy, oh-so-yummy, dark chocolate chips!

Anyway, it’s been a rough year for those poor little guys, and it doesn’t look like it’s letting up. They’ve had tough times with Hershey closing its last Canadian factory, confusing times with Cadbury telling them that they are synonymous with the color purple, rough times with Cadbury laying off thousands, and an uncertain future with Campbell looking to drop Godiva‘s like a hot potato. And just when you thought things couldn’t get any worse, Kraft has to recall white chocolate due to another case of salmonella contamination (which follows Cadbury’s admission that its “new” testing system allowed for “safe” levels of salmonella in its products*).

But the bad news doesn’t stop there! Earlier this month, CNNMoney.com reported that Hershey’s CEO is retiring at the end of the year. During his six year tenure, Richard Lenny shutdown six U.S. and Canadian plants and cut more than 3,000 workers. Just imagine how much harder the axe is going to swing when a younger, stronger, more eager CEO gets put in the top spot!

And if the salmonella contamination at Cadbury and Kraft wasn’t enough to turn people off of heavenly chocolate goodness and onto eternal damnation carob, there’s this story that would make even the most fearless Fear Factor contestant cringe. Those Ferrero Rocher chocolates you’re eating right now could be counterfeit chocolates made in China that have been found to contain worms, moths, and larvae. Now I know that chocolate covered ants might be a delicacy in the brazilian rain forest, some insectivores think crickets go good in chocolate chip cookies, and boys will eat worms on a dare – but moths? I don’t think that even the most desperate coke addict would want to snuff that powder! Bad China! Bad, Bad China! I can forgive your lead paint Thomas, your melamine dog food, and your diethylene glycol toothpaste – but mess with my chocolate, and I’ll boycott you!

* Salmonella is safe if you’re already dead!

The 2nd Sourcing Innovation Series ReCap, Part I

Even though a few bloggers have disappeared into the woodwork, I think it’s time to start wrap up the sourcing innovation 2007 series. First of all, I’d like to thank all of this years contributors to date and summarize the posts in an easy reference table. Then I’m going to recap each one before recapping the series.

The Future of eSourcing – Less is More Alan Buxton
The Future of Sourcing: Results-Based Process Specialization Charles Dominick
Sourcing Innovation Series David Bush
The Future of Spend Analysis Eric Strovink
Sourcing Innovation Series: Wither Procurement as Strategist in 2008? Jason Busch
Future Purchasing: The Extended-Enterprise Connector Jean-Philippe Massin
Yes Virginia! There is more to e-procurement than software! (Part 1) Jon Hansen
Yes Virginia! There is more to e-procurement than software! (Part 2) Jon Hansen
The FOSS(ilization) of the supply chain: The risks of a strategy centered on Free Open Source Software Jon Hansen
What’s Next in Purchasing? Ask Your Supply Management System Tim Minahan
Trading on the Spot Market the doctor
Let’s Get Analytical! the doctor

Alan Buxton tells us that in the future, e-Sourcing tools will be fun and helpful, taking cues from consumer-friendly sites like ecourier.co.uk and zopa.com that clearly demonstrate where the value is. Alan indicates that this is crucial if a mass adoption of e-Sourcing tools is to happen globally.

Charles Dominick said that the future of sourcing is continued adoption of the concept of supply chain management, but with smarter implementation, based on the goal of having the organization operate like a well-oiled machine, where workers are not jacks-of-all-trades and master of none. It will see appropriately assembled supply-chain management teams that have specialists for those areas requiring specialist-level expertise, like strategic sourcing, negotiation, and supplier management. An understanding of how functions within the supply chain interrelate will continue to increase in importance, but some of the often ignored purchasing skills will resurface as practitioners remember why strategic purchasing has become an elevated profession and how it significantly contributes to organizational effectiveness and profitability when done right. And the role of purchasing manager will be even more important – as this individual will be required to be a master of facilitation to keep the team running like a well-oiled machine, in addition to being well versed in all elements of the supply chain and master of a few.

David Bush, the most practical of all of us high falutin’ bloggers, proclaimed that even he sees that advanced sourcing optimization will be the catalyst which merges the function of general business analyst with the sourcing team. This is because taking a complex bid, and automating more of the lifecycle, is critical to compressing the amount of time needed, and thus, allowing more bids to be strategically sourced by the same number of people and, with integrated decision optimization, sourcing professionals can derive very detailed scenarios in a matter of hours, instead of weeks. He sees the next year or so as being a continued transformation of procurement to self sufficiency, which removes layers of inefficiency.

Eric Strovink made four prognostications for spend analysis in 2008:

  • The distinction between data-warehouse-based spend repository tools and traditional business-intelligence tools will continue to erode.
  • The distinction between true spend analysis tools and spend data warehouses will widen, in part because it is impossible to perform true ad-hoc analysis with a fixed-schema data warehouse.
  • The awkwardness and limitations of OLAP technology for spend analysis will become increasingly apparent as more general purpose data sets are considered by professional spend analysts.
  • Invoice-analysis and commodity-specific analysis will dominate the “what’s new” frontier for spend analysis during 2008.

Jason Busch pointed out that procurement will be far less influential in the year(s) ahead in a number of areas when it comes to determining corporate strategy, and pointed out procurement outsourcing, dashboarding, and risk management as three prime examples. This is because tangential stakeholders are about to take a larger role in procurement innovation. With respect to procurement outsourcing, you’ll see a lot more CFOs making the final decisions. Finance will also figure more prominently in dashboard selection and visibility. And the executive team as a whole will start to get a lot more interested in risk management.

We’ll review the rest of the posts, as well as the series as a whole, in Part II. Stay tuned!

Forecasting, Part III

In Forecasting, Part I, I pointed out that accurate forecasting is a complex and challenging problem but that it is generally still possible to create good forecasts through the proper combination of judgmental and statistical methodologies. Specifically, manually adjusted statistical forecasts by an expert who has “inside” information, is aware of “one-time” events, and / or who is responsive to the latest environmental changes can often (dramatically) improve forecast accuracy, provided human bias does not creep in. (Thus, only practitioners with domain knowledge should adjust statistical forecasts using a structured process and only do so when there are known changes in the environment that the statistical model wasn’t really built to handle.)

Then in Forecasting, Part II, I pointed out an article in Purchasing that noted that when it comes to commodity forecasting, judgmental forecasts by experts have the best accuracy on record, demonstrating that expert human judgment applied to good statistical models with solid historical data that also take into account market intelligence and global economic trends are the way to go.

Now I am going to draw your attention to a recent white paper, sponsored by Supply Chain Consultants, by Tom Wallace and Bob Stahl titled Forecast Less and Get Better Results that demonstrates that the conventional wisdom that companies need to project forecasts and plans far into the future at a highly granular level is not necessarily right. Specifically, it points out that detailed forecasts and plans are normally only needed inside of what the authors call the Planning Time Fence or the point in the future when the cumulative lead time to acquire the material and build the product is only a short time away. They argue that outside of this planning time fence, you should only be concerned with aggregate volumes.

Specifically, they argue that up until it’s time to plan a production run, you should only be concerned about forecasting the aggregate volumes required for raw materials beyond the average planning time fence. After all, if you’re a large fast food chain, chances are you can predict with a fairly high degree of accuracy how many burger patties you are going to need over the next year, even if you can’t predict exactly how many Big Burgers, Bob Burgers, or Bo Burgers you are going to sell in any specific week. And if you are a toy manufacturer, chances are you can predict roughly how much plastic you are going to require over the next quarter, even if you don’t know precisely how many units of Dolly House or Trixie Truck you are going to be asked to manufacture. Attempting to forecast to a granular level too far in advance will just mean you’ll constantly be revising your forecasts and wasting time and resources, instead of focussing on what’s truly important for sourcing – the raw material aggregate volume, since that’s where your leverage is.

I’m sorry, but “I’m not omnipotent” just doesn’t cut it anymore!