Monthly Archives: June 2016

First Clue that the New Public Procurement Policy is Going to Cost Everyone Money

Effective immediately, our policy is to only buy “Made in X”, where “X” is the local country or state.

Why is this going to cost you money?

First of all, it’s going to eliminate competition. And we all know what happens when competition goes away. Suppliers, who know they don’t have to worry about being replaced, as there’s only a few alternatives, and they’re already in your door, stop working as hard to be as cost competitive, innovative, or valuable to your organization.

But if that was the worst that could happen, it wouldn’t be so bad.

The reality is that as soon as a “buy local” policy comes into effect, suppliers are going to also (pretend to) “buy local”, which of course is going to raise their costs, because their suppliers are going to also stop working as hard to be as cost competitive, valuable, or innovative because the market is small, they’re in the door, and they know their competitors will also be content to maintain the status quo so they won’t have much competition. And this will continue down to the raw material supplier.

But if this was the worst that could happen, it still wouldn’t be so bad.

The reality is that once a supplier knows that it’s effectively the only game in town, it’s not going to worry about cost increases. In fact, it’s not only going to stop asking how much it has to raise costs to cover its increased costs and ensure it maintains nice, fat margins, it’s going to ask how much it can raise prices and just how fat its margins can get. It’s borderline corruption.

But if this was the worst that could happen, it might still be something that could be grudgingly accepted and dealt with.

The reality is that not all suppliers will be content to inflate their margins. In locales where corruption is common, this is only going to encourage more corruption. As per the public defender‘s post on how “Made in Nigeria” Public Procurement Policy Will Simply Lead To More Corruption, this sort of policy provides the perfect cover for both parties in a typical corrupt procurement transaction. How so? Read the public defender‘s post. Simply put, the buyer can now get away with saying “I had to buy local, and this looked like the best choice” and use it as a defence when caught.

How Does Your State of Flux Measure Up?

Your SRM (Supplier Relationship Management) is in a state of flux. It’s a fact. Policies are undocumented. Processes are not automated. Critical interaction data is not captured. And the majority of your employees interacting with your suppliers on a daily basis cannot even identify five of your top ten strategic suppliers. (Finance might hazard a guess, but while dollars spent is an indicator, it’s not a guarantee.)

A strategic supplier is any supplier that supplies products and / or services that are critical to your operations and that cannot be easily replaced by going out to bid to one of three suppliers in the next state. The supplier might get 1 Million annually and might get 100 Million annually. And if you want the best value from that strategic supplier, you have to be a customer of choice.

How do you become a customer of choice? Good SRM. How do you get good SRM? Good processes, and good platforms. That’s why it’s quite appropriate that this year the annual State of Flux research report is centered around technology. In particular, State of Flux will be researching the use of SRM technology globally, the benefits achieved, and implementation best practices for commercial success.

As with previous years, the 75-question survey takes about 20 minutes and all respondents get a free copy of the annual report, released at the end of October. This report has traditionally been the most extensive research on SRM on the global market and is well worth the time investment.

This year, as a bonus, State of Flux will immediately provide all companies that take the survey a benchmark ranking of how well they are doing against their peers based upon the eight years of survey data they have collected and a standardized ranking system that they are able to use. (And if multiple parties from your organization in different roles complete the survey, they will even augment that benchmark ranking with a SWOT analysis.)

The survey is open until July 1, 2016. Take the survey here.

How to Save a Whopping £500 on 1.0M of Spend!

Unless you are a best-in-class purchasing organization (and that is not the case for 92% of you), then you need to save. Budgets are shrinking. Costs are rising. Growth and consumer spend is flatlining. And if you don’t get your costs under control, you will be out of a job one way or the other.

But there’s a right way to save, and a wrong way to save.

The right way to save is to apply advanced analytics and optimization across your strategic and high spend categories which has proven time and time again to save an average of 10% across the board year after year when properly applied.

The right way to save is to influence and control demand. The only time demand should increase year over year is when it is for products or components that are for sale, or go into for sale products, and sales for those products are increasing. Demand should not increase more than x% for office supplies or MRO where x% is the increase in workforce, and, in fact, in many categories, should be decreasing year over year. For example, paper spend should decrease (since so much can be distributed online). MRO should decrease, as better inventory management and higher quality parts should decrease the number of products required. Etc.

The right way to save is to increase the value of the product sourced without increasing the price, so that even if costs stay constant, value increases and allow for an increased revenue stream.

So what’s the wrong way to save? Capital manipulation. In particular, earlier customer payment and later supplier payment.

The majority of analysts, accountants, and consultants, especially the unenlightened ones, will dazzle you with calculations that show how if you decrease accounts receivable from 30 days to 15 days and extend accounts payable from 30 days to 60 days, the extra 45 days of working capital you have will save you a fortune as you’ll either have to borrow less or can invest more and generate a huge savings on every Million that stays in your coffers an extra 30 to 60 days.

For example, if you have an annual cost of capital of 6% and you typically have to borrow 50% of required working capital to pay your suppliers on a timely basis, you will be paying:

	06% ACC		12% ACC
Borrowed Amount	30 days	60 days	30 days	60 days
1 M	5,000	10,000	10,000	20,000
10 M	50,000	100,000	100,000	200,000
50 M	250,000	500,000	500,000	1,000,000

And as soon as a CFO at a mid-size company believes that if he can squeak out an extra 60 days across 50 Million of expenditure at 6%, he can save £500,000, a blind mandate to delay payment terms and expedite payment collection goes out across the board. And then CFO pats himself on the back and goes on a well deserved corporate retreat to the next conference he can find at a mountain resort.

But what actually happens?

If you do the proper calculation, which is:

You see that very little is actually saved because the savings is on the cost of capital for the payment days of the amount, NOT cost of capital for the payment amount. Which is a much smaller number. If you do this calculation, the real numbers are:

	06% ACC		12% ACC
Borrowed Amount	30 days	60 days	30 days	60 days
1 M	500	1,000	1,000	2,000
10 M	5000	10,000	10,000	20,000
50 M	25,000	50,000	50,000	100,000

Remember, in the long run, the payments still have to be made and, most importantly, still have to be made on a monthly basis. So while you might see a savings the first month, there will be no further savings because all you have done is shifted all payments ahead by x days. A payment delayed is not a payment negated.

Moreover, all you’ve really accomplished is p!ss!ng off the supplier. And any chance of being a customer of choice has been thrown under the bus, where you effectively threw the supplier, who now has to borrow more capital to stay in operation, often at a rate double yours. In other words, the whopping £5K you saved likely cost the supplier £10K and, at the end of the contract, the first thing they are going to do is increase their costs substantially to cover their loss. So, at the end of the day, your short term savings of £5K is likely going to cost you £15K or more (especially when you consider the value associated with being a customer of choice). But hey, the CFO is always right, right? Wrong!

Don’t believe the doctor? Check out this great piece over on the public defender‘s blog that goes through this calculation in even more detail.

Ditch the Pepsi Blues, Already: Become a Marketing Procurement Asset Part II

Today’s guest post is by Brian Seipel, a marking project expert at Source One focussed on helping corporations achieve both marketing and procurement objectives in their strategic sourcing projects.

In our last post we noted that when Pepsi did away with their marketing procurement department, it was a big deal, but it wasn’t really a shock. Marketing teams have never had a great relationship with procurement. Procurement is still trying to get their foot in the door when it comes to marketing spend, so it isn’t too much of a surprise if that door occasionally gets shut in procurement’s face.

But, despite this example, Procurement should not have anything to worry about. Organizations don’t get rid of marketing procurement — they get rid of bad marketing procurement. And if Procurement can demonstrate value, Marketing will listen. How does Procurement do that? As per yesterday’s post, it starts by becoming an asset, not a roadblock. The next step is to …

REALIGN PRIORITIES

Work with marketing to establish which group should lead discussions on different aspects of agency selection. It may be a hard pill to swallow, but quantifiable apples-to-apples comparisons are difficult, if not impossible, for some marketing initiatives. Concede the value-oriented comparisons to marketing, but take charge where a number crunching comparison is warranted.
Procurement pros also need to do a better job at understanding marketing goals as well as how objectives are phrased using a marketer’s language:

Markets select agencies as partners, not vendors. There’s more at play than who can do a job at the lowest cost.
Tune into ROI. A marketer wins not by reducing the dollars they spend, but by improving outcomes of what those dollars buy.
Promote actions that achieve your long-term goals. Instead of focusing on cost avoidance, work with marketing teams and agencies to establish process improvements that lead to greater efficiency.

A failure to speak the same language or understand priorities is a big reason that procurement is alienated from marketing initiatives; getting on the same page in these ways helps.

These goals don’t always align with the costs savings mandate procurement pros are tasked with, which necessitates a discussion with the top brass to iron out inconsistencies. The point we need to make is simple; I would rather take part in guiding procurement on Marketing’s terms than have no say at all. All of our value counts for nothing if procurement gets overlooked and shut out because we don’t offer compromises.

PUT “MARKETING” IN MARKETING PROCUREMENT

Spend time with a marketer, and you’ll see what they want out of an agency. All of those key qualities need to apply to procurement, as well.

They want to have a relationship with their agencies, not just a series of transactions. They want to work with an agency that not only carries a brand’s identity, but can support their vision for how growing it. They want an agency that can turn on a dime to support new, hot, unconventional campaigns — and has the knowledge to assist in the decision making process for any uncharted waters.

They want an agency that “gets it”. If we want that seat at the table, procurement needs to “get it”, too.

Thanks, Brian.

Ditch the Pepsi Blues, Already: Become a Marketing Procurement Asset Part I

Today’s guest post is by Brian Seipel, a marking project expert at Source One focussed on helping corporations achieve both marketing and procurement objectives in their strategic sourcing projects.

When discussing marketing procurement, conversations still sometimes slide back to Pepsi’s big move at the end of last year, when they did away with their marketing procurement department. This was a big deal, but was it really a shock?

Pepsi’s news was huge, but hardly isolated; marketing teams have never had a great relationship with procurement. Procurement is still trying to get their foot in the door when it comes to marketing spend, so it isn’t too much of a surprise if that door occasionally gets shut in procurement’s face.

Let’s focus on the positive, instead. As long as dollars are still being spent on marketing initiatives, then there’s a spot at the table for you … if you are able to earn it.

BAD MARKETING PROCUREMENT

Let’s just be clear: Organizations don’t get rid of marketing procurement — they get rid of bad marketing procurement.

Pepsi is still devoting a good-sized budget to marketing and advertising, they just did away with a bad marketing procurement middle man. To be more specific:

If an agency search doesn’t move at a speed that keeps pace with marketing initiatives, that’s bad marketing procurement.
If you’re seen as a road block, that’s bad marketing procurement.
If short-term cost savings trump any other longer term considerations (“but it works when I buy office supplies!”), that’s bad marketing procurement.
If you don’t understand marketing, that’s very obviously bad marketing procurement.

If none of these concerns apply to you, then don’t worry. If they do apply, still don’t worry. Focus your energies, instead, on adding more value.

How do you do this?

START BY BECOMING AN ASSET, NOT A ROAD BLOCK

Procurement pros need to do a better job selling one of our greatest values: We allow marketing teams to focus on what they do best — marketing — by clearing the other stuff out of their way. We can make the process faster, not slow it down.

If you haven’t built this business case for yourself as an asset, then marketing teams have no idea what you can offer. They can, and will, view you as a stereotypical bean counter because you haven’t given them anything else to work with.

When I hear marketing complain that procurement slows the process down, I bang my head against a wall. Procurement has honed processes that help speed the process for identifying, vetting, and selecting agencies. Show marketers all of the procurement-based work you can take off their hands (they don’t go away even if procurement leaves the room) so they can focus on finding agencies that are the best fit.

But this is just the beginning. In tomorrow’s post, we will discuss the next steps.