Monthly Archives: August 2017

Is There Magical Thinking In Your Procurement?

Recently over on the Dilbert Blog, Scott Adams penned a post on The Magical Thinking Opposition where he noted that his hypothesis was that the political side that is out of power is the one that hallucinates the most -– and needs to –- in order to keep their worldview intact.

And this got the doctor thinking if there is a corollary that says the Procurement department that is getting the worst deal is the one that hallucinates the most — and needs to — in order to keep their worldview intact.

Why does he posit this? Typically the Procurement departments most against modernizing their processes or platforms are those that are doing the worst and think they are just fine with the processes or platforms they have. These laggards are not only without modern platforms, but resistant to their acquisition and implementation. They are not modern Procurement departments, but traditional Procurement departments that still run on the island of misfit toy principle — staffed with people who are nearing retirement (and being rewarded with a cushy purchasing job), related to the boss (because you can’t fire a relative of the boss), and who have been in the
organization too long to let go (but who are not suited for their current jobs anymore).

But this is not the only way to identify these Procurement organizations. You can also tell them by these telltale arguments against modernization:

  • Our processes are fine, we just need more people to implement them.
    They think that their lack of results is lack of resources, not the processes or the platform.
  • Out platform is just fine, we just need more people to maximize its potential.
    They don’t believe that the throughput is a problem of an outdated platform, just a lack of resources.
  • It’s not worth the cost, and it will slow us down.
    They fight modernization and change, usually based on outdated views, beliefs, or stereotypes.

They feel that all they need is a little more time, a few more resources, and then everything will work out a-ok with the help of a little pixie dust. It’s magical thinking, and there’s no room for it. Just like alchemy needed to be replaced with science, magical thinking needs to be replaced with realist thinking.

To Get the Best Supply Base, Go Beyond the Obvious!

the doctor recently came across an article that said that during the sourcing process, there are many qualitative attributes that procurement teams should take into consideration and that sourcing is about the lowest price, but identifying the greatest value for your sourcing dollars and that one should incorporate multi-factor award criteria into an automated sourcing process. All true. It also provided some examples of the most frequently used qualitative factors, which include:

  • Supplier Market Share
  • Supplier Performance
  • Production & Delivery Capabilities

And these are okay, but they don’t tell the whole story. Plus, sometimes the story they tell is not the right one. For example:

  • with respect to supplier market share, you only care that the market share is big enough to make the supplier financially viable … sometimes the emerging suppliers have the best technologies for you
  • with respect to supplier performance, if you haven’t used the supplier before, and the only data you have is negative data from customers that have gone public, you don’t know if this is the typical experience or an anomaly (like 1 out of 100) and sometimes even how recent the data is
  • with respect to production and delivery capabilities, there’s always a third party partner for delivery

That’s why you need to round out the supplier evaluation components, going beyond the typical, and obvious, evaluation factors, if you want to find the best suppliers for now and the future. Some other factors to consider are:

  • Innovation Capability do they have a track record for innovation and helping customers improve their designs, robustness, product longevity, etc.
  • Corporate Social Responsibility the best supplier from a product perspective could be the worst supplier from a corporate perspective if that supplier uses child labour in the supply chain or buys blood diamonds for their x-ray machines and the story breaks
  • Environmental Risk Profile that examines the supplier from a geo-location, social and political, and economic context which are out of the control of the supplier (whose financial, technological, performance, etc. risk you will be qualifying separately)

And these are valid for all suppliers. When you get into specific categories, you might also want to consider:

  • Services Capability can they support the product, offer consulting services around the product, or streamline the production process beyond other suppliers
  • Six Sigma Black Belt can the supplier help you with your design process or streamline your new product development
  • Supplier’s Supply Chain Design
    is their supply chain more efficient than their peers?

So if you want the best supplier, go beyond the obvious in evaluation.

Procurement and Finance is not a P2P Love Story …

… it’s a bitter rivalry to the bitter end. It’s a feud that makes the Hatfield and McCoy war look like a bitter spat. And you know what, that’s just the way it should be.

Simply put, it’s the CFO’s job to stop spending and it’s the CPO’s job to spend … spend as wisely as possible, but, in a perfect world, spend every dollar that goes out the door that is not a payroll dollar, a lease dollar, a tax dollar, or another dollar that is completely out of negotiable control.

Those job are opposites. Yes, the ultimate goal of the organization is to maximize shareholder value and that is done by maximizing the value of each dollar spent, and both parties are supposed to be working towards this goal, but the CFO, like the CEO, is also beholden to the shareholders, and their value is typically maximized when profit is maximized, and profit is maximized when revenue — spending is minimized, or, in other words, when the CFO succeeds in forcing the CPO to spend less.

And, as we know, spending less is not always the right decision. If the spending less decision results in lower quality, lower reliability, or higher risk, it’s the wrong decision as it will, ultimately, increase (warranty, replacement, service, stock-out, etc.) costs, decrease customer satisfaction, and damage the bottom line to an extent that is many time the short-term cost savings that was obtained from spending less.

But still the CFO will beat the spend less war drum while the CPO beats the give me more budget and more spending control war drum — and this will continue until the end of corporate time. It’s not a love story … it’s a never ending war. And the only hope for tense peace is to find a common enemy — like the enemy of brand damage that can occur if both parties don’t insure that all spend and decisions are made responsibly.

There are No Economies of Scale … Just Economic Production Quantities

As the public defender likes to point out on a regular basis over on Spend Matters UK / Europe, economies of scale is a procurement myth. The idea that the more you buy, the bigger discount you can get because the cost diminishes is a myth because, if it were not, if you could buy a large enough quantity, then the cost would eventually get close to 0 per unit.

But the reality is that there are always hard costs that cannot be reduced in the supply chain … particularly those components that involve human labour — product creation, product transportation, product component creation, product component transportation, raw material mining, raw material component transportation, security guards for storage, etc. — and facility leases, utility cost, taxes, etc.

And there are always limits to “economies of scale” production lot sizes. If the line can only do 60 units per hour, then the line can only do 2400 in a normal workweek, 4800 in a double shift work week, 7200 in a triple shift work week and maxes out at 10,080 a week … assuming no downtime (and most lines will require some maintenance). In this case, the major economies of scale are 2400, 4800, and 7200 — as this insures that the labour cost (and facility costs) are spread over the maximum number of units.

In other words, there are economic production quantities (EPQ) where the price per unit is minimized, and this is the optimal economy of scale.

So if you really want to minimize your costs, you can start by minimizing your supplier, and carrier costs, which can be done by appropriately distributing the award across suppliers in economic production quantities that can allow them to give you larger discounts (and still retain a reasonable margin). So how do you do that? Considering that each supplier has a different EPQ, each carrier has a different EPQ, and this varies by product (and plant location), how can you possibly figure out how to split in such a way that you can enable suppliers to reduce their bids?

If you’re a regular reader of Sourcing Innovation, you know the answer. A decision optimization platform …