Monthly Archives: July 2015

Two Hundred and Sixty Five Years Ago Today

Only one year and 20 days after its establishment as a town, the City of Halifax was almost completely destroyed by a fire 265 years ago today. Everyone remembers the great Halifax Explosion of 1917 when the SS Mont-Blanc, a French cargo ship loaded with explosives, collided with the SS Imo, a Norwegian vessel, caught fire, and burst in a cataclysmic explosion that devastated the Richmond District, killed 2,000, and injured another 9,000. But this wasn’t the first time Halifax was nearly destroyed by fire.

The first time was on July 11, 1750 when Halifax recorded the first fire of major proportion in Canada which almost wiped out the entire town. (Sources: Halifax.ca, FireHouse and Wikipedia) That’s probably why published fire regulations in Halifax date back to September 29, 1752 and
the Halifax Regional Fire and Emergency Service dates all the way back to 1754 and why Nova Scotia lays claim to a host of first in Canadian firefighting, including:

  • the first hand-propelled fire engine
  • the first steam-propelled fire engine
  • the first motorized pumper

And Halifax came close to being destroyed again in 1786 when a great fire raged in the woods on the outskirt of the city, a fire so great that the town was so enveloped in smoke for many days, as almost to impede business. (Source: History of Halifax City)

In other words, despite the fact that fate apparently wants to burn Halifax to the ground, we Haligonians are tough stock.

Correlations are Good, Causations are Better, but Models are Best!

the maverick recently penned a great post on Spurious Correlations, 150% Cost Savings and How to Justify Your Next Procurement Project that expounded upon the classic problem of second rate analysts, who didn’t read the classic post where the Brain gives Pinky a lesson in Statistics, using correlation to infer causation. If you listen to these analysts, you’ll find yourself in the same situation Roy Anderson was in when he was former MetLife CPO. Namely, the situation where if I added up all the promised savings from vendors and Aberdeen Reports, I’d be saving over 100% and suppliers would be paying me money! Not very likely, is it, but definitely the conclusion you’d draw if you stacked enough Aberdeen reports end to end!

After all, with enough data, you can find all sorts of near perfect correlations between (almost) completely unrelated data sets. For example, Pierre points out that if you go to tylervigen.com and check out the spurious correlations on the site, you’ll find out that there’s a near perfect correlation between

  • the number of people who drown after falling out of a fishing boat and the marriage rate in Kentucky (r=0.95),
  • the total number of computer science doctorates awarded in the US and the total revenue generated by arcades (r=0.99), and
  • the annual number of automotive suicides and the number of Japanese passenger cars sold in the US (r=0.94).

And while you might believe that computer science doctoral candidates spend all their free time in arcades, do you believe that buyers of Japanese passenger cars buy them to commit suicide or that somehow the marriage rate in Kentucky has something to do with the number of people who drown after falling out of a fishing boat? (I hope not!)

As Pierre notes, it’s important to have a good ROI model that really looks at the “R” and the “I” realistically. A model that uses ranges that allows you, as an analyst, to play around with assumptions and adjust the results based upon modifications to the assumptions. Procurement might want to be aggressive, but management might want to be conservative. Procurement might assume an abundance of supply, but Engineering, knowing that only a couple of suppliers are qualified to produce the refined raw materials needed, might want to assume a lack of supply based on the fact that these refined raw materials are becoming increasingly sought after. And so on.

Without a detailed model that captures all the cost components and the assumptions they are based on, Procurement can’t be realistic in its projections or its project requests. Analyst reports with benchmark data are a great starting point to identify where to look for savings, but the savings still have to be validated before a proposal is put forward.

Ten Commandments of Procurement, Christian Style

On Canada Day, while LOLCat was proactively learning the pledge of allegiance, Mr. Smith asked what were The Ten Commandments of Procurement that you adhere to that were absolutely, unarguably, true under all conditions (and offered a prize for the best set of commandments submitted).

Now, this is a challenge, because your commandments are, inevitably, going to depend on your Procurement religion. Just like a Buddhist is more concerned with the five precepts than the Christian ten commandments, a Procurement professional overly concerned with supply assurance in CPG is likely going to implicitly follow a different set of commandments than a Procurement professional overly concerned with risk management in Food and Beverage where contamination results in more than a costly recall. While someone is unlikely to get lead poisoning from a single model train covered in lead paint, someone is very likely to die from a severe salmonella contamination.

That being said, if you are a devout Christian Procurement professional, there is a set of Procurement commandments you likely follow on a daily basis, and to get this topic going, SI is going to define them.

10. You shall not covet status or budget you do not have.

While you may deserve the status and the budget, coveting it does you no good. Instead, you work to find ways to reduce costs and save money so that you can work out deals to jointly apply savings against against new tools and platforms to help both parties perform better in the future. By doing right, and succeeding, budget and status will come.

09. You shall not bear false witness against any supplier.

Whether the supplier performed well, performed poorly, or performed average — the truth is never obscured and all the data is laid bare, regardless if this is a supplier recommended or selected by Procurement. And Procurement works with the organization to lean why the supplier performed as it did, what the organization did well and what the organization could have done better, and what the supplier could have done better and uses that knowledge to improve its next set of supplier interactions.

08. You shall not allow or enable fraud.

Fraud costs an average organization 1% of its revenue, but some organizations lose even more. A recent study by Oversight in 2014 found that about 1% of 10 million transactions filed during a three-month period in 2014 on corporate expense reports proved fraudulent, amounting to $13.7 million in losses. Moreover, a study by the ACFE found that in 75.6% of their cases involving expense reimbursement fraud, the perpetrator was also engaged in at least one additional form of occupational fraud. Procurement will actively work with Accounts Payable to identify systems and processes to identify, and stop, fraud and will insure that no one in its organization is committing fraud to set an example.

07. You shall not support corruption.

Procurement shall not deal with third parties that engage in corrupt activities — including bribery, money laundering, or dealings with denied parties and terrorist organizations — and will do its best to identify systems and platforms that will prevent and detect any attempts at bribery and corruption within the organization.

06. You shall not allow unsafe working conditions or unfair worker treatment.

Not only will Procurement make sure that all of the organization’s workers (full time, contingent, etc.) are treated fairly, but that the organization only deals with suppliers who also adhere to the same principles. Every supplier will ensure that each worker’s rights are honoured and that its suppliers also do the same.

05. Honour the wisdom of your elders as the platform is the enabler, not the full solution.

Old timers that did Procurement before modern internet enabled platforms and actually succeeded at reducing cost and identifying value have a lot of wisdom about the right way to go to market, the right way to qualify a supplier, negotiation techniques that work, gotchas to look for, and processes that can be made even better with new tools and technologies and they should be listened to and respected.

04. Remember the organizational strategy, and adhere to it.

Procurement’s mission is to support the organizational strategy, not to set or change it (without consensus of the C-Suite). Everything it does should be aligned with the chosen, and agreed upon, strategy.

03. You shall not take the name of the Stakeholder, your Customer, in vain.

Without the Stakeholder and its needs, Procurement would not be needed and would not exist in the average organization. It is there to meet the needs of the Stakeholder, needs which are derived from the needs of the organization’s customers. It must respect those needs, no matter how strange, and not take the name of its reason for existence in vain.

02. You shall not make idols of preferred suppliers.

Personal feelings have no place in Procurement, only performance does. If the supplier performs poorly, it performs poorly — and Procurement will not hide that fact, even if it was Procurement’s recommendation. But more importantly, if the supplier performs (exceptionally) well, the supplier performs (exceptionally) well and that will be taken into account in the next sourcing event. However, Procurement will not give itself accolades or try to convince the organization of the supplier’s greatness. The supplier will be allowed to rise or fall on its merits (and performance).

01. You shall have no process before The process.

Procurement will have a process for sourcing organizational goods or services, and will always follow that process, even when sourcing goods and services for itself. Procurement is not above the process.

Only Supply Management Has a Future

In yesterday’s post we said that Procurement is Doomed, Entombed, and Marooned and we meant it.

No employee is going to send a paper request for authorization to Procurement to purchase a new phone when his dies, to authorize a laptop repair when his breaks, or to detail his need to purchase a few cases of paper when an emergency print run has to be done in house because the delivery from the printer got lost. They’re going to go online to Amazon or Office Depot or Apple and just order the product or schedule the service they need, and schedule the (same-day) delivery when they need it.

No analyst is going to wait for the quarterly market report from the old-school analyst firm when up-to-date online indices with past, current, and projected trends are instantly available at the click of a button. Another p-Card charge and it’s in their hands.

When demand increases rapidly, Sales isn’t going to wait for Procurement to negotiate a better logistics rate with a current carrier, they’re going to phone up the supplier and ask for expedited delivery on as many units as they can get their hands on.

And if a critical project requires additional contingent labour to be completed, HR is going to phone up the trustiest supplier in their rolodex (even if it is the most expensive) or go online to talent marketplaces to find talent for deliverables that can be outsourced and just get it done.

And so on. Procurement is doomed, entombed, and marooned.

But Supply Management is not. (And that’s why Sourcing Innovation is all about Next Generation Supply Management — the doctor saw the beginning of the end for traditional Procurement long ago and has been working hard, year after year after year, to educate you on what you need to do to transform your organization into an industry leading Supply Management organization that will not only survive, but thrive and get its seat at the table).

You see, while Procurement is focussed on buying for the organization, Supply Management is focussed on helping the organization buy. While Procurement is focussed on supply, Supply Management is focussed on supply assurance. While Procurement is focussed on supplier management, Supply Management is focussed on supplier development. And while this may sound the same, as the differences appear subtle at first glance, nothing could be further from the truth. Let’s take them one by one.

Before the age of the internet where an employee could go online, do a few searches, and not only quickly find the product she needed (and get it delivered next day), but find it at a good price too, it was difficult to research suppliers, research market pricing, cut a purchase order, and get the product in a timely manner. Without up-to-date knowledge on the supply market, market pricing, and delivery options, buying something was quite a hassle and many employees and departments were happy to hand off as much as they could to Procurement. But not anymore. People believe they can do it faster, better, and cheaper if they do it themselves — and a Procurement organization that tries to say otherwise is not looked upon very lovingly. However, a Supply Management department that realizes this and instead looks for ways to empower employees to do their own buying in a way that allows them to increase compliance is appreciated. A Supply Management department that finds a single platform that can integrate the marketplaces employees normally buy from with preferred vendor platforms, organizational pricing, and push on-contract and preferred products to the top of the search results is appreciated. Employees want one-stop-shops to buy their office supplies, software, electronics, and incidental needs just like they want one-stop-shops to book their air travel, shuttles, and hotels on a business trip. A Supply Management organization that enables that is cheered.

Moreover, a Supply Management organization that walks into Marketing and offers to teach them how to disaggregate creative spend with editing and print services so that each can be managed appropriately, which allows savings in non-critical categories identified and applied to new projects or top creative talent to insure better results, is welcomed compared to a Procurement organization that just wants to put the spend up to auction or consolidate it for discount leverage.

In addition, as SI has been stressing for weeks now, while supplier (relationship) management is important, supplier development is even more so. Having a supplier that comes to you at the first sign of trouble and works with you to resolve the issue before a delay or disruption occurs is good, but having a supplier that is able to constantly identify potential issues in its supply chain and work with its suppliers to prevent them is even better. Having a supplier that can implement any design for a custom manufactured component that you throw at it is good, but having a supplier that can provide suggestions on design improvements that will allow for lower cost materials and cheaper manufacturing processes without sacrificing quality is better. And so on.

In other words, while Procurement is focussed on cost reduction and control, Supply Management is focussed on value generation, of which cost is just a tiny component. And that’s why Supply Management has a future while traditional Procurement is doomed, entombed, and marooned.

Procurement is Doomed! Entombed! Marooned!

Apparently the recent Procurement Pub Debate, summarized in a recent post from Mr. Smith, ended up with a win for the pro side. But the harsh reality, is that Procurement, at least as we know it, is doomed, ready to be entombed, and marooned on a desert Island. The pro side can be as blindly optimistic as they want to be, but it doesn’t change Procurement’s future.

As the supporters of the doomed side note, with modern web platforms:

  • it’s easy to buy what you want, when you want, for the price you want,
  • up-to-date market information lets you know how the price compares to other offerings on the market, and
  • peer reviews and opinion crowd sourcing lets you know how likely it is to fit your needs.

In other words, from an average employee’s point of view, who needs Procurement?

Furthermore,

  • inflation is back, so Procurement is not going to be able to negotiate significant cost reductions, or do much better than a market auction across a sufficient supply base,
  • risk is increasing, and organizations’ think it’s more important to focus on Risk Management in the Supply Base than Procurement, and
  • the market is becoming more digitized by the day and the organization would rather focus on expanding sales through the largest sales channel out there than worry about cost control as they see increased revenue as the quickest path to greater profit in a time of inflation.

So, despite the continued need of an average organization to insure that the organization can continue to acquire the supply necessary to meet customer demand, Procurement is increasingly being seen to be of secondary importance in an average organization and this trend is only going to continue. As it stands now, Procurement has peaked well below the level it should have reached. There is no future for Procurement. Unless, of course, it evolves. How? Stay tuned!