Monthly Archives: January 2018

Scared of AI? Try Auto-Classify!

Last week we noted that if you were scared of AI (and rightfully so, as it tends to over-promise and under-deliver), you should start with Auto-Buy — specifically, auto-buy for certain tail-spend products and services where the platform can at least get you market average pricing on a product or service you’re likely overpaying by 15% or more on. The platform might not be able to match the best expert, but it can far surpass an average buyer, and paying market average is better than overpaying by 15%.

In this post we said that your spend generally breaks down into strategically sourced, bought from the GPO, catalog buy, and the rest falls into the tail. And the way to save significant money quickly and easy is to get the tail out of control … a large tail spend can be costing you 6% against the bottom line. That’s huge. And there’s only one way to get this under control. Auto-buy. And there’s only one way to do better — get the spend out of the tail into the other categories.

This is easier said then done. Tail spend might only be 20% of the spend by dollar, but it’s 80% to 95%+ of spend by volume — trying to classify each and every purchase to a strategically source, GPO, or catalog category it could fall into is a monumental task, and that’s why the tail spend stays high,

But it’s not a monumental task for AI. Remember, we can’t do millions of calculations a second – computers can. And when enough of these calculations are done, and correlated, computers can make assignments that, on average, greatly exceed the accuracy of an average buyer in significantly less time. Plus, the rare-misclassification will be found quickly by a human buyer and re-assigned to the right category — either the product has an equivalent in the GPO, or it doesn’t. Either it has an equivalent in the catalog, or it doesn’t. Or it fits the way the strategic buyers buy, or not. But in the first two cases in particular, the computer will be not only be able to identify the best matches with high accuracy, but even provide its reasoning.

So use the AI for what it’s good at — bulk computation and analysis. And be confident that while it will greatly reduce your tactical workload and make you more efficient, it won’t replace you — in fact, it will make you irreplaceable as you will be freed up to spend more time on the strategic, value generating work.

Category Management Savings Drying Up? Time to Cross-Optimize!

Leaders know that the best way to savings success, especially when the CFO and CEO demand savings today (even though this could sacrifice value tomorrow), is category management — a razor sharp focus on buying like products from like suppliers that allows for apples-to-apples comparison across products on key dimensions of price, quality, warranty, lead-time, etc. so that the best buy that meets the mandatory savings target can be made every time (and as much value preserved in the category as possible).

But Leaders also know, just like the third auction in a row increases costs, good category management sees savings fall rapidly as the fat is quickly squeezed out of the margin and the waste quickly squeezed out of the production, delivery, and inventory process as everything is optimized. This means that as soon as raw material costs go up, category costs go up, and not down.

This can be problematic when (unrealistic) expectations are placed on the Procurement department year after year and savings need to be found even when, apparently, none exist. But here’s the thing, while they don’t exist in the raw materials, or even the overhead, of production, they do exist in the distribution and inventory and still exist in the volume. But only in volume beyond what’s in the category.

This means that the only way to extract them is to increase the volume, which means that you need to simultaneously cross-source and cross-optimize across categories that can be shipped together from the same supply base. For example, while it might be logical to separate brass, bronze, and copper parts from a category management perspective, considering that some suppliers will likely supply parts across these categories (considering brass and bronze are alloys that contain copper), from a sourcing perspective it makes sense to source all three categories simultaneously. This way you can optimize logistics and negotiate additional volume discounts based on spend levels.

This also works in CPG — a supplier may supply computer devices, audio devices, and home security devices — and while you may want to manage these separately, you want to source them simultaneously. And it will work across seemingly unrelated categories if you are buying from suppliers that are essentially distributors (like office supplies vendors, MRO vendors, etc.). All you need to do is find a set of categories where the majority of products come from the same supply base. How do you do this? Simple: use a modern spend analysis tool.

And how do you source multiple categories simultaneously and cross-optimize logistics, inventory, and discounts for the lowest overall total cost of ownership (while maintaining value)? Strategic sourcing decision optimization — the technology SI has been telling you to acquire for a decade. Which vendor? Whichever one suits your needs best. Coupa, Jaggaer ASO, Jaggaer Bravo, and Keelvar are all great. Determine is re-building the Iasta capability on the b-pack platform, and when complete, will join the A-list again … and BidMode is about to hit the scene. Just get one, so you’re not left behind.

Your Procurement New Year Resolutions

To save you some time, the doctor has compiled a list of the most important.

1. I WILL NOT READ PREDICTION ARTICLES

As the doctor has stated repeatedly, most predictions are old news or remanufactured shoes, as clearly explained in our long series on The Future of Procurement where we tackled the same predictions you hear year after year after year and explained how some are, sadly, as old as commerce itself. Thus, there is no need to waste your time on them.

2. I WILL IMPLEMENT AT LEAST ONE NEW BoB MODULE OR SYSTEM

Let’s face it — even if you are 1 in 12 organizations and in the Hackett Group top 8%, I can guarantee there is at least one major Supply Management system or Source to Pay module you are missing (or lacking critical functionality in). In order to do a great job, you need a great system. This year, resolve everything to do everything you can to get at least one more tool that you need to be effective, or more if you are missing any of the following:

  • spend analytics with near-real time updates (at least weekly)
  • catalog buying or e-requisitioning system
  • SRM
  • optimization-backed sourcing

Why?

  • you have to understand what you are spending, otherwise you have no baselines and can never know if you are improving — plus, you need to catch overspends before the contracts run out to get supplier credits
  • all purchases, even if they are not on contract or not sourced due to lack of time, need to get in a system for analysis and tracking
  • your suppliers’ performance is your performance, you need to understand what suppliers you are doing business with, how they are doing, and have a platform to collaboratively define and implement corrective action and development plans
  • for complex categories or high dollar events, you need to be optimized; even 2% savings on a 10M spend pays for a senior buyer with overhead and bonus for an entire year!

3. I WILL IMPROVE AT LEAST ONE TIME CONSUMING TACTICAL PROCESS PER QUARTER

There is no value in tactical work. This is where you hand over as much as you can to the machine that can do it faster, better, and cheaper than you. You can’t do millions of calculations and comparisons a second — it can. You can’t consolidate data from 20 different sources into a 20 page report in less than a minute — it can.

What you need to focus on is strategic work. Analyzing the top recommendations that come out of the Cognitive Procurement system to make sure they make sense, that the system didn’t miss anything, and that it works for your organization. And then figuring out if you have the experience and expertise to ignore a system market buy recommendation to go negotiate a better deal with top (incumbent) suppliers because your 20 years of insights gives you an edge that cannot be encoded. Or if the projected results from a market auction with the top 6 suppliers is better than your team would ever do with their complete lack of category experience. Your value is your ability to use your intelligence, not your ability to push paper. Let the dumb machines do that, and do what you were hired for!