Daily Archives: May 18, 2009

While Others Slow Down … Sourcing Innovation Revs Up!

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While many organizations, including those you belong to, will slow down, go on vacation, and generally take it easy over the summer months (in the Northern Hemisphere), Sourcing Innovation is going to take it up a notch and bring you even more insight and innovation.

I’m excited to announce that, starting the first week of June, you’ll see three new regular contributors appear on SI and more regular postings from two of your favorite guest authors and that, by mid-month, more contributors and guest authors should be ready to go. Starting the week of June 1st, we’ll see:

  • Eric Hiller, the Enterprise Cost Master of Hiller Associates
    As a co-founder of Apriori and a former blog master of Cost Cents, Eric brings a wealth of Enterprise Cost Management knowledge and experience with him from both the consulting and implementation sides of the business. Not only will he discuss ways to save money through better cost management, but he’ll also highlight many of the common mistakes made by production and supply management that cost the business money.
  • Norman Katz, the Founder and President of Katzscan and its Supply Chain Fraud practice
    Norman is an expert in supply chain risk, supply chain fraud, and risk and fraud prevention who has been helping companies secure their supply chains for over 15 years.
  • Dick Locke, the International Sourcing Specialist of Global Procurement Group
    Dicke Locke, who brings over 30 years of international sourcing experience and expertise to every engagement, has been helping Fortune 3000 global companies do global business since 1993 though his books, seminars, workshops, and consulting. Author of Global Supply Management: A Guide to International Purchasing and co-creator of the new Basics of Smart International Procurement from Next Level Purchasing, Dick Locke is a reknowned expert in the ins and outs of international sourcing and procurement.

and we’ll also see more guests posts from

  • Kevin Brooks, a B2B 3.0 Visionary who has worked his magic at Ariba, Apexon, and TrueDemand
    Kevin brings with him a wealth of knowledge about the impact and usefulness of Web 2.0 and B2B 3.0 platforms (and collaborative and social networking platforms in particular) in supply management, a wealth of experience in performance monitoring and improvement, and the experience of an early advocate for green supply chain analytics and capabilities.
  • Eric Strovink, the Chief Cuber of BIQ
    An experienced professional who has been building transactional, analytic, and business intelligence systems for end-to-end business operations, including supply management, for over 20 years, Eric brings a deep knowledge of the many ways technology can be used to impact a business in a powerful manner and find productivity improvements and cost savings no one ever even knew existed.

and more voices will be joining us in the future because Sourcing Innovation is where thought leaders converge.

Best-In-Class Procurement is About Cost Avoidance, Not Savings!

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In a recent post over on his Purchasing Certification Blog, Charles asked why doesn’t Procurement save as much on non-traditional categories in response to his review of Aberdeen’s latest CPO Agenda research report which found that Best-in-Class Procurement achieves 10% savings on managed spend while laggard Procurement achieves savings of 16% on managed spend. His assumption was that Procurement didn’t do as well on non-traditional categories and that dragged the average down.

As far as I’m concerned, the situation is the exact opposite. If the Procurement department is truly a Best-in-Class Procurement department, each time they negotiate a contract they get the best deal possible. Once you’ve negotiated the best deal possible, there’s no more “Savings” to be had until either the indexed market price for the core commodities, components, or labor that makes up the product or service cost decreases or a disruptive innovation comes along that allows the product or service to be produced more cost effectively. Since that doesn’t happen every day, or even every year (as commodity and labor costs tend to increase and production efficiencies quickly reach a ceiling on popular products or services), if Procurement did it’s job right, there are no “Savings” to be found on the majority of categories sourced in the last year.

The fundamental truth — which is hard to see with the recent myopic focus on “Savings” — is that there is no such thing as “Savings” in a perfect Procurement organization. If Procurement did its job perfectly, it negotiated the absolute best deal. This would mean that there are no “Savings” to be had because, if there were, that would mean that Procurement did not do its job perfectly.

A Best-in-Class Procurement organization is all about Cost Avoidance. After all, since most products and services increase in cost over time, a great Procurement department finds a way to contain, and even eliminate, cost increases even when raw material costs go up 10% and labor costs go up 5%. They work with the supplier to find ways to improve supplier efficiencies, or they work with sales to find ways to increase volumes, so that the supplier can commit to the same price and still maintain a reasonable margin even if its costs increase 5% to 10%. And then, if prices happen to drop for a category that comes up for renewal, they renegotiate the renewal to represent the effective cost decrease and never pay a penny above the best price that can be achieved.

Using this definition, and this logic, this tells me that a Best-in-Class company should see diminished “Savings” year after year as they get better and better at getting the best deal each and every time they tackle a category, leaving the only “Savings” opportunities to be those opportunities where product costs (either due to commodity price or labor price decreases or production efficiency increases) have decreased since the last time a contract was cut. And this is much better than finding “Savings” because it means they didn’t waste capital in the first place, which they left free for the business to fund operations and growth!

Remember, even Wal-Mart, despite the popular perception, cannot roll-back prices forever, especially in categories where commodity prices rise day after day! (Heck, sometimes they even roll-up by 50%! Case in point, last time I was there I was going to pick up “our” brand of coffee because they advertised, in their flyer from the previous month, that it was 4.99 everyday, which is a price you can only get in the grocery stores on sale. Well, I’m there, and I go to get some on my way out, and it’s 7.57 … a 51% increase.) At some point, until a disruptive innovation comes along, a Best-in-Class Procurement department is going to get the best deal and there will be no more “Savings”. The better the department, the sooner they hit the floor. The sooner they hit the floor, the sooner they maximize “cost avoidance”, which is what Procurement should be all about.

In other words, I think the numbers are just fine and that Mr. Bartolini did a good job of uncovering numbers that reflect the actual reality of how a good Procurement department really performs!