Again, Tard?
Monthly Archives: June 2016
Supply Risk Management Can Not Be Siloed
In our post on Playing With Fire, we indicated that your supply chain was full of hidden risks, ready to materialize unexpectedly at a moment’s notice and bring your supply chain to a crippling halt as your bank account bleeds dry trying to deal with the damage. Risks that, in many cases, could be mitigated and prevent the organization suffering and, in some cases, losing 100 Million to fines alone.
Why? Because the average organization is not spending the time and resources required to properly manage risk, or if they are, they are not managing risk appropriately. There are a number of reasons for this, including:
- Lack of Resources
most organizations do not have enough people with the right expertise to effectively manage and monitor supplier sustainability efforts, and sometimes this is because there just isn’t the budget for the resources - Lack of Time
most of the skilled resources in an organization barely have the time to do their jobs properly, and since risk management is hardly ever anyone’s primary job, it typically becomes a side issue - Lack of Immediacy
even though there may have been hundreds of smaller incidents in the supply chain that resulted in small fines, unexpected cost increases, disruptions, and minor brand damage, if no single incident has been severe enough to get the C-Suite’s attention, something else will always be higher priority - Lack of Cohesion
most risk management and sustainability efforts grow organically over time as different functions encounter risks, regulations, or sustainability objectives that need to be addressed — this results in a fragmented approach to risk management that is inefficient and ineffective
But regardless of the reason, fragmented risk management does not work. It’s the biggest reason that many organizations are losing millions, if not billions, of dollars a year due to supply chain incidents (that could have been caught or significantly reduced with effective supplier management). With every department running off in their own direction, no one knows what is, and is not, being done. And that’s a problem. But it’s one that can be addressed. How?
Check out Sourcing Innovation’s latest white-paper on Why Sustainable Supply Risk Management Cannot Be Siloed: Lessons From Leaders Who Beat the Odds, sponsored by Ecovadis, for the answer.
Your Procurement Sucks … and Here are 3 Likely Reasons Why.
Yes, SI is trying to get your attention and yes there is the vanishingly small possibility that nothing SI says in this post applies to you because you are the top 8% of the top 8%, but let us face facts. The possibility that the entirety of this post does not apply to you is significantly less than 1% and we can say with near 100% confidence this post will benefit you.
Procurement May Not Be Dead (as per our four part series on Procurement is Dead! Long Live Procurement!) but that doesn’t mean your job isn’t if you don’t eliminate the situations on this list and enter the modern age of Procurement. So take careful note of not only what is wrong with your Procurement, but the hints we give you for addressing these problems.
You’re drowning in paperwork
Invoices. RFPs. Catalogues. It’s not the 90s anymore, it’s the teens. If you don’t have a modern e-invoicing, e-RFX, and e-Catalog/e-Shopping solution there’s no hope of you ever getting your Procurement on track because you’ll never be able to process the mound of paperwork that is getting bigger and bigger every day as your organization grows and more invoices go in, more RFPs go out, more suppliers respond, and more suppliers send you their catalogues that get bigger every year.
You’ve never sourced Marketing, Legal, HR, or any spend outside of MRO and For-Sale Products
If all you are sourcing are office suppliers, MRO, and resale products, you are likely only sourcing half of the organization spend, at most. These areas, T&E, and other areas you are not sourcing are accounting for greater and greater portions of organization spend. Many studies indicate that 10% is the magic number for marketing spend. With more and more work being assigned to contingent labour, consultants, or outsource partners, this can be 20% of spend. T&E is also 10% of spend at many organizations. Then there is legal, which can be quit high, p-Card spend, event, spend, etc. If Procurement is only responsible for half of spend, why is it even needed at all? A third party can manage MRO, a GPO can manage office spend, and VMI can manage products for resale.
The only metric on your scorecard is savings.
This might have been a great metric in the noughts when inflation was essentially zero, many suppliers had inflated margins during the right-sizing craze of the eighties and the outsourcing craze of the nineties to record highs, and new suppliers were desperate to win business at any cost and double digit percentage savings were the norm in sourcing events across the board. But inflation is on the rise, hyper-inflation is around the corner, margins have been trimmed to low single digits as a result of over-use of auctions, and savings is a word that will soon only appear in the history book. We’re in the age of demand management (for consumables and internal spend), spend management (to keep cost increases in line with actual inflation), and value management (where value-added services that can increase revenue is sometimes more important than reducing spend).
If any of these situations applies to you, fix it fast, or your procurement will remain in the dark ages. Not a situation you want to be in.
e-Auctions — Savings Machine or Inflation Nightmare?
When e-Auctions were first released, they were heralded as the saving grace that Procurement was waiting for because early efforts, in the early 2000s, were always a smashing success with double digit percentage savings on almost every category and endless praise and admiration for the Procurement organization, and their astuteness in the selection of an e-Auction provider to help them find more savings than the organization knew existed.
But mature organizations know that the glory days didn’t last. The next time the auction was run on the same category, double digit percentage savings became low single digit savings, which, if the organization was lucky, barely covered the cost of the pay-per-use auction platform and the services around it. Then, a few years later, when the third auction was run, costs increased, sometimes substantially in the double-digit percentage range that almost equalled the savings found the first time around. The savings machine became the inflation nightmare — run an auction, spend more money.
Auctions were dropped like a hot potato, old-school muscle was broken out of retirement, and in a few organizations, Procurement returned to the dark ages. But now, with many mid-market companies able to afford next generation sourcing suites where pay per use starts in the four digit range and can be put on a P-card and where unlimited use starts in the mid-five figure range (and not the high six figure range), auctions are making a comeback, and the cycle is starting all over again.
But this time, those of us who have been in the game for over 15 years know how the story ends, and can honestly tell you Auctions are not a saving grace. They are an out-of-control spend nightmare.
To understand this, one has to understand why auctions worked in the first place.
- The outsourcing and rightsizing crazes of the 80s and 90s pushed more and more spend out, while oversight remained the same, and this resulted in less and less oversight on the majority of categories. As a result, suppliers could keep inflating their margins because of “inflation”, “oil price increases”, “minimum wage increases”, etc.
- The lack of market knowledge resulted in most organizations not knowing the breadth of the competition or the true production costs.
- The lack of e-Platforms meant that most organizations could barely handle 3-bids and a buy with the usual suspects each time contract renewal went up.
It was the perfect profit storm for suppliers. But with the introduction of auctions:
- Suppliers could self identify and the buyers knew the extent of the marketplace.
- Hungry suppliers with efficient processes could afford to offer the product at cost + 10% whereas long-term suppliers who believed they had no competition got fat and lazy and needed 1.3 x cost + 10% to remain profitable. (Also, desperate suppliers could offer for perceived_cost in the hopes of using the award as a loss leader for future business.)
- Running the auction on line in real time gave hungry and desperate suppliers auction fever and they often bid the majority of their margins away. So where there were 40% margins, there were 30% savings.
But here’s the thing. With respect to savings, Auctions didn’t do anything. Exposing market truths isn’t identifying savings. Reducing margins isn’t identifying savings. And hastening the process isn’t identifying savings. The same “savings” could have been identified with an RFX.
Especially when those margin reductions hurt the supplier. A supplier that is suffering has to increase margins or go out of business. And inflation is back, so if the supplier is at rock bottom pricing, and the costs are going up, what is the supplier expected to do? Bid less and go bankrupt?
Savings is identifying better products, better processes, more innovative suppliers, better delivery schedules, and fat that can be trimmed to reduce cost. Savings isn’t about reducing a supplier’s fair margin to nothing.
And this lack of ability to deliver true savings is just one of the many problems with auctions. To find out the rest, download Sourcing Innovation’s latest paper on The Dangers of e-Auctions today, sponsored by Trade Extensions, before one of the big problems brings your supply chain to a screeching halt.
Can Your Platform Handle Direct? Take the Direct Procurement Challenge!
Or at least attend the upcoming ISM webinar, sponsored by Pool4Tool and featuring both the doctor and the prophet who will discuss how
- the direct procurement lifecycle is different from the classic indirect procurement lifecycle, which was cost-centric perfect for indirect
- key requirements of each phase of the direct procurement lifecycle …
- … and key requirements indirect procurement platforms lack
- key technological capabilities required to truly manage direct procurement
- 15 ways your platform probably isn’t up to snuff for direct, if it even address the issue at all — and —
- the consequences of using the wrong platform for procurement management!
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 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.
Don’t think you need a better platform? Remember that while the most blood an indirect procurement manager sourcing office supplies and temp labour has ever seen is the blood on his finger from a paper cut from signing the paper contract, people have been seriously injured and died (in the dozens) from poor judgement in direct sourcing. And if you don’t believe me, check out the many examples cited in the new white-paper on The Direct Material Procurement Challenge: An Indirect Tool for Direct Procurement is Mission Improbable — Direct Procurement Requires Different Capabilities by the doctor! (Just another reason to join our webinar on The Direct Materials Procurement Challenge. Registration is free and can be done now by following the link.)
As this is an ISM webinar, 1 CEH Certificate will be awarded to each attendee.
Free webinar. Free credit hour. Free white paper. How good does it get?