Monthly Archives: March 2017

Future Trend 34: Digital Transformation

How did SI miss this one in it’s two in-depth series on the future of procurement and it’s follow up future trends expose???

This anti-trend is as old as the internet!

But let’s back up. Recently, the procurement dynamo published a piece on the digital transformation of procurement where he asked if it was a good abuse of language. In this post he started off by noting that the digital transformation expression is an overused buzzword — which is an understatement.

Secondly, as the procurement dynamo notes, no one has a proper understanding of what it actually means. the procurement dynamo attempts to rectify this by giving a clear definition of the term with respect to the also overused digitization and digitalization terminology. According to the procurement dynamo

  • digitization is the conversion from analog to digital … atoms to bits …
  • digitalization is the process of using digital technology and the impact it has and
  • digital transformation is a digital-first approach that encompasses all aspects of business

… and, in particular, digital transformation is a digital-first approach to the extent that digital can be applied.

And this means that this is yet another anti-trend in Procurement as leading organizations have been doing this ever since the adoption of e-Auctions. The best organizations have been adopting, to the extent possible, new technologies since the e-auction hit the scene 20 years ago. RFX. True e-invoicing. Supplier Information Management. Contract Management. Decision Optimization. And so on. The leaders (which are very, very few) have pushed for, and embraced, digital transformation for the last two decades.

And, to be honest, when you get right down to it, the concept of digital transformation is, as a farmer would say, hogwash. You’re either continually adopting and using the best tools and processes available to you, or you are counting down to the days your doors close. The organizations that have survived decades have embraced multiple technological revolutions. They’ve went from carbon paper to copiers to digital transmission. Digital transformation is just the latest technological revolution, and may not be the last. (If quantum tech gets perfected, you’ll have to move to technology based on qubits … a blend of atoms and bits.)

So don’t fall for the latest fad — keep focussed on the goal. Better business building.

Enhancing MRO Supplier Value through Contract Service Levels

Today’s guest post is from Jennifer Engel, a Senior Supply Chain Project Analyst at Source One Management Services, responsible for executing strategic sourcing and process improvement initiatives.

Despite the convenience of boilerplate language and pre-approved templates to expedite execution, contracting is never a one-size-fits-all process within any silo of a business. Contracts for professional services tend to require a focus on performance expectations, and rarely have a need for protection against pricing volatility, lead time requirements, and fuel costs. Diametrically, contracts for the tactical purchase of goods focus not on service levels, but on maintaining pricing, ensuring product availability, and outlining delivery terms.

A trait often unique to the Maintenance, Repair, and Operation (MRO) space within a business is that many suppliers are providing a combination of both goods and services that support overall operations. As a result, contracts within this space are difficult to mold to a single template, and constructing agreements without taking into account the business needs to cover each area can be detrimental to the overall relationship goals. When undergoing contracting with a new or existing supplier, there are a few key principals to keep in mind that will benefit both parties as well as drive best value in pricing and service levels.

#1) Fully assess the risks associated with the goods and services separately

When negotiating terms, it is important to prioritize the areas that could most drastically impact the business should a change occur. If the pricing of a good is tied to a volatile commodity index or may be subject to interruptions due to raw material availability, protecting exposure to these factors should be at the forefront of the agreement. If the service associated is more critical than the actual good, for example a specific sanitation chemical being less critical than the completion of the actual sanitization process, then the level of service needed to ensure the business can continue to operate at or above standards should take priority. This primarily holds true to categories for which product substitutes are widely available, however the end result of the service is critical to business continuity.

#2) Adjust the terms of the agreement to form a mutually beneficial relationship that does not expose either party to significant risk.

Explicit service levels and pricing escalators and de-escalators inherently protect the business from any supplier shortcomings or market changes. As long as commodity increases are tied to a verifiable index, are accommodated by a manufacturer’s letter and advanced notice, and de-escalate at an equal rate should pricing decrease, the supplier is protected from becoming insolvent and the customer is protected from realizing an increase not driven by market conditions. For goods not driven by an identifiable index, pricing increases should be capped at a reasonable rate and subject to review and mutual agreement of the involved parties.

#3) Leverage rigorous service levels as another tool to drive negotiations and ultimately satisfy both parties.

As long as supplier expectations are detailed, measurable, and tied to a condition of termination with cause, there is less business risk to include contract language that may be viewed as more favorable to a supplier than the customer. A common point of disagreement in most MRO contracts is term length. Businesses are hesitant to engage in two or more year agreements with fear of dissatisfaction in a supplier’s performance. From a supplier standpoint, these lengthier terms allow them to invest more heavily in a specific customer without risk of being replaced in the near term. As a result, suppliers are often more likely to give more favorable pricing and terms under these extended agreements. Another point of leverage that incentivizes suppliers to offer more competitive terms is exclusivity clauses or volume commitments. Both can be high risk for a business to include, however are easily protected under strict service levels and quality expectations outlined in the agreement.

When putting together such agreements, stakeholder involvement should go beyond the legal department and relationship owner (department manager and/or procurement). End users, and those more closely aligned with the day to day operations should be consulted to outline critical functions of the supplier and bring to light any historical or future potential issues that will impact the integrity of the relationship or daily operations. Contracting should be viewed as opportunity to maintain and strengthen the relationship from both parties, and not seen as a necessary evil of back and forth on general language until legal departments reach consensus. Dedicating the extra resources necessary to construct a detailed and forward thinking agreement will prove beneficial in the long term, as company standards will be maintained without sacrificing cost competitiveness.

Thanks, Jennifer.

What is the Future of the Procurement Function? (Webinar)

In the beginning, there really wasn’t much of a Procurement function. When someone needed something, they either went to the local buyer (who was either the office manager or the designated purchaser) or the local boss and got permission to buy it themselves if it was small. Assuming it was large enough, then it would go through the buyer who than bought either from a catalog, a local vendor, or a contracted supplier for products he or she couldn’t get locally.

Volume leverage was small, time was short, and deals weren’t that great. It was typically the lowest price from some semblance of 3-bids and a buy. And any deal found by one location typically wasn’t shared with another.

As organizations grew and began to realize these inefficiencies, they decided to centralize the purchasing function to achieve volume leverage and better deals, at least for common categories, and in turn decrease the manpower needed for common buys. This also allowed best practices to be created and shared and archived in a knowledge center, but the centralization came with its own problems. Uncommon or unique categories to one or two locations were often sourced with worse results (as the centralized buyers couldn’t exploit volume and didn’t know the local market), local knowledge was lost, and manpower wasn’t reduced that much as inventory managers and designated “buyers” still needed to be at each location to order off of the master contracts and manage inventory.

So, these organizations moved to a center led model. Common, strategic, and/or high dollar categories were centralized, but uncommon, non-strategic, and/or low dollar were managed in a distributed fashion. This, presumably, would achieve the best of the decentalized and centralized procurement worlds with no disadvantages. Right? Wrong.

As center-led organizations matured, a number of cracks in the shiny new armor appeared. This model, like every model before, had its own disadvantages which leaders are now grappling with.

Another evolution is needed. What is that evolution?

A Virtual Procurement Center of Excellence.

What does that look like?

Join THIS THURSDAY’s free webinar (registration required), sponsored by Pool4Tool and featuring the doctor, and find out.

Supply Management Risk Management Needs to be Cranked to 11!

SI has been preaching the message of the need for strong supply chain risk management for a while now, given that the chances of your organization NOT experiencing a significant disruption over the next 12 months is about 1 in 10 and dropping fast. In fact, the doctor recently authored an entire risk management series for Ecovadis:

But given the uptake in deep supply risk management solutions, SI is not yet preaching to the choir. Don’t worry, this is not another post preaching from the pedestal, unless, of course, you are a vendor.

You see, even the best solution doesn’t have what you need to suitably address risks in today’s risk-laden supply chain. Consider the current enabling technology components, as addressed in the Supply Risk Management Landscape Report, co-authored by the doctor with the prophet and the maverick.

  • basic portal and information tracking capabilities which tracks all suppler and product info and allows a supplier to manage their end
  • risk analytics and reporting that focusses on relevant spend, supply, and supplier metrics that provide good risk indicators
  • risk intelligence feeds that report on current real-world (third-party) metrics and events that can effect your supply chain
  • commodity management enablement with price benchmarking and forecasting, availability projections, price risk exposure, etc.

These are good, but all these let you do is identify potential risks. Once a risk is identified, you need to do something about it. But a solution that only tracks, reports, augments, and projects — while it may give you some ideas — doesn’t let you do anything about it.

Some providers (like Resilinc) give you a command center that allow you to create disaster recovery plans for specific occurrences, or run what-if reports/scenarios based on decisions on how to mitigate a risk, but this doesn’t help you identify how to mitigate the risks appropriately.

And that’s why supply risk management platforms need to crank it to 11. And how will they do that?

The answer, as the doctor outlined in the aforementioned co-publication with the prophet and the maverick, is to also contain support for:

  • supply chain re-design and optimization based on decision optimization, supply chain modelling, predictive analytics, and “what-if” scenario planning

Now, not a single supply chain risk management solution supports even one of the four core capabilities required (although some will claim they do), but hopefully, now that the flashlight has been shone, they will … or maybe, just maybe, a true SSDO (strategic sourcing decision optimization) provider will hire a few risk experts and build a risk management platform on the right underpinnings. Only time will tell. The most important thing is that you realize when you go to market for a supply chain risk management solution is there is no perfect solution and more innovation is needed.

Anchoring Doesn’t Have to be a Problem …

… or even a concern, if you approach negotiations in a fact-based manner, instead of a seat-of-your-pants manner, like most negotiations are approached.

What are we talking about? We’re talking about the tendency for us to fix our thoughts around a particular number, point, or fact rather than thinking logically and independently about a decision. In particular, the fixation that occurs when people consider a particular value for an unknown quantity before estimating the quantity. From that point on, the estimates then stay close to the number considered, even if the estimate is way, way off. The absolutely proven phenomenon discussed in detail in the public defender‘s recent pro piece over on Spend Matters + on how to hone your procurement negotiation skills by learning the right way to think (fist part free, full article requires membership).

Anchoring happens if you begin your negotiation or event with a price that is based on current price, a recent supplier quote, a market index, or some other number that may or may not have any basis in reality. Anchoring is avoided if you start with a price that is based on a should cost model, for a product, or an amalgamated index by a large analyst firm or statistics bureau for services category.

The should cost model should be based on a detailed cost breakdown that takes into account raw material costs (at market indexed rates), average labour costs for a region, average overhead costs, and any advances in production technology. A current cost, a current market cost, or even a project cost from a trusted supplier is not a should cost – and negotiations should ALWAYS be based on should cost. It might seem a waste of time for a product you’ve sourced ten times over the past ten years, or a service that you’ve paid the same rate for from three different manpower suppliers over the past three years, but that’s a very small sample of the market price at large, or the should cost price.

So do a detailed should cost model (or, for a service, detailed market research and break it down against average salaries available through a number of portals, augmented with standard contractor / manpower / outsourcer mark-up) and start your negotiations around that reasonable, logical, point — even if it’s half of what the supplier is quoting. Remember, you can scream that they take their unreasonable cost off the table or you walk because you can say “look, I have a should cost model right here that backs up the reasonableness of my number — so we’re starting within 20% of this and adjusting as necessary, or we’re not starting at all”.