Monthly Archives: August 2015

How Should Your Procurement Department be Organized?

Earlier this week we talked about the importance of a Procurement Centre of Excellence (CoE) with functional excellence in key processes that can elevate the efficiency and effectiveness of the organization against its goals and objectives (as well as stating that this does not mean you form CoEs within CoEs as that’s just redundant), but this whole topic begs the question, how should the Procurement department be organized?

When it comes to a departmental organization, there are three common theories as to how a Procurement department should be organized, which included decentralized, centralized, and centre-led. These days most consultants either preach centralized or centre-led. There are advantages and disadvantages to each model, and the best model will depend on the needs of the organization and, often overlooked, the suitability of the organization to the CPO’s leadership style.

In a centralized Procurement model, all Procurement is directed through a single, central organization. This has many advantages as it allows corporate spend to be fully leveraged, sourcing processes to be standardized, team knowledge to be captured and documented, and best practices to be improved through continual execution by a central team. However, the localized expertise that was specific to a business unit is often lost, maverick buying increases when local site managers do not agree with the centrally mandated decisions (and there is no technology platform that can be used to enforce the decisions), and reaction time to localized disruptions increases.

In order to try and minimize, or negate these disadvantages, some of the more advanced Supply Management organizations moved to centre-led models to try and achieve the best of both worlds. In the centre-led model, the organization forms a a centralized procurement centre of excellence (COE) focused on corporate supply chain strategies and strategic commodities, best practices, and knowledge sharing that leaves individual buys and tactical execution of categories that are not worth sourcing centrally to the individual business units. With appropriate category balancing, the centre-led model is believed to provide the best of both worlds — all of the advantages of the centralized and classic decentralized model of Procurement with minimal disadvantages.

However, until the specific needs of the organization are analyzed and the management style of the CPO is taken into account, it is hard to say which model is better. For example, if the organization is very centralized in its operations, and the individual departments, or heads of, are all in the same geographic area, then the perceived disadvantages of centralization are not there. There are no geographically dispersed units that can easily ignore the directives from a centralized organization, no delayed reaction times as the centralized team can quickly interact with the individual departments, and the localized expertise can be involved whenever it is needed. Moreover, there’s nothing to prevent a centralized organization from having a centre of excellence. The centre of excellence (CoE) is simply part of the Procurement team that focusses on best practices, market intelligence, education, and support for the rest of the team.

So the answer is, it depends on what’s right for the organization, as long as what’s right is identified, and built, with the goal of enabling and supporting a CoE in mind.

In Sourcing, B2C cannot replace B2B, but B2B can learn from B2C.

As long as it doesn’t go app crazy. For years the doctor has been hearing about how mobile is the next big thing in Procurement, and even though mobile hasn’t really caught on, now a handful of vendors are staring to talk about how apps are the next big thing in Procurement. This is a bit ridiculous. When it comes to Procurement, there’s not an app for that. Can you really get market intelligence from an app? Can you really do spend analysis in an app? Can you really do should cost modelling in an app? Think about what “apps” on your “smart”phone really do. Take a few notes. Convert a few units. Play a simple game. Check your bank balance. Store your boarding pass. Simple, discrete tasks. Nothing about strategic sourcing or enterprise Procurement is app friendly.

But enough ranting. Today’s post is about how B2B can learn from good B2C technology. In particular, how B2B can learn from B2C for:

  • total purchase cost calculation
  • order and requisition management
  • collaboration management

These days, thanks to a number of web sites, consumers are becoming smarter when it comes to analyzing the total costs associated with big purchases like cars and houses as a number of sites, including AAA/CAA and BoA/CMHC, have calculators that allow the buyer to understand the total cost of buying, and maintaining, the vehicle or house they are considering including taxes, insurance, and other incidental costs. These consumers, who are not experts in car or house buying are using templates built by people who are experts to do total cost calculations.

B2B Procurement can learn from this and create sourcing and procurement platforms that come with built-in cost model templates for common categories of direct goods and RFX templates that can be used in sourcing common indirect categories to ensure that the organization asks the right questions, collects the right costs, and makes the right decision. The reality is that across an industry, indirect spend categories are common and there’s no reason that an organization can’t source a solution with pre-built templates for the common indirect categories it sources, which will likely constitute 90%+ of indirect spend. Unless the category is high-dollar, there’s not much point paying a large amount of money to a third party organization, even if the third party is an expert, because it is not likely that the savings will be enough to justify the cost. For most indirect categories, this is likely to be the case.

In 2009, AMR did a study that found that, in an average organization, 30 cents to 40 cents of every negotiated dollar of savings never hit the bottom line. There are a number of reasons for this which include, but are not limited to expedited shipping, volume increases, and maverick spend. In many cases, the biggest culprit is the latter — maverick spend. Maverick spend typically happens because a purchaser is unaware of a contract, unaware of how much it costs to buy off contract, or frustrated with the difficulty of buying on contract with current systems. (It can also be the case that the purchaser doesn’t care because they’re not in Procurement, but this usually isn’t the case.)

This situation can easily be rectified by incorporating some features of best-of-breed consumer shopping technology, such as that employed by Amazon.com, that not only allow a buyer to find the product or service they need, but see which of those are on contract. In other words, just like a search on Amazon.com can find all instances of that book you want, and, if you desire, only show you those eligible for Prime, a Procurement platform that enables a buyer to find all instances of a product they are searching for in an integrated catalog that contains all products and services available from approved vendors — whether in a punch-out site, an online database, or an offline catalogue (maintained by Procurement) — and see which of those are on contract can enable on-contract requisitions and purchase orders. Plus, since it will be easier to buy on-contract than to buy off-contract, there will be a lot less circumventing of the system.

And when it comes to collaboration, B2B can actually learn from best-of-breed professional, and even social, networks and communication platforms. For example, Linked-In not only allows a user to post their resume and connect to fellow professionals, but it also allows them to join discussion groups that allow them to post relevant information on a topic and comment on it. And sites such as join.me and Webex allow for real-time virtual meetings and collaboration.

Incorporating these types of technologies into a Procurement Project Management program allows for collaboration to not only take place on line, but all collaborative communications to be maintained and archived in the platform. This not only helps with conflict resolution, but it goes a long way to preventing disputes in the first place as the platform captures all communications and allows each party to see what it agreed to.

B2B technology can be improved by taking the best B2C innovations and appropriately incorporating them into B2B platforms, but it has to be done intelligently. Not all consumer technology is B2B appropriate, especially if it was designed for C2C purposes, and apps are prime example. However, as it has historically been the case that many innovations start in the consumer space, it’s no surprise that B2B can be improved by appropriating appropriate consumer technologies. It just has to be the right technologies appropriated in the right way and put to the right use.

Procurement Myths Debunked! Part II

Over on spendmatters.com/cpo, the maverick has been doing a great job knocking out Procurement myths one by one, with twenty (20) down and five (5) to go. While the doctor did not co-author this series, as per a post this spring, he did consult on them and believes that all of these are myths that you need to be aware of.

The next 10 myths are:

Of these, the doctor‘s favourites are:

Technology is not just a tool, it is a transformation engine that allows its users to be more efficient, effective, and transformational. It’s a process enabler, and the process at the same time. The level of your technology is directly proportional to the level of your Procurement maturity.

With the right platforms that enable the right processes, Procurement can be efficient and effective. It can also save money and provide increased value generation opportunities. For example, using technology enabled marketplaces to identify more sustainable suppliers can not only cut costs but also increase value as it gives marketing more to work with and allows the organization to increase brand value, which correlates to sales, with less effort and less money.

Finally, there is no one taxonomy, and if there was, it definitely wouldn’t be hierarchical. Products can be grouped by function similarity, component similarity, and department or geographic utilization, for example. Services by function, geography, and strategic nature, for example. Products and services can be mixed or kept separate. The best category definition at any given time will depend on market conditions, supplier capability, and projected utilization over the expected duration of the contract.

Supply is fluid, and Procurement must be as well to keep up. And it definitely must avoid the traps laid by the common Procurement myths.

Procurement Myths Debunked! Part I

Over on spendmatters.com/cpo, the maverick has been doing a great job knocking out Procurement myths one by one, with twenty (20) down and five (5) to go. While the doctor did not co-author this series, as per a post this spring, he did consult on them and believes that all of these are myths that you need to be aware of.

The first 10 myths are:

Of these, the doctor‘s favourites are:

While avoiding maverick spend is generally a best practice, sweeping it under the rug, even if it is small, is not a best practice — nor is mandating a stop until you understand why there is maverick spend. Is it because the buyer doesn’t know, doesn’t care, or thinks he has found a better deal? If the buyer didn’t know, then there is an issue with the process (of communication) somewhere, and fixing it will prevent future maverick spend. If the buyer doesn’t care, then there is a personnel issue that needs to be dealt with. If the buyer thinks he has a better deal, why? Lower cost, higher quality, quicker acquisition, or false perception. In the first three cases, the Procurement pro needs to investigate to see if there is a new opportunity she was not aware of, in the last case, an education program is probably required.

While spend is important, it is not the most important thing. Organizations exist to make profit for their shareholders. Profit is revenue minus expenses. That means that profit is increased when spend is decreased, or revenue is increased faster than spend is increased. The best way to to increase revenue faster than spend is to increase value. That’s why value creation, and not spend reduction, is the most important thing.

Savings are not a means to cut budgets — they are a means to find additional revenue for investment into opportunities for future value creation. These days, no department has enough money, and no one has enough money, or time, for training. If budget is freed up, it should be used to invest in training and new technologies, not to blindly increase shareholder dividends.

But these are just a few of the myths. More to come!