Category Archives: Best Practices

It’s Time To Rev Up Your Procurement Value Engine. But Do You Know How?

Procurement doesn’t exist to just buy stuff. Procurement exists, at least if it’s a modern Procurement organization, to identify and deliver organizational value. Long gone should be the days when Procurement, staffed by the island of misfit toys, existed only to process the paper work that allowed manufacturing to buy the parts it needed or the back office the paper and calculators required to do the day-to-day accounting.

But the identification of organizational value, as long-time readers of SI know all too well by now, is not always straight-forward. Every organization is different, and every Procurement function has a different level of organizational maturity. As per the classic Hackett Hierarchy of Supply, a supply organization could still be at the level of supply assurance, could have moved on to analyzing landed cost, may have begun its entry into the modern era with an analysis of TCO, might be poised to become a leader with a foray into demand management, or, and this is the highest level of maturity, may be focused on the art of value management.

However, delivering value takes more than just realizing that your function is to deliver value. It is understanding what value is to the organization and how Procurement can contribute to it. Simply put, one way of defining value to the organization is whatever allows the organization to increase its revenue potential. (More sales, more market share, more brand recognition and brand love, and so on.) One way of assisting the organization in the capture of this value is to deliver products, services, and knowledge that will assist the organization in strengthening its Unique Selling Points (USPs) or Unique Value Propositions (UVPs) that give the organization the competitive advantage it needs to increase its revenue (or profit) potential.

It is not easy to do, especially since a Procurement organization has to understand not only what it must do, why it must do it, and how it will achieve it, but how to be good at it. Few organizations get demand management under control and step up to the highest level of the pyramid. Fewer still can stay there as they will struggle with the how. And even if they occasionally understand the how, they may never master the art of being good.

If one wants to be good and drive to success, one has to have a vehicle powered by a finely tuned engine that can deliver value lap after lap around the sourcing track. Such an engine must be efficient, effective, and sustainable. Only then will Procurement be able to get good and stay good. So what does such an engine look like, what sort of value will it deliver, and how will it deliver that value?

For the answer, check out the new white paper co-authored by the doctor and the procurement dynamo, sponsored by Pool4Tool, on how to Boost Your Procurement Value Engine. Part I of a II-part series (with Part II coming out in Q3), this paper will give you the insights you need to understand the various levers you have to deliver true value and how you can do so in an efficient, effective, and sustainable manner.

Benchmarks: Blessing or Bane?

Benchmarking, formally defined by Wikipedia as the process of comparing one’s business processes and performance metrics to industry bests and best practices from other companies, are typically presented by consultants as a boon for business managers and a reason to buy their services and/or solutions. After all, if you can’t benchmark, not only do you know how good you are doing (compared to the industry), but you do not know if you are improving or deteriorating, at what rate, and what the potential is.

And all this is true, provided the benchmarks are accurate, apples-to-apples, and actionable. This is not always the case, and when the benchmarks are poorly designed and implemented, definitely not the case. In fact, if the benchmarks are not accurate, they can cost the organization precious time, money, and resources and result in worse, instead of better, performance. And even though you don’t hear about it (as the last thing a Big 6 consultancy wants to do is scare you away from one of their most profitable service offerings — as it takes a long time to design the scorecard, collect the data, and interpret the findings [which translates into a huge number of top dollar billable hours for the House of Lies] — it happens more often than you think, and if you end up being one of the unlucky, you will be cursing benchmarks until the end of your Procurement career (and beyond if the word ever again arises).

the doctor is being dead serious here. Benchmarks (like dashboards) hide at least six serious dangers that can seriously hinder productivity, savings, and innovation. Three of these are very common to internal benchmarks, and three of these are very common to external benchmarks.

One of the most significant dangers of internal benchmarks is hidden opportunities due to false negatives. This often arises when monitoring best-price contracts. A classic example is that of enterprise desktop systems. Considering that technology depreciates the time it hits the market, just like a car depreciates from the time it leaves the lot, the price of these systems should decrease over time. If the benchmark says that the contracted configuration decreased over the 12-month contract by an average of 0.5% a month, for a total decrease of 6%, the buying organization might believe that the vendor is honouring the best-price clause. But if the buying organization isn’t aware that the average depreciation of these systems is 12% to 18% and doesn’t monitor market pricing, the buyer might not know that the pricing should have decreased an average of 1.25% a month, and would have lost 0.75% a month on purchases. If the organization was buying 500 systems a month as part of a phased replacement for 1.5K each, or spending 750,000 a month, that’s a loss of $5,625 a month for a total loss of over $60K, or another help desk resource! (And if all hidden opportunities were this small, it might not be too bad. But this is more of a best-case loss example.)

One of the most significant dangers of external benchmarks is wasted years due to lack of validation. One common example is that of contingent or manual labour spend analysis. For example, consider the analysis of warehouse (contingent) labour across the enterprise. An enterprise could quickly find that its paying, on average, a fully burdened rate of $17 an hour for workers to stuff boxes while its competitors are paying, on average, a fully burdened rate of $14 an hour for workers to stuff boxes. This might lead an analyst to believe that the organization is paying 30% more than it should be and that it should seek out a new contingent labour provider to get costs down, and waste months on RFX and analysis only to find out that the most it can lower its costs from the quotes is 10%. At this point, the analyst might go back and do an analysis of what it would cost to take the labour management back in house (which would require building a Contingent Labour CoE, staffing it, etc.) and still not see a savings when it replaces the outsourced management cost with the internal management costs applied to the total wages paid out. At this point the analyst would give up, or spend even more time investigating the reason only to find out that the organization’s main warehouses are in California, New York, and Massachusetts, the states with the highest minimum wages in the nation, while most of its competitors keep their warehouses in the mid-west / south-west states that only mandate the federal minimum wage of $7.25 (vs. minimum wages north of $10). Benchmarks only capture price and performance tiers, not the realities that led to them.

But these are only two of the six major hidden dangers that can ruin any benchmarking project (and the efforts that they will kick off, for better or worse). For a detailed insight into the other four, download the doctor‘s latest white-paper (sponsored by Trade Extensions) on The Dangers of Benchmarks and Trend Analysis (registration required) today. You need to know these inside out before even looking at a benchmark (which, when improperly constructed and improperly interpreted, can be just as deadly and dangerous as a dashboard).

If You Are Going to Create RFPs – Avoid RFP Hell

And Write Better RFPs!

On Sunday, in Why Create RFP Hell? we referenced a post by Larry Bodine that he posted over ten (10) years ago over on the Law Marketing Blog on Why Go to RFP Hell where we noted that, as a vendor, the last thing you want to do is answer an RFP. Especially a poorly designed RFP, because it is the only thing worse than the Spreadsheet Hell you have to endure to manage your Sourcing Project Pipeline (unless, of course, you have a Sourcing CRM solution, like Per Angusta described in yesterday’s post).

Since the last thing you want to do is be on the receiving end of a bad RFP, the very last thing you want to do is issue a bad one. If you don’t drive away the best suppliers, you will at least put them off and they will not be all that excited about giving you a great solution or putting their best effort into the project. So, as we indicated in Sunday’s post, you really need to Write Better RFPs (membership required). And the new Plus series co-authored by the doctor and the maverick is designed to help you do all that. All five (5) parts of the series are now up, and can be found here:

  1. Intro & Issues
  2. Requirements
  3. Provider Secrets
  4. Buyer Best Practices
  5. Tech Benefits

So how will this series help you write better RFPs? Instead of telling you what an RFP is, specifying the section, and giving you a template with hundreds of useless questions that will have respondents pulling out their hair (and searching for the closest voodoo shop with your linked in profile picture in hand), it addresses a number of key requirements of RFPs that most guides will fail to tell you.

For example, what is more important to keep in mind when writing an RFP — the supplier limits, or your limits? Most people would say “supplier limits” because the supplier will be providing a product or service and you need to know the extent of their capability. And while this is true, it’s more important to know your limits. If you don’t know your limits, you end up asking questions that are too detailed and that effectively only allow suppliers that fit in a neat little box to respond — a neat little box that might represent last year, or last decade’s solution. An initial RFP needs very open, broad, questions that allow a top-notch, engaged, interested supplier to show their capabilities, not just the subset you think you are interested in. Success is describing the desired end, not the acceptable means. If the supplier can host their software on a quantum computer, all the better for you.

And while you might need to Cover Your @ss, Asking CYA questions is pointless. No supplier who takes the time to fill out a 20 page RFP is going to say “NO” knowing that it could be an immediate disqualification. And while you will want to disqualify any supplier unable or unwilling to meet necessary conditions by the first delivery date, you do not want to disqualify a supplier who does not have sufficient insurance now, because, for the right contract, many suppliers will increase their insurance, change their operational practices, and participate in optional sustainability improvement programs. Simply create an attachment that lists, in detail, necessary insurance requirements, and mandatory certifications and audits, minimally acceptable codes of conduct, and any other inflexible requirements and explicitly state that any supplier unable to meet these requirements by a certain date will be disqualified in the next round and that any suppliers selected for the next round (which could be in-person negotiations) will have to verify the ability to meet all of the attached terms and conditions before they will be allowed to continue in the sourcing process. If you take the time to specify all this in detail, the supplier will know your organization is serious, but that it is willing to give a good supplier until the product or services delivery date to meet the requirements. The better suppliers will self-select.

The reality is, as per our in-depth Provider Secrets article, suppliers, and the best suppliers in particular, have a lot of reasons to ignore your RFP. If you want the best suppliers to respond, it has to be a good RFP (for a decent size project which clearly conveys that the best supplier, whether or not it already does business with the organization, has a solid chance of winning some business).

If you follow the tips and tricks in Buyer Best Practices, your chances will improve considerably, especially if you use a good RFP creation tool that makes it easy to engage organizational stakeholders, gather supplier responses, and compare them side-by-side in a meaningful manner (that goes beyond just a weighted scorecard). So check out the series (membership required) and learn to Write Better RFPs today.

Why Create RFP Hell?

Over ten (10) years ago, over on the LawMarketing Blog, Larry Bodine asked Why Go to RFP Hell? in response to a fellow lawyer who asked how her firm could get more RFPs for legal work from corporations. This question is as relevant today as it was then.

As Mr. Bodine quite astutely noted, RFPs are onerous chores leading to hideous events where clients get the chance to dictate terms, chisel down your fees and turn you into a fungible commodity. Nobody wants to be fungible. Moreover, RFPs were liked to competing to be the first to be hanged.

Why? RFPs were typically 50-page monstrosities divided into a dozen sections that required a complete history of relevant litigation, minority hiring statistics, alternative fee arrangements, financials, references, industry knowledge, and so on — all to make a short-list. At which time, if the firm was not considerably better than the incumbent in the eyes of the buyer, they would not see a penny. It is a hell.

A hell unnecessarily created by buyers who believe that they cannot even consider a supplier for an event before they know everything there is to know, even though a single piece of information can disqualify the supplier from consideration before any negotiations ever begin.

This is not a good thing to do. A company with a reputation for putting its potential suppliers though RFP hell is not one that many suppliers will want to deal with. The more a supplier’s peers complain about RFP hell with Company X, the fewer are the suppliers who will even acknowledge the existence of an RFP from Company X. As the word of RFP Hell from Company X spreads, the only suppliers that will respond to an RFP from Company X are those that are desperate. Those in bad financial shape, those without a stable customer base, and those with a bad reputation. These are not suppliers you want to deal with.

If you need to cast a wide net to find new suppliers, start with an RFI that only requests enough information to determine whether or not an RFP response from a supplier can be seriously considered. And before this RFI is issued, make sure to understand the category need in detail and what the absolutes are and that the RFI addresses each absolute. If multi-lingual support is an absolute, if a platform that encrypts 100% of data is an absolute, if a company with a headquarters in a country where it can be held responsible and liable for its products is required, or if a company with a factory with certain equipment is required, the relevant questions should be asked in the RFI. You should never ask a supplier to complete a 50-page RFP until you are sure the supplier can meet every absolute requirement. You can ask them even if their chances, based upon their initial RFI response, are less than 1% (as long as you make the award criteria, and weightings, abundantly clear), but not if their chances are known to be zero. (With complete requirements, award factors, and weightings clearly known, a supplier should be able to determine its own chances and determine whether or not its investment of time is worth it.)

And then, make sure that if you need a supplier to complete a lengthy RFP, that the RFP is well written. For details on how to write better RFPs, see the ongoing series over on Spend Matters Plus (membership required) by the anarchist, the maverick, and the doctor, of which 3 parts are already up.

  • I: Intro & Issues
  • II: Requirements
  • III: Provider Secrets

Have We Reached B2B 3.0 Yet? Part 7: Category Management Excellence

In the series so far we have:

  • defined the basics of B2B 1.0 in Part 1
  • defined the basics of B2B 2.0 in Part 2
  • defined the basics of B2B 3.0 in Part 3
  • defined the (basic) requirements for a B2B 3.0 Sourcing platform in Part 4
  • defined the (basic) requirements for a B2B 3.0 Procurement platform in Part 5
  • defined the (basic) requirements for a category management application in Part 6

in an attempt to determine whether or not we have reached B2B 3.0 yet. To that point, we haven’t reached a conclusion yet, stating that we needed to figure out just where we were in relation to where we should be and what B2B 3.0 really is. Plus, we’re still not ready to address this question because B2B 3.0 has to enable category management excellence, and this goes beyond just building the basic technical capability to support category management that was defined in our last post.

More specifically, while the requirements of:

  • multi-dimensional category taxonomies
  • global virtual “product” masters
  • centralized master data management
  • centralized risk (and compliance) management
  • supplier development and innovation program management
  • real-time on-line collaborative category plan creation

are necessary conditions for category management excellence, they are not in and of themselves sufficient conditions. Why? First of all, simply creating categories by lumping similar products into groups based on some arbitrary characteristic (such as proximity in the UNSPSC taxonomy) is not true category management, so it’s more than just taxonomy support – it’s the right taxonomy. Similarly, centralizing data in a global product master is pointless if that master cannot be used to accurately and informatively analyze category spend. Centralized risk and compliance management is good, but only if the right information gets back to the right systems that are used day-in-and-day-out by people in the field (that certainly aren’t using the Supply Management source-to-pay platform). Program management is good, but only if it is the right program being managed. And the plan has to be a strategic plan that generates value, not a tactical plan that just keeps the wheel turning.

As such, the platform also has to enable:

  • true category spend analysis
  • market analysis
  • forward-looking category requirements
  • linkages between the external customers, sourcing, and internal customers
  • deep workflow linkages with SRM and S2P

And it has to support the best practices that get result. For deep insight into what those are, we recommend the three-part series on Getting a Grip on Category Management by the doctor and the maverick over on Spend Matters+ (membership required).

Part 1: A History Lesson
Part 2: Some Basic Approaches
Part 3: Advanced Approaches