Monthly Archives: October 2008

Procurement Fundamentals — A Path to Innovation

Today’s guest post is from Bernard Gunther of Lexington Analytics.
He can be reached at bgunther <at> lexingtonanalytics <dot> com.

Every year, I look forward to going to conferences with the hope that I will get a chance to see a great deal of innovation and learn something new. Most years, I am largely disappointed. Is there innovation? Yes. But much of what is being presented relates to operational excellence, operational success or even operational “good-enough.”

Why is this? It’s a lot harder to innovate when you are still struggling to set up standard practices. Procurement systems and processes tend to be a patchwork of different approaches for different spend areas all jumbled together. Many organizations are just catching up to best practices. Let’s take the “101” starting point for any procurement organization, the basic spend analysis of vendor payments — understanding how much you are spending with each of your vendors. Recent surveys indicate that less than half of companies have a system for this. For those companies without a system, they seem to be doing ad hoc dumps of data from their AP system into Excel or a data warehouse with no consistency in the analysis. We all know this is not a best practice in procurement. If companies are not doing the basics well, they have little time to focus on innovation.

It’s not surprising that there are so many presentations about operational successes and so few about innovation at sourcing conferences. Operational success is a key element of a strong function and can deliver significant value, but should it be considered innovation? At a recent conference, I attended a wonderful presentation on Negotiation Fundamentals. One would think that everyone in a purchasing group would be well versed in this and applying the fundamentals regularly. But if you look around procurement organizations, you find that many people are not applying the core disciplines of procurement in effective ways.

Is there support for innovation at organizations? Successful companies are continually investing in innovation and developing new products and processes. These new products rarely just happen and not every new product idea is a success. This means that a procurement group interested in innovation should be doing three things:

1. Look for innovation. Innovation usually comes from new companies but it can also come from unexpected areas. But, in order to recognize it, you’ve got to be open to it. I remember when my grandmother came to visit us one summer from Germany. Like many older people she wasn’t open to trying new things. Her attitude was, “I don’t know that food, so I don’t want to try it,” or, “We have that at home too.” Because she wasn’t open to new things, she didn’t see anything new. She wrongly concluded at the end of her stay that food in America was just like Germany. Are you saying the same thing to innovation?

2. Invest in innovation. Is it 1% of your budget? 10%? Is it 5 projects? Is it 3 new vendors allowed in? Don’t know? If you don’t know, how are you making it happen?

3. Allow for “failure”. A group that is innovating is going to have failures, or “less-than-total” successes. But that’s okay if your environment rewards some risk taking. If not, your people will only attempt things they know will succeed — which is not innovating, it’s following. You need to be able to work on projects and initiatives that aren’t perfect. Success is usually the product of many such small failures. There are far too many projects / programs / implementations that are deemed too big to fail by the owners. Projects promising innovation in a company may get viewed as another procurement initiative ready to fail — over promising and under delivering. This atmosphere is rarely one that fosters innovation.

If you are already innovating — wonderful. But I suspect that most organizations would be delighted if Purchasing were to deliver better operational performance. If your organization is not ready for true innovation, perhaps focusing on operational success is the way to build your organization’s credibility. By demonstrating your ability to add value through the fundamentals, you are setting the stage for future innovation. When you do innovate, you can present it as delivering more of what the organization already values.

“Spend” Analysis helps the Service Chain too

It would appear that Business Intelligence, once restricted to leading edge spend analysis providers, is starting to permeate the services supply chain. As noted in a recent Industry Week article on “Creating Visibility Throughout the Service Chain”, customer dashboards, key performance indicators (KPIs), and customized reports have long been available to internal account teams but now, however, leading edge organizations are making these same tools and data available to their suppliers and customers through business portals with aggregated information from multiple enterprise and transactional data systems. This is because business intelligence in the service chain not only generates efficiency, but also creates opportunities for real customer loyalty and business growth.

As the article notes, a real analytics solution that provides a user with the ability to truly “slice and dice” data across multiple business hierarchies offers a number of benefits, which include:

  • the quick determination of how well the most strategic and / or largest revenue sites are being serviced
  • the mapping of actual service delivery performance to perceived customer satisfaction
  • the actual equipment utilization against contract terms
  • the proactive monitoring of equipment usage and synchronization of information with actual inventory
  • the ability to gather the data required to capture a true “operational index” or “readiness-to-serve indicator”

The last benefit is of particular importance. The success of the service chain relies on the ability of a service organization to quickly and efficiently serve their customer. If service is bad, the customer will go elsewhere. It’s that simple. And the only way to to gage the true “readiness-to-serve” of the organization is to get a multi-dimensional view of the data. This is because overall equipment utilization (OEE), MTBF, first-time fix rates, on-time delivery performance, service-event resolution times, call center performance, service supply-chain order-fill-rates, warranty compliance, and invoice accuracy, among other service metrics, all contribute to an organization’s “readiness-to-serve”. To extract and aggregate this data from a classic reporting tool would be a humongous project that required multiple rounds of data extraction and Excel manipulation. But in a true data analysis tool, you could slice, dice, aggregate, disaggregate, normalize, derive, re-derive, restructure, aggregate again and get the report you needed in ten minutes.

And this is something that can only be done by a real spend analysis solution, because “spend” analysis has to go beyond the spend, and be able to analyze all of the data related to the spend. Otherwise, you get an incomplete picture, and that can cause more harm than good.

The 6th International Supply Chain Management Symposium is Almost Here

This is your friendly reminder that the 6th Annual PMAC/MeRC International Supply Chain Management Symposium is happening in two weeks. It starts with the 3rd annual Doctoral Colloquium on Wednesday, October 15 and the welcome reception that night and the main body of the conference is on Thursday, October 16 and Friday October 17.

This year, their keynotes are from Mr. Dean D. Loria from Shell Canada Limited, Dr. Terry L. Esper from the University of Tennessee, and Jason “The Prophet” Busch, the Spend Master of Spend Matters. Jason’s always an energetic speaker, Dr. Esper is rather well reknowned, and although I must confess that I don’t know the dude from Shell, I’ve never attended a bad presentation from a Shell representative. (Not that they’ve all be gems, but compared to some presentations I’ve attended, including an Ariba keynote from last year, they were never bad.)

In addition, they again have a number of tracks on timely supply chain issues that include green supply chains, health care supply chains, energy sector best practices, and remanufacturing supply chains as well as the old standby topics that include global logistics, procurement management, and negotiation. In addition, this year’s panels are on green supply chains, non-profit supply chains, and supply chain education.

As I noted in last year’s announcement, there aren’t a lot of good Supply Chain / Sourcing / Procurement conferences north of the border, and this tends to be one of the few. So, if you’re in Canada or the northern states and do business in, or with, Canada, I strongly encourage you to consider checking it out. Plus, you get to check out Cowtown this year, which might be a nice change after five years of Hogtown.

For those of you who haven’t been to Canada’s wild wild west, you can check out the the city web site, the Tourism Calgary site, the Calgary Community Events Guide, and eventhe WorldWeb.com travel guide and vacation planner. And even though the event is not being held during the annual Folk Festival, Blues Festival or during the world famous Stampede, you can always check out the Calgary Zoo and Heritage Park and see how your average Canadian still lives outside of the big nine Canadian cities (which, from east to west are: Halifax, Quebec City, Montreal, Ottawa, Toronto, Winnipeg, Edmonton, Calgary, and Vancouver). In addition, you can also check out the Calgary Herald, the Calgary Sun, and The Gauntlet from the University of Calgary for the down-low on what’s going on. (And you music lovers can check out Calgary Music Lives here, Music Calgary, and the Calgary Music Special Interest Group.) And, for us bloggers, there is the Wild Rose Brewery and the Brew Brothers Brewery … so we’ll be just fine.

Public Sector vs. Private Sector Procurement : Does One Size Fit All? II

Yesterday we noted that if you were looking for a way to quickly and easily segregate the vast array of companies offering procurement solutions in the marketplace, you’d quickly find that they could quickly be divided into those that almost exclusively serve the public sector and those that almost exclusively serve the private sector. We also noted that public sector organizations operate quite differently than their private sector enterprise counterparts. We then discussed the differences in day-to-day procurement public sector organizations vs. private sector enterprises.

Based on the operational differences we identified, we reviewed the fundamental differences in workflow, awards, and approvals and discussed the underlying technology required to support both the public sector and private sector needs. And we found something quite surprising – pretty much the same solution was needed in both cases. Which left us scratching us head and asking, so what’s the difference?

Well, when you get right down to it, there are no differences in the fundamental e-procurement technology requirements for public sector and private sector organizations. They both need to create RFXs to solicit information, accept bids, generate awards, create and approve contracts, cut purchase orders and goods receipts, accept invoices, issue (e-)payments, and track and report on spending. And they need to be able to do it in a smooth and integrated manner that minimizes data entry (and eliminates rekeying of data already in the system, as that just leads to human error).

The fundamental differences are in the processes they use. Public sector organizations have one set of rules for whether it’s a public RFX, renegotiation with an incumbent vendor, or a direct award and private sector enterprises have another. Public sector organizations tend to use the RFX, Bid Management, and Contract Management solutions more heavily than their private sector counterparts who are free to chase the award with the greatest long-term value and use non-discriminating e-auctions and cutting edge decision optimization to get the best value for their shareholders. But the fundamentals of procurement don’t change.

So why are most e-Procurement companies either or?

I think the answer is two-fold.
(1) Most technology-focussed solution companies don’t understand the differences between public sector and private sector procurement, and thus focus on one or the other.
(2) Most technology solution providers are still selling B2B 2.0 solutions, which have been customized for one environment or the other. In order to support both environments on one platform, you have to have very flexible workflows that are extremely customizable by the customer (to meet their needs) and a user interface that is trivially easy to use. This is easy with flexible B2B 3.0 solutions, but almost impossible with rigid B2B 2.0 solutions.

And if you have the right platform, you can easily support both types of customers.

Public Sector vs. Private Sector Procurement : Does One Size Fit All? I

If you were looking for a way to quickly and easily segregate the vast array of companies offering procurement solutions in the marketplace, you’d quickly find that they could quickly be divided into those that almost exclusively serve the public sector and those that almost exclusively serve the private sector. And if you’re like me, you’d wonder Why Is That?

It’s true that public sector organizations operate quite differently than their private sector enterprise counterparts, and that’s good, because they’re supposed to. A public sector organization is supposed to first and foremost serve the public good, a private sector organization is supposed to first and foremost bring value to its shareholders. Public sector organizations need to be fair when awarding contracts in terms of minimum minority awards, small business awards, disadvantaged business awards, and woman-owned business awards, especially when all else is equal. Private sector organizations need to select the best vendor for the job — every time, as that is their duty to their shareholders.

But does it mean that the solutions have to be different? Are not the fundamentals of good end-to-end e-procurement the same whether you’re public sector or private sector? I guess that’s the Trillion Dollar Question, isn’t it.

Let’s start by examining your average public sector procurement organization a little more closely. Public sector is not only very policy driven, it’s very stake-holder driven. In the private sector, most purchases don’t require more than two approvals — the procurement specialist and, if the dollar value is high enough, her boss. Yes, the stakeholders need to be consulted and have to be given a chance to provide their input, but the contract can be inked once the procurement manager, and her supervisor with enough fiscal authority, sign off. In the public sector, most procurements require no less than four or five signatures. You have the procurement (or contract) specialist, her supervisor, the project/program/department manager who needs the product or service, the Equality Awards Office (EAO) responsible for insuring that enough awards are made to MWBE and disadvantaged vendors, and, if any clause or term in the agreement is non-standard, legal. If the procurement carries risk, you might need the signature of the officer responsible for risk management, if the procurement will result in recurring payments, you might need the approval of accounts payable or finance, and if the spend is significant enough, you might need a senior VP in addition to your boss’s signature. But all of this can be handled by a flexible workflow with a configurable approval chain.

In the public sector you primarily have RFPs and sealed bids where the award often HAS to be given to the lowest bidder who can fulfill the demand at the minimum level of quality, safety, and performance, whereas private sector organizations can select the bidder that they believe will generate the most value for them in the long run. This means that the public sector requires an extensive RFX application with weighted scorecards and good comparison reports … the same thing that the private sector has gotten for years since GE implemented the reverse auction and FreeMarkets made it famous.

The public sector needs to support the lowest common denominator in terms of issuance of POs and receipt of invoices. If a supplier still operates out of a 1970’s production plant and can only accept and receive faxes, then the organization has to deal with paper for part of its procurement process whereas a private sector organization can dictate that it will only accept invoices electronically. But e-Procurement solutions have been accepting attachments for over a decade, and allowing the user to define the appropriate meta-data (vendor, po #, contract #, line items, quantity, amount, taxes, total invoice amount, etc.) for just as long. So it’s still easy for a data entry clerk to create an e-invoice in the system on behalf of a vendor and print, and fax, an e-PO on behalf of the public sector organization.

And so on.

So what’s the difference?

Come back tomorrow for Part II!