Category Archives: Best Practices

Optimization Backed Sourcing Platform … Or Bust Part II


This is the second part of a five part series that revises and ties together key ideas outlined last year on Sourcing Innovation across multiple posts. Regular readers will be familiar with much of the content, but the integrated perspective should help to cement the ideas in regular readers and new readers alike.

This post is largely based on It’s Not a Suite, It’s Just Sourcing, Part II.

In our last post we made the rather bold claim, which is probably going to irk a lot of vendors, that it’s NOT a Suite, It’s JUST Sourcing. SI likes vendors that are trying to build solutions to solve their customers’ pain points, and has chronicled the efforts of many over the years, and thus isn’t doing this series to be irksome. SI is doing this series because it’s not 2005 anymore, it’s 2015 and the nature of, and need for, Sourcing has changed as global trade has become more complicated, supply chains have lengthened, risks have increased, and sourcing has become more complex. Today, sourcing absolutely has to be more strategic and Suite Sourcing is NOT Strategic Sourcing. In today’s post, we’re going to begin to clarify why.

Our last post outlined a hypothetical, but realistic, example in the high-tech space, discussing a typical, primary, sourcing event for a company that assembled custom-built high-end workstations for software developers and engineers. We started by discussing the primary factors that the Sourcing analyst was likely to identify as well as two strategies the analyst was likely to take. This led to a perceived event progression and a plan that looked like it was easily executable in you average modular sourcing suite. We did this to make it clear why many companies fall for the fallacy that you can attack sourcing in a step-wise fashion using a modular suite, and, as a result, why some vendors still believe that a modular suite is the way to go. The reality is that, at a quick glance, it does look like this is the right approach and that there is no reason to question it — even though there is a big reason. Namely, the approach is wrong.

The reason being is that, in reality, the event is not going to go as planned.

Specifically, it will not be an analysis followed by an RFP followed by a single auction / optimization analysis followed by a push into the contract management system. One or more, with emphasis on the more, of the following will happen:

  • the RFX will come back and some of the requested bid fields will be empty because the supplier is no longer producing the product
  • the RFX will come back and there will be new products that the buyer did not know about with new bids (and new interdependencies to be mapped)
  • the logistics carriers will come back with quotes much higher than expected and/or a logistics carrier or 3PL will withdraw (due to overcommitments) and lanes will vanish
  • stakeholders or key customers will change requirements post RFX issue and you will have to go back and ask for prices on next generation products, which might still be in final design stages
  • the baseline optimization will come back with completely unexpected results and once the analyst uses spend analysis to dive in, the analyst will find a number of outliers in the incumbent bid and realize that she has to go back and ask for verified or corrected data
  • the auction will end with three suppliers almost equal on baseline scoring and extensive analysis will be needed to determine which supplier gets 50%, which supplier gets 30%, and which supplier gets 20% in the 50/30/20 split dictated by the stakeholders to minimize risk

In these situations, respectively

  • the analyst will have to identify a larger supply base and send the RFX to more suppliers
  • the analyst will have to research the new products and decide whether to accept them or not and then, possibly, ask the supply base to bid on (comparable) products in a revised RFX
  • the analyst will have to invite more carriers to bid and consider alternate lanes, possibly from secondary (air)ports to secondary (air)ports
  • the analyst will have to create revised specs and go back to the supply base for additional prices and options
  • the analyst will have to backtrack to the spend analysis step on the submitted data, followed by a request for bid verification and a repeat of the optimization on revised data
  • the analyst will have to go back to the analysis step to identify which bid components were strongest for each supplier and then compare that to existing supplier scorecards (to determine likelihood of on-time delivery, quality guarantees, price consistency, etc.)

In other words, the event is not going to go as planned and it’s not going to be a sequential progression from analysis to RFX to auction/optimization to award. Moreover, most events are going to see multiple occurrences of the above hiccups and require an almost random workflow that uses all of the sourcing capabilities of a suite multiple times.

Moreover, the transitions back and forth will need to be seamless. If an analyst has to push data out of the optimization “module” into the “analysis” module for detailed data and outlier analysis, then push the data, with insights, back into the “RFX” module for revised RFX data collection, and than push the revised RFP data back into the “Optimization” module for revised analysis only to find out that the lane cost is coming out higher than expected in the preferred award, indicating that there is still an additional opportunity if logistics costs can be lowered, then this “modular” workflow quickly becomes a nightmare.

Plus, in this situation, the analyst will have to do an in-depth analysis of the logistics cost to determine if costs can be lowered simply by inviting more carriers to bid, analyzing primary and secondary lanes, or doing something progressive like using the organization’s sourcing expertise to help a provider lower their overhead with better insurance rates, communication plans, and office & computer supplies from the organization’s GPO contract. Then, after this analysis has been done, which will likely take the form of multiple what-if optimizations using various cost models, the analyst will have to go back to the RFP, issue the revised RFP with more options to current and new suppliers, push the data back into the optimization module and continue.

In a modern sourcing project, one cannot separate data collection from cost modelling from analysis from bidding from optimization — it is all one integrated sourcing process that lathers, rinses, and repeats until the solution is found and the event is done. And any provider that thinks you can separate pieces out and take a modular, piecemeal approach and build up to a suite, one module at a time, is still living in 2005 and should be approached with caution. It’s not a suite, it’s just sourcing. And, as indicated in our previous post, and as will be discussed in more detail in a future post, it’s not optimization, it’s strategic sourcing.

Optimization Backed Sourcing Platform … Or Bust Part I


This is the first part of a five part series that revises and ties together key ideas outlined last year on Sourcing Innovation that were spread across multiple posts. Regular readers will be familiar with much of the content, but the integrated perspective should help to cement the ideas in regular readers and new readers alike.

This post is largely based on It’s Not a Suite, It’s Just Sourcing, Part I.

For a while now, Sourcing Innovation has been effectively saying that if you do not have an optimization-backed sourcing platform, you’re not ready for the modern era of complex sourcing. And SI means it. This isn’t to say that you can’t get value from a modern suite that covers the end-to-end sourcing lifecycle, or that you can’t get value from a first generation optimization platform, because you can — especially if you haven’t had these solutions before. However, every last-generation solution has a limit on the value it can deliver. Some of these limits are low, and some of these limits are quite high — so high, in fact, that it can take years, and sometimes a decade or more, for the average organization to hit the ceiling. But once that ceiling is hit, the organization has to know what comes next to continue extracting value from the supply chain. So this is a post about what comes next for the average organization and, most importantly, what comes now for the leaders who have already realized that their first generation optimization modules and / or first generation suites are failing to deliver the value they need today.

The reality is that, these days, Sourcing needs to be much more strategic and is thus not an activity that can be accomplished as a discrete set of loosely connected tasks where you can pick and choose what you need ahead of time. Strategic Sourcing is an activity that needs to both analyze the need and the market situation and respond to the stimuli the market is providing in a dynamic fashion.

This can not be done according to a pre-planned, limited set of tasks. To clarify, let’s take a hypothetical, but realistic situation. Let’s say that the company is a high-tech retailer selling custom assembled high-end development boxes to software development and engineering shops. This company will not be buying pre-configured Dell and HP machines, targeted to the consumer market, but custom configured boxes using high end motherboards, which may be manufactured by the same production houses that manufacture boards for companies like Dell and HP, high end Intel and AMD processors, ultra-fast high density DRAM, high-end solid state drives, mid-tower cases with extra fans, etc.

This might sound like a relatively easy sourcing event as there are a relatively small number of acceptable motherboard manufacturers, DRAM manufacturers, drive manufacturers, case manufacturers, and only two chip manufacturers, but even 5 * 5 * 5 *5 * 2 = 1350 and each manufacturer might have over a dozen acceptable options — and it’s hard to say up front how many of these combinations are not only viable, but acceptable (as even though it might be feasible to connect the components, there might be driver or other issues that affect compatibility or performance). In addition, new manufacturers arise once in a while and old manufacturers fail or sell out. Last year’s customer spend pattern is not the same as the spend pattern two years ago, and until year-over-year is analyzed for multiple years, you have no idea of the average deviation.

In other words:

  • you may or may not need a pre-event spend analysis to determine potential volume leverage points, the opportunities with supply base consolidation, and expected savings potential, all depending on when the last event was run, how much data you have, and current market data points
  • you may or may not need optimization; if you restrict the bid to pre-configured systems, because business is up 40% and you need a quick event to get through the rest of the year with plans to do a more detailed analysis in 6 months, you can probably get away with a weighted auction, but if bid options are open, you will probably need optimization to handle all the data
  • you may or may not need multiple RFX rounds, so you may or may not need a supplier portal to handle the communication necessary for a multi-round event

And this is all fairly obvious, so you are probably thinking

  • if I need the analysis, I invoke the spend analysis module, get my insights, and plan my strategy
  • then I invoke the RFX module to create the RFX
  • if I am doing multiple rounds — I have to configure the Supplier Portal instead of just sending out the Excel spreadsheets (which I would import on return otherwise)
  • when the data is retrieved, validated and cleaned up then I either
    • push it into the auction for a weighted auction or
    • push it into the optimization module for optimization-backed analysis
  • when I have my winners, I push the data into the contract management module for draft contract creation

… easy-peasy, right?

Wrong!

This is the real world, and it never works this way, as we will discuss in our next post.

If You Can Marry Magic to Logic You Might Just End the Marketing Mayhem

In our last post where we asked if marketing mayhem got you down, we noted that, in many organizations, Marketing is still one of those sacred cow categories that Procurement has (very) little influence over (but yet often accounts for [up to] 20% of spend).

And since it needs to have a substantial impact on sales and revenue at that spend volume, it’s important that the spend be effective as well as efficient. This means that not only does the organization have to make the spend that is most likely to lead to a return, but it can’t overspend in the double digit percentages on a significant percentage of spend if it wants to get the maximum ROI. But when a considerable portion of the spend is on consumables (like print) or commodity services (like website design, social media marketing, or production overhead costs), that spend has to be efficient. But when its managed by Marketing, it typically isn’t.

But as a Procurement professional, whom Marketing often sees as the enemy who only wants to help Finance cut their budget as Procurement cuts their spend, chances are you won’t ever get to lay a hand on this spend unless you can change the status quo, which starts with changing the way Marketing sees you. In order to do this, you have to look like someone who is their friend, and not their foe, and this will involve mastering the marketing way — walking the walk, talking the talk, understanding, and working towards their viewpoint (spend money to make money, even if they can’t measure it). (Except that you will work with Marketing to take action to make sure that spend is accompanied by measurements and metrics that will help Marketing gage which spend is most successful with respect to a particular goal.)

Only once the walk, talk, and focus is mastered can Procurement get to the message, which has to revolve around Agency (Lifecycle) Management, as discussed in a recent six-part series over on Spend Matters Plus on Mastering the Marketing Way by the anarchist and the doctor. As of our last post, only the first three articles were available. Now the entire series is available. And in the last three articles you get a deep dive into agency management support, intelligence, training, and how to create a great RFX. If you want good results, you need a good RFX — and creating a marketing RFX is not like creating an RFX for commodity goods.

the doctor recommends that you check out the rest of the series, which is the most in-depth series on mastering marketing spend for Procurement that has ever hit the Procurement bit stream.

  • Offering Agency Management Support
  • Optimize Your RFX Support
  • Intelligence and Training

Enjoy.

Should All Service Spend Be Subject to Procurement

Last week, Spend Matters UK ran a great post that asked “why do executives employ their friends as consultants”, which noted that one of the most problematical spend categories is professional services, and in some organizations, this is even more problematic than contingent labour spend, marketing spend, and legal spend. Why? Not only do some executives in some firms often engage senior experts and big 5 consulting firms on six, seven, and eight figure (plus) deals without any notice or without any respect for the process, but they often do so without any background checks or references whatsoever.

Sometimes, as pointed out by the public defender, the consulting firm or expert is being hired because the consulting firm or expert was hired in the past and did a great job, and, more importantly, there is a need for speed.

Sometimes, as also pointed out by the public defender, the budget holder is simply lazy. He knows the consulting firm or expert will do an okay job, and that’s good enough for him.

But sometimes, as documented by the public defender, there is an emotional dependence on the supplier, and that’s a good enough reason for the budget holder not to rock the boat, and other times there is a personal relationship, which is a great reason for the budget holder but not so great for the organization.

And sometimes, as clarified by the public defender, the reason is not a good one, or even a legit one. The budget holder might be making the award on the future expectations of a favour or because of a bribe and/or kickbacks that have been, or will be, received.

But if bribes and kickbacks was the worst situation that could happen, that wouldn’t be so bad. It would just mean that the award was costing the organization more than it should (and maybe significantly more than market average). If the work is quality, and identifies an ROI, that’s not too bad.

You see, if proper process, and due diligence is not taken, the organization could:

  • guarantee a large minimum payment regardless of work quality, completion, or dismissal (such as a 1M payment for early termination)
  • hire someone with a known criminal record for fraud
  • hire someone with known terrorist associations who will try to steal trade secret technology protected under a defence act

And if you think overpaying an average consultant who will take twice as long to produce an inferior result is bad, imagine how much worse each of these situations would be.

So, while maybe it is the case that not all spend should be under the control of Procurement, it is the case that all spend should follow the proper Procurement process under the guidance of Procurement so that all the facts, and options, are available to the budget holder. And since the CFO and CEO can be held criminally liable for certain oversights in the business, they should support this as following a good Procurement process and policy is the best CYA defense there is.

There’s Nothing Wrong with a Paid Pilot – As Long as it’s a Real Pilot

Over on Spend Matters, the analyst team has been posting their thoughts on the market outlook for the next three years (instead of making pointless predictions like their peers, and we all know what the doctor thinks of predictions, which was reiterated in this post), and most of them are logical and expected. However, one in particular needs to be addressed, and repeated. And that’s the fifth of the prophet‘s predictions in his “E-Procurement Market Outlook” on Spend Matters. In particular, the prophet‘s prediction that

Paid Pilots [will] Become More Frequent

There are two types of pilots. The kind where a provider takes data from a past event or project, runs it through their system, and provides you with a report of what they would have done and the results they would have achieved and you compare it to the results you achieved to see if it’s worth considering the system in depth.

Then there is the type of pilot where you try out the system on a live event or real data, replace your current system with the new system temporarily, or deploy the system for a specific project or division to compare operation and results side-by-side with the live system.

Before an organization invests a large amount of money or a large amount of effort to switch to a new system, and after it runs an initial pilot on historical data to determine that a full pilot is worth it, this is a great idea as the organization should be sure that the system will work as intended before it implements the system to support critical functions, but the pilot will only be effective if both parties take it seriously and make their best effort to get the best, and most realistic, results.

Even if the platform is a true SaaS solution that runs on the cloud where the provider can instantiate a new instance simply by clicking a button that creates a new, default, private instance and can make it available by simply creating a user name and password, configuring it for your use will take a lot of effort on the part of both parties. Even if everything in the Admin section and MDM control panel can be 100% user driven, until you have sufficient training and experience with the platform, you’re not going to be able to hook it into your ERP and existing supply chain / Sourcing / Procurement platforms, configure the workflow, create the secure user hierarchy, and complete other configuration tasks. Moreover, you’re not going to know the unique features, the features that can generate the most value, or the best practices. For best results, the supplier has to be actively engaged.

And in the business world, clients come first. If you’re not a client, while the sales and account teams will do their best to make you successful, they have paid clients to support. If those clients need help, they come first. Plus, at any time, they have other organizations they are trying to sell, as any sales person or account manager that doesn’t spread the risk across multiple potential client organizations is not a sales person or account manager that is going to keep their job very long.

However, if you pay for the pilot, the provider’s costs, and risks are covered and the provider can dedicate the resources that you need to get the most that can be obtained from the platform. If every pilot is paid, the provider can hire more resources that can be dedicated to pilot success.

In other words, if success is desired, then the organization should pay for a pilot – as long as it’s a real pilot to support a real project (and not a demo analysis on historical data, that should be free), the provider treats the organization as a real client for the extent of the pilot, and, the provider is not profiting off of the organization. The pilot should be priced to cover cost, nothing more, nothing less.

And, as the prophet points out, done right, the benefits of a paid pilot include tactical ones such as building support for the cost/benefit analysis of different roll-out options (e.g., standardization vs. customization) as well as broader organization involvement in the overall selection of a solution (which will pay dividends in frontline adoption during a full scale deployment). And you can have confidence the solution, and solution provider, will work for you before signing a multi-year deal — all for the cost of a short consulting engagement (which will likely bring more results than a typical consulting analysis will).