Category Archives: Best Practices

Hi-ho! Hi-ho! The PO will never go!

Purchase orders have recently made the news big time, as a result of Amazon pulling the plug on thousand of vendors who suddenly had theirs cancelled.

And while this story isn’t about the latest Amazon media mess, it is about the PO. With the increase in automation since the introduction of second generation e-Procurement / Procure-to-Pay platforms that could do automated m-way invoice matching to POs, goods receipts, or contract schedules, certain vendors have argued that the need for the purchase order is declining rapidly as there are so many other ways to validate an invoice or an order, especially if there is a contract, an expected fulfillment schedule, a database of agreed upon prices, and so on.

And while they are not needed in some well defined situations, they are still needed. As indicated in our piece four years ago explaining that the dream of Hi-ho. Hi-ho. It’s Off PO We Go! is a pipe-dream.

As we noted years ago, when there is no (master) contract, or in the case of services, no agreed upon rate table, how do you verify you are paying for the right goods from the right supplier at the right time at the right amount!

Now, it’s true you won’t need it for everything that is not on a (master) contract — a T&E expense, an invoice for off-contract services under a threshold, MRO products being delivered at the previous, accepted rate, etc. — but this is not the majority (by dollar value) of the off-contract organizational spend.

Furthermore, as the prophet clearly highlighted in a Plus+ piece last year on Spend Matters [Membership Required] The Consequence of Eliminating Purchase Orders, the results of this can range from errors and mistakes to outright fraud, either supplier-driven or internal.

You see, if there isn’t another document with all of the information needed to verify an invoice, the supplier could accidentally, or maliciously, charge the wrong price. And if it’s for a new SKU, with no prior price, there’d be no way to even flag that maybe, just maybe, the invoice should be manually verified before being auto-paid.

So even if you took all of the great advice that the prophet gave you, which allows you to minimize situations where you need POs, and enable better purchase controls, implement better e-invoicing systems, allow good suppliers to qualify for discounts or early payment, etc., you’re still at a much higher risk than if you simply create, and send, a PO which, guess what, like an invoice, could, and should, be electronic.

So, while the paper should go, the PO, and what it enables you to do, will never go. So implement the right systems so it’s auto-generated, auto-sent, auto-verified, and auto-matched in all appropriate situations and then you can almost pretend it’s not there. Almost.

4 Strategic Sourcing Mistakes Businesses Should Avoid Courtesy of the Strategic Sourceror (Re-post)

The best way to get out of trouble is to avoid trouble in the first place. In a recent blog entry, the Strategic Sourceror outlined four common mistakes that a company can avoid to minimize poor spend management and operational efficiency.

Overlooking the Importance of Supplier Visibility

Having a clear understanding of supplier practices is essential in evaluating the risks and possible sources of disruption that are inherent in sourcing partnerships. Blindly entering a relationship with a supplier may result in a procurement strategy that is misaligned with business goals, and this could result in slashed profits in the future. For example, the strategy could be high quality to support the brand, but the end result could be poor quality and the resultant impact to the brand from the high defect rate could result in lost sales and slashed profits.

Failing to Emphasize Results

Because Procurement resides in the back office, it is often tempting to think of it as a service function and not a driver of productivity and profit. It’s critical to focus on real, measurable, and substantial results and communicate the message to the rest of the business. Like any business process, procurement management needs to impact the bottom line. When it does, and the message is communicated, Procurement, unlike Rodney Dangerfield, will get more respect.

Overlooking Contracts

Without written contracts with specific language, businesses won’t have adequate protection if a supplier relationship goes sour. That’s why contracts should be reviewed by a corporate lawyer before being signed. But just getting the contract right isn’t enough. It’s also important to make sure the terms are followed, rebates and discounts are collected, and contracts are renegotiated and not allowed to go evergreen.

Permitting In-House Inefficiencies

An inefficient internal procurement process can limit firms’ ability to obtain the goods and raw materials they need in a timely fashion. Be sure to install the appropriate e-commerce tools that will help a company identify potential suppliers, execute RFxs, conduct auctions, optimize awards, and strategically manage the maximum number of categories.

The Value of Market Intelligence in a Down Economy

A decade ago we ran a piece on The Value of Market Intelligence in a Down Economy because it was a down economy near the end of last decade and many organizations were overlooking the importance of market intelligence at a time when it was needed most. (Because, when times get tough, organizations always cut the training budget first and the intelligence / consulting budget second, even though the only thing that will get the organizations though the tough times is their talent — which needs to be as educated and informed as possible to do the jobs that need to be done.)

But now that depression era economics are about to make a come back, SI believes its time to repeat the message in the hopes that you will do the right thing and make sure that, under no condition, do the limited market intelligence and training budget get cut when they are needed most.

Remembering that success in a down economy stems from smart sourcing, and that smart sourcing stems from intelligence, it should be pretty obvious how critical market intelligence is, but just in case it is not, let’s remind you that:

  • market cost data is market intelligence
    and without it, you don’t have enough data to know how much you should be paying (even if you have extensive should cost models because, guess what, those component costs need to come from the market)
  • expected supplier performance is market intelligence
    even if you have lots of historical performance data across your supply base, that doesn’t tell you how good a supplier should perform, just what would be better performance for your organization
  • expected product quality, lifespan, and consumer usage levels is market intelligence
    and you are only going to get so much data from your customer base, and none for a new product line under development

Plus, when you look at the big picture:

  • it’s not as expensive as you think it is
    since a lot of the data or information you need to spot trends and focus on the core issues and data points is low cost, and even expert advice at 5K a day is nothing if it saves you 50K of internal research or steers you toward a solution that helps the organization generate a 500K return
  • it enables supplier performance, and relationship, management
    which is key in difficult times — just look at the auto industry. When times get tough, the American automakers (that score dismal on the OEM-Supplier Working Relations Index [OEM-WRI]) all fail while the Japanese (and Korean), who cooperate and collaborate with their suppliers (and rock the OEM-WRI) always pull through
  • intelligence gathering is an iterative process
    not “one-and-done” and if you stop, especially when market conditions are changing constantly and could change drastically at some point in the near future, you can be blindsided by an event that could grind the entire organization to a halt

Market Intelligence is critical for good decision making – in good times, and bad. Especially in bad. It identifies risks before they materialize and insures that your contracts have appropriate risk mitigation clauses built in. It leads to savings and cost avoidance that would never be identified without it. And while it doesn’t always require multiple high six-figure subscriptions to analyst firms … it does require some spending to keep up with what you need, when you need it. But if you choose wisely, it will save you 5X to 10X what you spend or help you increase your value proposition by that amount.

So get the intelligence you need. Today.

So You Need a Sourcing Platform That’s Next-Gen To You. Where Do You Start? Part III

In Part II we noted that there’s no single right answer or easy answer here as it’s very situational. And even though some consultants will always tell you to start with Sourcing and others with Procurement, they’re obviously not always right. Sometimes both are right, but usually neither are right. Because sometimes you start with Supplier Management. Other times you start with Contract Management.

But, in fact, absolutely speaking, neither are right. You start with analytics and strategic situational analysis based on analytics to figure out whether the problem is:

  • you can’t do enough sourcing events
  • your events are generating limited returns
  • you can’t find the right suppliers
  • you have to (quickly) ensure compliance with a newly introduced regulation
  • your over-spend, and need for audit recovery, is too high
  • your maverick spend is too high
  • you need to get your services spend under control
  • you are unsure of where your best opportunities lie

or

  • your suppliers are under performing on quality and related metrics
  • your deliveries are regularly late
  • your (internal) customers are unable to get the information they need when they need it
  • Finance is taking regular hissy fits about lack of timely cash flow insights
  • etc.

More specifically, you start with analytics on:

  • spend
  • (spend vs) contracts
  • cashflow and discounts
  • event throughput
  • performance metrics
  • inventory and logistics

Only then can you understand how the organization is performing and where it’s biggest problems lie. An analysis of spend might find that maverick spend is high, but the estimated overspend is at most 4%, but poor payment processes are actually costing the organization 4% interest (because it signed contracts with late payment penalties) as well as a 2% savings opportunity as a result of lost early payment discount opportunities (which it can afford as the majority of its customers pay on time). In this situation, while the organization might be tempted to get an e-Sourcing or catalog application to help reduce maverick spend, it should actually start with an I2P system to get invoices and payments under control. And so on.

Remembering that big bang implementation efforts always result in a very destructive big bang, do the analysis and start with the right platform application. Then, add one by one based on problem severity until you finally have a full end-to-end S2P platform implemented and utilized on a daily basis, which could be 18 to 36 months in the future, no matter how fast that SaaS vendor can flip the switch.

When Managing Supply Assets, Don’t Forget …

Last year we brought up a very important point when managing supply. Specifically, we reminded you that sometimes supply comes from within the four (virtual) walls of your business — a fact that is often overlooked by man BoB (Best-of-Breed) S2P (Source-to-Pay) modules and even suites.

When we are talking about MRO, the goods and services you need might be in a storage room in another building. If we are talking about consumables, like what you might need for a new hire, everything you need might be one floor down, left behind by another hire who, after the probation period, didn’t work out. As a result, inventory and asset management are key to successful Supply Management, and to successful Procurement.

But Asset Management is more than just keeping track of assets, moving them from one location to another, and making sure employees choose existing assets in inventory before ordering new assets from suppliers.

Asset Management is not just tracking assets and deploying them when they are needed, it is making sure they are used when they are usable. Assets have a value, a value that almost always depreciates when they are not used. Add this to the extra cost of having them in inventory, and that’s a lot of wasted capital.

In other words, good asset management requires a platform that can

  • track and improve forecasts … especially if demand or utilization timeframes start to shift
  • optimally manage inventory levels … there should be enough to last to the next, optimal, restock window with a bit of buffer, but not so much that the excess inventory grows at every restock
  • re-assign internal assets that should be utilized as fast as possible, and even allow for internal upgrades to delay unnecessary spending (e.g. the new machine bought for a new hire that didn’t work out after 3 months should be reassigned to an engineer 3 months away from a hardware upgrade)
  • manage leasing of assets that are going to go unused for a while (e.g. the organization has an expensive piece of construction equipment that it will not use for the next three months — lease it out)
  • identify when extra inventory or newly retired assets should be sold off to minimize loss

… or at least integrate with a platform that does.

Asset management is frequently overlooked, but very important to successful supply management.