Category Archives: Best Practices

The Power of Optimization-Backed Sourcing is in the Right Sourcing Mix Across Scales of Size and Service

the doctor has been pushing optimization-backed sourcing since Sourcing Innovation started in 2006. There’s a number of reasons for this:

  • there is only one other technology that has repeatedly demonstrated savings of 10% or more
  • it’s the only technology that can accurately model total cost of ownership with complex cost discounts and structures
  • it’s the only technology that can minimize costs while adhering to carbon, risk, or other requirements
  • it’s one of only two technologies that can analyze cost / risk, cost / carbon, or other cost / x tradeoffs accurately

However, the real power of optimization-backed sourcing is how it can not only give you the right product mix, but the right mix across scales. This is especially prevalent when doing sourcing events for national or international distribution or utilization. Without optimization, most companies can only deal with suppliers who can handle international distribution or utilization. This generally rules out regional suppliers and always rules out local suppliers, some of whom might be the best suppliers of goods or services to the region or locality. While one may be tempted to think local suppliers are irrelevant because they will struggle to deliver the economy of scale of a regional supplier and will definitely never reach the economy of scale of a national (or international) supplier, unit cost is just one component of the total lifecycle cost of a product or service. There’s transportation cost, tariffs, taxes, intermediate storage, and final storage (of which more will be required since you will need to make larger orders to account for longer distribution timelines) among other costs. So, in some instances, local and regional will be the overall lowest cost and keeping them out of the mix increases costs (and sometimes increases carbon and risk as well).

When it comes to services, the right multi-level mix can lead to savings of 30% or more in an initial event. the doctor has seen this many times over his career (consulting for many of of the strategic sourcing decision optimization startups) because while the big international players can get competitive on hourly rates where they have a lot of resources with a skill set, when it comes to services, there are all in-costs to consider, which include travel to the client site and local accommodations. The thing with national and international services providers is that they tend to cluster all of their resources with a certain skill set in a handful of major locations. So their core IT resources (developers, architects, DBAs, etc.) will be in San Francisco and New York, their core Management consultants will be in Chicago and Atlanta, their core Finance Pros in Salt Lake City and Denver, etc. So if you need IT in Jefferson City, Missouri, Management in Winner, South Dakota, or accounting in Des Moines, Iowa, you’re flying someone in, putting them up at the highest star hotel you have, and possibly doubling the cost compared to a standard day rate.

However, simple product mix and services scenarios are not the only scenarios optimization-backed sourcing can handle. As per this article over on IndianRetailer.com, retailers need to back away from global sourcing and embrace regional (and even local) strategies for cost management, supply stability, and resilience. They are only going to be able to figure that out with optimization that can help them identify the right mix to balance cost and supply assurance, and when you need to do that across hundreds, if not thousands, of products, you can’t do that with an RFX solution and Microsoft Excel.

Furthermore, when you need to minimize costs when a price is fixed, like the price of oil or airline fuel, you need to maximize every related decision like where to refuel, what service providers to contract with, how to transport it, etc. When it can cost up to $40,000 to fuel a 737 for a single flight (when prices are high), and you operate almost 7,000 flights per day with planes ranging from a gulf stream that costs about $10,000 to refuel to a Boeing 747 that, in hard times, can cost almost $400,000 to refuel, you can be spending $60 Million a day on fuel as your fleet burns 10 Million gallons. Storing those 10 Million gallons, transporting those 10 Million gallons, and using that fuel to fuel 7,000 planes takes a lot of manpower and equipment, all of which has an associated cost. Hundreds of thousands of associated costs per day (on the low end), and tens of millions per year. Shaving off just 3% would save over a million dollars easy. (Maybe two million.) However, the complexity of this logistics and distribution model is beyond what any sourcing professional can handle with traditional tools, but easy with an optimization backed platform that can model an entire flight schedule, all of the local costs for storage and fueling, all of the distribution costs from the fuel depots, and so on. (This is something that Coupa is currently supporting with its CSO solution, which has saved at least one airline millions of dollars. Reach out to Ian Milligan for more information if this intrigues you or how this model could be generalized to support global fleet management operations of any kind.)

In other words, Optimization-Backed Sourcing is going to become critical in your highly strategic / high spend categories as costs continue to rise, supply continues to be uncertain, carbon needs to be accounted for, and risks need to be managed.

A Truly Great Article on Transforming Legacy Procurement

If you’re a new occasional reader, you might think that one of the doctor‘s primary goals is to just rip big analyst firms and publications apart when they publish ridiculous results (based on ridiculous surveys) or ill-conceived articles with little to no good Procurement content (if we’re lucky), or wrong content (if we’re not) that, as far as the doctor is concerned, would have been just as good if they unleashed an intern with no knowledge of procurement on Chat-GPT (and you all know what the doctor thinks of that!).

However, that’s just because, as Procurement is hitting the limelight (as a result of all the supply chain disasters we’ve been facing that they have been expected to deal with), coverage has increased significantly (to capitalize on the hot topic), and most of it is, frankly, NOT that good. However, every now and again there is a truly tremendous article published under the radar, and when the doctor finds one of those, he’s very happy to bring your attention to it. Especially when it’s written by a practitioner who obviously gets it.

In her article on From Tactical to Strategic: Transforming Legacy Procurement, the author reminds us that the majority of large scale transformations fail, that a major challenge for older companies is that they have no comprehensive view into global spend, that e-Procurement systems offer many fixes, but also that if they are not optimized for your specific business needs, you could be missing out on opportunities for better supplier partnerships and cost leadership.

This does not mean that you should build your own (overly) customized system, or insist that the systems support your current processes (before determining if those processes are better than the processes supported out-of-the-box by the new systems that have been developed based on typical best practices of the industries the vendor serves), but that the solution has to be appropriate to your industry and support some customization where you need it for specific products, services, or processes that make your business unique (but only those — don’t reinvent the wheel already there where you’re the same as everyone else).

The author then goes on to outline a three-phase approach to identifying, selecting, implementing, and, most importantly, maximizing adoption of the platform — which is an ultimate key to success.

the doctor highly recommends you read this article on going From Tactical to Strategic: Transforming Legacy Procurement.

Finally! A “Think Tank” Article that Gets It Right!

the doctor has been reading a lot of “think tank” and “thought leader” articles lately that are completely off the mark. Some are so bad that he’s wondering if the publications are paying interns who know nothing about the space to use “chat j’ai pété” (Chat-GPT) to hallucinate content for them. (And, as you’ve seen, some are so bad and/or make him so angry that he just has to rant about them. Our space don’t get no regard at all as it is. The last thing we should be doing is providing anyone who takes the time to read about it with misleading or wrong information).

All that being said, Supply Chain Brain recently published an article on 2024 Predictions: A New Era of Strategic Supply Chain Design by Donald Hicks, the CEO of Optilogic. In it, he makes six predictions for the new era of strategic supply chain design in 2024.

The first five predictions were good.

1. A shift from short-term to strategic thinking.

COVID demonstrated that we’ve reached the end of short-term JIT thinking, and the recent geopolitical turmoil since has only heightened that reality. Any company that wants to survive has to go back to focus on mid-to-long term strategic thinking that will help it mitigate the plethora of risks it is being hit with and assure supply.

2. An end of the age of unlimited cheap suppliers.

Especially since the majority of these were based in China. As the author notes, China-US relations are deteriorating fast and the Chinese economy is underperforming. Moreover, as a result of COVID, logistics are uncertain and considerably more expensive from China (due to less carrier space, as many ships were scrapped during COVID for insurance settlements, and the need to sail around the capes, due to the Red Sea situation and the prolonged Panamanian drought). So, companies need to start looking elsewhere, and since they let their best suppliers in Mexico and South America wither and die, there aren’t many good options at the moment.

3. Demand for vendor transparency.

In addition to customers becoming more discerning, as the author notes, there are more supply chain regulations that need to be adhered to globally, more sustainability regulations, more denied party regulations, and so on. Companies need to know who they’re dealing with; that all supply chain, sustainability, and regulatory requirements are met; and that any desires of its customers can be met.

4. Market turmoil and the rise of new leaders.

This year is projected to witness down rounds, market turmoil, and a reassessment of strategies. Most definitely. VC went too hot and heavy before COVID trying to force unicorns where the foals weren’t even breeding stock, and then lost heavy in the SVB failure; and PE, trying to get a piece of the payments, online collaboration, and/or FinTech market during COVID paid ridiculous multiples for rather basic offerings that weren’t even complete — and that would never demand the price tag the investors expected. As a result, these PE firms are now looking at payback timeframes of a decade or more, if they’re lucky. This means that cash is sparse, investments will be sparser, and some companies (that overspent and can’t get the valuation) will not survive.

5. Digital Twin Skepticism.

Every supply chain technology vendor is clamouring to tell you about their digital twin capability, but the term “digital twin” is a marketing creation that can’t live up to its ambitious name. Companies don’t always have all the data (or quality data) relating to supplier orders and timelines, inventory levels and factory production in separate operational systems, much less a single location.

There’s no digital twin without complete data, and there’s no complete data. Modern manufacturing companies and direct buyers are figuring this out and not falling for outlandish claims anymore.

The sixth prediction was absolutely fantastic!

6. Artificial intelligence exhaustion, and a return to old-school evaluation.

Hear, hear! Smart companies are getting fed up of the ridiculous claims made by new Open/Gen-AI companies and the paltry results that were delivered, if any. They’re also fed up of the high-price tags relative to the limited value they’re received from “AI” so far.

Thus, rather than relying on the mere claim of being AI-enabled, companies should be expected to showcase their capabilities, substantiate their claims with proof, and provide clear reasons for belief, signalling the return to a more traditional approach to purchasing decisions.

Hear, hear!

We Need Integrated Business Planning (IBP); But it Won’t Work Without Proper Organizational Structure and Roles – And Definitely Won’t Work Without a CRO and CPO!!!

There’s been a number of articles lately, which we’ll likely discuss in later articles, about the need to move to integrated business planning (IBP) as a means to combat, and minimize, supply chain disruptions. While those articles have a point, there are two things they are missing, at least so far. One, while IBP can minimize certain types of preventable disruptions, it doesn’t help much in mitigating disruptions that are unexpected. Two, it requires end-to-end modelling of, and monitoring of, overall business processes, and without the right representation of the right stakeholders in the process, this never happens.

And the right representation usually doesn’t happen because, as we kind of hinted at in our last article on why You Need A CPO, most organizations don’t have the right C-Suite, and, thus, the right people aren’t included, or at least properly represented, in integrated business planning (IBP), and, as a result, the right processes, or at least the right assumptions and data, aren’t included, and the planning fails.

If you look at the goals of Integrated Business Planning, which include, but are not limited to:

  • aligning strategic objectives with operational and financial goals
  • aligning product strategy, R&D, and manufacturing with objectives and supply chain
  • ensuring demand forecasting is influenced by market research and historical sales data and connected to procurement
  • ensuring procurement strategy aligns with demand forecasting, risk management, and the organization’s current supply chain network
  • ensuring network and logistics changes and optimization takes into account procurement, risk, regulatory compliance, and ESG goals
  • ensuring marketing and sales focusses on current product availability and aligns with the product strategy dictated by market research
  • creating an all-inclusive profitability analysis that takes into account true end-to-end lifecycle costs
  • ensuring inventory is balanced with logistics times and disruption risk so that overall cost (balanced between inventory cost and losses from stockout) is the most appropriate for the organization
  • creating a cash-flow analysis that considers not only all inflows and outflows but the timings so the organization can balance debt/loans, on-time payments, early payments, and investments to maximize the return on every dollar

and the expected results which include, but are not limited to:

  • enhanced revenue growth
  • faster and better (data-informed) decision making
  • improved customer satisfaction
  • better product lifecycle management
  • faster supply chain disruption responses
  • increased target ownership and the ability to rapidly revise, and commit to, plans
  • better planning efficiency

you cannot

  • align objectives with goals unless you have the owners of all objectives, impacted operations, and finance involved … and this dictates a complete C-Suite with all the key parties, including, but not limited to the CEO, CFO, CPO, CRO, and, if present, COO, CTO, and any other CXO role NOT fully owned by another CXO
  • align strategy without the marketing & sales perspective (CRO), the market research (CRO or COO), the R&D/Manufacturing owner (COO or CSCO), and the procurement perspective (CPO)
  • you need the CRO, COO, and CPO to agree on the demand forecast as all parties need to deliver
  • … and the CPO needs input from the Risk Officer and the CSCO to finalize the strategy
  • the CSCO cannot optimize the supply chain network without the CPO, Risk Officer, Compliance Lead, and ESG Expert
  • the CRO needs to continually monitor input from the CPO and CSCO to ensure that products are marketed and sold at the right time as manufacturing challenges, logistics delays, inventory hiccups can change product availability daily
  • profitability needs to take into account all organizational costs, which means you need to look at procurement costs (CPO), operational costs (COO), HR costs (CFO, COO, or Head of HR), logistics and tariffs (CSCO), etc. it’s way more than revenue minus COGS minus overhead
  • and, while the cashflow belongs with the CFO, the CFO needs insight into organizational wide costs and commitments to figure it all out

and you will not

  • reliably enhance revenue without a CRO;
  • be able to make better data-informed decisions with missing data;
  • improve customer satisfaction without market research, procurement input, manufacturing quality;
  • better manage lifecycles without integrated input from market research to warranty repair and all steps in between;
  • respond quickly to a disruption without all of the integrated data to make an alternative decision as a mitigation response;
  • have all of the target, and task, owners in the same system; or
  • plan better with partial data. Never.

So you need all of the key roles, including the CRO and CPO that the majority of organizations are missing and, most importantly, you need the right structure — CRO and CPO at the top with the CFO and (if not done by the CEO) COO — with the other C-Suite roles reporting to the CRO, CPO, CFO, and COO as appropriate. For example, the CMO and VP sales under the CRO, CSCO and Risk/Compliance under the CPO, HR and R&D under the COO, etc.

In other words, all this push towards IBP is great, but you need a fleshed out, well oiled organizational structure, with all key roles filled, to support the processes with a collective holistic data view, or it just won’t work.

The Prophet‘s 2024 Procurement Prediction Number 10

A “CFA-like” Credential Emerges in Procurement and Supply Chain B+.

The Prophet says that the procurement and supply chain industries, similar to most others, excluding finance, are lacking any certifications/credentials, by those “in the know,” as a superior qualification for a job than even a top degree from a world-class or specialized university which is totally true.

The Prophet also says that organizations such as CIPS, ISM, SIG, etc., might disagree with this viewpoint which is also totally true. The Prophet does note that he supports all of these organizations, which the doctor does as well, and that he believes their training materials are highly valuable, which the doctor doesn’t across the board. (the doctor has seen some of their training materials. While some of their training materials provide a very good foundation, some of their training materials are not so good. Most of these organizations are very weak when it comes to analysis, tech-backed processes and practices, government/industry specific compliance requirements, risk management in today’s increasingly fragile global supply chains. etc. But when so many Procurement departments are struggling with the basics, understanding what their role is, and how ethics should enter the equation, we do need these organizations and that is why the doctor supports them while reminding you to do your homework when it comes to training. Use them for their strengths, not their weaknesses.)

The Prophet then suggests that in 2024, credentials will take on new meaning, and the best ones, particularly those challenging to obtain and requiring rigorous exams (which many fail), similar to the CFA in finance, will begin to take on a new significance in Procurement.

the doctor agrees with the principle, but does not agree it will happen this year, or even next year. Why? This will only happen with industry regulation, and that only happens in two situations.

  1. when an industry-led body gains enough support from the majority of professionals in an industry to make it a de-facto requirement in any employer of any size to get a high-level procurement job; no organization yet has that weight, and we’re not going to see the NLPA, SIG, APS, etc. all fold into the ISM, and definitely not into CIPS, which is pseudo-global (as it has made progress in some of the Commonwealth); this means that we’d need to see a new industry initiative that gave all parties representation and allowed them all to contribute to the standard and exam — for this to form, a certification to be adopted, and a test accepted will take years
  2. when a government forces a requirement that can only be met by a certification (and either creates their own or adopts one); governments move slow, and when we have the situation in the US where
    1. the republican focus is on ripping democrats apart for what they didn’t do, rolling back human rights to the fifties, and installing a wannabe dictator as President-for-Life
    2. the democrat focus is on shaming the republicans, selectively protecting the human rights they want, and taking up the former republican war mantle (since Trump just wants to be a dictator, which doesn’t profit the military complex) and doing everything they can to back Ukraine and Israel (including risking World War III with their Middle East bombing of Yemen vs. just destroying every Houthi vessel launched into the water)

    and the situation in the UK where

    1. the conservatives are too busy trying to keep Dishy Rishy from making them the laughing stock of the political world (as he’s so far disconnected from the common person he has no clue)
    2. the liberal (democrats) are too busy trying to counter the conservative support for the global wars and lack of focus on the situation at home by being extra woke (and we know how that fared in America) …
    3. when we look at the NHS mess and postal service mess and their apparent unwillingness to do anything meaningful about it (for longer than should be humanly possible to ignore a crisis), it seems that good procurement is the last thing on their mind

which are the two countries that would need to lead such an effort (as the EU is very focussed on climate change and AI and struggling to hold itself together now with active protests in about a third of its member states on any given day; heck it’s too focussed on attacking the farmers, already forgetting what happened when Stalin called the Farmers the enemy of the state. (See this article, for example).

Thus, while such regulation is sorely needed, it’s not likely to happen, if it happens at all, until the later part of the decade (unless, of course, The Prophet and the The Public Defender want to once again band together and take up the charge and lead the effort to bring all the necessary parties together).

The Prophet was dead on with three of the primary reasons we need it.

  • GPAs are no longer a measure of academic performance in many universities.
    The Prophet notes that, according to the Yale Daily News, “Yale College’s mean GPA was 3.70 for the 2022-23 academic year, and 78.97 percent of grades given to students were A’s or A-’s,” including the hard sciences and engineering! He also notes that the Michigan State Broad Business School (which includes the Supply Chain and Procurement degree programs) also experiences significant grade inflation, with 80% of students in 3 out of 5 undergraduate classes earning a 4.0. (Source)
    The situation is even worse in China where you don’t even get accepted to some Universities unless you are an A- or better student, and where you are under intense pressure to maintain that A, to the point where a student will drop out (or commit suicide) rather than risk being thrown out for not maintaining it. Now, this would be great except for the fact that As are often contingent on rote memorization and learning to do the work the “state way”, not always with any free thinking whatsoever. (And then graduating ONLY if they think you’ll agree to share what you learn when they allow you to go outside China for that Post-Doc/Professor position).
    The situation is better in Canada [except Quebec], but there are some Universities / Departments that are under great pressure to remain competitive to maintain grant and industry funding, and others where the professors are so overworked that they don’t even bother to confirm that a Master’s student in Engineering can manually calibrate an oscilloscope or a Master’s student in Computer Science can appropriately identify and test for all boundary cases in a simple procedure. (Remember, the doctor has been a Professor, and maintains regular contact with Professors and knows this to be truth.) How could you trust either to validate your equipment or your code? (He couldn’t!) (Regarding Quebec, the current premiere is taking Quebec’s status as a nation within a nation and essentially discriminating against anyone who is not French and willing to speak French as a first, and only, language. [See this article, for example.])
  • DEI/affirmative action preferences, which still exist (despite the supreme court ruling and their illegality if they enforce admitting or hiring a less qualified candidate), have removed objective academic criteria in both degree-based programs and industrial training programs. This has resulted in candidates who might only be a D being admitted to programs because of their minority status while non-minority candidates with Bs were excluded.
  • The best talent may no longer be pursuing traditional college or graduate programs. There needs to be an objective means of evaluating hard and learned skills for those who cannot afford or do not wish to invest time in university studies, especially those who have taken industry training programs or annex courses specific to what they need as well as obtained relevant real world experience under a mentor. (There’s a reason there used to be apprenticeships; some learning onlly happened under the guidance of a mentor.)

The only other reason that needs to be mentioned in the doctor‘s view is

  • without a certification, how can you know that any candidate, no matter how experienced and skilled they appear, knows all of the foundations you need them to know? With so many different definitions of sourcing, procurement, and purchasing; so many different thoughts on what an individual should know about analytics, supplier identification, supplier vetting/onboarding/management/development, negotiation, contracting, global trade, logistics, risk identification and management, compliance, finance / finance support, etc., how can we have a solid baseline with a (multi-level) certification program?

It would be great if 2024 is the year that we saw this certification, but while we desperately need it, the doctor believes that, unfortunately, it’s still years away. (But he will challenge The Prophet to step up and make it happen!)