Monthly Archives: April 2013

Procurement Key Issue 2013: CXO’s Still Don’t Get the Disconnect!

This week, the Hackett Group released their “2013 Procurement Key Issues” study. This study, which was likely the last hurrah from Pierre Mitchell as a Hackett Group Employee, found that some organizations are going deeper and broader to deliver borderless procurement services, which is good, but the one thing that blatantly stands out is that your average CFO, COO, and CEO still doesn’t understand the value of the Procurement Organization.

Before I explain, let me review a few of the key findings.

1. 82% of respondents state that increasing operational agility and flexibility is a key enterprise issue.

2. 65% of respondents state that pursuing game-changing innovation/technology is a procurement initiative planned for the next 12-24 months in support of enterprise strategy.

3. 76% of respondents state that expanding purchasing’s scope and influence is a major procurement-related issue in 2013.

4. 76% of respondents state that increasing innovation and product/service report is a major procurement-related issue in 2013.

5. 88% of respondents cite strategic sourcing as a major issue.

6. 81% of respondents cite category management as a major issue.

BUT

7. As a whole, respondents are projecting:

  • a 0.4% drop in the operating budget and
  • a 0.5% drop in the FTEs in the procurement function.

 

I think this calls for a WTF!

Strategy and category management require skilled resources with the right intelligence and toolsets. This requires adequate budget.

Innovation and agility require advanced skills, expertise, and market knowledge that requires a lot of supply market intelligence, outside information, and time to study mini- and mega-trends. This also requires adequate budget.

Scope of influence comes with results, and results require talented people with appropriate toolsets and knowledge. Again, this requires adequate budget.

Furthermore, we have the situation where budgets are not being cut equally. From what I’m gathering, for the fifth year in a row, Procurement Training budgets are being slashed or are non-existent! This is driving me nutz! This disconnect of separating expectations from budget is ridiculous, especially when the organization is supposed to be scored on value. Value is ROI. ROI is return on investment. In Procurement, this is defined as savings/avoidance/revenue increase over spend. This means that if spending $10K on training will give your category managers the capability they need to go negotiate another $100,000 of the TCO (Total Cost of Ownership) through unit price, logistics, and non-value added service savings, then you increase the budget by 10K because you are getting a 10X return!

If the goal is for the Procurement organization to deliver value, then they need the budget for the technology, supply market intelligence, and training they need to deliver that value. Otherwise, expecting them to do more with less (FTEs) is just stupid. Ludicrous in fact!

Why A True Supply Management Professional will Never be Replaced by Technology

As succinctly stated in this recent HBR headline, Algorithms Don’t Feel, People Do.

Also, algorithms don’t sense, read non-verbal cues, detect patterns in seemingly unrelated data, take risks, or form common bonds. They don’t feel, and they aren’t intelligent. And while their predictive capabilities are scary given enough data, they are not infallible, and when they do fail, they will fail in a big way. Let’s address these points one by one.

First of all, as noted by the author of the HBR article, algorithms don’t feel, and can’t predict how a person will respond to a message. Marshall McLuhan may have stated that the medium is the message, implying that the form of a medium embeds itself in the message and influences how a person will receive the message, but the reality is that, in today’s individualistic society, the message is what is interpreted by the recipient, and only someone with a shared understanding will be able to comprehend what that is and react accordingly. As a result, an algorithm can not negotiate.

Successful negotiation depends on a first party transmitting a message, agreeable to that first party, that the second party can accept, and, moreover, figuring out, of all of the possible messages that the second party might accept, which subset represent message that the second party are most likely to accept and which messages of the subset are the least distant from the desired message. An algorithm can compute which options are likely given certain assumptions, and which of these options are the least distance according to some metric, but cannot determine what assumptions to make. Only a person who can feel, and feel what the other party is feeling, can be the judge of what good assumptions are. And, secondly, algorithms cannot sense. They don’t feel, and they don’t have instinct — which requires real intelligence.

Thirdly, they can’t read non-verbal cues. Even if someone is stating that they may be agreeable to an offer, the reality is that they may have no intention of ever accepting the offer, and are only indicating the contrary to stall for more time. It’s often the case that such a person is not as good at masking their demeanor as they are at masking their words. It might be the case that their non-verbal cues give more away than they would like. Only a trained negotiator with years of experience and instinct can be the judge of this.

But even more importantly, they can’t detect patterns in unrelated data, as it’s typically the case they can only process specified data in specified ways. And a fixed data pool never tells the whole story. A fixed algorithm might not know that a fire today will impact resource availability in six months, that your main competitor is likely to go out of business do a massive loss in a patent infringement lawsuit, or that a new technology is going to make the current technology obsolete in 18 months, with prices and demand starting to plummet in six months. As a result, in each of these instances, the algorithm would buy (today) (at a much) higher (price) than it needs to.

Furthermore, algorithms don’t understand when to “trust your gut” and take a calculated risk such as betting the farm on a new technology or riding the spot-buy market when all signs point to locking in a price for three years. The reality is that real success often requires risk, and only a true pro will know when such a risk should be taken.

Finally, as algorithms are not intelligent, they don’t form common bonds with like-minded algorithms that would help them advance their company and their profession. Algorithms have their place, and properly used can take a great deal of tactical and low-value workload off of a Supply Management professional’s plate, but algorithms will never be smart enough to handle the strategic and high-value workloads without intelligent — human — supervision. Optimal is only optimal if all of the assumptions are valid and modelled. An expert will always be needed to define the assumptions, check the assumptions, verify the results, and tweak them according to an ever-changing Supply Management world.

In short, good technology can make you two, ten, and maybe even one hundred times more productive (depending on the metric), but it cannot replace you. So don’t be scared of new technology for your supply chain — embrace it. Given the ever-increasing demands being placed upon you, you will be glad that you did!

If You Really Want to Future-Proof Your Career

Join the world’s second oldest profession!

A recent guest post over on VentureBeat on your career, future-proofed notes that industries that once were dominant are long in decline and that nascent sectors are ascendant and will likely shape everything that lies ahead. This includes the careers that will be available to you. Given that you don’t want to be among the 23% of workers who are unemployed to some degree, according to the latest shadow statistics that includes long-term discouraged workers not included in the BLS U-6 unemployment rate that includes short-term discouraged and marginally-attached workers (which is close to 15%), it’s important to do what you can to “future-proof” your career. (Source: ShadowStats)

To this end, the author of the guest post gives you four simple rules that he believes will help you win your future. They are:

Take Risks – Big Ones

If you see your industry on the fast-track to the doghouse, try something new, even if it means working half a world away for a while.

Take All Opportunities

Never shy away from any event, trip, assignment, or project they want to give you that will expand your experience, horizon, and opportunity.

Go Where the Future Is

Even though we had the dot-com crash, the future still lies in tech and healthcare, but tech will be more than just over-hyped software companies. And it will be most prevalent in healthcare as the population continues to age and wants to live longer and better.

Think Beyond

Whatever we’re using today we won’t be using in 10 years, or at least not in the same form. Don’t get comfortable. Look to what is coming next and prepare for it.


These are great pieces of advice, but if you really want to future proof your career, all you have to do is take up the world’s second oldest profession – Procurement! Whether you call it purchasing, sourcing, or supply management, it’s based on buying, and there has been buying at least since the ancient Anatolians were trading obsidian circa the 9th century BC. We’re a consumer culture that constantly needs to trade (money, or equivalent) for what we need, so buying is never going to go away. Paper money might, as we replace it with digital bits, but the concept won’t.

Plus, being in Procurement implies that you will have the opportunity to take risks (and will have to if you want to stand out and advance your career quickly), expand your experience (as you will have lots of opportunities to travel to suppliers around the globe and work with them), go where the future is (as there is always a big focus on emerging markets), and think beyond — as the only real way to create lasting value is to continually innovate beyond the norm.

Why You Need SIM-Powered Recovery

Two weeks ago, we explained how SIM Powered Recovery Will Take You to the Next Level by noting that it can improve your recovery results by a factor of 3, 5, or even 9 over time and asked you to download the latest Sourcing Innovation Illumination, sponsored by Lavante, on Taking Capital Recovery to the Next Level.

Today, we’re going to make it clear how that will happen. Traditionally, a recovery audit will be done by a recovery audit firm that will send in a team that will spend weeks manually reviewing invoices, payments, and transactions looking for discrepancies and revenue recovery opportunities. Depending on the deal you strike, this will cost you manpower plus a not-so-small percentage of the recovery above the manpower cost (that will be in the 10% to 20% range, we’ll assume 15%) in a time plus results deal, or a large percentage of the total recovery, typically 30% to 35% (and we’ll assume 30% after strong negotiations), in a results-only deal.

In addition, it will typically be three (3) to six (6) months before the recovery firm even attempts to recover the first dollar because it will take them that long to get through enough paperwork to find enough opportunities to make a recovery effort worthwhile. During this time, up to 20% of potential credits will disappear permanently as dispute timeframes and contracts will expire.

In comparison, it’s likely the case that you can acquire a perpetual license to a good SIM-based recovery platform for approximately 100K with 20% (or 20K) annual maintenance. And you won’t need to hire any extra manpower as all you’ll need to do is feed it your sourcing, procurement, and accounts payable data, set up some matching rules, and the platform will automatically identify duplicate, non-compliant, or suspicious payments. We’ll assume it costs 25K to integrate the data feeds and work with the provider to set up the initial rules set, and 5K to maintain the feeds on an annual basis. In addition, we’ll assume a firm that does a time plus recovery deal will bill you 150K in manpower. Given these costs, we can now compare manual-vs-SIM-based recovery efforts noting that an average company, due to cost, will only undertake a recovery effort every 2 years. (Mainly because a recovery audit firm will only want to do an audit every two years because it typically takes 18-24 months after a recovery effort before a company has the same recovery effort.)

After a recovery effort, a company will temporarily scrutinize invoices and payments more closely. During this time, the vendors will also be careful not to over-bill or duplicate bill until the buyers have stopped watching so closely and have gained confidence that the over-billings have stopped. As a result, available recovery will be less the following year. However, as the buyer gains confidence that overspending is under control, the buyer will stop watching as diligently and the vendor, if it has a history of over-billing or duplicate billing, will revert to its former ways and the overspending and recovery opportunity will creep back up to where it was.

Noting that you can expect to identify 90%+ of recovery opportunities with a SIM platform, that can process all of the data you throw at it, compared to the 60% of recovery opportunities that you can expect to find with a manual effort that stops when 80% of the spend has been identified and analyzed and when almost 20% of opportunities for recovery have been lost, we get the following.

 

Year 1 Year 2 Year 3 Year 4 Total
Overspend 1,000,000 500,000 1,000,000 500,000 3,000,000
Recovery
Year 1 Year 2 Year 3 Year 4 Total
SIM 900,000 450,000 900,000 450,000 2,700,000
Manual T&R 600,000 300,000 600,000 0 1,500,000
Manual R 600,000 300,000 600,000 0 1,500,000
Cost
Year 1 Year 2 Year 3 Year 4 Total
SIM 125,000 25,000 25,000 25,000 200,000
Manual T&R 240,000 0 240,000 0 480,000
Manual R 300,000 0 300,000 0 600,000
Recovery over Cost
Year 1 Year 2 Year 3 Year 4 Total
SIM 7.20 18.00 7.20 18.00 13.50
Manual T&R 2.50 N/A 3.75 N/A 3.13
Manual R 2.00 N/A 3.00 N/A 2.50

 

Which says that a SIM-effort is expected to return 4.3 times as many dollars into your organization as a manual time + results audit over four years and 5.4 times as many dollars into your organization as a manual results-only audit over four years!

You can argue the numbers a little bit each way, but it won’t affect the fact that a SIM Powered Recovery solution will deliver results that is orders of magnitude above what a manual audit will deliver. So download your copy of SIM Powered Recovery Will Take You to the Next Level today! (registration required)

Want to Ride the Rails? Go East, Young Man, Go East!

Recently we pointed out that despite the fact that the US has a 100 year lead on China on the rails, China is kicking the USA’s @ss when it comes to rail. It just launched the world’s longest high-speed rail route from Beijing to Guangzhou.

Now, not to be left out, India is getting in on the action. As per this recent article over on The Financial, “Tata Projects [has begun] work on [the] RS3300 crore Eastern Dedicated Freight Corridor project” (EDFC), which it recently won in partnership with Aldesa of Spain. This particular project will lay 337 lines of track between Bhaupur and Khurja in Uttar Pradesh.

Eventually, the eastern dedicated freight corridor (EDFC) project will connect Ludhiana to Dankuni (in the eastern corridor), and Dadri to Jawaharlal Nehru Port, Mumbai (in the western corridor). In addition, the EDFC has been designed for 32.5 tonne axle load, which is at par with America and China, and will increase the speed of freight by up to 100 km per hour.

It’s amazing. North America used to own the rails, but now we’re falling behind the emerging markets, who understand that while a truck is good, a locomotive that can pull ten cars is ten times better. If we were smart, we’d be investing in high-speed rail across the US, instead of bickering about cost distribution between states/provinces and the federal government. A century ago, rails was the future, and it looks like it will be again. Will we realize that before its too late?