Author Archives: thedoctor

To What Extent Can True Supply Chain Value be Created under Private Equity?

the doctor recently encountered a headline that implied that there could be supply chain value creation under private equity ownership, which, even before he made it to the tenth word, caused him to stop and ask just how much supply chain value could be created under private equity as the entire point of private equity is NOT to create supply chain value but to increase investment value in the short term for the fund contributors who are essentially the shareholders of the private equity firm.

And when we are talking short-term investment value creation, usually the biggest value creation levers are:

  • revenue / customer base increase
    (Wall Street Values this the most, so most investors value this the most as it gives them a better exit opportunity)
  • operational cost reduction
    (layoffs of the perceived dead-weight or high-earners, job consolidation, etc.; office space downsizing; cloud/SaaS infrastructure reduction/optimization; etc; as it’s an immediate reduction on the balance sheet which results in an immediate profit increase)

Supply chain is not the top two, and in many cases it’s not even in the top twenty, when you’re talking short-term. Mid-term (5 years), it gets up there (but not high enough for anything significant to be done), and long-term, it’s likely the second top value driver there is (as we must always remember that financiers will always put revenue first) as it can lead to cost reductions and value generation that can exceed any short-term operational cost reduction as the benefits from a supply chain improvement will be realized every year (and not just one time).

When the doctor got past these thoughts and returned to the article, the first thing the article noted is that private equity (PE) and the supply chain have been somewhat at odds with each other … due to what we could call a timeframe imbalance since PE typically aims to secure an exit within 3-5 years while supply chains … tended to operate on longer timespans. (Often much longer timespans.)

Now we must admit that, thanks to the pandemic, PE firms now realize more than ever that, without a functioning supply chain, any traditional business that needs to buy and sell physical goods to function is up Schitt’s Creek without a paddle. As a result, the smarter PE firms have started to give the supply chain some attention, but for the most part their focus and investments are usually limited to qualifying suppliers and carriers, not transforming global supply chains.

Moreover, the execution of this focus on qualifying suppliers and carriers is usually part of a broader strategy to make better decisions, which needs better data, so the focus ends up being a data, analytics, and BI (which is supposed to stand for Business Intelligence, but in some companies just ends up being BullSh!t Interpretation when they buy the wrong tool) strategy and an investment in the right SaaS tools to do that, and not on actual supply chain modelling, (re)design, or transformation. The best companies will procure modern S2P and ERP platforms which support real-time visibility into the location of all product — be they inventory, in transport, and ordered — by way of message and e-Document (EDI, XML, etc.) exchange with supplier platforms, but that’s as far as they’ll go on the “supply chain“.

And when the doctor finally brought himself to finish the article, it mostly admitted all of this, but finished by saying that there has been a surge in PE investment into supply chain technology, which he knows to be true.

In other words, PE firms do invest in supply chain technology and do utilize such to maximize the value in the supply chains of the companies they invest in, but they don’t actually invest in the actual supply chain, which is a much greater source of value (and carbon reduction, FYI) in the long term. And, as the doctor thought, the title was quite misleading. PE firms, if they took a longer term view (even 8 to 10 years would be enough), could totally transform supply chains, but, at least for now, all they do is tighten up what’s there in the hopes of making the company profitable enough to flip it to a bigger PE firm or take it public. So, to be brutally honest, there is no true supply chain value created under Private Equity today. (Hopefully tomorrow is a different story, but we’re not holding our breath.)

Disagree … contribute to the conversation on LinkedIn.

If You Want Good Procurement People …

TRAIN THEM!

A common problem among all Procurement departments is their ability to find good, educated, experienced people. The reason for this is simple: there just aren’t enough good, educated, and experienced people to fill all the Procurement positions that should exist among corporations world-wide.

Why?

1. Procurement isn’t Sexy

People go into careers that are attractive. These are careers that are held in high regard (like doctors and lawyers), careers that pay well (like finance and tech), careers that are currently in high demand where unusually high premiums can be found in the right locations (like nursing or remote mining/O&G positions), or careers that bring fame (like acting, entertaining, and professional sports). People don’t go into careers that no one’s heard of, careers that have a negative stigma, or careers that don’t pay well. Guess what bucket(s) Procurement falls into? The latter three. No one’s heard of it (who even advertises their world class Procurement, yet alone makes it sexy — that’s right, no company on earth). It’s still thought to be the Island of Misfit Toys. And many people think back office purchasing pay scales are akin to entry level AP clerks.

2. There are No Real Procurement Programs

Prestigious Universities have prestigious business schools. These focus on executive management and basic operations. The best of these will also teach classic logistics. There are only a few Supply Chain Management programs globally, and none of these teach modern Procurement platforms and processes as a general rule. A few have brief introductions to modern spend analysis or e-Auction or RFP platforms, but that’s literally two decades old tech in our field. No one coming out of University has any real understanding of modern procurement processes, best practices, or platforms.

3. Most Procurement People Have Very Narrow Skill Sets

When you’re in Procurement because you get put there, fall there because there was nothing else at the time and you needed a job, or voluntarily move there to help the company because you demonstrated a knack for buying certain categories and without you, the company would be suffering and possibly have to layoff your friends, you didn’t go there because you had the right education and experience and knew it was the best job for you. Furthermore, when companies don’t invest in the education you need to learn end-to-end processes, best practices, and category specifics outside of the area you came from, you end up developing, usually by trial and error, a very narrow skill set in terms of applications you can use, processes you know, and market interpretation to determine if the offer is reasonable in current market conditions. This makes it very hard to jump to another job and be a good buyer in another category, or even a similar category where you would have to buy a whole new set of parts from a whole new set of suppliers in a whole new geography.

Thus, it’s going to be very hard, for any intermediate position, to find the right person who can walk in and do the job at market average performance day one.

However, Procurement is not rocket science, open heart surgery, or CPU design. It’s not hard to find very smart engineers, mathematicians, technologists, pharmacists, chemists, etc. who can, with focussed training in best-practice procurement processes and platforms, very quickly pick up the basics of Procurement and use their deep knowledge of products and R&D/Engineering/Manufacturing needs to identify the best products, suppliers, and partners for the organization. These highly educated individuals will also have a decent background in mathematics, algorithms, and logic to learn the spend analysis / market intelligence platforms and quickly identify market average prices and costs for products and parts and be able to analyze bids against current organizational prices, market prices, and should cost models to identify those suppliers offering fair quotes as well as additional service-based value.

With a few weeks of focussed training on key processes and platforms, these resources can often be up and running effectively, and with a few months of training over their first few years, quickly progress to a top-tier performer. All you have to do is bring back the Learning & Development budget and train them by hiring appropriate analysts and consultancies to design/deliver the courses they need to be effective for your organization. And even though custom courses can cost considerable up-front dollars, 10K is nothing if it helps a top-tier resource identify a 10% savings on a 10M contract, as that’s literally a 100X return on your investment. (Remember this the next time someone considers cutting the training budget for Procurement as the return on proper training for a good resource will always exceed the investment many times over.)

The Seven Patterns of Artificial Idiocy … in Procurement

AI proponents, who keep telling us it stands for Artificial Intelligence which does not exist, keep pushing the benefits of AI while sweeping all of the detriments under the rug so you’ll sign that multi-year deal now (and they’ll have the money to keep researching the technology in the hopes that their continued efforts will prevent the bad from happening again). (And while the tech will get better and the success rates will improve, the very nature of the technology they are deploying is such that it is impossible to prevent the bad because the technology is not intelligent and not deterministic, as per our many previous posts on the subject. The best will eventually get success rates up to 99%, but that’s still a 1% failure rate and, in Procurement, it only takes one catastrophic failure to wipe out all of the successes made in the rest of the year. It only takes one bad decision that shuts down a multi-million production line, results in class action lawsuits for the release of unsafe products in to the market, or results in seizures and destruction of millions of dollars of inventory when the products violate import restrictions, etc. to deliver masses losses.)

And the benefits they push typically fall into one of the seven patterns of AI that the AI proponents keep telling us AI will deliver. To help you better classify the false promises, we’ve decided to cover the seven patterns, example promises, and realities you will encounter if you implement current iterations of technology that employ Artificial Idiocy.

HyperPersonalization
Promise: The system will adapt and evolve over time so that when you log in, you see exactly what you need to see, in priority order for you.
Reality: The system comes with a set of widgets, and all the AI does is reorder the alerts/notifications/tasks/reporting views in each widget based on a priority weighting where the weights are recalculated based on recency in access so, at the end of the day, it just keeps showing you what you just looked at and truly important alerts, because you haven’t regularly looked at them, are at the bottom of the widget and off the screen since you never scroll down inside the widget. Classic rule based systems work better.

Recognition
Promise: 100% effective automated invoice processing, routing, and approval
Reality: it only recognizes invoices from suppliers who invoice regularly in a format that never changes; and only if the line item descriptions are never abbreviated; and only matches properly if the PO number is included; 10%+ of invoices have to be manually processed, and abbreviation errors cause misclassifications of units that sometimes don’t get caught until after payment is issued

Conversation and Human Interaction
Promise: natural language interaction, including voice to text
Reality: due to the ambiguous nature of the English language, the number of follow on questions the AI has to ask just to produce a simple report requires the user to spend five minutes giving clarifications and specifying parameters that could be point-and-click selected in 30 seconds; efficiency is flushed down the virtual toilet

Predictive Analytics & Decisions
Promise: what the price will be when, and why
Reality: works really well 95% of the time, with price accuracy often within 2% to 3% and demand predictions (outside F&B and other highly unpredictable industries) within 3% to 5% at the macro/rollup level, but when a trader illegally tries to run up the market with excessive trades, and prices start to skyrocket and the algorithm doesn’t know this is unusual/short-term, it may predict extreme price increases at contract expiry in 6 months, and automatically early renew the contract for you at rates 30% to 130% higher than it should (before the costs become unaffordable)

Goal-Driven Systems
Promise: Sustainable Buys with Cost Savings
Reality: Unsustainable buys as cost is overweighted and over-prioritized in all situations; ’nuff said

Autonomous Systems
Promise: They will procure automatically and do better than humans
Reality: They procure automatically and occasionally do better than humans, usually do on par, and occasionally make such disastrous decisions that the company does well to avoid bankruptcy …

Patterns & Anomalies
Promise: They will detect unusual spending patterns and detect the best opportunities for savings and the most likely instances of fraud
Reality: Unusual spending patterns don’t mean savings, and usual spending patterns don’t mean absence of fraud, and you get all kinds of “priority alerts” with no savings opportunities while the largest opportunities go unidentified and collusion frauds are never detected

At the end of the day, as we’ve said again and again, Procurement Automation: Good, (AI) Automated Procurement: Bad. Only you, dear reader, are intelligent and, thus, only you should do the thinking and only use technology for what it’s good at, the thunking.

While A Good Procurement Tool, Amazon Business IS NOT The Answer to Increasing Revenue and Boosting Resilience in Procurement!

OI! This is yet another article the doctor shouldn’t have to write, but after encountering this thinly veiled advertisement for Amazon Business masquerading as a sponsored article on Thriving Through Disruption over on Supply Chain Dive, it appears he has no choice because simply transferring your Procurement to a third party, like a GPO (Group Purchasing Organization) or Outsourced Procurement Operation, doesn’t necessarily solve the problems you are having (it just changes ownership of them). Furthermore, no single organization, including Amazon Business, is going to even be aware of, yet alone work with, all potential suppliers, and, thus, no single organization is going to be capable of maximizing your options, especially around DEI (which is something else the article trumps up).

As the article notes, resilience is KEY to successful Procurement given that major sources of global supply chain descriptions — global conflict, changing climate, resource shortages, human error (and just plain incompetence), political unrest, and much more — have only increased since the transition from pandemic to endemic for COVID, and the rate of increase shows no sign of slowing down (especially with labour disruptions also heading towards all time highs along with natural disasters).

And, as the article notes, your Procurement department needs to be agile. Unknowns abound and disruptions, even high probability ones, cannot be predicted. And even the best laid plans for risk mitigation can be voided when those plans depend on alternate supply from a supplier or distributor that gets impacted from the same natural disaster, border disruption, or labour strike. As such, an organization needs near real-time supply chain monitoring, a diverse supplier base, and the capability to react quickly when the unexpected, but inevitable, happens.

And, as the article notes, with the backing of an e-Procurement system … organizations can discover new insights that could help them adapt effectively to a changing supplier landscape, fostering flexibility and enhancing robustness.

But, and this is a key point, Amazon Business is NOT an e-Procurement system. It’s a marketplace. More specifically, it’s a very good marketplace, and one that EVERY organization should have in its arsenal for low-volume/tail spend/indirect Procurement (because, like a GPO, the volume it can deliver to suppliers can make it very attractive for suppliers to advertise its best prices up front to win all of the customers on Amazon Business), but it’s NOT a modern e-Procurement platform. (And if you want to understand what this is, and which vendors may provide this to you in a marketplace/vendor agnostic fashion, check out Parts 3 to 7 of Sourcing Innovations 39 Part Series to Help You Figure Out Where to Start with Source-to-Pay, where Part 7 contains a list of over seventy [70] e-procurement companies to check out.)

Similarly, when the article says supplier diversity is a powerful way to enhance service, quality, and value by promoting an inclusive, proactive approach to purchasing from individuals or groups who are members of a traditionally underrepresented or under-utilized group. it is also dead on. Furthermore, as the article says, with the right solutions in place, Procurement leaders can extend equitable access into their sourcing practices, creating a transformative opportunity for small, local, or diverse businesses, as well as their own organizations. And, yes, DEI suppliers can build capabilities, create opportunities, and strengthen community and, yes, a DEI program focussed on including diverse suppliers in sourcing events will help an organization broaden its supply chain, but Amazon Business alone will NOT be sufficient to identify and validate all of the diverse suppliers an organization should be considering. It is true that it is one of the few marketplaces that has designed features and tools to streamline the identification and validation of diverse suppliers, but it’s also true it only has so many vendors on the platform, and the majority are for indirect and MRO — not direct and not services. So it’s NOT a complete solution.

Now, let’s be clear that we’re not trying to dismiss Amazon Business here, because, for many mid-size organizations, it should be part of their Procurement Toolkit and even part of their tail-spend / non strategic purchasing strategy as it can really simplify a Procurement buyer’s life by offering verified products from verified suppliers with reliable delivery dates at good prices. But it’s not an e-Procurement platform and definitely no where close to a complete solution. Understand it for what it is, use it as appropriate for the great value it will give you, but don’t have unrealistic expectations, or the disruptions that eventually be arise will be much more damaging and shocking then they should otherwise be with an appropriately managed multi-pronged organizational Procurement strategy.

There are Three Primary Parts to Procurement Orchestration

Procurement Orchestration is the craze, presumably because Procurement shouldn’t operate in a vacuum. There are a number of startups just focussed on orchestration, a number of analyst firms are jumping on the orchestration bandwagon, and a number of enterprise automation platforms are all of a sudden claiming to be procurement orchestration platforms to get in on the buzz. But there’s a lot more to Procurement Orchestration than just application automation. A lot more.

Procurement Orchestration, which we included in our 39 Part Series to Help You Figure Out Where to Start with Source-to-Pay in Parts 34 to 36 and 39, MUST Address, at a minimum, the orchestration of:

  • procurement data
  • procurement process
  • procurement stakeholders

First of all, good Procurement needs to be data-informed. (Not data driven, data informed. Data driven means that all decisions based on the available data, which is never complete. You can accurately capture all bids in an RFP, previous OTD metrics, previous defect metrics, subjective quality ratings, ESG data, etc. but you can’t capture relationship data, innovation support, etc. and these are also factors that are important in Sourcing and Supplier Selection.) This means that all available data needs to available to the Procurement team. It doesn’t have to be centralized in one system or pushed to a data warehouse / lake / lakehouse, but the source system (that holds the golden record of truth) for every piece of data needs to be identified and integrations created to allow the necessary data to be accessed as needed by the Procurement system currently being used.

Secondly, good Procurement needs proper processes. That’s more than just application orchestration as not all Procurement teams will have applications for every step of the process, and even those that have major applications for every major stage (intake / need identification, spend analysis / opportunity / procurement process identification, sourcing, supplier onboarding / management, contract negotiation and governance, e-Procurement/PO Generation and Management, Invoice Management and OK-to-Pay) will still need to orchestrate intermediate process steps such as stakeholder collaboration, external vendor risk/ESG review, etc.

Thirdly, good Procurement needs to involve all of the relevant stakeholders. The category manager, the risk manager, the budget holder / executive, the in house counsel, etc. All of these individuals need to be able to interact with the procurement process and artifacts at the right time, and through their applications if they have special tools to do the risk analysis, budget analysis, contract review, etc. Thus, supporting procurement goes beyond just supporting procurement applications and processes, but peripheral applications and processes as well so that all stakeholders can be part of the process and effectively contribute their expertise and experience.

Remember this the next time a jazzy tool tries to lure you in with pre-built Procurement platform integrations or easy, visual, procurement workflows. That’s just part of the puzzle.