Author Archives: thedoctor

A CPO Leading a Spend Management Strategy is a Key to Organizational Success

Not that long ago, the doctor gave you THE SIGN that you need a CPO which, directly put, was that your organizational spend was over 10 Million a year. No ifs, ands, or buts about it! Not long after, he found this article over on CXOtoday.com which pointed out that empowering business success was The Art of Mastering Spend Management. This article stated that companies should consider implementing a spend management strategy, regardless of their size and it made him happy (even though the article looks like it was written by a junior copy-editor* who just cut and paste standard spend management summary sentences from generic spend management publications as it was not very deep or specific) because CXOs need to hear this at a high level over and over and over again until they get it. (Note that the doctor doesn’t get happy often. Most articles just make him angry. Sometimes very angry, especially when the conscientious invoke their right to dare to be stupid and embrace artificial idiocy, but that’s a rant for another day.)

The article starts off by clearly stating that a spend management strategy plays a vital role in today’s economic reality as it enables companies to control costs, boost financial efficiency, and make informed decisions. It ensures resource optimization, agility, and long-term stability, enhancing competitiveness and adaptability in a rapidly changing business landscape.

This is most certainly true. And all one has to do to see that it is true, and it would have been so much better if the article said this, is remember the first formula they teach you in business school:
Profit = Revenue – Expense

Since Spend Management allows you to minimize expenses, this helps you maximize profit. And when you consider that
Margin = Sale Price – COGS      and that
Margin % = (Sale Price – COGS) / Sale Price      and that
Margin % for most industries <= 10%

This says that every $1 saved in expense generates at least as much profit as every $10 increase in sales. As a result, spend management is at least ten times as effective as sales or marketing and key to get a grip on early, even before you can afford the full time CPO. The CFO and COO should develop best practices for any decisions that result in spending, monitor the decisions, ensure corrections are made (and employees [re-]trained) when mistakes are made, and baselines generated for all recurring costs. Even though they might not realize the same level of success as an experienced and dedicated CPO, the baselines they generate and the knowledge they capture will be key when the CPO starts as the knowledge will allow them to dive in quickly and find near-term and mid-term opportunities for improvement (and cost reduction) and the benchmarks will allow them to not only prove it, but ensure that all bids received are competitive.

The only thing we want to note is that the important aspects of spend management, especially for smaller organizations, are:

  • strategy,
  • process (that implements the strategy), and
  • governance (that ensures the process is followed and the strategy implemented)

Technology is not critical (or even necessary), and only technology that supports the process (and collects the appropriate data) should be implemented.

This is important to note because this article is sponsored by a particular vendor in an effort to promote a particular product (which is only good for T&E spend, not all organizational spend) and you don’t necessarily need that technology (or any other instance of that technology) to have a spend management strategy and do proper spend management, especially if you are a smaller organization. (However, larger organizations do need good T&E spend management, and spend analysis, because flowers should not be $5,000 unless it’s a greenhouse.)

* but what should one expect considering it was sponsored by SAP to promote SAP Concur (and routed through their PR Agency)?

Do you want to get analytics and AI right? Don’t hire a F6ckW@d from a Big X!

Note the Sourcing Innovation Editorial Disclaimers and note this is a very opinionated rant!  Your mileage will vary!  (And not about any firm in particular.)

Now, I’m going to upset a lot of people with this, but I don’t care because the linked article below is literally the best article I ever read on why you should NOT hire F6ckW@ds from Big X (or any other) Consulting Firms who claim to be analytics and AI experts when they don’t actually know

  • the difference between a mathematical formula to calculate the center of gravity of a falling object and to calculate the median spend in a category
  • proper software architecture
  • proper compute resource allocation
  • your business
  • the difference between real ML technology, RPA and a few formulas, and the current Gen-“AI” where the “AI” stands for artificial idiocy

because

  • you’ll spend 3 years and millions of dollars to implement something that should take 3 to 6 months
  • you’ll spend hundreds of thousands on big vendor software licenses you don’t need
  • you’ll spend hundreds of thousands on compute power you don’t need

After all, these guys and gals get paid by the hour and the commission on the resell license is a percentage of the total price they convince you to pay for it. So, the longer the project takes and the more licenses and compute power they sell …

Read the linked article. Twice. And then tape it up to your fridge. The situation described in the article is NOT the exception. As a former CTO and 25 year consultant/analyst, I know this is the norm!


I Accidentally Saved Half A Million Dollars
 

Now, if you’re wondering how to tell who is a F6ckW@d and who’s not when it comes to analytics and AI at the Big X, I’m sorry to say that it’s not so easy (especially when it only takes a few bad apples to spoil the bunch, and while the good firms will do mandatory pruning of the consulting tree annually to weed those bad apples out, you don’t want to be the unlucky client who gets one on your project) .

It used to be if they were there for more than a year or two, their was a possibility that they were, or at least not as good as they claimed to be,  that especially if they were junior, right out off school, no real experience. This was because, first of all, tech talent wants to go either to the big glorious tech firms (Alphabet, Meta, etc.) or the wild-west startup frontier, and big consultancies were the backup until they got enough talent to move on.

Thus, the real talent in tech and analytics, who didn’t get promoted quickly in the Big X, usually didn’t stay long before they moved on to specialist firms where they felt they were more respected, higher up, could control the projects, and, more importantly, being higher up, were higher paid.

(Tech/Analytics people take pride in their work [and not their title], and seek the job that gives them the most pride.  Also, even though good tech/analytics people won’t contradict managers because they want to be important, and will only contradict managers because they want the job done right, the reality is that junior people or new hires in big firms often have the impression that this is discouraged in a larger firm [even if it’s not] where you are supposed to learn from and follow your manager’s lead because you don’t see the big picture and may not speak up on the way a project is being approached when they are unsure.  They might be wrong, and should stay quiet, but they don’t learn if they don’t ask.)

However, now that all the big firms are acquiring mid-market experts, with some of the Big X acquiring 3 or 4 specialist plays in analytics and AI over the past couple of years, it’s much harder to differentiate if you are getting the best talent or not.  You have to vet every candidate.  Not the Big X.  YOU!

And you need to remember that some of this AI and analytics stuff is literally so complicated that you need degrees in mathematics and computer science and sometimes a decade of experience to get it right! (It took the doctor two advanced degrees and building advanced analytics and optimization systems for multiple leading companies in the 2000s before he really understood the art of the possible and, more importantly, what was relevant for an industry and what was not.)

In other words, it’s okay if you don’t really get it as a manager. Just find those one or two people who do who you can trust, pay them well, and let them do what they need to make your department look good (be it hire internally, choose a consulting firm you never heard of, hire former colleagues on short-term contracts, use their contacts to get the right person at the Big X, etc.).

They’ll get the job done right and be quite happy to let you take all the credit IF you give them regular raises and a bonus any time they do particularly well. Just put your ego aside and let the people who get it make the tech/analytics decisions, and everyone will win!

But, whatever you do, don’t throw a poorly formed project description over the wall in advanced analytics and AI to a Big X (or any other vendor) and expect good results.

If you don’t know what you need, why, and how you expect to get it, instead focus on what you understand and Use the Big X firm for all of the things you know it is good at, understands implicitly, and has the history and experience to figure out simply based on the type of company you are.   Used appropriately, like any service provider, a Big X can deliver amazing value.   See the linked article on when you should use Big X in our opinion.

Fail Fast And Forward? How About Not Failing At All?

A recent article over on The Sourcing Journal indicated that one should “Fail Fast and Fail Forward When Implementing AI into Workflows”. WTF? Why fail at all? Especially since if you’re using AI where you are expecting a high risk of failure, there’s no reason to expect that you’ll only fail once, or that you can actually fail forward.

Now, if we were talking traditional ML, where it’s just a matter of continually expanding and refining the model and training data, tweaking the parameters, and starting small, then fail fast, fail forward, get it working, use the spice weasel, knock it up another notch, and continue until you have automation across the platform in appropriate places, it would be good advice.

But when we are talking full fledged Gen-AI (which is the article’s focus) based on massively large and entirely unpredictable LLMs or super-sized DNNs, you can fail fast, but, with absolutely no way to control the models, you can’t fail forward. So while fail fast and fail forward is a good motto in general for technology, process digitization, and automation, as long as you take things step by step and control the risk, it’s not appropriate at all when we are talking about AI!

Recruiting Top Procurement Talent is More than Just Standard Best Practice Recruiting …

A recent article over on the Supply Chain Management Review proclaimed to offer 9 Ways to Recruit Top Procurement Talent in Today’s Competitive Market. So of course it caught our attention. However, the tips it offered were just standard Best Practice Executive Recruitment, and it was quite disappointing. According to the article, the best way to recruit top procurement talent, which is the rarest talent out there right now, is to:

  • Personalize the Recruitment Process
  • Optimize the Candidate Experience
  • Clarity and Transparency on the Role
  • Tangible Opportunities for Growth
  • Flexible Work Arrangements
  • Holistic Compensation Packages
  • Consistent Employer Branding
  • Empowered and Inclusive Workplace
  • Understand and Act on (Current) Employee Priorities

… and absolutely, positively NOTHING here is specific to Procurement talent. It’s the basics you should be employing when recruiting for ANY role as you are seeking out the talent (which is NOT coming to you). If you want Procurement talent, you have to do more than this. For starters, we recommend

  • Parity Compensation with Sales … in an average company, if that company is lucky, 10 cents of every sales dollar goes to the bottom line but the sales person, on top of a nice baseline salary, will get a 10%, 20%, and even 30% of the sale; in comparison, every dollar of spend reduction achieved by a Procurement professional goes straight to the bottom line (i.e. 10X the ROI, or more) and their commission is a pat on the back and maybe a trip to ISM … they should be incentivized to go above and beyond baseline expectations if you truly want the best (of the best)
  • Adequate Technology Budget … as almost half of organizations don’t have any modern sourcing and/or procurement technology solutions/platforms and the majority that do have not yet digitized the full Source-to-Pay+ process to maximize Procurement productivity and profits
  • Adequately Sized Procurement Department … while technology will allow the team to do more with less, as per the Hackett Book of Numbers, there’s still a minimum number of personnel you are going to need to sufficiently analyze and monitor the spend, strategically analyze and source all the necessary categories, keep the tail spend under control, improve sustainability, support the brand, etc. etc. etc.

… but what we really recommend is not trying to lure away more than one high talented Procurement individual (to be your Director / CPO if you don’t have one) but instead lure away top talent with the potential to become Procurement Rock Stars because they have deep category expertise in multiple categories the organization needs to source; outstanding project management, technology/math, and management skills; and the right EQ to be both a team player, team leader, and supplier development professional.

In particular, you should consider looking for:

  • new age logistics leaders (who can model supply chains, complex landed / ownership costs, and understand lead times and extended supply chain risks);
  • astute supply chain modellers and designers from consultancies who have particular expertise in your domain
  • engineering leaders (who know their categories inside and out, do complex modelling on a daily basis, have been trained in project management and managed projects, and have leadership and people skills
  • corporate / supply chain insurance actuaries and professional economists who have the expertise to appropriately predict, cost, and manage risk and create proper risk-aware sourcing events and risk mitigation plans

… and then training them on your Procurement processes, which will be easy-peasy for them to learn compared to the complex logistics, supply chain modelling, science/technology/engineering/math knowledge, and actuarial science and econometrics they had to learn to do the job they’re doing now.

Moreover, depending on your domain, you may also be looking for chemists (chemical manufacturing), biologists (pharmaceuticals), lawyers (if you do a lot of contracting / contingent labour / outsourcing), etc. The reality is that the best of the best for your organization likely aren’t in Procurement yet (because, as we pointed out in our recent article on how If You Want Good Procurement People YOU NEED TO TRAIN THEM).

Don’t Overlook the Network (that Corresponds to the Award)

According to a recent Forbes article on Supply Chain Software’s Best Return on Investment, per $1 Billion in company revenues, no supply chain application has a better return on investment (ROI) than network design! And the doctor couldn’t agree more.

Just like strategic sourcing decision optimization is the best bang for the buck in Source to Pay, with documented, average returns of up to 12% year-over-year (by multiple analyst firms) as it can minimize total landed cost, and even total cost of ownership in some cases (including internal inventory costs, waste costs, etc.) and not just bids, while ensuring all business constraints are adhered to, an optimization-backed network design application can help minimize overall organizational supply chain costs. This is because a supply chain network optimization platform can minimize transportation costs, intermediate warehousing costs, tariffs, waste, emergency replenishment in the case of an unexpected stock-out, carbon/GHG, etc.

Plus, as the article notes:

  • network design solutions are absolutely necessary to uncover business value when the production-distribution infrastructure is large (and not just because you just can’t model that infrastructure in a spreadsheet)
  • network design solutions can look at Total Cost to Serve (TCTS) across a wide-range of fixed and marginal costs (and identify unintended circumstances of network design changes that could cause marginal costs to skyrocket)
  • network solutions can allow for multiple scenarios to be defined and multiple models to be run and cross-model and cross-scenario Pareto analysis to be run, trade-offs to be analyzed, and the best decisions to be made

One point that should not be overlooked is that projects will take some time, and it’s not because of the complexity of the network modelling or the time it takes to run the scenarios (as modern computing architectures are super powerful and modern algorithms highly optimized to be efficient and take advantage of massively parallel processing), it’s because you need a lot of good, clean, data. It can take months (and months) just to identify, collect, clean, and enrich the data required for global supply network optimization. But once you do that, the ROI will be beyond the expectations you have for every other supply chain solution.

The article, which describes a project to redesign the spare parts supply chain for a global automotive manufacturer, resulted in a redesign that immediately reduced network costs by 4% and identified transportation cost reduction opportunities through consolidation and re-allocating of routes to a smaller set of 3PLs that will save another 2.5% at contract renewal time. In today’s climate, especially in direct supply chains, a savings of 6%+ across the entire supply chain, and not just one category, is phenomenal!

Plus, as the article notes, in the age of sustainability, reduced transportation mileage and fuller trucks also equate to significant reductions in carbon emissions. WHAT A BONUS!