Category Archives: Best Practices

Why You Need MROaaS

Yes, you need MROaaS. Everyone needs MROaaS. ( But don’t tell your boss you need MROaaS, spell it out, because we all know what she’s likely to hear when your tongue trips over this one. 😉 ) Next to T&E (not T&A), it’s probably the biggest tail-spend savings opportunity in the enterprise. And it deserves to be addressed.

MROaaS, short for MRO-as-a-Service, which is itself short for Maintenance-Repair-and-Operations-as-a-Service (which is very unsexy when you say it this way), is, for large organizations that need to maintain a lot of inventory on hand, the biggest overlooked outsourcing opportunity in the business. Inventory is costly (and many estimates put annual inventory overhead at 25% of product cost). But not having the right inventory at the right place at the right time is even costlier. (Downtime leads to lost production and, ultimately, lost sales which is very costly when you still have to pay the day-to-day overhead, including your employees’ salaries.) And MRO is often the biggest consumer of long-term inventory (because the majority of goods for sale will move in and out within a few months, or even a few weeks, while MRO inventory could shit on the shelf for two years). So inventory optimization alone is a good reason to have good MRO.

But that’s not the only reason to have good MRO. The reality is that, in an average organization:

  • over 20% of inventory on the shelf is excess and/or obsolete
  • fill rates for most MRO storerooms are closer to 75%
  • there is supplier “lock-in” even where alternative sources of supply exist

And the losses mount quickly.

But these aren’t the only problems organizations face. Most also have to deal with

  • recall inventory not getting identified and then being used when it shouldn’t (which creates hazards)
  • significant expediting when a part is out of stock and it is needed yesterday
  • inefficient returns management when the wrong part gets shipped or a part is identifies as bad six months (or three years) down the road (when it might not even be returnable)

And the losses continue to mount.

But with good MRO:

  • excess and obsolete inventory can be reduced by up to 90% (or more)
  • fill rates can exceed 95%
  • alternative sources of supply are easily identified
  • recall inventory is immediately identified and returned
  • expediting becomes the exception rather than the rule
  • returns are properly handled in a timely fashion

And the organization stops bleeding red.

And this is why the organization needs good MRO. But why does it need MROaaS. Slowing down the cash hemorrhage is one thing. Improving the organization’s overall health is another. Good MRO can add value in a lot of ways. In addition to the inventory optimization that will see the results above, it can also provide:

  • proactive shipment monitoring to insure the right shipment is made at the right time
  • lean process improvement to take time and cost out of the process
  • supplier consolidation to allow for more volume-based cost reduction opportunities and more time to focus on each supplier
  • supplier development programs to insure that supplier performance improves over time

And this is just the tip of the iceberg a good MRO program can provide. But a typical organization, which never gets to the MRO tail-spend, is not an expert in MRO. It’s not even a novice in MRO management in most cases. This is where MROaaS comes in. For the most part, the only organizations that are true MRO experts are those that provide MROaaS. And since it takes true expertise to go from cost reduction to value generation, you need MROaaS.

And if you are still not convinced, the doctor and the maverick have put together a detailed four-part series over on Spend Matters on the subject that should provide all the education you need on why MROaaS is something that has to be considered if MRO spend is a significant part of the organization’s tail spend. Parts I and II are already up and available here:

  • MRO as a Service (Part 1): Embedding Procurement as the Value Engine
  • Unpacking and Applying the Value Streams of this Model: MRO-as-a-Service (Part 2)

Why You Need Mass Adoption Of An Optimization-Backed Sourcing Platform

Last week, in our post on why Higher Adoption is Where the True Value of Optimization Lies, we emphasized the importance on not just having optimization, but an optimization-backed sourcing platform that can be used by the most junior of buyers. We focussed on the efficiency, time savings, and value such a platform would bring, but didn’t give you any hard numbers. While the hard numbers will be hard to come by, SI expects that the savings that hit the bottom line from such a platform will increase by at least 150% over using stand-alone optimization, and more than likely will double what an organization would see if it just used a regular strategic sourcing platform without optimization. We know that 2.5X is not a very impressive number when vendors go around talking about 10X ROI, but the ROI that vendors promise is relative to the cost of the platform, not the ROI relative to the organization’s bottom line, and that’s what really counts.

The reality is that, at the end of the day, after COGS, depreciation, taxes, etc. are factored in, a good Procurement organization might only take 2% off of the bottom line. This doesn’t sound that impressive, unless the organization is a 10B organization where 2% is 200M, in which case it’s knock your socks off impressive. Now imagine if that same Procurement organization could increase the straight to the bottom line savings by 150% and show a bottom line savings of 5.2%. That’s another 320M in annual savings for a total savings of 520M! That’s buy everyone on the Sourcing team a custom made Jaguar savings because no other initiative is going to take that much off the bottom line.

But you don’t have to be a 10B organization to see the impact. Imagine you are a small mid-size organization with only 100M in annual spend. Instead of seeing an average year-over-year impact of 2M, you’d see 5.2M. If a fully burdened FTE is 200K and you had a small Procurement department of 5 people managing your spend, the department’s ROI would go from 2X to 5.2X in a single year, and that is quite significant.

So where are these, quite conservative, numbers coming from?

  • A Best In Class Organization has 80% of spend under management (Hackett, Gartner, etc.)
  • A Best in Class Organization will strategically source approximately 1/3 annually (due to resource restrictions) (Crowd Wisdom approximation used by many vendors)
  • A Best In Class Organization with stand-alone or hard-to-use optimization capability will only put the top third of complex, strategic, or high volume spend through the organization (Generous crowd wisdom approximation based upon SI’s interaction with optimization vendors)

As a result, (at most) one-third of one-third of four-fifths of spend gets optimized on an annual basis, or about 9% gets optimized using strategic sourcing decision optimization and the full extent of its capability.

However, if the organization has an optimization-backed sourcing platform that is configured for one-click evaluations and automatic weighted auction awards for low-cost / standard categories,

  • 98% of spend can be under management (as it can flow through the platform as easy as it can flow through an auction or spot buy RFP),
  • one half of that can be sourced annually due to efficiency gains
  • and all of this spend will be subject to optimization.

This means that about one half of organizational spend, or about 48% of spend, can get at least partially optimized on an annual basis. In other words, an organization can subject 5x its spend to optimization on an annual basis.

The net result is that an organization that adopts an optimization-backed sourcing platform that can be used by every buyer will see at least 150% more savings hit the bottom line every year. Why?

If we look at the numbers:

  • the average return from Procurement at a world class organization is 4.7% (Hackett Group)
  • the average return on tail spend (which is never strategically sourced) is 7.1% (Hackett Group)
  • the average return from SSDO on a strategically sourced category where the full power of the solution is enabled is 12% (Aberdeen)

This leads to the following (where we assume 20% of spend is “tail spend”):

Traditional:
09% using SSDO @ 12.0% savings = 1.0% savings
18% using SS   @ 04.7% savings = 1.0% savings
TOTAL = 2.0% savings
 SSDO Platform
38% using SSDO @ 12.0% savings = 4.5% savings
10% using SSDO @ 07.1% savings = 0.7% savings
TOTAL = 5.2% savings

Now, mileage will vary among organizations, but this example should make it pretty easy to see that optimization is a huge value driver that will have a significant impact on your bottom line when it is widely deployed.

So if you want to know what to look for in an optimization-backed sourcing platform, download Optimization: Higher Adoption is Where True Value Lies (registration required) today and find out what you need to take optimization from a success to a smashing success in your organization.

Two MUST READS on SpendMatters UK!

Today’s post is being pre-empted with a request to go and check out two great posts published yesterday over on SpendMatters UK that:

  • echo a point that SI has been screaming for years and
  • echo another point that has been pointing out for years to anyone who would ask


Post 1: The True Cost of Screwing Your Supplier

In “The True Cost of Delayed Supplier Payments” on Spend Matters UK, Nancy clearly explains just how much money you will save by extending supplier payments by 30 days on £1.2M annual spend against how much opportunity cost you will lose. An organization might think it will save a very pretty penny on the cost of capital by doing this, but the reality is that all it will save are a few copper pennies that the average CFO wouldn’t even bother to bend over and pick up if they were all dropped in front of him in a platinum-lined wicker basket.

The post works through the savings calculation in detail and the net result (with a cost of capital of 5%) is a whopping annual savings of £417! That’s right, over the course of a year you won’t even save enough to pay the consultant who forced this hare-brained scheme upon you. (Heck, you won’t even have enough to cover the executive lunches where the consultant pitched this hare-brained scheme upon you.) On the other hand, the organization loses a £60,000 benefit they could have gained from SRM (as well as any benefits they were getting as a customer-of-choice, as you’re no longer a customer-of-choice once you screw a supplier like this for no reason).


Post 2: “Made in X” – Legalized Piracy!

In ‘”Made in Nigeria” Public Procurement Policy Will Simply Lead to More Corruption’ on Spend Matters, Peter clearly explains how this new “anti-corruption” policy is just going to lead to more piracy at home (as if there isn’t enough piracy on the seas and over the internet as it is). You see, with the insistence that the government must buy local, and especially where there’s only a handful of suppliers, you’re just going to see cartels forming among the local suppliers for the purposes of colluding to double and even triple prices.

And this is the problem with any “Made in X” public procurement policy that insists that the government always buy local – for any category where the supply base is small enough, unless the product is a commodity that is sold in a local office supplies chain or store where public pricing can be easily tracked and monitored AND the government has a law that says the public sector cannot be charged more than the private sector MSRP or something similar, the public sector price is going to be significantly more than the price on the open market.

SI strongly recommends you check both of these posts out as both of these posts were, literally, between the posts.

 

Authoritative Sustentation 63: Board of Directors

As per our authoritative damnation post on the board of directors, they can be your best friend or your worst enemy, but they’ll probably be your ongoing nightmare because their dictates can drive your daily duties even more than the wacky whims of the CEO.

If all the board does is chant “savings, savings, savings”, then guess what the CFO has to chant. That’s right! “Savings, savings, savings.” But this isn’t the only craziness the board can throw your way. They can get razor-focussed on outsourcing. They can decide that the organization should have no FTE obligations and try to make as many jobs as possible contingent labour. Or they could decide the organization has to acquire or merge with someone soon and task you with supply chain analysis of the most likely candidate organizations.

So what do you do? Dance to their tune every time it changes? Well, you have to — but we’re no longer in the age of the folk, ballroom, or line dance, so you should do your best to make sure those aren’t the dances that come your way. How do you do that?

Stop waiting to follow the leader and start planning to lead the leader. What do we mean? Regardless of any lip service the executive or the board may throw towards the press about a desire to do support minority businesses, increase overall sustainability, or focus on innovation, they profit when the company profits, and profit, which they generally associate with higher revenues (which they demand of sales) and lower costs (which they demand of Procurement), is all they really care about.

So if you want to stop looking for illusive, and possibly non-existent, savings, then start focussing on how you can increase profit and come up with value-generation plans that you can sell to the board.

For example, Procurement can add value by:

  • helping Sales sell into new markets
    maybe the problem is high distribution costs, which Procurement can rectify as it’s already sourcing from the market and knows the lowest cost shippers;
  • helping Finance improve working capital
    as it’s understanding of in-depth cost modelling and (strategic sourcing) decision optimization can help it work with finance to create an optimal payment plan model that optimizes early payment discounts, invoice factoring, and supplier interest charges or late fees
  • helping Engineering improve quality and lower costs during NPD
    as a leading Procurement organization has expertise in Supplier Management

And Procurement can bring a plan to do so to the board before the board gives it a plan that would take it back to the Procurement dark ages.

Mass Adoption of Optimization via Modern Sourcing Platforms

In a previous post, we addressed three common misconceptions about sourcing. In this post we expand upon those corrections we provided to give you six pillars of a properly designed optimization-based sourcing platform.

The three pillars of a properly designed optimization-based sourcing platform that we addressed in our last post were:

  • Useable by everyone, including the most junior of buyers
  • Affordable as any other sourcing platform
  • Efficient, decreasing event set-up time by at least a factor of 2 to 3

In addition, an optimization-based sourcing platform is also:

Powerful

Optimization is powerful. A modern optimization engine can solve sourcing problems to 99.9%+ optimality in a matter of minutes, even if they require tens of thousands of variables and hundreds of thousands of equations to describe. The platform is effectively evaluating hundreds of thousands, or millions, of different award splits in a matter of minutes.

Valuable, more so than any other sourcing platform

Simply put, optimization gets amazing results. Even if the category has been negotiated repeatedly over the last ten years, and it looks like the savings opportunities are razor thin, with the ability to analyze more suppliers, more bids, more transportation options, more value-add options, more constraints, and more supplier-specified opportunities, optimization can often identify an additional savings of 10% or more. In fact, the year-over-year average savings from optimization alone on the categories it has been applied to has been clocked at 12%, more than any other sourcing platform.

Insightful

With optimization, you can create different scenarios, with different suppliers, constraints, and goals and see how the optimal awards differ as the problem definition changes. This inspires a sourcing analyst to look at the problem in different ways.

However, the first three statements in particular are only true if the platform used by default is an optimization-backed sourcing platform . Classically, optimization solutions have been implemented as stand-alone platforms. These were powerful, and when used by the right senior resources who set up the right sourcing events, these platforms generated amazing results, but they were very difficult and time-intensive to use compared to an e-RFX or e-Auction platform. The model had to be set up. RFX data had to be imported. The data had to be validated and cleaned. The model was then run, altered, and re-run until an acceptable baseline was found. Then multiple what-if scenarios were run until a final award scenario was identified. Then the award scenario had to be exported to the sourcing platform so the suppliers could be notified and the contract(s) drafted. All of this was very time consuming. As a result, the platform was not useable across the sourcing organization, was not very affordable as it had to be supplemented by other sourcing platforms, and this process was definitely not efficient.

For mass adoption of optimization, it needs to be supported by an RFX and/or an e-Auction platform for data collection, by analysis and reporting for result presentation and exploration, and needs to be integrated with contract management and the supplier portal for negotiations and communication. In other words, optimization is the engine that powers the modern sourcing platform, it is not a stand-alone solution.

That’s why a modern optimization-based Sourcing platform, and not a standalone optimization module, is the silver lining that Procurement has been waiting for. What does this platform look like? Stay tuned!