Monthly Archives: February 2012

Managing Indirect Spend: An In-Depth Review, Part III

In our last post, which ended the review of Part II of Managing Indirect Spend, a new book by William (Bill) Dorn and Joe Payne of Source One that takes you on an excellent adventure through the world of indirect sourcing (that they have been living in for the past two decades, well before Strategic Sourcing and Supply Management became cool), we discussed the non-software tools at a sourcing professional’s disposal, Procurement Services Providers (PSPs), and the (common) mistakes that can kill a sourcing project. This wrapped up our discussion of the capabilities at a sourcing professional’s disposal. Today, we’re going to discuss Part III, Examples from the Field, and focus on some of the results that can be obtained when applying the best practices discussed in the section.

The examples focussed around the gains that can be achieved by collaborating with suppliers, leveraging supplier feedback, and analyzing data — which, as SI outlined in Spend Visibility: An Implementation Guide, we know to be significant even before the application of additional tools and techniques. We’ll start with supplier collaboration.

As Bill and Joe point out, collaborating with your suppliers can produce surprising and profitable results. In fact, collaborating with your entire supply chain (including your suppliers’ suppliers) can often produce sustainable results that equate to large cost savings opportunities. Plus, it encourages partnerships with your suppliers, which may lead to your company being the first in line for new product developments or other supplier benefits.

Consider these examples from the text:

  • specifying printer models and toner requirements, instead of brand name toner cartridges, generally leads to savings north of 50% when suppliers are asked to propose low-cost (non-OEM) solutions
  • the cost of a simple chemical compound was reduced 39% when the buyer worked with the supplier to jointly source expensive regulatory valves at a higher volume
  • the willingness to work with a new supplier that produced a required solvent at an insufficient level of purity (and guarantee them a reasonable amount of business under the right circumstances) if the supplier was willing to refine their manufacturing process to get to the required level of purity convinced the supplier to make the infrastructure investment and saved the customer a considerable amount of money now that a third, lower-cost supplier, had entered the market

In addition to collaborating with suppliers, you can use the information they provide to your advantage. By leveraging the information that your supply chain provides, you can actually achieve deeper discounts in the products or services you are buying, and improve the overall relationship and integration with each of your suppliers. This can lead to results like the following:

  • by working with suppliers to find out what was possible, the buyer was able to approach the incumbent and ask for a new type of telecommunications infrastructure that reduced organizational cost by 35%
  • by working with the supplier to find out when the supplier wanted to make a sale, and the supplier representative, who was quite eager to make a bonus target, the customer was able to get a software product (only available through resellers) at cost with terms of net 30 days, allowing it to delay the purchase to the following quarter (while still allowing the supplier, and the representative, to recognize the sale this quarter)
  • a buyer which needed specialized multi-million dollar computer equipment that could only be supplied by one supplier was able to reduce its costs and get millions of free marketing by allowing the supplier to use its logo in its advertisements (which the supplier promised to spend millions on if the buyer allowed the use of its logo)

Lastly, there are great opportunities to be had through data analysis, including:

  • a detailed line analysis that will often identify a significant number of (secondary) phone lines that are not required that are costing the organization hundreds (or thousands) each
  • the appropriate segregation of MRO spend into the right buckets that will allow suppliers to be more competitive on the categories they are strong in, as this will decrease overall cost significantly
  • the identification of non-compliant spend and the top offenders as a few choice words from the CFO to these individuals (or their superiors) will considerably decrease maverick spend quickly increase realized savings 20% to 30%

There are plenty more examples, but considering that SI essentially co-wrote a book detailing what they are and how to find them in Spend Visibility: An Implementation Guide (free download, no registration required), we’re not going to go into them any further in this post, especially since the important lesson is that you should be leveraging the information provided by the supply chain (for analysis) and then working with your suppliers to implement the best solution(s) you identify.

Stay tuned. After another break, SI will conclude it’s review of Managing Indirect Spend later this month with Part IV: How to Do It.

Series to date:

“Procurement’s Strategic Role in Driving Total Corporate Performance”


Today’s guest post is from Robert A. Rudzki, President of Greybeard Advisors LLC, who has (co-) authored a number of acclaimed business books, including Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise, On-Demand Supply Management, and the just published text on Next Level Supply Management Excellence that is a follow up to the now-classic Straight to the Bottom Line.

Every CPO or chief supply chain officer needs to be conversant with the performance improvement framework shown in the following figure.

World Class Supply Management

This is one of my favorite charts, and is the essence of relating supply management to improved corporate performance. Let’s walk through this framework briefly — a more involved discussion appears in Chapter 4 of my new co-authored book “Next Level Supply Management Excellence“.

Two important measures of corporate performance are return on invested capital (ROIC) and cash flow. ROIC is calculated by taking the annual earnings of a business and dividing it by the total capital invested in that business (long term debt and stockholder’s equity). ROIC is important because it is an indicator of the current health of a business. For a business to deliver value to its shareholders, ROIC needs to exceed the corporate cost of capital. A company that operates where its ROIC is lower than its cost of capital is essentially liquidating itself.

Improving profits helps to improve both ROIC and cash flow. Reducing the capital intensity of your business also helps to improve ROIC and cash flow. Improving profits while also reducing the capital needed to run the business has a powerful compounding effect on ROIC and cash flow.

So how do we go about improving profits? There are two fundamental ways: revenue enhancements and cost reductions. Supply management can — and should — play an important role in each of those areas, as indicated with examples shown in the Figure above.

Supply management should, for example, take a leadership role in creating a more responsive supply chain, thereby helping the company to win more business (and increase revenues) from customers. Supply management should also take the lead applying good processes to better manage all areas of spend, not just those typically assigned to procurement.

So far so good, but how do we reduce capital intensity? Again, there are two ways: working capital improvements and capital expenditure improvements. Once again, supply management can play an important role in each of those areas. In many companies, for example, there is no clear responsibility for analyzing and coordinating supplier payment terms. This area is ideally suited for supply management to take a lead role (as detailed in Chapter 15 of “Next Level Supply Management Excellence“).

With regard to capital expenditures, experience demonstrates that the sooner Procurement is involved in new projects (even at the concept stage), the better the overall project economics and ramp-up time will be.

A thorough opportunity assessment for supply management requires a careful evaluation of the improvement opportunities in each of the four categories shown on the exhibit. Then, to tie it together for the executive audience, you relate those improvement opportunities to the company’s income statement and balance sheet. Going that extra step allows you to demonstrate the impact of supply management on net income, earnings per share, ROIC and cash flow — all key areas of interest for senior executives. It’s a powerful way to communicate the enormous potential of a transformed supply management organization in the language of senior executives and in a manner relevant to your company.

And, based on our experience, it can pave the way for significant executive support for your agenda.

(Note: Portions of this post are based on the author’s new book “Next Level Supply Management Excellence” — a sequel to the bestselling book “Straight to the Bottom Line“.)


Thanks, Bob.

How Do We Drive Technological Advances? Part III

In our first post, we noted that an organization must master the three T’s — talent, transition, and technology — to excel in Supply Management, and lamented that an average organization has not yet (truly) mastered any of the T’s, with technology often being the T in which the organization is the furthest behind in. We lamented on the lack of advice on what to do to drive organizational advancement and dove into a recent article from Chief Executive on Seven Strategies for Driving Technological Advances in the hopes that it might provide a guide for an organization wishing to catch up on the technology curve.

Unfortunately, after reviewing the piece, the verdict was not very good. While the article was well intentioned, and gave SI hope that the adoption problem was understood, the advice contained within really wasn’t that good. While it would certainly encourage a progressive leader to be more receptive of new technology, it’s not going to encourage the organization as a whole. So what is a Supply Management Leader to do?

First we take a page from BravoSolution’s playbook on High Definition Adoption Measurement and Measure what the organization is using, and, most importantly, what the organization is not using relative to the organizational goals.

For example, if the organization obtained an e-Sourcing platform with e-RFx, e-Auction, and Decision Optimization a year ago, and 50% of the team is using the e-RFx, 25% of the team is using the e-Auction solution, and only 5% has ventured into Decision Optimization, there are obviously problems across the board. First of all, unless there is a really esoteric category where all of the suppliers are stuck in
That 70’s Show, just about every Supply Manager should be using the e-RFx. In addition, it’s likely that 25% of the categories could literally be set up on e-Auction auto-pilot and that the additional savings that may be obtainable on another 25% of the categories would be worth the extra effort, indicating that at least half of the Supply Managers should be using the e-Auction tool. And even if the team is not ready to trust allocations from a decision optimization tool, at least half of the team should be using the team to compute a minimal spend baseline to guide analysis and negotiations. This means that usage of each tool is at most 50% of what it should be.

The next step is to Identify the likely causes of non-use. Is it lack of awareness of the tool? Is it lack of awareness of the potential capabilities of the tool? Is it lack of awareness of the key features of the category that would make it suitable for e-Sourcing? Or is it, more likely, Fear of the Unknown?


Aware of what will hurt you
You’re prepared to remain this way
So sad yet safe with your afflictions
Afraid to start a brand new day

These words, writ and recorded by Siouxsie and the Banshees almost twenty-one years ago, are probably the best descriptor of the average pseudo-technophobe in a modern multi-national Supply Management organization. They know not using technology will hurt them, but they are safe with their affliction, and prepared to remain technophobic as they are afraid to start a brand new day — and possibly a brand new, technology enabled, career. And it’s completely illogical. It’s like


We all get the strangest feeling
When we’re standing mighty tall
To jump from seventeen floors
And crash into free fall

It just doesn’t make any sense. If this is the case, you have to identify it. Then, once you’ve identified the issues holding your team back, you have to Resolve them. Start by identifying common-sense resolutions that will be comfortable and affect the team on an emotional level, even if such resolutions are not the most efficient or logical. For example, if the issue is that a Supply Manager doesn’t think auctions are appropriate for a category that he can save 20% on simply by pitting the two leading office supply vendors off each other, you may have to ignore the fact that, if the volumes are high enough, this will enable suppliers with 3PL capabilities to also bid directly and all bids to be compared on landed cost and instead focus on how it will automate data collection and award and allow the Supply Manager to get the same result with much less work. This will in turn allow him to run more events, save more money, and maybe get a bigger bonus. And if it’s fear that the technology acquisition is an intermediate step to manpower reduction (once everything is automated), you have to demonstrate to the team that it can’t run on auto-pilot (even if it can for a few simple e-Auction categories) and that a human always has to drive the technology to get results (and disable any auto-pilot modes that may be built in). Once the team realizes that the tool is to enable them to do their job better, or that it is easy to use, then you can always turn on automation or incorporate advanced features.

Then, once the initial trepidations are overcome, you have to Train your team on the Technology. Start with a SWOT analysis viewpoint as the team has to understand the strengths, weaknesses, opportunities for cost avoidance and reduction it will enable, and the threats that the technology poses to the organization if your competitors use it and you don’t. Then move onto transition training and demonstrate how to move from current, mostly manual processes, to newer, mostly automated, technology-enabled processes that let the team focus on the strategic opportunities and leave the time-wasting tactical processes to the technology. Finally, focus on category specific training tailored to the use of the technology for strategic and high value categories.

Finally, you have to Hatch the organization out of its shell. This means getting off the egg and letting them break free. This will require Trust, Empowerment, Acknowledgement, and Mentoring on their terms, not yours. You have to trust them to their jobs and empower them to make decisions. You have to acknowledge that their will be mistakes and a learning curve, but with mentoring and guidance, they will be identified, corrected, and the organization will be better for them. In other words, you will have to rely on true TEAMwork. Not an easy task, but a doable one.

In other words, the key to Technology Adoption is MIRTH (Measure-Identify-Resolve-Train-Hatch). Furthermore, MIRTH is a suitable acronym because, when done right, and technological advances pervade your organization, there will be gaiety, jolity, and joviality — a state of affairs that is sadly lacking in many organizations today (that are not on the Top 100 employers list).