Monthly Archives: December 2007

The 12 Days of X-emplification: Day 9 – Strategic Sourcing Services

Tactical procurement doesn’t cut it anymore. It doesn’t even come close. You need to source strategically, and if you’re not sure how to do that, you need to get help. There’s nothing wrong with asking for help from someone better than you (as long as you make the effort to learn from them so that you will eventually become reasonably self sufficient), but you better make sure they are better and more experienced in the categories you’re handing over before you sign the contract. After all, just because a firm has been in the strategic sourcing business for ten years, it doesn’t mean they’ve ever sourced the categories you’re looking for (especially if they specialized in automotive categories and you’re in retail), nor does it mean that the people who will be assigned to your project are those with the most experience in the categories you need the most help with. Thus, it’s doubly important to ask the right questions, and get the right commitments, before selecting a services provider to help you with your strategic sourcing projects.

1. What experience do the consultants who will be performing the work have?

Every decent size consulting firm (including boutiques) has their standard pitch deck which will read something like “hundreds (or thousands) of years of strategic sourcing support … ten (or twenty) plus years per sourcing consultant … average 10 – 15% savings across all categories … average 20 – 35% savings in these categories relevant to your vertical … etc.”. What’s important is how much experience the consultants who will be performing the work have in general, how much they have in the categories they will be sourcing, and what results they expect to get. Be sure to get resumes of the consultants who will actually be performing the work, and to reserve the right to reject changes in the roster if they are not available at the project start date. Otherwise, you might find that you’re baited with the grey-beard but on the day the project starts you end up with a clean-shaven MBA straight out of school. He might be the smartest MBA you’ll ever meet, but unless the grey-beard is also on the project imparting his wisdom, whether or not he succeeds may ultimately depend on his luck. (Given what some of these firms charge per day, you don’t want your success to come down to luck!)

2. What implemented savings have they achieved? Which customers can you call to back this up?

A negotiated savings of 25% is just that – a negotiated savings. How much of the projected savings was the customer actually able to implement? If the customer was only able to implement 10%, then it’s really only a 10% savings. The firm you want is the one that tracks implemented savings and isn’t afraid to give you some customer references you can call to verify the numbers they give you.

3. How does their approach differ from everyone else’s? Does their answer set off the bullshit detector?

There’s a number of good answers here. The point of this question is to establish their credibility. The fact of the matter may be that their approach is the same approach used by the big guys, like AT Kearney or EDS, or the boutiques, like Denali and Archstone, and that’s ok. Most of the strategic sourcing approaches out there are similar, and, more-or-less, equally correct. What it usually boils down to when selecting between these firms is their experience, their ability to execute, and their willingness to work with you. Thus, it’s okay if they use the same approach, as long as they are willing to be up-front about it (and be able to explain why they think it is the right approach).

To be honest, you probably don’t want an answer that’s completely different from the answer everyone else is giving you. The standard approaches have been working quite well for a while now, and though I believe that constant innovation is critical to continued to success, when it comes to services, sometimes the best route is incremental improvement. After all, most organizations are resistant to change and if the approach is too radical, it could scare off some suppliers – and since you never know who the right suppliers are for you until you go through the process, this usually isn’t a good thing.

4. Do they use their own platform, a third party platform, or your platform? If they plan to use your platform, how do plan to do better than you did? If they plan to use a different platform, why is it more appropriate?

Each of these answers is acceptable, as long as the platform supports the appropriate processes, they understand how to maximize the effectiveness of the platform, and how to get you the data you need when the project is over as well as how to import the data they need. If they use your platform, then you don’t have to worry about getting the data export from someone else’s platform into yours. If they use their platform or a third party platform, then you need to make sure they have a plan for exporting the data in a format that you can archive it for future reference (and comparison purposes when you resource the category when the contract expires). If they use a third party platform, be sure to place extra emphasis on their responsibility to insure that your confidential information is protected.

5. How flexible is the organization in providing sourcing support?

When it comes to sourcing, especially where complex categories are required, it’s not always possible to keep to the fixed schedule you outlined before the project started. Sometimes you need to escalate the project priority and start it early, and sometimes you need to delay the project. During the project, you might have to shorten or extend phases due to unexpected occurrences in the external environment such as natural disasters, demand spikes, or supply shortages. The service provider should have the flexibility to accommodate sudden and unexpected changes during the project as well as the flexibility to take on additional projects as the need arises.

The 12 Days of X-emplification: Day 8 – Market Intelligence

Market Intelligence is defined as information relevant to a company’s markets, gathered and analyzed specifically for the purpose of accurate and confident decision making in determining market opportunity, market penetration strategy, and new market development metrics on Wikipedia. For our purposes, it is essentially the information you need to make the right buy from the right supplier at the right time.

Before we get to the questions, I should point out that as we move away from technology into services, the number of questions with one right answer drop dramatically and it boils down to not whether the answer is right, but whether the answer is right for you. Thus, before you select a service, it’s important to know what you need so you will be able to properly identify what it is that you are looking for.

1. Does the firm undertake its own benchmarking – and how extensive is it?

Benchmarking is defined by Wikipedia as a process in which an organization evaluates various aspects of a set of processes in relation to best practice, usually within their own sector. In the context of a market intelligence firm, benchmarking is the process of not only tracking changes in raw material prices, but also tracking how well your projections have tracked over time. This allows the firm to continually improve their data collection and forecasting methods, which in turn allows them to continue to provide you with better intelligence over time.

If the market intelligence firm isn’t benchmarking their performance over time, then what value is their data providing you versus projections you can read in your average industry publication?

2. Does the firm track supplier financial performance over time?

You don’t just want intelligence on the raw materials and components that you buy, you also want intelligence on the suppliers that provide them. You don’t want to award a contract to a new supplier only to find that they go out of business three months later. Nor do you want to continuing doing business with a supplier when their performance is dropping.

3. Does the firm have commodity and category specific intelligence?

If you’re just looking for current pricing trends, then any data source will do. But if you’re looking for an understanding of why those trends came about, whether or not they’re likely to persist, and what changes in the marketplace could bring about a rapid change, you need to go to experts. Furthermore, if you’re basing your sourcing decisions on key categories on this intelligence, you better make sure you have the best.

4. Does the firm keep track of changes in industry regulations, supply, and demand that could cause all of their projections to be considerably off? And provide me with that data on a timely basis?

You’re looking for intelligence that tells you not only how things are, but how they are expected to be, at least in the short term. These projections are going to be based on certain assumptions. If changes in the industry or environment nullify those assumptions, chances are prices are going to change – maybe even dramatically. You want a market intelligence firm that tracks all of the relevant industry regulations, environmental conditions, and supply availability information and notifies you if something changes so that you can re-analyze the situation and, if necessary, take appropriate action.

5. Does the firm have models that break down cost components and explain discrepancies?

If the price of a commodity increases by 5%, there’s a reason. Typically, it’s because either the costs of one or more component raw materials have increased, or the cost of labor has increased. Without appropriate cost models, the firm supplying the market intelligence will not be able to explain why. Furthermore, you will not be able to model what the impact is of copper going up 5% if you don’t know how much the cost of copper is contributing to each of the commodities that you buy.

6. What types of information is included? Pricing Trends? Market Trends? Best Practices?

Most market intelligence will include pricing trends. However, in order for you to make good sourcing decisions, you also need to be aware of significant market trends. But if you really want to get the most from your market intelligence firm, you also want them to report on best practices being employed throughout the industry that you can use to improve your sourcing efforts.

7. How current is the intelligence?

In order for the intelligence to be useful, it has to be recent. If you’re engaging a market intelligence firm to help you track prices and trends on raw materials, commodities, and services that are critical to your organization, you want to know that the firm is redoing their category and commodity reports at least yearly, providing market updates at least quarterly, sending you important alerts at least monthly, and tracking relevant data daily.

8. Which audience is the intelligence focussed on? Corporate Research? Financial Analysts? Sourcing Professionals?

Although all types of market intelligence is important, as a sourcing professional you need intelligence relevant to you. Make sure the reports that the firm produces are for sourcing professionals first and research analysts second.

9. Is raw data access available?

Maybe a report includes the analyses you want to see, and maybe it doesn’t. But if you can access the raw data and the cost models, you can do your own forecasting and analyses based on different what-if scenarios and see how much a potential award could save you, or cost you, if certain changes happened in the marketplace.

10. Does the provider offer custom research?

Most market research firms have a set of raw material, commodity, and service categories that they track by default. Although these raw material, commodity, and service categories may be sufficient for your initial needs, the situation could change in the future. Unless you want to build relationships with multiple market intelligence firms, and pay the premium that is associated with retaining multiple firms, you might want to select a firm up-front that will produce custom research on an as-needed basis.

the doctor Wants To Assure You That This Blog Is Not Evil

The unnaturally observant will notice that this is the 666th post. Knowing that the majority of readers of this blog are from North America or the UK, that the predominant religion in these parts of the world is Christian, and that many Christians associate 666 with the number of the beast, I feel that it is important to point out, for their piece of mind, that this blog is not evil. Furthermore, this post does not have any special significance.

I should also note that I do make it a point to expose the truth wherever I can find it – be it the elephants in the room that your vendor would rather keep hidden behind the blind; the myths that salespeople use to spread fear, uncertainty, and doubt; or the reality with respect to what a technology-based product can, or can not, do. While it’s true that I will praise certain vendors on their innovative technology or service offerings, it’s also true that I will harshly criticize others for promising more than what they are really delivering. Moreover, if all they’re doing is serving up last year’s outdated technology in a new shiny wrapper, I can be quite harsh in my scathing expose. And if they’re all haughty about it, or their messaging is way over the top, then it’s the case that I’m likely to open the water tower door and let out the Sourcing Maniacs.

Okay, maybe this blog is just a little bit evil.

The 12 Days of X-emplification: Day 7 – GPOs & Marketplaces

Little GPO, you’re really lookin’ fine
Three staplers and a printer only $389!
   “GPO” by Dot and the ‘Riba Brothers

If this is all you’re looking for in a GPO, then you’re looking for the wrong thing. It’s not selection or price, it’s service. Furthermore, the fact of the matter is that it doesn’t matter how much volume the GPO has or how good they claim to be, you’re still not going to save a fortune on office supplies!

If you’re looking for a GPO or a Marketplace, you’re looking for an organization that can not only help you with greater volume leverage, but for an organization that can help you with better processes, best practices, and supply risk. Of course, you can’t just select a GPO on these factors alone, which is why I bring you seven questions you should be asking each and every GPO that you are considering as a potential business partner.

1. Are you a for-profit enterprise?

Non-profit consortiums might sound like a good thing, especially if you’re in the public sector, but let’s face it – unless we’re already filthy rich, most of us are in business to make money, so just how driven is the non-profit going to be if the income opportunity for each of its employees, including senior management, are capped? In a for-profit enterprise, even if the buyers aren’t driven to make money, the shareholders definitely are and you can be sure they’re going to be making sure that each and every employee is doing their best to deliver value – the key to attracting and retaining your business.

2. How are you compensated?

There are multiple compensation models – including variants of buyer pays, everyone pays, and supplier pays – but some of these are dangerous. The most dangerous is, as you can probably guess from yesterday’s post on supplier networks and catalogs, supplier pays. You don’t want a GPO that provides suppliers an opportunity to bid on the provision that they have to pay a percentage of their award to the GPO, because it’s likely that the only suppliers who are going to be attracted to the GPO’s RFXs are those that are desperate – and that’s not the kind of supplier you want to be doing business with.

You want a consortium where all costs are born by the members, and preferably one that works on a fixed cost model (unless you expect the savings to be so significant that the percentage of the savings is acceptable for the next few years) with incentives if they exceed a performance baseline (then they get a percentage of additional savings beyond the baseline as a bonus). The reason you want incentives is you want them to perform above and beyond what your in-house team can do. (If you just gave them a percentage of all savings, the incentive to perform is not as great.)

3. Are you vertically or horizontally focussed?

Although there’s no wrong answer from a GPO’s perspective, there could be a wrong answer depending on what you’re looking for. If the GPO is horizontally focussed on getting all of its customers the best deals on telecommunications, legal services, and marketing services but you just want a better deal on your chicken, french fries, and cups and lids, then it’s the wrong GPO for you. Similarly, if they are ultimately focussed on servicing the food-service and retail industries but you’re in the automotive industry, then it is again the wrong GPO for you.

4. What economies of scale, process, and information do you provide?

You want more than volume leverage. After all, if you’re buying a lot, the quote difference between buying a lot and buying five times that from most suppliers isn’t much. And if you’re not buying a lot, then you’re not going to get much in the way of savings – so there’s not a lot of point in spending a lot of effort on the category. The real savings is going to come if it allows you to achieve economies of scale (they can do a lot of categories you’re willing to outsource), process (they can help you in categories you want, or need, to keep control of), and information (on the market trends for the categories important to you).

5. How do you protect my confidential information?

Unless you’re just using them for office supplies, telecommunications, and temp labor services, chances are you’re going to have to share some confidential information with them above and beyond basic demand requirements to get what you need. You need to make sure that this information is protected from your competition and the marketplace at large. You want to know that they have measures to safeguard that information, which include physical, process, network, and communication security measures.

6. How much control do I have over requirements and decisions?

You want the ability to insure that you are not tied to a contract unless you have approved the project requirements, the potential supplier pool, and the communications issued at each stage of the sourcing process. A good GPO knows that the deal, as well as its bonus, gets better as volume is aggregated, and such a GPO will be aggressive in its attempt to identify and amalgamate as much demand as possible across its subscribers. You have to be sure that they aren’t too aggressive and don’t leave out key requirements in their effort to aggregate demand.

7. Do I buy through my e-Procurement system or yours? How do I integrate my system with yours?

If you have to buy through their system, you want to make sure that it meets your needs and that it’s easy to get your transaction data back into your ERP, e-Payment, and spend analysis systems. If you buy through your system, you want to make sure it’s easy to do so at the contracted rate and easy to provide the GPO with the information they need to track project success.

The 12 Days of X-emplification: Day 6 – Supplier Networks & Catalogue Management

A number of vendors have a number of representatives whose sole job is to pound on your door and tell you about all the advantages of a supplier network – advantages that, as a few of you have unfortunately realized, never materialize unless you have the right network with the right suppliers participating. And even then, the high fees associated with some of these networks, which are often hidden and don’t show themselves until after you’ve sunk a significant investment into the project, should make anyone question how valuable they really are.

The negativity out of the way, implemented properly, a supplier network can provide you with a host of benefits with respect to multiple aspects of supplier management – relationship, performance, and information (to name a few) – that are simply unattainable by any other technology on the e-Sourcing and e-Procurement marketplace today … but only if it’s done right. The reality is that when it comes to supplier networks, we are often holding the sharpest double-edged sword of them all. If it’s done right, it can slice though inefficiencies and costs like a hot knife through warm butter; but if it’s done wrong, you stand to lose a lot more than just your investment – your productivity, key suppliers, and even brand reputation can vanish faster than the last drops of dew on a hot spring day!

That’s why the questions posed below are so important. If you don’t understand why you need to ask them, and the reasons the desired responses are so critical, you could end up selecting a supplier network or catalogue management solution that is entirely wrong for you and your organization. Since this could actually move you significantly backwards on the innovation curve, I think it’s critical that you cut through the buzz and hone in on the real benefits as quickly as possible when making your assessments.

1. Does the supplier network / catalogue solution support integration with your suppliers’ current web-catalogue solution? And what’s involved?

Most suppliers today already have electronic catalogues, despite the myth that some vendors might be propagating. After all, do you really think they manage their price lists using paper-based general ledgers? They manage it using databases*, and most of them make their standard pricing available over the web. The less sophisticated will use flat files, which can be downloaded through batch processes over FTP by clients on a regular, if not daily, basis. The more sophisticated will have a full website with client login and dedicated pricing. Thus, when a vendor says most suppliers don’t have a catalogue, what the vendor means is that most suppliers don’t have a catalogue in their (proprietary) format.

However, data transformation is not nearly as difficult as most people will make it out to be – after all, even Excel supports multiple file formats, and your average analyst is quite adept at successfully importing any text-based flat file format. Plus, most of the bigger vendors will support a standard such as EDI (if they’re old school) or XML (if they have accepted that the times they are a-changing’), so how hard should it really be to load a catalogue into a supplier network?

The correct answer is – it shouldn’t. It should be a 5 minute exercise. If your potential technology vendor says it takes on average a day to a week to enable a supplier and add a catalogue, they don’t have a modern supplier network. A modern supplier network uses the network that’s already in place – the world wide web and the internet on which it is based – and connects to supplier catalogues in their native format. This makes integration as simple as entering the URL to the supplier catalog, specifying the connection protocol, selecting the default file or data record format, and entering the information required (such as user name and password) to meet the security requirements. This should literally be a 5-minute task if the connection protocol, file format, and security protocols are all based on accepted standards. If there are slight modifications of the standard, it should simply be matter of selecting the closest configuration and specifying the necessary changes – a task that should only take a few hours if the application makes use of modern agent technology and business process management.

* As much as I may hate to admit it, Microsoft Access is a database. A rudimentary one, but a database nonetheless.

2. Does the supplier network / catalogue solution support the integration of multiple catalogues into one coherent view?

Not only should it be trivial to add a supplier’s pre-existing catalogue to the network, or enable them to create a catalogue in any format they choose, but it should also be trivial to browse all of the catalogues simultaneously in one coherent view. After all, would Amazon be as popular as it was today if you had to go to one page to search for books, another to search for DVDs, and another to search for CDs? And then make each purchase separately? How popular would e-Bay be if you had to go to eBayCDs to buy and sell CDs, eBayClocks to buy and sell clocks, and eBayBeenieBabies to buy and sell beenie babies? And more importantly, what if you could only search one seller at a time?

The power of a catalogue application rests in its ability to reduce complexity – not in its ability to create it! If you need to buy handhelds, chances are you can buy them from your electronics vendors, your office supplies vendors, and your cell phone carriers. Do you really want to search all three catalogues separately for the best deal? No! You want to be able to do one search across all catalogues and have all of the results compared side-by-side in one consistent view. Consumer comparison web-sites have been doing this for close to a decade – so why shouldn’t your “enterprise” product do it – and do it better? After all, you’re paying for the enterprise supplier network* – so you benefit from it!

* If it’s supplier funded, then you’re paying even more! And don’t let any snake oil salesman convince you otherwise. After all, if I have to fork over 1% of all transaction costs in “network fees”, then I’m going to have to raise my best price by 1% to cover that. Let’s say you buy $10M worth of goods from me through the network. That says it’s costing me $100,000 to serve you. That says I have to charge you $100,000 more to cover that cost of doing business. That says the cost of doing business through the network with me alone costs you $100,000! If you have a network, you probably have at least your top 20 suppliers in it. Let’s say you do a total of $250M of business through the network. Since every supplier pays the same fee, this network is costing you $2.5M a year … for what is nothing more than a catalogue! To put this in perspective, you could have a small team of call center workers in India maintain the different vendor catalogues for you manually for about 1/10th of that. That’s why the following question is probably the most important question of all!

3. Is it expensive for suppliers to use the supplier network / catalogue management solution?

The answer you want to hear is “No – it doesn’t cost suppliers anything to use our network. There are no fees for vendors, and since we can integrate with all of the following standard protocols and data formats, you can link to the catalogue that your average supplier, who has upgraded their technology in the last five to seven years, already has in place with virtually no effort on your part or theirs. And if they don’t have a catalogue, they can use these tools to build one either locally on their machine, for upload in a standard file format, or over the web through an easy to use GUI.” This is because just about any other answer costs your supplier money, which, one way or another, will cost you.

If it’s costly for the supplier, either in terms of dollars or resources, one of two things are going to happen. The supplier is going to refuse to join the network, which is going to prevent you from realizing the benefits that you hoped to realize by selecting the network, or the supplier is going to factor in the cost of doing business with you through the network. (And if you have a contract in place that fixes prices for the mid-term, then the costs of using the network go up even more, since the supplier will have to increase their prices even more when the current contract expires to make up for the losses they are going to take in the near-term!)

The reality is that, unlike BI and other e-Procurement technologies where you only need to capture the 20% of suppliers who constitute 80% of the business in order to see a return, supplier network technologies are only beneficial if you have at least 80% of your suppliers enabled because most of your time is spent dealing with suppliers who are not enabled! If a supplier is enabled in your technology, then most of the transactions are automated and time is only spent dealing with exceptions. If a supplier is not enabled, then every transaction requires a time-consuming interaction. So adoption better be a no-brainer for your supplier community if you want your network to be a success.

4. How did you amass all of the suppliers currently in your network?

There’s at least one vendor whose primary selling point appears to be the number of suppliers in its network. The question is, how did they get all those suppliers to sign up, are the conditions for joining and the costs of membership the same today as they were when these suppliers first joined, and are the conditions for joining and costs of membership applicable to the business environment today?

If the network was almost free in the past, and conditions for membership rather lax, as that can be enticing to a large number of suppliers looking for a new market (as the cost of trying the network out is low and the risks nominal), that can explain a significant membership gain in a short time-frame. However, if after a certain membership size was met, the network all of a sudden introduced a five figure annual membership fee and a transaction cost of 0.5% or more, chances are good that not only did the rate of membership increase start declining rapidly, but that you’re going to have a hard time convincing all but your largest volume suppliers, who are not already in the network, to join.

5. Does it allow for override pricing based on business rules?

It might be the case that it’s easy for your supplier to maintain one catalogue with standard pricing, but hard to maintain instances with customized pricing for each client they interact with. (Especially if they are using older technology or are lacking in modern technical competence.) Therefore, it should be trivial for a user to go in and define contract pricing for, or price modifications on, each item or service that is covered under a contract. Furthermore, the user should be able to do it at the item, category, or catalogue level. Maybe you just have a simple 10% off everything deal. Then the user should be able to create just one rule and have it take effect each time pricing data is retrieved.

6. Can the solution be integrated into your current e-Procurement platform?

As I indicated in a previous post, the value of e-Procurement lies in its ability to integrate requisitions with invoices with contracts and make sure that each buy against a contract is paid at the contracted rate and that each buy that is not against a contract (but should be) is flagged and brought to the attention of the appropriate manager. Thus, it’s critical that your supply network solution provide a simple mechanism for getting requisitions out of the network and into your e-Procurement platform.