Daily Archives: August 3, 2010

While Reverse Auctions Are Not Evil, They Are Not Salvation Either!

Despite the frequent misquoting of the work of Dr. Bob Emiliani, which is regularly used to slam reverse auctions, reverse auctions are not evil, and, used on the right category at the right time, they can provide a company with double digit savings.

However, despite the claims that appear to be made in this recent ChainLink Research article on broadening the scope of reverse auctions, they are not salvation either. While it’s true that some companies have proven that e-auctions can generate double-digit savings year after year, this doesn’t mean that your company will see double-digit savings, and, as pointed out in a brief history of optimization, sometimes reverse auctions result in cost increases, which can be significant.

Not only does the comprehensive auction have to be conducted properly to be successful, but the following has to be true if the company is going to see meaningful savings:

  1. There must be enough serious competition in the market.

    There should be three or more suppliers who can meet the company’s need at an acceptable quality level and who are willing to actively (and aggressively) compete for the business.

  2. There must be true savings potential.

    The company must collect index and benchmark data and determine with reasonable certainty that it’s current price is significantly higher than the (expected) average market price.

  3. The company must be ready and able to commit to the winner.

    If not, this will damage the company’s reputation and drive away those suppliers who could (potentially) work with the company to find ways to decrease cost.

If these basic criteria are not met, you will not see (significant) savings, and the auction will likely be a waste of time at best.

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Hackett, Hast Thou Forsaken Us?

I was very disappointed after reading this recent article on process matters too in the CPO Agenda which discussed the recent findings of The Hackett Group with respect to P2P transactional channels as well as their recommendations for procurement organizations wanting to improve overall source-to-settle performance. If the article is to be believed, Hackett has fallen for the classification trap.

According to the article, Hackett says that a company must:

  1. Possess a unified spend category taxonomy.
  2. Define a rationalized set of transactional purchasing and payment processes that are then explicitly mapped to spend categories and/or associated suppliers.
  3. Ensure that individual P2P transactional channels balance cash, cost and stakeholder satisfaction.
  4. Integrate a channel strategy selection and implementation plan into the category management process.

In reality:

  1. A single taxonomy is not enough as each business unit will need its own in order to be effective. Moreover, taxonomy is irrelevant. The only thing that is important is that the spend is captured and available for analysis. Every department and user will want to see the data rolled up differently. This is the classification trap, and those who fall into it never advance to real data analysis, which is where true savings are discovered.
  2. While the company must define an accepted set of purchasing and payment processes, and while spend must be associated with the appropriate suppliers, the mapping should not be made to an explicit fixed category. Assignments must be able to change as needs change (spend by supplier, spend by commodity, spend by category).
  3. Channels must balance cost and stakeholder satisfaction, but the amount of cash flowing through is not relevant. If the cost of maintaining the channel is too high (relative to the value), the channel must be abandoned.
  4. This is good advice. Planning greatly increases the chance of success.

So, if you really want P2P success:

  • Come up with a channel plan.
  • Implement the appropriate channels and insure all spend goes through an approved channel.
  • Make sure all of the spend data is accessible from each channel.
  • Analyze the data in a true data analysis tool to determine which channels are performing well, which aren’t, and adjust the plan over time as necessary, and
  • allow each business unit to use their own taxonomy.

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