Monthly Archives: June 2016

Time to Remove e-Auctions from the Strategic Sourcing Toolkit

Time to face the music. There’s absolutely nothing strategic about them.

Strategic Sourcing is supposed to be strategic. Something that is strategic is something that is carefully designed or planned to serve a particular purpose or advantage. What is carefully designed about an auction, and where’s the advantage from a strategic supply management perspective?

Auctions are not a new invention. Recorded auctions are over 2,500 years old, having been recorded as early as 500 B.C. by Herodotus, who recorded the Babylonian auctions for women for marriage. Shortly after, Romans adopted the practice to auction off the spoils of war, including slaves. (So, not only are you using something non-strategic and ancient you are using something that had its beginnings in oppression and slavery. Think about that for a moment as you write your annual Corporate Social Responsibility report.)

The only difference between the auctions of old and the reverse auctions of today is that instead of selling, you are buying and asking bidders to progressively lower their bid until all but one drop out. And instead of oppressing people, you are oppressing corporations as sellers are told they do not get any business at all unless they bid the lowest, and adhere to that bid, no matter what the toll on them.

And when they were invented, there was no careful design. It was merely a way to close multiple transactions in a short time and get the best price for the best “merchandise”. No thought about how that best price would be obtained ever entered the picture — it was up to the bidder to figure out how he (yes, *he*) would honour his bid.

And there is no advantage. The advantage that auctions are sold on is “savings“. But, as per our last post on Savings Machine or Inflation Nightmare, there is no savings in an auction. None. Any savings identified are illusory at best, and hard costs that will have to be paid in the future at worst.

In fact, what you actually get is risk. Lots of risk. Quality. Compliance. Liability. And, depending on the auction, possibly a dozen other types of risk. How so? Download Sourcing Innovation’s latest white paper on The Dangers of e-Auction, sponsored by Trade Extensions, today and find out the many, many hidden dangers of e-Auctions which could quickly become Procurement’s worst nightmare as long as they remain in the strategic sourcing toolkit.

The Direct Procurement Challenge Webinar is One Week From Today!

That’s right, only one week until the upcoming ISM webinar, sponsored by Pool4Tool, where both the doctor and the prophet will discuss:

  • the direct procurement lifecycle
  • how it is different from the classic indirect procurement lifecycle
    (which was cost-centric perfect for indirect)
  • key requirements to support direct procurement that indirect procurement platforms lack
  • key technological capabilities to truly manage the direct procurement lifecycle
  • 15 ways your platform likely isn’t up to snuff
    (especially if it’s a platform built for indirect)
  • the consequences of using the wrong platform for Procurement platform
    (which can leave a lot of blood on your hands)

The fact of the matter is that you wouldn’t use a Chihuahua to herd sheep, so why are you trying to use a mouse to herd cats (which is mission improbable anyway)? (This is exactly what you are doing if you try to use an indirect sourcing platform for direct sourcing.)

Join our webinar next Tuesday on June 28, 2016 @ 11:30 AM PT, 14:30 PM ET, and 19:30 PM BST (UK Time) and find out why your procurement platform may not be doing your Procurement organization justice!

All attendees receive 1 CEH certificate. This is an ISM webinar after all.

Register today. Don’t delay!

Why Good Procurement Goes Bad. Part II.

Most poor-performing Procurement departments don’t start out bad. They start out with the intentions of doing a good job, at least as good as any other department in the organization (although not necessarily a better one), but somewhere along the way, they stumble, and sometimes fall. And since there are not enough best-in-class Procurement organizations, (8% is a small number), and since there are theoretically more good people out there, we have to ask: why does good Procurement go bad?

Yesterday we covered two major reasons good Procurement departments go bad: strategic blinders (like Excel, where nothing good happens) and efficiency over effectiveness (where process is adopted for process sake and no other reason). Today we’re going to cover two additional reasons.

Relationship Blinders

Sometimes a good Procurement department will start by segmenting spend into strategic and non-strategic, do the right thing and start negotiating the strategic, and then treat those suppliers as strategic suppliers. When the suppliers deliver a more consistent, somewhat higher quality product, at a lower price than was delivered before, those suppliers will be looked upon as partners and, as the relationship cements, the relationship will not be questioned over time. Contracts will auto-renew at annual increases to cover “inflation”, but sometimes the “inflation” will also cover “margin inflation” and the quality of the product will not increase.

Even strategic relationships need to be reviewed and the suppliers subjected to a (360-degree) scorecard. The supplier might still be the best choice, but needs to know that the relationship is being monitored and the goal is that both parties continue to benefit, not just the supplier.

Plus, if a customer never goes back to market, it will never know if new suppliers with production capabilities and innovation capacity hit the market and if some of the award should be shifted to a new supplier to help them become a strategic supplier for the organization’s next generation of products down the road.

Values become Dogma

Values are good things. They should be respected, adopted, and implemented. But they should never become dogma. For example:

Relationships first
is a great idea, especially with strategic suppliers. But, as per above

Relationships above all else.
can blind an organization to faltering performance or better alternatives. Similarly:

Value-add
is great to get in every negotiation and can be a differentiator but

Value-over-customer-desire
can simply increase cost. If the customer is buying a “disposable” product that they plan to replace in a year, they may not want a two-year warranty, and focussing on “value” that the customer doesn’t want just increases cost.

There are other examples, but you get the point. Just like an organization can go process-crazy, they can also go dogma-crazy. Too much becomes as ineffective as too little.

For a Procurement organization to get good, and stay good, it has to reevaluate its processes on a regular basis and not get blinded by its own good intentions.

Why Good Procurement Goes Bad. Part I.

Most poor-performing Procurement departments don’t start out bad. They start out with the intentions of doing a good job, at least as good as any other department in the organization (although not necessarily a better one), but somewhere along the way, they stumble, and sometimes fall. And since there are not enough best-in-class Procurement organizations, (8% is a small number), and since there are theoretically more good people out there, we have to ask: why does good Procurement go bad?

Strategic Blinders

The first thing a new(ly formed) or re-staffed Procurement organization does is try to get organized. As they have not yet acquired a Procurement tool, been given budget for a Procurement tool, or even know the right tool exists, they turn to the tool they know — the spreadsheet. Spreadsheets really limit a Procurement professional’s view of what can be done with modern technology — how efficient Procurement can be, how effective they can be in their negotiations with correct and properly weighted bid and survey data, and how complete they can be in their supplier evaluations (as they don’t have to rely on one size tis all surveys for each supplier, which easy supplies different products and services). Spreadsheets are a Technological Damnation, often result in 20 Million in the scrap-heap, and sometimes cost you billions. There’s no such thing as good spreadsheets. The strategic technology choice to get started is often the technology choice that ends it all.

Efficiency over Effectiveness

Process is good, often very good. It increases efficiency, creates operational standards, and provides a repeatable baseline for junior buyers to follow. And no organization should be without processes. But sometimes, in their haste to be the best, Procurement departments wanting to do as much as they can as fast as they can often rush to get as many processes as they can in place to be as efficient as possible. But not all processes, even best-practice processes, are right for the organization. Adopting the wrong process and running with it can hinder Procurement’s effectiveness beyond no process at all. Having a process that all spend between 20K and 200K goes to an auction, while efficient, will be very ineffective if the wrong categories are put to auction.

Another process that blinds Procurement departments trying to get spend under control is the classic 3-bids and a buy. It is better than no bids at all, but there right number of bids is not always 3. For some events it’s 30 — as many supplier who can supply satisfactory non strategic products. For some events it’s two — because the strategic nature of the custom-manufactured nature means that only a couple of suppliers are up to snuff to start producing today.

And even if the process was good in the beginning, a process that goes unchanged for years and becomes an unquestioned routine can miss new opportunities. Gathering the same old, same old intelligence from the same old, same old sources can miss new intelligence from new sources that could identify new, innovative suppliers and products that could be game changers.

These are just a few reasons good Procurement goes bad, but not the only reasons. In Part II, we will explore more.

Marketing Needs Procurement Now More than Ever!

On June 7, 2016, K2 Intelligence released An Independent Study of Media Transparency in the U.S. Advertising Industry on behalf of The Association of National Advertisers (ANA), and it is scary.

If you think that the antics of the Mad Men and the mis-leading management consultants in the House of Lies are bad, if only it was as bad as seen on TV. And by that the doctor means that if that was as bad as it gets, it wouldn’t be so bad. The truth is, as bad as you can imagine the situation is when it comes to agencies handling, or more accurately, mishandling your money, it is much, much worse.

Just like financial analysts, financial consultants, wealth management advisors, and other non-financiers don’t have to advise you on what’s best for them (and, in fact, usually advise you on what will add the most cash to their compensation, see this great expose by the one and only John Oliver), your agency has no legal authority to advise you on what’s best for you or spend your money in the best way possible. The most they have to do is deliver the artifacts in the contract and do so in a manner that can be reasonably justified as meeting the requirements (or at least in a manner that a lawyer can argue meets the requirements).

They don’t have to tell you that they get rebates for volume business to their suppliers that they don’t pass on, financial incentives in the form of free media or cash, and that they sometimes take on transactions as principal transactions, outsource all the work, and sell it back to you at markup. The talent they offered up might not even touch your work! Many agency principles hold equity stakes in the media suppliers they use and so profit twice off of your work. Some respondents to the survey also noted that their obligations to their respective Agency Holding Companies were in conflict with the interests of their clients (and had no problem with this). They had no duties beyond the contract. WOW!

This is a rather intensive report at 60 pages, but the summary speaks for itself. Procurement needs to take heed of what happens when agency relationships are not vetted, very well defined, carefully managed, and fully transparent — especially with respect to the cashflow.

And it needs to make sure the organization has Agency Management solution, and that both Procurement and Marketing make use of it.

To understand why, read the free report that is An Independent Study of Media Transparency in the U.S. Advertising Industry.