Category Archives: Best Practices

Spring Will Soon Be Here. Time to Clean Up Your Procurement Operation. Part II

Spring is on the way, and that means that it’s spring cleaning or not, and whether you want to admit it or not, your Procurement operation has a few messes that can be cleaned up, or at least minimized. And, as we indicated yesterday there is no better time than the present to clean those messes up … as much as you might want to leave them behind.

If you’ve taken the first step, you’ve identified (the worst of) the messes you have. Now you get to tackle them. How depends on the mess in question, but we’ll help stimulate some ideas by discussing how you might deal with the messes we mentioned in yesterdays post.

People – Maverick Buying

If the maverick buying is due to the fact that buyers just don’t know about the contracts in place, then make sure they have easy access to a centralized e-contract repository with powerful, free-text, search which understands product and services similarity. This way, a single search should identify the majority of products and services they should be buying on contract. They may still miss some contracts for obscure products or services which can only be uncovered with obscure keywords, but the majority of off-contract purchases going forward will be intentional (and then you have a different problem).

People – Master Data Degredation

Hold mandatory training sessions for all employees on procurement and data management processes, insure that the processes are adequate to prevent data degradation, and that only the right people have approval authority. This will keep data clean and useable.

People – Denied Party Dealings

Put processes in place where the only people with contract signing authority have been trained in denied party searches, sign a statement indicating that they will always do a denied party search before signing a contract, and have them immediately report potential denied parties to appropriate legal counsel in the company. Not only will the chances of a denied party transaction be greatly reduced but if, by some chance, a transaction ever occurs with a denied party, the organization will be able to show best efforts to prevent such a situation.

Process – Piles of Paper

This is an easy problem to remedy — install a modern e-Invoice management solution with EDI, XML, PO-flip, intelligent OCR, and m-way matching and the organization will not only approach 99% e-Invoice rates, but 96% straight-through processing (where suppliers deal with routine exceptions and small errors and resolve 90% of those without purchaser interaction).

Process – Slack Sourcing

This is another easy problem to ready — a modern e-Sourcing or e-Source to Pay platform with easy RFX and e-Auction creation, customizeable workflows and lots, as little or as much detail as you want, bulk attachment uploads, templated projects and weightings, and everything else an average buyer needs to get a 3-to-6 bids and a buy event configured and launched on tail spend that would normally just go to the first supplier identified.

Process – Quality Quarrels

Another problem easily remedied by technology — scorecard technology to be exact. Keep good data on all key metrics, monitor them monthly, and automatically alert the buyer and supplier when a threshold is hit or a downward trend (defined as lapses in performance over 3 regular measurement periods) is detected. This allows both parties to collaboratively identify, and correct, a root cause before slips become falls and minor losses become major losses.

Platform – No Platform

Get one — and if you’re starting from scratch, get one that supports a Virtual Procurement Center of Excellence.

Platform – 1st Generation Platform

If the budget is there and the right stakeholders can be convinced, upgrade, if not, bolt on missing functionality from best of breed providers to cover the key components of the end-to-end source to pay cycle as well as deep analytics.

Progression – Change Management

Make sure the organization has a great competency in change management. Hire someone if needed.

There is no silver bullet, or should we say, silver dustpan that can clean up every mess, just like there is no one-size fits all

Spring Will Soon Be Here. Time to Clean Up Your Procurement Operation. Part I

Spring will soon be here, that means it’s spring cleaning time and, chances are, somewhere in your Procurement organization is a mess … maybe a whole whack of messes. And there’s no better time than the present to clean those messes up … as much as you might want to leave them buried.

The first step is to identify the messes you have. Chances are they fall into one of the following buckets.

People

We’re not saying that your people are a mess, and should be let go (although that is sometimes the case), just that, probably due to lack of experience or lack of training, they are contributing to the mess. For example, they might be regularly ordering off contract or from non-preferred suppliers (because they don’t know how to look up contracts cut by the centralized CoE), screwing up the master data (because they don’t know the proper procedures for requesting data updates that can be properly verified and approved), or even signing contracts with denied parties (because they don’t know how to check the lists).

Process

Maybe you are getting a third of your invoices on (e-)paper when only 3% should be coming in on (e-)paper, maybe you are only sourcing 30% of your buys when you should be sourcing 80%, and maybe your return rate is 10%, when it should be 2%, as a result of poor quality control processes.

Platform

Maybe you are lucky (given that only 6/10 Procurement organizations have any Procurement Technology at all) and have a first generation e-Sourcing or e-Procurement platform and have primitive RFX, e-Auction, or Supplier Information Management technology, and maybe you are not so lucky. Anyway, without the right platform, you’ll be impaired day in and day out.

Progression

Maybe you have some sort of process / technology review, and / or some sort of change management capability, but chances are you don’t. In most organizations, any evolution of the function is literally seat-of-the-pants, and that’s a recipe for chaos and even disruption. Change management is critical for procurement success as modern supply chains are the most dynamic entities on the planet, with disturbances and disruptions occurring on almost a daily basis, and the severity never known until it hits.

In other words, you need to take stock of where you are and what you need. Then you need to do something. What? Come back tomorrow for part II.

Procurement Produces Platinum when Engaged Early

We all know the statistic that 80% of the cost is defined the first 20% of product design, and that engaging Procurement early can significantly attack and reduce these costs considerably. But leading organizations are learning that engaging Procurement during New Product Design (NPD) is not early enough. Real success comes from engaging procurement during the Market Needs Analysis and New Product Definition phase.

Engaging Procurement after the product specs and initial design has been more or less determined limits Procurement’s capability to add value and extract cost. Once you’ve decided on a 9.7″ tablet with 64 GB of memory and a 5.1 MP camera limits Procurement to going to market for 9.7″ casing, 64 GB of memory. and 5.1 MP cameras and boards that support processors that can stay cool in a 9.7″ tablet. You’ve already limited the universe of potential. Moreover, you haven’t really defined what the real value is from a customer point of view (specs, reliability, brand value, sizzle), why, and how Procurement could add to
it.

Procurement really needs to be involved from the inception of a new product introduction project. It needs to be both a sounding board and the voice of reason to help the organization zero in on the right mix of what will sell and keep the costs in line with market expectations (or at least market acceptance). Value to the organization is maximized when profit is maximized — which is maximized when profit per unit times number of units is maximized. This requires balancing cost with consumer values, not just optimizing cost, which is all that can be done if Procurement is not engaged until the final design / pre-manufacturing stage of the product lifecycle.

So, for real results and greater success, engage Procurement early and engage Procurement often. Sometimes the perceived market requirement isn’t worth the cost, and other times it is.

For more information on the product lifecycle, as well as some of the results Procurement can deliver not only early, but at each phase, you can check out Source One’s latest paper on Strategic Sourcing Throughout the Product Lifecycle. It’s a quick read, and if you want to go deeper, they have hundreds of projects they can draw on if you reach out to them.

Trump & Brexit Woes? Optimization is the Answer!

SI has been preaching the gospel of strategic sourcing decision optimization since day one, noting how it was the only way to not only achieve the year over year cost savings that could be identified by spend analytics but also identify additional value necessary for struggling under-staffed and under-budgeted supply management organizations to realize the value that was being demand of them. Year-over-year was key. During the noughts, thanks to the success of FreeMarkets and Ariba, everyone thought that e-Auctions were king, as the first e-Auction often returned 20%, 30%, or even 40% savings and the second a healthy 5% to 15% in a host of categories, but no one realized these savings were just a result of excess fat in supplier margins, shaved out by more aggressive, hungrier, competition looking for a chance to prove themselves and grow. Once the fat was trimmed, and inflation began to return near the end of the noughts, subsequent auctions not only failed to identify additional savings, but also resulted in cost increases.

SI knew this, as the early adopters were already beginning to experience this when SI started and multiple options for strategic sourcing decision optimization were available (CombineNet [now Jaggaer], Emptoris [now IBM], Iasta [now Determine], VerticalNet [now BravoSolution], Trade Extensions, and Algorhythm), but the auction providers had big marketing budgets (as a result of their big successes, % of savings contracts, and VC funding) and bigger mouths to spread the auction word. And by the time the blush faded from the rose, most organizations weren’t ready for what seemed to be complex solutions, so the focus turned to better RFX, should-cost models, spend analysis, and weighted evaluation models. This worked for simpler categories, and the fact-based negotiations shave the remaining fat while also identifying processes or unnecessary non-value add offerings that could be trimmed, and savings continued, but began to trail off. That’s why the leaders are slowly accepting decision optimization and why Trade Extensions has been growing aggressively year-over-year for the last five years or so.

But let’s face it … when 40% of the market still doesn’t have any Supply Management tool and only 20% of the organizations that due are leaders (which kind of explains the Hackett 8%), the adoption is still low and the usage still minimal. As long as savings can be squeaked out through other means (analytics, cost modelling, aggressive negotiation, GPOS, etc.), the average organization seems to be doing everything it can not to evolve. Cognitive Procurement is the buzzword, but cognitive dissonance is the reality.

But that could all be about to change. Why? Between Trump continually threatening new border taxes, border closings, and visa program overhauls and Brexit looming on the near-horizon, which will totally change the tax and border situation in Europe, supply chain costs are totally unknown for a large majority of global supply chains. Considering how many global organizations are headquartered (at least regionally) in the US or UK and how many more have their Procurement Centers of Excellence there (either in a distribution hub or a financial hub, of which New York and London are two of the biggest in the world), it’s looming chaos. Are your costs going up? If so, are they going up 10%, 20%, 100%? Are sources of supply going to be cut off due to trade bans? Is your best talent going to be locked out of the US or UK? It’s a nightmare waiting to happen. It’s enough to put even stock market traders into full panic mode.

So what do you do? You manage the risk? But how? Most of the traditional supply chain risk management platforms (Reslinc, Risk Methods, Achilles, etc.) are geared at supply chain visibility — attempting to identify potential disruptions [as a result of external or internal events] before they happen so that mitigation plans can be identified and put in place before they do. However, when the disruption is not an event but an unpredictable [and unaffordable] tax hike or border closing, these solutions, even those that reach level 5 on the Spend Matters scale, are pretty useless. That’s why Sourcing Innovation has recently stated that Supply Management Risk Management Needs to be Cranked to 11. (It’s important to go to 11.)

You see, the key to survival is “what if” the current supply chain becomes unsustainable due to a tax hike or border closing in the US or UK. Running a new scenario with all of the inputs except any lanes, countries of origins, and / or products where you expect to see disruptions, trade bans, or extreme import/export duties. And then running another new scenario under a different set of assumptions on lane, country, and/or product restrictions. Running scenarios at the product level and the category level. Running with current supply base, previous bidder supply base, and newly identified scenario supply base until you have a mitigation scenario that is acceptable and ready to go if something happens.

Only a good supply management decision optimization solution with what-if scenario support can do this – nothing else.

So, since we’ve all forgotten Kermit’s Lesson, this is what we’re left with. But considering how it will enhance your overall supply chain operations in these turbulent times, that’s not a bad thing.

 

Vendor Scorecards DO Work – But Only if They are Done Right!

A recent guest post over Spend Matters by Andy Kohm, founder of VendOp, provided 4 reasons why supplier scorecards don’t work, which is a terribly inaccurate and a disservice to the procurement space because

  1. They Do Work if done right and
  2. what he was describing was internal vendor surveys, NOT scorecards.

Even worse, if he had said internal vendor surveys don’t work, SI would have totally agreed and hailed the post because, frankly, internal vendor surveys don’t work. Expecting enough people to fill out enough long surveys to get statistically reliable data when everyone is overworked, underpaid, and tired of doing everyone else’s job (because no one has time to do their own) is just ludicrous. It’s not going to happen, and when it does, the data and answers are not going to be that good or reliable because the surveys will be filled out in a rush. And all the reasons provided by Mr. Kohm will hold true.

But you see, a scorecard, at least a proper scorecard, is not a survey, or a summary of soft, qualitative feedback survey scores, but a summary of hard, quantitative metrics built up from hard data over time. A scorecard summarizes hard performance metrics, KPIs, and unarguable (undisputable) incident counts, not subjective scores on reliability.

We have to remember that just like anchoring can be a problem in negotiations, it can be a problem in subjective ranking. If the last couple of interactions with the supplier were problematic, the recipient is likely to fill out a fairly negative score even if the 20 interactions before that were great and, overall, the supplier is batting 800. Similarly, if the last few interactions were particularly good (because the supplier knows their review is coming up and making extra effort just to score enough to pass), the recipient may rank the supplier very positively even though 8 out of 10 requests are ignored on average. In short, for reliability, surveys suck.

But hard scorecards, built on on time statistics, reject rates, incident counts, billing accuracy, and so on are unbiased, anchored in fact (and not fiction), and work. They allow both parties to zero in on true issues, problems, and disagreements, and work collaboratively to fix them. They are the best supplier relation management tool the average organization has at their disposal and should not ever be discounted. Proper scorecards are the solution, not the problem.