Category Archives: Best Practices

THE Sign That You Need a CPO

The Supply Chain Management Review recently published an article on the top 10 signs that your organization needs a talented chief procurement officer. They were all good reasons, but they kind of suggested that you needed multiple reasons to hire a CPO. The reality is that you only need one reason, it’s very straight forward, and it almost needs no explanation. In fact, most of you will get it right away, so we’ll give it to you straight away, and you can stop reading now if you like.

The Sign That You Need a CPO: Your organization spends over 10 Million a year.

That’s it. Easy, eh? No top ten list. No long winded explanations. No complicated requirements. Just one number. Just one check.

Why is it this easy? Simple. Good Procurement practices will save your organization at least 10% across the board, regardless of current market conditions. Why? Even if costs are going up, if best in class Procurement practices weren’t deployed in the past,

  • even previously sourced categories will not have maximized savings
  • the process will have been inefficient, which would have cost the organization time, resources, and opportunity costs on other categories
  • most tail spend categories would have been completely ignored
  • many orders would have gone out without POs
  • most invoices would not have been closely checked, resulting in over-payments
  • etc. etc. etc.

So, if you’re spending 10 Million, a CPO is going to save 1M at a minimum. That’s going to be 3X or more the CPOs fully burdened cost in a smaller organization. Simple calculation, simple rule.

Procurement Needs to Change for the Better … But it is Currently Stalled!

A recent article over on Supply & Demand Chain Executive noted that Procurement is Changing for the Better, but if you look at the 5 most strategic objectives from the recent APQC survey they referenced, two of the five focus on costs — specifically, #2 on reducing procurement costs and #5 on maintaining of improving margin. Just like the recent Ivalua/Procurement Leaders survey, cost is the focus, and all the real value they could be delivering is being ignored — and the doctor would argue that while Procurement may have been changing for the better before the pandemic, the supply disruptions and successive inflation that resulted since has not only stalled that progress but reverted Procurement back to its early days.

The reason, as indicated in an article over on CIPS, which also references the Ivalua/Procurement Leaders survey, is inflation. Rapid inflation, which has not only wiped out prior savings for many organizations but resulted in the Procurement department blowning past budgets, has resulted in the C-Suite ordering Procurement to contain costs through any means necessary, and, as the CIPS article has noted, this has resulted in the ESG agenda, along with other agendas, being pushed to the sidelines, if not thrown out entirely.

This is very sad. Not only because ESG initiatives are critical, but because the other three priorities from the AQPC survey are also more critical:

  • avoiding supply disruption
  • improving social responsibility in supply chain
  • improving supplier relationships

First of all, the number one focus of procurement should always be supply, not spend. Doesn’t matter how great the negotiated savings are, if you don’t get the goods, you don’t get the savings and, more importantly, if that was product to sell, you don’t get the revenue. No cash-inflow, no business. (Or, as we say up North, No Sale, No Store.)

Secondly, with carbon emission limits and carbon taxes coming in globally, ESG needs to be a top priority, especially in jurisdictions where you are responsible for all of the carbon in your supply chain.

Thirdly, your quality and capability is limited to that of your suppliers, so you want to improve your suppliers, and that requires good relationships. Furthermore, suppliers can be a source of innovation and creativity, but you won’t get access to any of it without good relationships.

So how do we get Procurement over the hump and back to strategy and not cost reduction regardless of the true price that is paid? It’s a good question, especially when the focus is always short term and not long term. Long term, innovation, responsibility, quality, and sustainability will result in the best value for money, but this never happens in the short term. So, focus on long term sustainability, get back to value, and show the organization what Procurement can really do.

How Medium Sized Enterprises Can Better Manage Spend

McKinsey & Company recently ran a long article on how medium-size enterprises can better manage sourcing that noted that the big reasons that mid-sized companies have difficulty reining in external spending are:

  • a lack of spending transparency
  • a myopic focus on the short term
  • talent gaps
  • underused digital tools and automation
  • exclusion of procurement and supply chain in business decisions

And noted that any action plan that a medium-size enterprise comes up with for procurement cost savings should include:

  • establishing CoE (Center of Excellence) teams
  • improving forecasting
  • expanding use of digital procurement tools
  • gaining greater market intelligence
  • establishing a culture of — and process for — continuous cost improvement
  • incorporation supplier-driven product and service improvements

And they recommend a ladder model that consists of the following steps:

1) Set Aspirations
2a) Rapid renegotiations with top suppliers
2b) Make-vs-Buy Analysis
3) Build spec catalog to enable market engagement
4a) Conduct request-for-quote (RFQ) rounds
4b) Build parts catalog
5a) Validation of suppliers and production parts
5b) Consolidation of SKUs and modularization

And this is all very good, and when you read the article for the details you will understand why it’s all very good, but it doesn’t really provide a clear, step-by-step, roadmap on where you should start.

Fortunately, Sourcing Innovation did provide a partial roadmap in it’s 39 Steps … err … The 39 Clues … err … The 39 Part Series to Help You Figure Out Where to Start with Source-to-Pay which outlined the order in which an organization should get the tools (and thus the associated market intelligence) it needs to effectively tackle spend (and forecasting), work with suppliers, and establish a culture of continuous improvement. About the only item we didn’t address on the McKinsey list is the establishment of CoE teams — the right structure is highly organization dependent, and will be better enabled by the implementation and adoption of the right tools.

So, if you missed the series, go back to the beginning and understand where you start, why, and how a proper, ordered, logical implementation of Source-to-Pay in a modular fashion will help you maximize savings, efficiency, and even sustainability within your allowed budget.

Where Should Procurement Have the Greatest Impact?

Ivalua and Procurement Leaders recently did a study on Purpose-driven Procurement: Entering an Age of Holistic Value that was partially covered over on EPS News that ran a typical, bland, headline on how Procurement’s Value Exceeds Cost Control.

Procurement can add value beyond cost control, and should add value beyond cost control, but what stands out the most in this article, and likely in the Ivalua/Procurement study, was the highlighted figures on areas in which Procurement has made the greatest impact (by % of respondents). Of the fifteen (15) areas presented in which Procurement should be making an impact, only three areas were selected by more than 30% of respondents, and the top 2 were the same old, same old responses of delivering cost savings and cost avoidance which are, in this market, the last two areas Procurement should be delivering value. First of all, times are such that there are, or soon will be no, cost savings in any category. Secondly, it’s not “cost avoidance” it’s “need avoidance“. It’s not just about saving money. In an age where your carbon footprint may soon be more important than your bank account, you don’t want to buy anything you don’t need, and you don’t want to waste anything.

In fact, today, the top ten things that Procurement should be doing are likely the bottom 10 things on the response pyramid, which were ten of the best responses such a survey could have included! Procurement is more than savings, cost avoidance, risk management, and theoretical sustainability (as most organizations won’t let Procurement spend a penny more than necessary to meet a need, even if that penny is to a much more sustainable supplier — there’s a lot more bark in the marketing then there is bite in the implementation; the doctor is aware of many surveys and has had many conversations where, if the buyer could pay 1% to 3% more than the lowest cost, sustainability would be substantially more; the reality is that, at most organizations, it doesn’t matter if the lowest cost is from the dirtiest, most unethical, supplier on the planet — the CFO wants cost reduction, the CEO wants profit, and the buyers were told to meet the targets and make the investors happy, not do the right thing. Hopefully more countries will pass carbon caps, carbon taxes, and sustainability laws because only then will Procurement get to serve the Purpose it wants to serve).

Procurement is the enabler that can transform the organization. And to demonstrate that, let’s review the bottom 10.

  • Supplier Diversity and Inclusion (16%): while you shouldn’t have arbitrary targets (as there is no one magic number that’s the right number), you should always look for diversity that you can include to widen your horizons — you never know where the next big idea, product, or saviour (when your strategic supplier becomes unavailable as the result of an unexpected event) will come from
  • Developing Team Skills and Talent (16%): while the first line to be cut from the budget is always the training budget when it should be the last line to be cut (when the world evolves faster everyday than the day before, and the job you do today will, in some ways, never be the same job in the future), Procurement can maximize the budget you have, find the right partner to improve your skills in a fair exchange (they train you for free if you use their products or services), and even train you on better processes and practices on their own
  • Digitalisation (11%): while this is not a conversation we should be having in 2023 (when Nicholas Negroponte told us all we should get used to Being Digital in 1995), most departments in most organizations are still woefully behind when it comes to technology (and the average employee has more modern apps on their personal smartphone than on their work computer), and that’s where Procurement can help as it needs to digitize to manage its sourcing, procurement, and supply chain and has already been through (part of) that process
  • Improving Cash Flow (11%): Procurement is in the best position to optimize outbound cash flow, balancing payment terms with cost reductions with risk minimization, and can even use that knowledge of cash flow optimization to help Finance select the right terms for short term investments, loans, or even factoring on the organization’s invoices to big, slow, clients
  • Contributing to Revenue Growth (11%): Procurement’s analytics skills that it uses to predict demand can also predict the products/services that are the most popular and the ones that the organization could use to grow revenue by shifting production, marketing, and sales focus to those product lines
  • Improving Product/Service Quality (7%): Procurement can do more than just find new suppliers, they can help with product innovation and service improvement; they can identify suppliers with alternate designs that use alternate, more sustainable, materials that can build a better product and consultants with more experience and expertise to offer a better service
  • Drive Innovation from the Supply Base (6%): Procurement is the perfect partner to drive innovation; it is the first, consistent, and for better or worse, the last department to interact with the supplier, and in order for it to keep the CEO and CFO happy (and get the mythical savings which, after a certain point, don’t exist), it has to develop suppliers to an extent — no reason it can’t be helping you drive innovation
  • Support Mergers and Acquisitions (5%): let’s put it this way, if there’s no synergy in Procurement, there’s no synergy in the companies, and the company being considered should NOT be a target; so at the very least, Procurement should be one of the first sniff tests; it can also determine the synergy potential, the cost avoidance and efficiency potential, the innovation potential from an improved supply base, etc. etc. etc.
  • Demonstrate ROI to the Bottom Line (4%): Procurement NEEDS to be better educating the C-Suite on how its activities hit the bottom line across the board, not just on a few categories it finds savings in
  • Asset Disposal Activities (1%): We need to move towards a circular economy, and that means buying goods that meet as many of the R’s (refuse, reduce, reuse, repair, recondition, refurbish, remanufacture, repurpose, recycle) as possible, which will always include recycling when it’s impossible to get any more value out of the asset, and Procurement, which understands the product best, will understand how best to dispose of it to ensure it is recycled and all of the raw materials reused in the most sustainable method possible

And this is where Procurement should be focussing. Let’s hope Procurement gets there sooner rather than later.

Efficiency Is In The Process, NOT THE MARKETPLACE!

the doctor really should stop reading the “news” and “best practice” articles the internet pushes his way because most of them are rubbish and just make him angry, but then again, if he didn’t get angry, what would he have to write about?

One of the articles recently was about how procurement can push efficiency and sustainability into the organization. The sustainability advice of “look for eco labels or EPA ID or products with recycled content” was pretty abysmal (because, duh!), but the efficiency recommendation of “create an e-marketplace to give your buyers an online catalog of goods and services” was just appalling.

That’s only efficient for organization end-users charged with restocking the supply cabinet in the office or keeping the MRO stock levels high enough to guarantee the production lines keep going when the store room gets low. That’s not injecting ANY efficiency into the Procurement process.

When you consider even the most basic strategic procurement process, you have to:

Identify the Need
and efficiency here is an intake management solution that allows you to collaborate with the end-users / end-sellers to make sure you’re procuring the right products for them to ply
Identify the Potential Suppliers
and efficiency here is a solution for supplier discovery, evaluation, and onboarding
Identify the Evaluation Requirements
and efficiency here is an orchestration solution that allows procurement to integrate all of the requirements from the users, the business, and the organizational goals
Evaluate the Bids
and efficiency here is an RFX solution with integrated analytics
Negotiate and Sign the Contract
and efficiency here is a contract lifecycle management that at least supports the contract negotiation process with complete document (and version) tracking and preferably also includes support for initial contract creation from award, key issue tracking, and e-signature integration
Determine the Appropriate Ordering Strategy
and efficiency here is determining whether the best fulfillment is regular shipments (if the factory uses X thousand units a month), auto-reorders on inventory level triggers (if the usage is/sales are irregular, but the product can be pulled quickly), or (managed) catalog-based orders as needed
3+-Way Match (against an invoice)
and efficiency here is a solution that makes it easy to ensure the invoice matches the goods receipt that matches the PO (at a minimum, and you also want to make sure the PO matches the contract etc.)

Efficiency is injecting efficiency into this process, not just setting up a marketplace!