Monthly Archives: May 2013

Don’t Forget The Post Mortem in Your Strategic Category Management of Services!

A couple of weeks ago, after running our series on Strategic Category Management (Part I,
Part II,
Part III and
Part IV), we said Don’t Forget Strategic Category Management in Your Services Categories. This was because a lot of organizations believe that strategic category management is only for direct categories or physical goods, when nothing could be further from the truth (especially when indirect spend can approach 50% in some organizations).

In this post, we outlined the nine phases of strategic category management and how they relate to services categories. Although we did not make Post Mortem a separate phase, it is still a critical part of the process. In fact, it’s one of the most critical parts – because if you do not analyze how you did, you will not improve the next time around. So why isn’t it a separate phase? Two reasons. One, it’s a required input to the first, rationalization, phase because if you don’t do a post mortem and analyze how well the last strategy worked, you can’t be sure if it was the right strategy or not. (The fact that the results were not what you expect is not sufficient to declare a strategy incorrect. Maybe the team didn’t follow though on the strategy as required in each phase.) Two, and this is the real reason, you should be doing a post mortem after each phase. Face it. If you’re procuring discovery services for the next three years, and you wait until thirty-three months in to start the post mortem, how well can you reasonably expect to assess the job you did in the supplier identification and sourcing phases three years earlier, when half of the team has changed, memories has faded, and a lot of the details of the process has been lost? Here’s what you should be doing from a post-mortem perspective at the end of each phase.

At the end of the rationalization phase, you should be documenting not only what strategy you are pursuing, but why. What are the assumptions you are making that favour this strategy? What other strategies did you rule out and why? (If it turns out an assumption was wrong, then another strategy might have been viable and you will have saved work the next time around.)

At the end of the supplier identification phase, you should document how you conducted your search and how effective you were at identifying additional suppliers. How long did it take, how many new suppliers did you uncover, what percentage were suitable to push to the sourcing phase, etc?

At the end of the sourcing and contract award phases, document the process that was followed, how long it took, what seemed to work well and what didn’t, and anything you wish you would have done (differently).

During the supplier management phase, which is ongoing from contract award until the end of recovery, conduct regular supplier assessments and thoroughly document the results against well defined metrics, any benchmarks you have, and any expectations that were included in the contract. For each issue, document the root problem, what you did to address it, and what you think you could have proactively done to prevent it.

During the procurement phase, review actuals to expected at the end of every quarter. (This will be “easy button” simple if you have a decent e-Procurement system that allows you to define budgets at the line-item level.) For all line items that are off more than 20%, do a quick manual review to identify any that aren’t easily explained (a payment slipped, you moved some work back, you ordered extra inventory as a precaution, etc.). Dig into these. If they can’t be adequately explained in five minutes, someone didn’t do a good job of budgeting or project management. This needs to be identified and documented as part of supplier management.

Then, at the end of the phase, and before you execute a new sourcing event, you need to do a more detailed analysis. At the very least you should:

  1. Run the spend reports on your complete transactional data
  2. Compare the results to your original spend analysis data (which was likely incomplete if this is the first time you are doing strategic category management)
  3. Focus on the gaps – where the data does not match, is it because you brought new spend under management or is it because there was some off contract spending
  4. Focus on the differences that are +/- 20% (adjusted for inflation or demand, as required) – for each difference that was not already detected and adequately explained, do a deep dive
  5. For each gap and each difference >= 20%, document what could be done to prevent this in the future – better forecasting, new processes to keep purchases on contract, better supplier / demand management, etc. and what changes, if any, are required to the overall strategy

This is the phase where you “close the loop” and begin to loop back to the next, hopefully better, iteration of the strategic category management cycle. If the loop is not closed, spend under management will not effectively increase and the organization will only see savings the first time. If the loop is effectively closed, then, when inflation and demand is adjusted for, the company will see savings each time through the process as efficiency, in both the buying and supplying organizations, is increased (and unnecessary fat is taken out of the margin).

During the recovery management phase, you have to document what actions you take and how well they do.

Scandinavian and The Netherlands in the Creative Top Ten. Why?


Today’s guest post is from Gert van der Heijden, the Executive editor of Spendmatters.nl.

I just read the doctor‘s post on Sourcing Innovation (which I translated and posted on SpendMatters.nl) which noted that Scandinavia and The Netherlands are leading the world in creativity. The post, which referenced The Global Creativity Index, ranked 82 nations on their alignment between Technology, Talent and Tolerance to determine that Sweden was first, Finland was third, Denmark was fourth, Norway was eighth, and The Netherlands were tenth. While I have to admit that (being a Dutch bloke), as The Netherlands only came in tenth while the real Scandinavian countries were three of the top four, I shouldn’t be too proud of the Dutch, the next thought that came to my mind was the question of whether or not I believed the conclusions were right. So I looked at my field of expertise, the (small) world of sourcing and procurement and discovered these facts:

  • Science: In the Netherlands there are 6 professors in Supply Management
  • Publishing: A significant percentage of the scientific papers for the world wide IPSERA conference on Sourcing & Procurement were from individuals with a Nordic/Dutch background
  • Software: In Europe there are a lot of (e-)Sourcing Software providers, but some of the main players, like Basware and Tradeshift, come from the Nordics
  • Associations: Nevi is the third largest Professional Procurement Organization (after ISM and CIPS) in the world

Does this prove anything? I don’t think it really proves anything, but I have to admit that there should be a good reason why, for instance, our professional development is high in relatively small countries (Sweden 8.9 million, Norway 4.4 million, Finland 5.2 million and Netherlands 16.2 million), compared to surrounding countries that are much bigger (Germany 80 million, France 60 million, Spain 40 million, and UK 60 million).

I see a lot of similarity between the people in these countries in the way we approach our colleagues, our superiors and others. We like to discuss everything and our goal is to get consensus before we act. We like to do things, because we want to and not because our superiors are telling us to. The open, direct and confronting way of doing business and having meetings takes us a lot of time. This really differentiates us from the more hierarchic Germans and the more polite Brits. Therein might lie the difference. The Nordics do not think hierarchically and are more tolerant. So yes, I do believe that a lot of creativity can be found here, but I also believe we need the people in North America to get the work done, otherwise we will just keep on talking in an effort to be more creative.


Thanks, Gert.

So, How do We Fix the Problems We Created? Part II

As per yesterday’s post, we are the biggest supply chain risk. So, how do we become the biggest supply chain solution? By fixing the problems we created. Then the risks will be minimized, and so will the disruptions. Fortunately, the solutions are easy. Unfortunately, the decisions to implement them aren’t always easy from a business, or should I say, capitalistic, point of view. In the short-term, they can be expensive even though, done right, they pay off considerably (and often in multiples) in the long-term.

Today we will review the other seven problems we overviewed in our post on the biggest supply chain risk and illustrate how they can be solved.

Global Democratization
When you get right down to it, all methods of government have the potential for good as well as evil. A country will flourish under a great monarch and fade into darkness under a poor one. Socialism, implemented without corruption, can create a state of security and well being for all. Democracy only works when the will of the people is implemented by the representation. If the representation caves to lobbyists (and bribes), it’s not much better than a stifling dictatorship. The real issue is social and economic disparity. If great strides in these issues were made in the areas of greatest unrest, the unrest would considerably lessen and that could allow the government to evolve into the appropriate one in an organized, productive manner. (Or not. But it’s important to understand the reason for the unrest and solve the problem before trying to inject a miracle cure.)

Dependence on Information Technology
If you absolutely can’t live without a piece of technology, make sure you have backup systems in place ready to activate at the flip of a switch. Otherwise, it’s game over. And make sure that you have a backup power supply as well. If your data center is in a building on a grid serviced by only one power provider, and your “backup” is an industrial strength UPS that will last thirty minutes, or just enough time to shut all the systems down safely, and you need these systems 24/7, you better get a backup (diesel) generator and be prepared to produce your own power as long as necessary.

Government Financial Crises
Financial crises are avoided with sound financial decisions and policies. Who are often the best at analyzing the (potential) value of a financial decision? Talented, trained, and technologically equipped Supply Managers. We see the big picture, so it’s time to start advising the finance guys of the downstream decisions of their funding and purchasing policies. While this is not a complete solution, injecting more analytics, forward thinking, and common sense into the economy as a whole will go a long way!

Government Social Policies
When you dig in, this is one of the problems we’ve created that is hard to identify a solution for. Everyone has different ideas as to what services the government should provide and as to how to administer those services (so they are administered fairly). the doctor is not going to even attempt to define what a government should provide and how it should administer what it provides. This is one of the few problems that has no obvious solution.

Global Economic System Disruptions
Global economic crises and system disruptions are avoided with sound economic policies and frameworks. However, we rarely understand the full extent of the models we propose or how they will be applied (and manipulated) under real world conditions. There’s no easy answer to this except to say that we need to apply common sense, and if a model doesn’t seem to be working as expected, we need to pause, step back, analyze the data, determine the cause (and not just the correlation), admit our mistake, and try again.

Social Media Threats
The reason for this is the same reason for the push for global democratization — people are not content because of a (perceived) inequality that they feel is an injustice that has to be corrected. So they make threats and, sometimes, take action.

Global Mega Cities
If we stem population migration, we will minimize the need for additional global mega cities.

That’s it. We’re the biggest problem, but we know most of the solutions! Do we have the courage to do them? As Supply Managers, we determine who we buy power from, who we source from, where we source from, how we source, and what we value in our suppliers. We can directly influence the rate of climate change, globalization, and our ability to recover from information technology failures. We can indireclty influence social inequity, gender imbalance, population migration and, thus, also indirectly influence the push for democratization, social media threats, global mega cities, and the treatment of the aging population by adopting values and choosing partners that share those values, hire people in rural areas for jobs that don’t have to be urban, pay fairly, tolerate different people with different views, retain the wisdom of the elders, and push their peers to do the same.

There’s not much we can do directly or indirectly to prevent financial crises, social policies, and economic system disruptions — but we can use our skills to monitor the global market place and predict where, and when, they are most likely to occur and avoid sourcing from those regions at those times to insure the organiation is able to continue its operations uninterrupted. And as for the population explosion issue, that is a truly global problem.

So, How do We Fix the Problems We Created? Part I

As per yesterday’s post, we are the biggest supply chain risk. So, how do we become the biggest supply chain solution? By fixing the problems we created. Then the risks will be minimized, and so will the disruptions. Fortunately, the solutions are easy. Unfortunately, the decisions to implement them aren’t always easy from a business, or should I say, capitalistic, point of view. In the short-term, they can be expensive even though, done right, they pay off considerably (and often in multiples) in the long-term.

Climate Change
We could build more wind farms, solar farms, and hydro power stations and greatly increase the amount of energy on the grid that come from renewable sources. And we could deal with the irregular energy production by using natural batteries such as pump storage, compressed air (in natural, deep, airtight caverns), and water (to trap heat energy). It’s a considerable amount of up-front investment, but there’s no need to be putting energy on the grid that comes from dirty coal, natural gas, or oil — especially when we still need the oil for planes, trains, freightliners, and automobiles (as battery technology is not there yet for long-distance travel).

Global Supply Chains
There’s no reason we can’t do more sourcing at home — and do it cost competitively. Given the rise in labour costs, transportation costs, and management costs associated with managing production half a world away, with the right investments in new technology and training, we could produce many of the goods just as competitively in North America. But again, this could require significant multi-million investments in new, automated, technology and training to increase the skill of the manufacturing workforce. (But if we’re as talented as we claim to be, this shouldn’t be a problem.)

Increasing Social Inequity
Rick Perry, following the sound advice of economists like Arther B. Laffer, is proposing a flat tax to be applied equally to all. While it wouldn’t fix the fact that we are allowing some people to be 1,000 times as rich (or more) than the average person, a flat 20% tax on all individuals and businesses in the U.S. would go a long way towards reducing the U.S. national debt. If this resulted in an additional 15% tax on the richest 1% who are currently keeping the majority of their wealth in tax shelters, this would allow the United States to reduce the national debt by almost 20% if all of that tax money was applied to the debt!

Gender Imbalance
Not only do we need to promote equality of women in some countries, but we need to promote equality of men in some countries — often the same countries! In some countries, like China and India, certain jobs are viewed as “women’s work” and given the gender imbalance, this is going to be a problem. Just like men can be nurses and airline stewards, they can also be garment makers and janitors.

Population Increase
We can be smart about this. And while we don’t have to go to the extreme “one child per couple” policy, there’s no reason we can’t educate people about the downsides of large families. While the planet can likely continue to support the current population for the foreseeable future, there is a tipping point, so we should do everything we can to prevent additional growth. But since the planet can likely continue to support the current population for the foreseeable future, we don’t need to panic and jump on the bandwagon that the population has to decrease. Note that, as simple math will illustrate, provided that we don’t considerably increase our expected lifespan in the near future, if, on average, we slowed population growth to an average of 1 offspring per person, or 2 kids instead of 2.5 kids in the average household in the U.S., around the globe, we could reach a steady state population very quickly and eliminate the issue of population increase.

Population Migration
Talent tends to migrate to where there is the most opportunity, and all things being equal, to where there is the most tolerance. If we focussed on increasing the acceptance of people in rural as well as urban areas, possibly through telecommuting and telepresence, we could slow down the migration from rural to urban areas and make populations more predictable.

Aging Population
When you dig in, this is another of the problems we’ve created that is hard to identify a solution for. People are getting older. That’s not going to stop. We’re going to have to accept, and prepare, for this reality.

Uh-oh! You’re in the S&OP Rabbit Hole!

Procurement Leaders recently released their CPO Guide for 2013. One of the key findings, related to the economic environment, was that most CPOs seem over-optimistic about their organization’s sales potential for 2013, but are less positive about the wider economy. To be blunt, if the economy is going to remain stagnant, then the majority of you are going to have stagnant sales. Mathematically speaking, the only way a majority of organizations could have an increase in sales in a stagnant economy is if one or more major market players in the majority of market segments went bankrupt, freeing up a considerable percentage of the market to be divided among everyone else. And even then, the market share gain most organizations would get would be miniscule. Let’s illustrate this with a table.

Company Current Market Share Economy Grows 2% Equally Economy Grows 2%; 3 Top Players Grow 4%   Market Share after A goes bankrupt
A 25% 25.5% 26%  
B 15% 15.3% 15.6%   26%
C 15% 15.3% 15.6%   24%
D 10% 10.2% 10%   15%
E 8% 8.16% 8%   12%
F 6% 6.12% 6%   5%
G 6% 6.12% 6%   5%
H 5% 5.1% 5%   5%
I 5% 5.1% 4.9%   4%
J 5% 5.1% 4.9%   4%

In other words, if the economy grew 2% and all things were equal, a company’s business would only grow 2%. No more. If some companies beat the market, and grew a combined total of 4%, as demonstrated in column 4, for three companies to beat the market, in a good scenario, we would expect four to five companies to hold steady while two to three companies drop in sales (and at least one company must have decreased sales). And the market leader going bankrupt will not help much either. What typically happens is the top two companies rush in to fill the void and get the lion’s share of the business, the next two companies, taking advantage of the marketing frenzy created by the new top two and their lower prices pick up the rest, and the companies at the lower end of the spectrum actually lose business to those making all the noise (with enough market share to get noticed by the big buyers). A likely scenario is given in column five. In other words, since the market is fixed, only a few companies are going to increase their sales more than average.

So don’t let sales and marketing lead you down the S&OP rabbit hole where you negotiate volume discounts that never materialize (as you never order the full volume) and get stuck with obsolete inventory (as you will front load to meet the massive increase in demand that sales and marketing are promising). You’re smarter than them and know that stagnant markets mean stagnant sales.