Category Archives: Best Practices

Why Isn’t Procurement Changing?

It’s a good question, and one the procurement dynamo recently tackled over on procurement.world. According to the dynamo, multiple factors are at play, including, but not limited to:

Big Jelly Theory

Attributed to Paul Finnerty, the ‘theory’ is that if you throw yourself and your team members, 100% mentally and physically, at the organization, in an attempt to change it, at best the organization will give a little shiver, momentarily, like a giant jelly, and then immediately return to its pre-existing shape and carry on, with business as usual, as though nothing has happened.

Irrational Actors

Attributed to Charles Jacobs, brain cience has found that human beings are anything but reasonable… When it comes to motivation, our approach is based on the view of classical economic theory that people are rational beings trying to maximize their economic return. This leads us to use the promise of rewards to motivate the behavior we need. But in direct defiance of the theory, people don’t respond reasonably or objectively to the rewards.

But are these the only reasons? There are two reasons that modern Procurement solutions aren’t adopted. The first is the people. They can resist, resist, and resist. The second is the management.

Management with Revolving Door Priorities

When Management falls for every fad of the day and changes priorities, processes, and even technologies every couple of years, employees get jaded and even more resistant to change then they’d naturally be. The Big Jelly gets bigger.

Maury the Management Moron

Sometimes the team, who want to do well and get their bonuses, will come to the conclusion they need a new solution, go through a detailed evaluation and select one they are willing to give an honest go. But, Maury the Management Moron, who will just see the price tag (and not the ROI) and correlate it with a potential negative impact on his bonus will say no. And that’s the end of the Procurement progression.

So, when trying to figure out a way around the conundrum, you have to go beyond just people and look at roles and how the values change as the role changes. And take that into consideration when applying your economic theory. (And, sometimes, wait for Maury to be shown the door.)

Precision is Contextual, But How Can You Get Precise?

Late last year, over on the public defender‘s blog, Pierre Lapree penned a post that asked how many decimals of π does Procurement really need? In short, the answer was, it depends on the context — some situations don’t need very precise calculations, and others need precision down to 1/100th of a decimal point. In his post, Pierre notes that in some situations, like savings, rounding can be to the closest power of 10. In others, like RFP, rounding to the dollar is more than enough, sometimes the closest hundred or thousand is enough. But in spend analysis, sometimes you need to match those financial statements down to the penny to get it right.

But how do you do that?

Your data is a mess, across multiple systems, in multiple formats, with varying levels of detail.

The financial reports are typically created from spreadsheets, which, even though they were output from the organization’s accounting systems, are typically riddled with errors.

And any hopes of matching, despite the fact that each system should be the checksum for the other, are as fantastical as J.K. Rowling’s beasts.

So how do you get precise?

You get out of the data and into the real world. When you don’t know where you are in the real-world, you geo-locate. How do you do that? In today’s world, you tri-angulate your position by taking measurements with respect to cell phone towers and/or satellites and using mathematics to estimate your position as close as possible – the more readings, the more accuracy.

In other words, you take measurements. Lots of measurements. And correlate them. The financial statements are just one set of checks.

Another set of checks are inventory levels. You’re paying for physical goods — you should have payments and invoices for the majority of physical goods and vice versa.

A third set of checks is the accounts receivable system — every part or good that was bought for (re)sale should not only have a corresponding inventory entry but an invoice, and vice versa.

In other words, every enterprise system that tracks goods and services is a data point for correlation, and should be used as such. Don’t just focus on the dollars and cents, as trying to balance erroneous totals can lead you down the wrong path — use all the data at your disposal to get it right — and precise.

the public defender’s five principles of sourcing … (Part II)

… and why you need to understand them if you want to source better.

Over on Spend Matters UK, the public defender recently gave us the fifth in his Five Principles of Sourcing. Designed to mimic the philosophies that underpin many of the biggest and best firms in the world, the public defender‘s five principles were designed to inform good practice that is fundamental to procurement success, regardless of vertical, region, or category.

Yesterday, we discussed the first three principles: Coherence, Openness, Rigour. Today we continue where we left off.

Alignment

Alignment covers both alignment to stakeholders and to the market. Sounds obvious, and there will be few procurement professionals (we hope) who don’t understand the need for stakeholders to be signed up to and involved in critical sourcing and procurement activities. But on the market side, how often do we try and source something that isn’t really what the market can best supply?

True success is not saving money, consolidating SKUS, consolidating the supply base, or increasing supplier performance measures — true success is meeting the needs of the stakeholders *while* doing all of the above. Remember, Supply Management’s job is to support the organizational goals, not it’s own … and true success is satisfying stakeholders (and helping them satisfy end customers).

Commerciality

Everything we do must come back to being “commercial” — looking to achieve benefits and competitive advantage for our organisations through putting in place and managing effective “commercial” deals.

Even non-profit organizations are in business to generate “profit”. The only difference is “profit” is defined as excess revenue (beyond what is needed to cover expenses) that can be put towards the intended purpose of the noon-profit (such as researching a cure, sheltering the homeless, or spreading the word). Thus, the end goal of the event is to minimize the cost necessary to achieve the stakeholder goals and have money left at the end of the day to do “more”, whatever “more” may be. That’s how competitive advantage is achieved, more value for less outlay.

In other words, if you fail to embed one of these principles in your sourcing event, you are not going to extract the value you should … and may even do worse than just spot buying on the open market or leaving every organizational user to fend for herself. For example:

If the process is not coherent, you might get the best possible deal on ink cartridges, but not realize that IT has included free replacements of all the inkjet printers with laser printers as part of their big server buy that they did internally because your team just didn’t have the technical chops to digest the overly convoluted specs provided by the potential vendors.

If the process is not open, you might save 2% on the same old, same old steel parts buy, but not realize that 40% of the cost is in the overhead because the supplier is still using bending and punching and not new laser cutting techniques that the supplier down the street is using to reduce overhead to 20%, which means that 1/5 of the cost is up for negotiation!

If the process is not rigourous, incumbents can be allowed to negotiate away awards that were fairly awarded to new suppliers in return for shady promises of cost reductions on future events, free trips to vendor learning days, and so on. This takes you down a slippery slope that not only puts your ethics in questions, but the value you delivered, as maybe the incumbent lost because they were charging more for what has become an inferior product or service (as competitor offerings improved since you first picked the incumbent).

If the process is not aligned, then you’ll get a great deal on a great product and deliver a huge value … no one wants. As a result, the stakeholders will just buy off contract at higher market prices because there will be inflated demand (as a result of contracts not being adhered to which reserve inventory). Without alignment, no one wins. Ever.

If the process is not commercial, you’re missing the point. Supply Management is about more stakeholder value for less outlay than would otherwise be made without Supply Management. (Not necessarily less than last time. If market prices increased 10% but Supply Management kept increases to 5%, that’s less outlay than the org. unit would have done without Supply Management’s involvement if it was historically buying at market.)

In other words, heed the five principles well. And download the public defender‘s white papers (registration required) for more insight.

the public defender’s five principles of sourcing … (Part I)

… and why you need to understand them if you want to source better.

Over on Spend Matters UK, the public defender recently gave us the fifth in his Five Principles of Sourcing. Designed to mimic the philosophies that underpin many of the biggest and best firms in the world, the public defender‘s five principles were designed to inform good practice that is fundamental to procurement success, regardless of vertical, region, or category.

In this post we are going to review the five principles, discuss how they are relevant, and explain why you need to adopt them as a foundation of your n-step sourcing process, whatever n may be.

The five principles are:

  • Coherence
  • Openness
  • Rigour
  • Alignment
  • Commerciality

Coherence

In the words of the public defender, coherence means applying an end to end logic and consistency to the whole sourcing process. That means understanding the aims and goals before you even start engaging the market, and having that “thread” running through all the stages of the process, including critical elements such as the evaluation methodology and process.

This is a key to sourcing success. If you haven’t figured out the desired end state, you shouldn’t even issue the first RFX. You need to figure out the products you need, the services you need, the specifics of the provision, and any other requirements from the supplier. Only then can you define the initial RFI where you ask questions to weed out suppliers you wouldn’t do business with (due to sustainability practices, lack thereof, financial stability, and so on). That can be followed by a detailed RFP which focusses in on product/service/solution requirements, and only then will an RFQ be issued to the remaining subset of suppliers that should be good-to-go should they win.

Openness

This is perhaps the most obvious of the principles. Being open to new suppliers, new ideas and new solutions is fundamental to the concept of generating competitive advantage for the organisation through our procurement and sourcing activities. Openness is key; working on the principle of sticking to what we know is simply a guarantee that a competitor will in time do it better. That openness means not just seeking out new suppliers, but allowing suppliers (new or existing) to express their preferences, innovative ideas or options, rather than the buyer dictating to them.

Remember that insanity has been defined as doing the same thing over and over again and expecting different results. If you always invite the same suppliers, ask for bids on the same products, and don’t change any service requirements, then why should the bid for this event be any different from the last? The only way to get new, better, results is to open the event up to potential new suppliers, potential new products, new service offerings, and so on. Openness is a fundamental requirement of success.

Rigour

Rigour is about treating the sourcing process with respect, applying diligent and rigorous planning, appropriate processes and analysis to it. Rigour means having a focus on the professionalism of the sourcing process, which for most organisations also reflects on the professionalism of the procurement or sourcing function, team and individuals.

Simply put, rigour means making a plan and sticking to it. No results will materialize unless the sourcing plan is adhered to. No allowing a supplier to the next stage if they fail the first stage. No skipping a stage. No negotiations outside of the defined negotiation window. No negotiations outside of the negotiation team. No picking the incumbent unless they win with the agreed upon ranking system. The only way to truly get results is to make a plan, share it, and stick to it — no matter what happens.

Come back tomorrow for Part II where we continue where we left off.

It’s Time to Go Beyond Supplier Management, But Where is That?

Supplier Management has been a thing ever since Aravo burst onto the scene back in 2003 and made it a thing with their Supplier Information Management solution. Since then we’ve progressed from just tracking contact information and associated documents to tracking and managing performance metrics to putting in place the foundations of relationship management.

But’s that just the beginning. As per a recent Primer post over on Spend Matters Plus [membership required], the following overlaps Supplier Management:

  • Corporate Social Responsibility (CSR)
  • Supplier Information Management (SIM)
  • Sustainability Initiatives
  • Supplier Development
  • Risk Management
  • Compliance

But even this is just the tip of the iceberg. There’s also:

  • Contract Management
  • New Product Introduction
  • Maintenance, Repair and Operation (MRO)
  • Services and Service Management
  • Spend Analytics

Supplier Management is a difficult subject because it is key to Supply Management, and that’s what it’s all about. And we know where Supply Management is, and has been, but where does it need to go. It’s a hard call, but three things we can say for sure are:

Visibility. In order to manage your supply chain, you need to see beyond your supplier. Especially if you are buying contract manufactured goods and not taking the time to understand where your suppliers parts, components, and raw materials are coming from.

Value-Driven Design. These days, it’s not just the lowest cost product that wins the game. There is corporate social responsibility in making sure there is no slave or abused labour in the supply chain. Sustainability both in terms of materials used and in their production and harvesting. Carbon footprints. Reclamation and recycling laws. And so on. You need to go beyond design for supply and even design for three Rs and design something that captures value to each segment (supplier, consumer, and regulatory body) that the product touches. And that’s almost impossible to do on your own.

Verocity. Organizations these days need more than traditional historically focussed spend analytics that tell them, weeks or months after, what was spent, on what, from whom, by whom, from where, to where, and in what quantity. You need to know what is being spent, by whom, on what in real time … and where the dollars are trending towards. Is a new supplier taking all of the spot buy spend, or even worse, spend that is supposed to be on another contract? Are product and services tastes changing? Are market costs changing? The application has to not only be able to keep up, but identify the most pertinent trends and options for dealing with them … it has to have advanced predictive analytics that, at the very least, identifies the most relevant changes (and ranks them by value or statistics or outlier distance from the expected norm), if not offering prescriptive analytics on how to take advantage of changes, minimize losses, or control them in (historically) well understood situations.

More requirements will surface as markets move, but this should help you understand that supplier (relationship) management is not enough.