Monthly Archives: May 2019

92 Years Ago Today …

The last Ford Model T rolls off the production line, ending a production run that lasted almost 19 years and produced over 16.5 Million units.

The Ford Model T, coloquially known as the Tin Lizzie, is iconic as it is generally regarded as the first affordable automobile that brought the automobile to the common middle class American, and this is, in part, why it was named the most influential car of the 20th century (as it is synonomous not only with the rise of the middle class but the modernization of America). Moreover, even ninety two years later, it is still the ninth best selling car of all time.

It was with the Model T that Ford pretty much perfected the modern American production line that revolutionized entire industries. The car should not be forgotten.

Can You Even Identify Savings to Realize?

A few week ago we sort of put the cart before the horse when we noted that Realizing Those Savings is No Easy Feat because many organizations will undertake sourcing events, cut contracts, but then fail to realize 30% to 40% or more of the expected savings (and this has been the case since AMR’s classic studies on savings realization over a decade ago, well before they were bought and absorbed by Gartner).

So even though it’s sort of putting the cart before the horse to put an infrastructure in place to capture savings, without such an infrastructure, identified savings won’t realize. So it’s really not a bad idea to start with Procurement platforms that capture savings, because you need them.

However, today we’re going to assume you have such an infrastructure in place, and ask the question, even if you do, can you identify real savings? It’s a lot harder than you think. It’s not the lowest cost. Or the lowest landed cost. It’s the lowest total cost of ownership … over the product lifetime, which could be for years if you offer a warranty. Because not only is their warranty costs, there are return logistics costs as well!

But it’s not easy to capture all of the relevant costs in an RFI, nor is it easy to build the models that can accurately model total lifetime cost of ownership in Excel. That’s why the doctor has been promoting optimization-backed sourcing platforms for years — only those platforms can accurately compute lifetime costs and allow for the right fact-based negotiations and award decisions.

But it’s not just cost that needs to be considered, it’s value and service levels. You need customers to want your products, and you need delivery times you can depend on. But value and service guarantees cost money, and in inflationary markets, that means costs just go up and up.

If market prices are increasing, and you need to improve service levels and add more value-based features to appease customers, can you even identify savings?

The answer is, without the right platforms that allow you to look at your costs holistically and find ways to minimize them beyond just a price-based bid, is that you can’t … at least not after the first time you’ve “strategically sourced” a product. Additional savings will come from better category definition and alignment, smarter network design, better inventory management and aligned inventory levels, and up-sell opportunities from more appropriate, sustainable, sourcing selections.

And that will require the right upstream technology that will include the following:

  • supplier discovery to identify the right suppliers
  • optimization backed sourcing to make the right value-based decisions
  • supplier management to make sure the relationship and performance can be managed
  • risk management to identify, monitor, and mitigate potential disruption risks
  • analytics to analyze past, current, and ongoing price and KPI performance
  • CLM to manage the contract, obligations, and identify the time for renewal, renegotiation, or termination

And that’s why you see a proliferation towards Strategic Procurement Technology Suites and why the doctor has teamed up with Spend Matters to analyze them. Platforms are becoming key to identifying real, sustainable, savings — but only if they are the right ones for the customer base they are installed in.

Don’t Underestimate The Importance of Workflow …

One of the big reasons that, even four years after the doctor told you about the Procurement Damnation of Project Management most vendors haven’t done anything as per my post last week (read here), is that they have little or no workflow management, a capability that we told you is vital to the modern platform in our post three weeks ago where we were Digging into the S2P Tech Foundations.

Workflow is more than just a platform’s ability to guide a buyer through the application to complete a specific task, workflow is the ability of the platform to be adapted, and adapt, to the processes an organization needs to support, and the ability of the platform to support management of those processes and the projects that create them.

This is something a large majority of software application developers don’t get, and, as a result, something a large majority of applications don’t have. And it’s something that needs to be baked in at the foundations of an application, or the application will never have good workflow capability.

Why is there so little? Because classic application design philosophy, inspired by the waterfall model of software development, has been:

  • identify a problem
  • define the problem
  • translate into requirements
  • detail into functional specifications
  • build a software solution that implements the functional specifications
  • iteratively test and debug until stable enough for release

And the agile philosophy didn’t change much. The only difference is that instead of attacking the full extent of the problem and translating the full problem into requirements, you focused on a core piece of the problem, translated it into requirements, fleshed out, built, and then went back and extended the core, extracted the new requirements, fleshed those out, built new pieces and integrated into the existing solution, and so on.

No thought was given as to how to create a set of self contained units that could be strung together in a workflow to solve bigger problems, which is key to providing a platform that would allow the workflow to be extended and altered and allow the organization to change over time.

And if you’ve invested five to ten years in a platform that has been profitable, do you really want to go back to square one and build it up from foundations the proper way? Especially if you think you can still make money on what you have? Probably not.

And looking to the bigger picture, that’s the state of Procurement 2.0 and why we need new, evolutionary, platforms if we are every going to realize the extent of Procurement 3.0. But that’s another post.

AI Will Make Your Talent More Efficient and Effective!

… but, as per our post last week, AI won’t solve your talent problem, so let’s get that out of the way right now!

AI, regardless of whether it’s being sold as assisted intelligence, augmented intelligence, or amplified intelligence, is valuable It’s powerful, and in some domains, essential to the modern day enterprise. In fact, without it, some enterprises won’t survive because the efficiency improvements and related cost reductions it can bring are so significant that competitors who invest will be able to reduce prices and leave their breathren in the dust.

And while it won’t ever replace a workforce, as it will not only allow that workforce to be 2, 3, or 10 times as effective, it will allow you to control the size of your workforce and associated costs where it can be properly applied, leaving more money to hire workers in areas of the business where AI can’t be employed and you are understaffed and/or not operating at full efficiency.

A great example we’re all familiar with is automated invoice matching and processing. A lot of vendors have automated 3-way match and kick out an invoice for manual review when something is off. This allows the department to focus on the 10% to 15% of invoices that have errors instead of spot checking 10% to 15% of invoices they have time to manually review, allowing all errors to be caught and dealt with if the manpower is efficient (and all invoice-based overspend to be prevented, which prevents costly recovery efforts down the road).

But the reality is that only 10% of these invoices have errors that need to be manually addressed. In many cases its missing PO numbers, missing bill to or ship to addresses, unrecognized line items due to OCR errors, etc. which can easily be corrected by an assisted intelligence system which can search the PO database and find out that there’s only one PO for that supplier which is for the same item (quantity, and price) shipped, one address in the vendor master, or a 95% fuzzy match due to a simple OCR error of reading an “O” as a “0” or dropping a character. Why should a human waste time on that? Good AI can handle this, and handle bouncing back an invoice to a vendor when a price is wrong (and allow the vendor to correct or open a dispute), when there are no associated shipping notices or receipts (and tell the vendor the invoice is rejected until such time as one or the other are received), etc. At the end, all the procurement professional or AP clerk is left with are invoices where there are no corresponding contracts, POs, or work orders; invoices from unknown suppliers; invoices with unapproved payment terms (or unknown accounts), and other situations that need to be manually handled. About 1% to 1.5% of invoices, on average for a large organization. For an organization with 1M invoices a year, this is 1,000 – and can be fully dealt with by 2-3 staff members, in comparison to an average organization which would have 20 who couldn’t properly review 20% of the invoices.

There are similar situations where AI can greatly speed up Sourcing Events. For example, new supplier discovery efforts often take 40 to 60 hours of manpower, and a supplier discovery platform like Tealbook can sometimes reduce that to as little as 4 hours and achieve the same result.

There are other examples in sourcing and procurement, but the point is proper AI technology is worth its weight in gold. (But relying on AI to entirely replace part of your workforce will yield an investment less valuable than lumps of coal, which at least you can burn for heat when your business goes bankrupt due to one bad decision on the part of an AI without a complete world-view or real intelligence to process it.)

Your Tail Spend Should be Vanishingly Small …

Not the 30% to 40% of spend that it probably is (as this is the amount of tail spend in the average organization)!

The reason it’s so large is that, in most companies, there is strategically sourced spend and tail spend when, in fact, there should be (at least) three categories of spend: strategic, managed, and tail — and, if the managed spend is large enough, you can break out a 4th category of tactically procured spend. Each of these categories is defined as follows:

Strategically Sourced
This is the spend that is high volume, high dollar, or strategic to your organization. While there will usually be a dollar minimum relative to your total spend (i.e. 5M to 50M depending on organizational size), if the part is critical to production of a primary product or service, if it can only be sourced from one supplier (hopefully split across multiple locations), and if its absence would bring an entire multi-million production line to a halt, then it would be include, even if it was only 1M annual spend).

More generally speaking, a product or service fits in this category if the return expected from a strategic sourcing exercise (which costs manpower and technology) will be considerable relative to the cost. (I.E. an ROI of 3X to 5X.)

This is where you put the categories or buckets of spend that are not quite big enough to undergo a strategic sourcing event (as the expected return is low relative to the effort of a manual strategic sourcing event) but where not managing the spend leads to a considerable loss when you look at an average of 15% or more overspend in tail spend.

For example, in a big multi-national, 1M is not large when there are 100M categories, but 15% overspend on 1M is 150K, that’s enough to pay the salary and overhead of another junior buyer.

This is where you do mini-events and/or take steps to make sure Procurement is efficient and cost-effective throughout the category.

Good examples are

  • low-value non-electronic office supplies and MOR, where you can integrate the punch-outs of two or three leading, generally cost-efficient vendors, into a federated search catalog which forces the organizational buyers to procure the lowest cost item in stock that meets the requirement without supervisor oversight (and keeps costs close to market, vs. 15% above)
  • recurring tech-support services, where you can integrate master rate cards from local vendors and just have the users select a vendor with an approved rate card to perform the service (and push all spend through the system)
  • one-time event spend, where you bundle up as much of the spend as possible and push out a standardized RFI to an event organization firm who makes money by aggregating event-related spend across their clients, negotiating sizeable discounts from venues and services providers, and passing those savings on to their clients in exchange for management fees … while you won’t see the full 20% they negotiate once you deduct the management fee, you might still see 10% of it, and that’s savings to you

Tactically Procured
If a category of spend is large enough that an auction or (multi-round) RFI will save money, but not so large that the savings are enough to waste a buyer’s time on a strategic sourcing event or tactical procurement event, then you can push that spend to a platform with modern automation and assisted intelligence that can automate the RFI or auction for standardized goods and services.

If the goods and services are market standard, or you have fully defined specifications that have been vetted and manufactured multiple times without issue, if you have a set of pre-approved suppliers, if you have price history and market data, why not just automate the entire process with bounds and checks?

New providers like Keelvar, Levadata, and Xeeva are realizing this and this is a great way to manage what was tail spend and keep costs down.

True Tail
These are true small, one-off, purchases that can’t be combined into a managed (or tactically procured) category and are truly not big enough to waste the valuable time of even a junior buyer on.

This should be less than 10% of your spend at most, and, in reality, with the low-cost, low-effort of automated tactical procurement in newer platforms, as well as the guided buying features of modern federated catalog platforms, should be less than 5% of your spend. A modern organization should not be overspending by more than 0.5% of its total spend (which is an acceptable margin of spend error), not the 4.5% to 6% or more it is typically overspending on the tail when 30% to 40% of the organizational spend is unmanaged.