This post ran two years ago today. Two years later, the problem remains because a number of organizations still have not figured out it’s Sourcing and Procurement and follow-through. Solutions need to be end-to-end or savings leak!
It’s deja vu all over again!
Robert Rudzki is not the only blogger and consultant to recently hear that a potential client had, just a few years ago, hired a large consulting firm to do a high-profile “strategic sourcing program” with nothing sustainable to show for it, as he indicated in his recent SCMR blog post on Deja vu all over again. I’ve heard the same sentiments echoed to me by a number of consultants at a number of small and mid-size niche and specialty services and software providers in the e-Sourcing & Supply Management space in recent months.
It would appear that a common trend last time money flowed into laggard Supply Management organizations before the recent downturn was to simply hire a Big-X consulting firm to fast track the organization to strategic sourcing success. While this is a great way to fast-track a project, and a contract, that is expected to result in significant savings, the only thing that is fast-tracked from a finance perspective is payment to the consulting firm that runs all the way to the bank! As leading Supply Management professionals know, a contract does not guarantee savings. The only way to achieve savings is to execute against the contract and make sure savings are realized. Just because you have a new contract that allows you to source widgets at $8 a pop, instead of $10 a pop, this doesn’t mean you are going to save $200,000 on your annual purchase of 100,000 widgets. For the savings to materialize, all of the following has to happen:
- the buyer has to place the order with the contract supplier
- within the contracted lead-time and the supplier
- has to ship on time
- using the approved carrier and shipping arrangement
- and pay all required third party and government export fees
- and file all appropriate paperwork at the same time your organization, or a 3PL acting on your behalf,
- files all of the appropriate import and compliance paperwork
- and pays any associated duties to make sure that
- the product arrives at the warehouse when its supposed to
- where it is received, inventoried, and appropriately stored which results in
- an invoice being accepted and verified against the contracted rates and
- paid at the appropriate time only when all goods are received and verified as acceptable.
Simply put, if
- the order is placed with the wrong supplier
- or placed late and the order has to be expedited
- or shipped late and a different shipping method has to be used
- or export documents are not filed on time
- or fees are not paid and fines are issued
- or import documents are not filed on time
- or taxes are not paid and fines are issued
- or the product is not properly inventoried or stored and can’t be found and unnecessary replacements need to be ordered
- or the invoice is not verified and the old rate is still being charged
- or the invoice is paid late and a penalty is applied
then those (significant) savings negotiated on your behalf go out the window. And you’re not going to get them back! First of all, once they’re gone, they’re gone. Secondly, because you weren’t actively involved in the project and didn’t insure that the knowledge that you required to achieve a sustainable transformation was transferred, you’re not going to be able to keep costs down when you renegotiate the contract in this economy where supply is tightening and costs are rising. So you’ll pay even more, even if the rate should stay almost flat.
In order to get results, you have to work with the consultants to understand the strategic sourcing process, the strategies applicable to your organization, the goals of each individual project, the savings opportunities in each project, the key contract terms, the changes that need to be made to capture the savings and adhere to each contract term, the key metrics, the measurements that need to be made regularly, and the warning signs that something is happening / has happened that could jeopardize the savings the organization expects. Failure to do any of this is a sure-fire way of making sure that nothing changes and that your organization continues to leave money on the table.
In short, if your organization continues to be one of those organizations that leaves up to 40% of the contract value on the table because you did not do all of the above, don’t blame the service provider unless you did all of the above. As Charles, Bill, and Bob said in their recent books on The Procurement Game Plan, Managing Indirect Spend, and Next Level Supply Management Excellence, success is your responsibility and you have to actively manage your service providers and make sure that the knowledge required for a sustainable transformation is transferred to you.
So put an end-to-end solution in place. And let’s Never Talk Again about this!