Monthly Archives: March 2010

What’s Your Procurement Value Level? … Strategic? (II)

In Part I, I reminded you that Pierre Mitchell of The Hackett Group invited you to participate in a study that would help you identify where you were on your procurement journey by way of 18 value streams that range from “naive apprentice”, where you’re measuring performance at an elementary (tactical) level, to “expert sourcerer”, where you’re extracting procurement value at a very advanced (transformational) level. Considering that this survey will not only help you identify a path to increased value but that Pierre has promised to share some of the results with all survey participants for free, it’s a survey that’s definitely worth your time as Hackett has the premiere benchmarking data in the space.

I also told you that the first seven value streams were tactical and provided relatively little ROI compared to the ROI that is available through more advanced value streams. The next six value streams are strategic and will generally provide you with good payback over a longer term. They range from:

Costs avoided by receiving ‘no charge’ items and services
through
Early payment discounts, P-card rebates, or other supply chain finance benefits
to
Internal enterprise process costs are reduced via a new supplier solution

Costs avoided by receiving ‘no charge’ items and services

Now we’re into strategic procurement where the “savings” are real and sustainable. By negotiating in more items and services for the same money, you’ve considerably reduced your costs and increased the value that you can provide your end customers for the same price. And while it’s true that the ‘no charge’ items and services could disappear at contract termination, you’ve established with your supplier(s) that you expect a higher level of performance and service, which will make future negotiations, and cost-avoidances, easier.

Early payment discounts, P-card rebates, or other supply chain finance benefits

Now you’re starting to look at the total cost of the buy from an organizational perspective, and not just a unit cost or landed cost perspective. If your supplier’s annual cost of capital is 36%, and yours is less than 12%, you could be saving yourself up to 24% annually, or 2% for each month you shave off the total payment time. This can be substantive and is easily sustainable. Plus, once you get good at managing your working capital and finances, you’ll start to see even more savings opportunities appear.

Internal enterprise process costs are reduced via a new supplier solution

Once you get to the point where you start recognizing that sometimes you don’t know all the answers and that a smart supplier can point out additional opportunities for you to save money, you have not only mastered the art of strategic sourcing, but have reached the point where your sourcing is on the verge of becoming transformational … which is the topic of Part III.

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A Quick Reference to Perfect Order Fulfillment in Your Warehouse

I enjoyed the recent white paper from Motorola on Warehouse Management: A Quick Reference Guide To Improving Inventory Accuracy For Perfect Orders because it was short and got straight to the point. Defining the perfect order as an order that is

  • delivered on time and in full,
  • in compliance with a customer’s three-way match (invoice, PO, and receipt), and
  • free of quality issues,

it goes on to say that multiple factors contribute to imperfect orders and that the most important starting point is a value stream map that identifies where the most errors are occurring in your current operations.

It then presents some straight-forward resolutions to common operational challenges that you can use to quickly increase your perfect order accuracy. Examples include:

Operational Challenge Resolution
Manual Order Processing & Improvement automation technology, RFID, barcodes, and mobile printers
Picking Methods hands-free wearable computers, scan verification, and voice recognition
Software Systems central database/ERP, WMS module, continuous training and improvement
Labor include employees in improvement processes, reward workers for achieving goals, communicate regularly, and hold everyone accountable for following the right processes

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Decideware: Agency Performance Management Experts

DecideWare, an Australian Company (with offices in the US and the UK) that dubs itself as a Supplier Performance Expert with a Scorecard Deployment Service, offers a niche Vendor Management Solution that excels in managing certain types of vendors. Specifically, their niche solution, which started out as a niche play in HR Management, is used globally by a number of Fortune 500 Multi-Nationals — which include P&G, Dell, Pfizer, Target, and Wal-Mart — to manage their vendor relationships, and their Agency relationships in particular.

Their uniquely designed solution — which allows for simultaneous 360° degree assessments and self-assessments between buyers, agencies, and vendors (which allow a buyer to rate an agency who can self-assess while it rates the buyer and a third party vendor, such as a print shop, which can rate the agency in turn) — is built on the ultimate application of the KIS(S) (Keep It Simple, Stupid) philosophy. Knowing that their target market are not very technically sophisticated, they opted for the 80% solution, free of bells and whistles, with easy SaaS deployment and an easier-to-follow step-by-step methodology for building vendor capability repositories, scopes of work, vendor assessments, and reports that allow vendor performance to be quickly determined, performance gaps immediately identified, and a vendor’s relative performance graphed against their competitors.

While the base capabilities may not exceed the capabilities of a standard RFX tool with extensive survey creation (which they have), process management (which the tool is built around), and reporting capabilities (which are fairly extensive), the extensive amount of industry knowledge they’ve built in for their niche markets is impressive. They understand that organizations have units, geography, account structures, account types, locations, functions, and accounts; that profiles need criteria, contacts, priorities, questions, and documents; that accounts have definitions, assessors, and reviews; and that business people in non-technical areas of the business like lots of ready-to-use pre-packaged reports and easy-to-use drop down interfaces for drilling into performance data and performing gap analysis. The tool literally walks an administrator through the definition of a vendor capability database, a scope of work, and an assessment step-by-step. (And the tool is even more streamlined for the assessors.)

All of these tools have all of the basic capabilities, and a few advanced ones, that you would expect in a scorecard-based on-demand performance management tool. The vendor capability database, which is a streamlined Supplier Information Management (SIM) tool, allows you to approve supplier (agency) representatives to manage their supplier profiles. The scopes of work (or, for us in North America, statements of work) module allows you to define the services, initiatives, and deliverables that are required, broken down by organizational unit, type, and geography, as well as the details of the quotes required (line items, fees, expenses, etc.), with fees that can be broken down by type and include overhead rate, profit margin, and total hours and benefits for FTE quotes. And the assessment creator, which is part of their Relationship Optimizer, includes all of your standard RFX Survey creation features including configurable variable weight scales, the ability to include quantitative measures, and the ability to define weightings to each section and each component question. The tool contains significant support for comments and detailed explanations for questions as the goal is to take the qualitative and fuzzy and generate numeric scores that are quantitative and precise which can be used to generate actionable intelligence for semi-annual, or quarterly, performance reviews.

In summary, while a number of providers might offer more powerful Supplier Information Management (SIM), RFX, Reporting, or Supplier Performance Management (SPM), the tool is exceptionally well defined for the niche Vendor Management Spaces DecideWare is going after. And their client list, most of whom have rolled out the solution globally, speaks for itself — as will the case studies from Pfizer and Dell that they will be releasing in the near future.

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New and Upcoming Events from the #1 Supply Chain Resource Site

The Sourcing Innovation Resource Site, always immediately accessible from the link under the “Free Resources” section of the sidebar, continues to add new content on a weekly, and often daily, basis — and it will continue to do so.

The following is a short selection of upcoming webinars and events that you might want to check out in the coming weeks:

Date & Time Webcast
2010-Mar-16

13:00 GMT-05:00/CDT/EST

 What Everyone Should Know About China
Sponsor: 42 Rules
2010-Mar-16

11:00 GMT-08:00/AKDT/PST

 Fixing Broken Oursourcing Arrangements
Sponsor: Sourcing Interests Group
2010-Mar-16

11:30 GMT-05:00/CDT/EST

 Our WMS: Should it Stay or Should it Go?
Sponsor: Cornerstone Solutions
2010-Mar-16

13:00 GMT-04:00/AST/EDT

 Effective Management of Non-Strategic Spend
Sponsor: Global eProcure
2010-Mar-16

14:00 GMT-05:00/CDT/EST

 DrinkIT Overview Webcast
Sponsor: Tectura
2010-Mar-17

14:30 GMT-05:00/CDT/EST

 Contract Management the Last Mile
Sponsor: Zycus
2010-Mar-17

11:00 GMT-06:00/CST/MDT

 Measuring Supply Chain Profits and Costs
Sponsor: CSCMP
2010-Mar-17

10:00 GMT-08:00/AKDT/PST

 How NOT to pick a Marketing Partner/Trusted Advisor
Sponsor: Regalix
2010-Mar-18

11:00 GMT-05:00/CDT/EST

 Through-Life Sustainment for Customer Excellence
Sponsor: BAE Systems
2010-Mar-18

10:00 GMT-05:00/CDT/EST

 Improve and accelerate your S&OP process with OMP Plus
Sponsor: OM Partners

Dates Conference Sponsor
2010-Apr-14 to
2010-Apr-16		 International Conference on Information Systems, Logistics and Supply Chain
Casablanca, Morocco (Africa)		 SAP
2010-Apr-15 to
2010-Apr-16		 IEEE Green Technology Conference
Dallas, Texas, USA (North-America)		 IEEE
2010-Apr-18 to
2010-Apr-21		 11th Annual Purchasing Card Conference
Orlando, Florida, USA (North-America)		 NAPCP
2010-Apr-20 to
2010-Apr-21		 NTMA/PMA Legislative Conference
Washington, D.C., USA (North-America)		 NTMA
2010-Apr-21 to
2010-Apr-21		 Retail & Distribution Operations China Summit
Shanghai, China (Asia)		 GSCC
2010-Apr-25 to
2010-Apr-28		 Payments 2010
Seattle, Washington, USA (North-America)		 NACHA

They are all readily searchable from the comprehensive Site-Search page. So don’t forget to review the resource site on a weekly basis. You just might find what you didn’t even know you were looking for!

And continue to keep a sharp eye out for new additions!

What’s Your Procurement Value Level? Tactical? (I)

Recently, Pierre Mitchell of The Hackett Group asked you if you knew the difference between procurement value and procurement performance (part I and part II) and invited you to participate in a study that would help you identify where you were on your procurement journey by way of 18 value streams that range from “naive apprentice”, where you’re measuring performance at an elementary (tactical) level, to “expert sourcerer”, where you’re extracting procurement value at a very advanced (transformational) level. (Pierre also posted a link to a corresponding finance study that you can share with your finance associates, which will help Hackett compile a full view on the problem.) Hopefully, by now, you took the survey and are eagerly awaiting the result and insights that Pierre has promised to share with you on Spend Matters and Sourcing Innovation. (Note that the posts will be distinct and that you need to follow Spend Matters as well as anything posted on Sourcing Innovation will not duplicate whatever he posts on Spend Matters!)

In my post last week where I directed you to the survey, I told you that I would be sharing some of the value streams with you and explaining their importance as a lead in to Pierre’s forthcoming posts. The goal is to help you understand the value that can result from a procurement journey that takes you from a tactical outlook, that results in minimal ROI, through a strategic perspective, that results in moderate ROI, to a transformational realization that results in significant, long term, ROI.

The first seven value streams, which are still representative of the procurement that takes place at the majority of organizations today, are tactical. You’ll generally see some “savings”, but not very much. And the savings are not very sustainable. They range from:

The purchase price of an item is negotiated down from a list price
through
A fixed price is created and cost increases are avoided when the market price subsequently rises
to
The price stays the same but demand/consumption is reduced/delayed to reduce total spend

The purchase price of an item is negotiated down from a list price

This is old-school style procurement, and doesn’t represent “real” savings because suppliers expect you to negotiate them down no matter what price they list, so they build some negotiating room into the price, pretend to cave, get the deal, and get back to enjoying their relatively fat margins and traditional, fat, way of doing things. And then you start the cycle all over again when the renewal comes up and have to renegotiate the savings that were never there in the first place.

A fixed price is created and cost increases are avoided when the market price subsequently rises

This is another classic example of tactical procurement. If you’re in an industry where the raw prices traditionally inrease steadily over time, you know that if you lock in prices, the price will go up, and you can claim “savings” that you never really negotiated in the first place. And then, as before, you have to start all over again from the new list price at renewal time, lock in a new rate, and then watch the “savings” evaporate at contract expiration.

The price stays the same but demand/consumption is reduced/delayed to reduce total spend

While still tactical, this represents the transition point to truly breaking into the realm of strategic because it gets away from simply beating up the supplier in a negotiation and locking the price in a contract and moves toward thinking about ways to reduce costs and identify sustainable savings. However, since you’re simply delaying an order until you need it, or being careful not to waste supplies, instead of finding a way to reduce demand in the long term, it’s still tactically focussed. But it hints at sustainable savings, because if you become more efficient at JIT ordering and delivery, and better at reducing waste, over time, the small amount of savings you do find will be sustainable.

In Part II, we’ll dig into a few of the strategic value streams and explain how they represent real cost savings and lay the foundation for truly sustainable cost reductions that are fully realized when you eventually become transformational in your procurement strategy.

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