Monthly Archives: September 2015

Procurement 2020: We’re Off Track, But Can We Get Back on Track? Part I

As per our recent post that asked if we were on track for Procurement 2020, we’re off track. Way off track. So far off track that we can’t even see which direction the track was in.

Hackett told us way back in 2008 what we needed to do to get where we needed to be, but most Procurement organizations are still nowhere close to where they should be, even though most of it is easy-peasy.

Business Process Sourcing

This is easy to get under control, it just requires some good planning and process mapping. Specifically, an organization has to map all of its processes, define the knowledge-centric strategic aspects versus the manual-processing tactical aspects, and then figure out the benefit of each part of the process with respect to the cost.

If the benefit is low, the cost is high, and the process is tactical, it is a prime candidate for outsourcing. If the cost is low, the benefit is high, and the process is knowledge-centric, the process is a poor candidate for outsourcing. Organizations need to maintain their knowledge and strategic advantages and outsource that which brings them no benefit when performed internally.

An organization that takes the time to map its processes and understand them can find the right candidates for outsourcing and manage them appropriately.

Supply Performance Management (SPM) & Supplier Relationship Management (SRM)

While this was a major oversight in first generation Sourcing systems, this is a common module in second generation Sourcing systems and over the past few years a number of expert consultancies and solution vendors have come on the scene that can help you get your SPM and SRM processes up to snuff. They have n-step processes that can be used to help you get an understanding of where you are on the SPM and SRM maturity curves, what you can do to get better, and how you can figure out how you compare to the market average and the best-in-class.

In addition, there is a lot more information on SPM and SRM, what it is, how to do it, and the importance of it to your supply chain on the various blogs and publications then there was a decade ago. Those who seek out and make use of this information can progress well ahead of the curve. (And a couple of overviews will be made freely available to SI readers over the next month or so as part of a larger offering … stay tuned.)

Knowledge Management

A decade ago, it was unheard of to have more than half of spend under management, and if you said that one day you’d have integrated spend data, you risked being put in an asylum. However, with modern platforms that provide an organization with the ability to not only push all payments through a common platform, but all purchases through a common platform that supports integrated internal and external catalogues — whether they be cXML punch-out, EDI, flat-file, data-base driven, or custom entries — things have changed. When all requisitions and purchases can go through one platform, all spend gets in one database, and the organization has visibility into all of its spend and can plot a course to get the majority of its spend under management.

In other words, we can return the engine to the tracks, but an effort will have to be made to do so. How much of an effort? Stay tuned for Part II.

Consumer Damnation 74: Demand Planning

Each group of customers are a damnation upon themselves, and they will get the attention they deserve, but demand planning to meet customer demand is its own damnation. Why is this?

Traditional demand planning models require historical data.

To be precise, they require a fair amount of historical sales or usage data in order to be accurate. And sometimes a lot of sales data. But with new product introductions coming fast and furious every day, there are so many categories without a decent amount, if any, historical sales data that it’s hard to make good predictions. Now, one can always use the most similar product, or the product the new product is expected to replace, but this weakens the model and the confidence in the result.

Traditional demand planning models require market predictability.

To be more precise, they expect that the market will not substantially change. That the needs will stay the same. The utilization or replacement curves will stay about the same. That a competitor won’t substantially increase or decrease their market share overnight. That a revolutionary new product won’t be released that causes a huge market shift.

Traditional demand planning models require market foresight.

In addition to requiring historical data and market predictability, traditional demand planning requires market foresight. Knowledge of potential competitor product introductions that could change the market demand. Knowledge of innovations that will begin demand shifts. Knowledge of general market conditions that could delay replacements or result in reduced demand due to cash availability.

Demand Planning requires knowledge of the expected price point.

Most products are services, especially in the end consumer market, are very price dependent. People will pay more if they perceive more value, which could be better quality, more functionality, or owning an iconic brand, but if they don’t perceive more value in your product which is priced higher than a competitor’s product, don’t think for a minute, even if they bought from you last time, they won’t shift. And price prediction is difficult if it is dependent on production cost, which can be variable if transportation can involve unpredictable fuel surcharges, raw material prices can skyrocket due to insufficient supply as a result of a disaster, and labour prices are dependent on contingent labour to meet demands at peak periods.

In other words, sometimes demand prediction models fall flat, and demand projections come from a place that can only be seen by a proctologist with a flashlight, so how do you effectively plan for those as a Procurement Professional? You don’t. It’s damnation.

Two Weeks to the Trade Extensions Workshop. Two Weeks to Freebies.

And two weeks to the next Sourcing Innovation white paper on Complex Sourcing. Are You Ready? The first of many great freebies coming your way at the TE Workshop (and the first of two freebies coming your way from SI. What’s the second? Stay tuned. All I can tell you now is that it is Awesome! TE has spared no expense this year in making sure that you as a practitioner get what you need to tackle complex sourcing.)

That’s right, those of you who took up Trade Extensions’ exclusive offer to practitioner readers of Sourcing Innovation and Spend Matters UK and are attending the workshop will be the first to get SI’s new white paper on Complex Sourcing.

Following last year’s big white paper on Optimization, What Comes Next?, still freely available compliments of Trade Extensions, which introduced you to six new ways that optimization will continue to identify new opportunities for Sourcing that you likely haven’t even thought of, this year’s white paper dives into what complex sourcing is, what platform capabilities are required to support complex sourcing, and why complexity is no longer the exception but the norm.

This paper, which builds on Mr. Smith’s soon to be classic paper on What Defines Complex Sourcing, dives deep into how categories are complex, how the complexity requires new processes and new solutions, and why first generation solutions are not ready for what comes next.

And not only will you as an attendee be the first to get the doctor‘s new white paper, but you will also get to hear Mr. Smith talk about the future of Procurement, which we all know is Doomed! Entombed! Marooned!. (And then, if you are so inclined, discuss the subject with the doctor in person.)

See you in two weeks!

Provider Damnation 70: Outsourced Providers

Dear outsourced service provider, you didn’t think that Carriers and 3PLs were going to get all the attention did you? You can cause your clients just as many headaches as these providers, if not more. In fact, you can also cause them cold sweats, fever, panic attacks, and even heart attacks if you play your cards right (and very, very, wrong for the client).

Outsourced Serviced Providers, especially those that are experts in what they do, can be a boon to an organization trying to get some quick savings to hit some (overly) aggressive (and stupid) savings targets set by the C-Suite (that doesn’t realize Procurement should be about maximizing value, not maximizing short term savings). This is especially true if the Procurement Service Provider (PSP) outsourced to is a GPO (Group Purchasing Organization) that already has contracts for goods and services in a number of categories required by the organization at rates lower than the organization is paying now, as any categories the organization can switch over result in instant savings. It’s also true if the provider is an invoice and payment processing provider that is fully automated and can accomplish the same task as the organization at half of the price (because 2 workers can do the work of 10 and the platform subscription is only the annual cost of 3 worker’s salaries) and free up valuable resources in the organization to focus on strategic value identification activities and not tactical processing.

But these benefits come at a cost.

Handing over a category means losing control on that category.

GPOs are going to select providers that please the majority of their customers, where majority really means the financial majority. So, if the GPO has a few heavyweight Global 3000 clients that account for a significant amount of its annual revenue, guess which clients get the greatest say and the contracts they want? (Hint: Not you!)

Handing over a contract means limited control over a slew of categories.

A GPO is only going to take a contract if it can make money. Since it typically charges a small fee per transaction, it knows it needs a lot of transactions to make money. As a result, it is going to demand a set of categories that mean a minimum annual spend, and the organization is going to lose a lot of control on those categories for the length of the contract.

Handing over processing hands over control … and control over realized savings.

You are dependent on the provider to do an m-way match and detect over billings, duplicate billings, and failure to account for return credits and volume-based discounts and rebates. If they just get the invoice and pay it blindly, and the invoice for a multi-million category is still at last years prices, you could lose hundreds of thousands of dollars.

Handing over processing hands over knowledge.

Knowledge of tactical procurement processing operations, best practices, and the best and worst suppliers from a Procurement perspective is now in the hands of the provider. As tactical processors are displaced and leave, and more and more focus is put on other Supply Management activities, the organization becomes more and more dependent on the provider for even simple tasks. This makes it incredibly hard to pull the function back in house if it ever wants to, or to even switch to another provider in the future. It’s like giving the supplier Power of Attorney. Not a good thing.

Handing over sourcing is giving them the keys to the castle.

Losing control over tactical processing is bad enough, but losing control over sourcing of a set of indirect categories makes you ultimately dependent on the provider. As the great Angus and Malcolm Young said twenty-five years ago, the service provider, she got you by the …

Organizational Damnation 59: Warehouse Management

This warehouse frightens me.
Has me tied up in knots …
   Dave Matthews Band

And if your warehouse doesn’t frighten you, obviously you haven’t taken a good look at it.

The warehouse is responsible for inventory, and inventory is very costly even when it’s well managed. Some studies of inventory (carrying) costs have estimated inventory costs to be 25% of the value of the average inventory level. Having your inventory cost you up to 25% of its value is a damnation in itself! That’s why many organizations have been migrating to JiT (Just in Time) inventory strategies. But this brings its own problems — and is another source of warehouse damnation (but we’ll get to that).

If an organization aggressively pursues a JiT inventory strategy, even a slight delay can result in a stockout which can result in production line downtime if the product was needed internally or a loss of sales if the product was for sale and needed on the shelf.

Now, besides costing a small fortune, why is the warehouse a damnation?

They control product availability.

If they take their time unloading product, temporarily misplace product, damage product, miscount product, or store it in the least efficient location, the product won’t be available when you need it.

They are the final product quality check.

If they don’t carefully check deliveries for apparent damage, don’t return defective units (and accidentally restock them), and don’t perform any quality checks they are supposed to perform on delivery, defective (or tainted) product can get in the system, get shipped to customers, and give you a black eye.

They control product delivery.

If they take their time loading product, or get behind in orders, customers won’t get their product on time and you will be blamed even if the order arrived on time.

They have a huge impact on inventory cost.

You can move to JiT and optimize inventory levels, but inventory cost is the overhead costs and the depreciation costs, and the overhead costs are the space utilized, the manpower employed, and the operational overhead. If poor planning requires 50% more manpower, on average, than is needed, that bumps up cost. If poor organization means each product retrieval or shipment takes 50% longer than it should (because the warehouse is not lean), that bumps up cost. If poor operational policies or systems means that it is heated 24 hours a day, even though only staffed 10 hours, that bumps up cost. Warehouse controls all of this, not Procurement.

Even a warehouse staff with the best of intentions can cause Procurement the worst of nightmares. It’s yet another organizational damnation that you need to deal with on a daily basis.