Daily Archives: March 14, 2011

Are You Willing To Go Out On A Limb?

A recent Industry Week article on how Manufacturers are Redfining Themselves had a great quote by Michael Collins who said you can’t cost-reduce yourself to growth. “I look at some of these companies that have been successful and see what they’re doing differently from those that are just floating along. You know what I see? They’re willing to go out on a limb and develop unique strategies. That’s what separates them. And whether you’re trying to grow a business or a supply chain, the net requirements are the same — if you want your supply chain to be successful, you have to invest in it and take chances every now again. New technologies, new processes, and new distribution models will be key to future growth and success.

And you have to rethink the value that the supply chain contributes (from a value-focussed or high-definition perspective). The sidebar provided in the article lists some good starting points, once appropriately translated to the supply chain.

  • Identify “Blue Ocean Space”
    Where are the real savings opportunities that supply chain has not yet tackled. Are there any sacred cows such as marketing, legal, or HR spend where supply chain could make a huge impact? Is supply chain involved in NPD, or only in sourcing after the design has been approved and expensive single-source components locked-in?
  • Think Beyond Processor Mentality
    Real savings come from strategic planning, sourcing, and network design – not tactical PO processing.
  • Offer a Value Proposition that Goes Beyond Sourcing the Cheapest Part
    What about quality, sustainability, and end-customer value? Customers will pay more for high-quality products that give them a (perceived) value end, and since profit is revenue minus cost, any contributions to revenue also have a huge impact on overall business performance.
  • Ask the Right Questions that Identify Risks and Opportunities
    Don’t just focus on opportunities or risks. The greatest success will come from a careful balancing of risk vs. reward.
  • Offer specialized high-value services that can’t be easily duplicated.
    Find ways to save other departments money that they can’t duplicate without your help. For example, better e-negotiations, deeper spend analysis, or better JIT inventory management with 3PL support.

Demand for Procurement Systems is Up In General

But, as far as I am concerned, the specifics are still in question. Over on Software Advice, Michael Koploy recently published a post on 2011 Market Trends: Procurement Systems where he noted that the six trends he’s following, namely:

  • Demand
  • Cloud Adoption
  • Application Usability
  • Strategic Sourcing
  • Spend Analytics
  • Contract Management

With respect to the first four, he’s definitely right. After 2-3 years of spending freezes, and displacement of seasoned pros from big shops to mid-tier shops, pent-up demand is nearing an all time high. Also, a lot of shops, especially in the mid-tier, have figured out that they’re not IT, shouldn’t try to be, and want the IT to be someone else’s headache. Today’s generation of workers expects usability, and won’t settle for anything less. And with continuing pressures to cut costs (or lose your job), a number of organizations are finally getting behind strategic sourcing, even if they’re not entirely sure what it should mean to them.

But I’m not sure about the last two. Yes, demand for “BI” and “Analytics” is up across the board, but I’m not still convinced that most organizations have any clue whatsoever as to what real “spend analysis” is.

Spend analysis is:

  • NOT automated cleansing and mapping

    Sorry, but someone else’s rule set will not be anywhere close to 100% applicable to your organization’s data, and a rule set only catches known screw-ups in data entry, not unknown ones. Let’s say you’re in IT. Then HP obviously means Hewlett Packard. But if you’re in construction, it could just as easily mean Harry’s Pumps (or, if you’re in apparel, Hilary’s Pumps).
  • NOT automated Top N reports

    While it’s important to track your Top N suppliers, categories, etc., the greatest opportunities for savings aren’t necessarily going to be in your Top N categories or with your ToP N suppliers. Even without an analytics system, chances are your Procurement people have a pretty good idea who the Top N suppliers are or what the Top N categories are and aggressively negotiating them. In many organizations, the biggest opportunities for savings are in the Next N categories and in better optimization of the Top N categories that goes beyond simply identification. In the first case, let’s say the Top N are 40% of spend and the Next N are 30% of spend. Let’s say the immediate opportunities for savings are 3% in the Top N and 9% in the Next N. That’s 1.2% savings on TCO on the Top N and 2.7% savings on the next N. Which is greater? Also, let’s say a number of categories use a common, pricey, metal or mineral that accounts for 30% of total cost and that, if demand was aggregated across the categories, the average cost could be chopped by over 10%. Well, that’s a 3% savings if you buy the metal or mineral on behalf of your suppliers. A Top N report ain’t gonna show you that!
  • NOT a Freakin’ Dashboard

    A dashboard only tracks progress on identified opportunities. It does not track progress on unidentified opportunities! It only allows you to see that you’re not screwing up something you just fixed, it doesn’t show you that you’re screwing up ten other things.

But when most people make their purchase decisions, this appears to be what they are evaluating based on what they buy and how they implement.

Then there’s Contract Management. To be useful to Procurement, a Contract Management (CM) has to do more than simply store and index contracts for easy retrieval. While it’s important to be able to quickly put your finger on a contract when a dispute arises, that’s not management. That’s e-filing. In the context of Procurement, true management is tracking purchases against the contract in near real-time and insuring that before an invoice is paid, it’s paid at contracted rates. This requires some integration of the CM system with the e-Procurement and/or e-Payment system.

So far, most CM systems are still being bought stand-alone or loosely coupled.

In other words, demand for Procurement Systems is up, but not always for the right reason. And this includes demand for new reverse auction features. I’m getting tired of repeating myself, but I guess I have to say it again.

Listen, bub, a reverse auction IS NOT an advanced sourcing application. If you want real savings, you need a decision optimization system.