Category Archives: Best Practices

Procurement 2020, Are we on Track?

Long time readers, including those who worked through last year’s mega series on The Future of Procurement and The “Future” Trend Expose already know the answer to this, but with only 5 years left to go, it’s worth exploring this topic that was all the rage 5 years ago but now no longer a whisper, even from the voices that were once the loudest in their great proclamations.

Why the silence? Because, to be frank, we’re not even close to their predictions, predictions which, to be honest, should have already been met by now.

While there is a lot of cannon fodder to go back to, let’s take Sourcing Innovation’s post from four summers past, which was penned at the height of the 2020 blathering, and which took us back to a report released by Hackett in 2008! In the first of the grand prophecies, which laid out the hierarchy of supply, rather than make grand projections, Hackett simply laid out a set of seven core competencies that businesses would need to acquire. And even though leading providers have offered next generation solutions for each of these since the end of the last decade, progress along these paths is still few and far between.

Business Process Sourcing

Many companies are still taking a scattered approach to process sourcing and outsourcing and indirect spend in general. Some are using BPOs, some are using GPOs, some are using both, and some are simply hiring contingent labour to handle the processes the business does not want to do, or does not have the skills to do, in house.

Supply Performance Management & Supplier Management

Formal Supplier Management is still weak, or non-existent at many companies, and fewer companies still have, or use, modern platforms to manage the performance of their supply base, even though there are a number of second generation platforms out there that have quite extensive capabilities. (The capabilities that are out there will be described in detail in the next platform-based Spend Matters Pro series on Supplier Relationship Management, starting after the CLM series concludes, which will be co-authored by the doctor, the maverick, the prophet, and the anarchist!)

Knowledge Management

According to Hackett, Sourcing will need to master content-driven analytics which integrate external data into internal data models …. We’re not there yet. Less than 1 in 2 Procurement departments are even doing basic spend analysis, yet alone more advanced content-driven analytics using multiple internal and external data sources! Knowledge is still quite poor. (Maybe that’s because only the leading sorcerors in the leading Procurement departments read Sourcing Innovation and Spend Matters CPO?)

Talent Management

After years of reducing the training budget to almost zero following the last big recession in the late 2000’s, there’s still been no sign of restoration and talent is still not getting the training they need to do the best job they could do. Until this happens, there’s no way that Supply Management will be the career path of choice for new talent.

Next Level Strategic Sourcing

Most companies still aren’t doing true TCO modelling or using strategic sourcing decision optimization, which is the only other supply management technology (in addition to true spend analysis) that has been demonstrated to find year-over-year savings. And a true next level company should be at TVM modelling and decision optimization, multi-tier analysis, trending and predictive analytics, long-term strategic supply chain redesign, and other advanced initiatives that will save money now and for years to come.

New Product Development & Introduction

As Hackett said long ago, Supply Management will have to include advanced design-for-supply support that incorporates multi-tier cost modelling, scenario planning and optimization, but seeing as how the majority of Supply Management departments are still struggling with TCO and weighted RFXs and e-Auctions, even though companies like Arena Solutions and DirectWorks (formerly Co-exprise) have been promoting this for close to a decade, this is still a ways off from being main-stream.

In other words, even though 2020 is approaching fast, we’re still a long way from 2020 Vision in Supply Management, despite the doctor‘s best efforts.

An Open Invitation to the Trade Extensions Workshop for Practitioners

Trade Extensions, a leader in Sourcing Optimization (and a sponsor of Sourcing Innovation), is having their annual user conference on October 7 (2015) in London. As pointed out yesterday by Mr. Smith in his invitation, this year they are opening it up to a small number of practitioners who want to learn more about advanced sourcing and sourcing optimization, and, Sourcing Innovation and Spend Matters UK readers in particular. (Outside of the Trade Extensions website, you won’t see this invitation anywhere else.)

Unlike some vendor conferences, that spend hours and hours demoing their new products and discussing where they are going and how great it will be for you as a customer, Trade Extensions keeps anything even remotely marketing related to an absolute minimum in their events, preferring to focus more on education and best practice then on sales. (Last year, except for a very brief “here’s what we did over the past year, here’s what we’re doing, and here’s a few screen shots of what the new capabilities look like“, the rest of the day was spent on presentations by experts and practitioners on best practices, process transformation, and advanced sourcing (including a presentation by yours truly on what comes next in sourcing optimization). (If you got in a bit late or left a bit early, you wouldn’t even know who was putting it on.)

This year, they want to cram even more education into a single day. With presentations by Sigi Osagie, who’s gonna tell you how to get your Procurement Mojo on, Mr. Peter Smith, who’s going to discuss the Future of Procurement (which, in the doctor‘s view is Doomed. Marooned. And ready to be Entombed.), and Sindbjerg Hemmingsen, a known thought leader on responsible procurement, the day is going to be jam packed with education and useful information. And if that’s not enough, it’s another opportunity to meet the elusive yours truly who will be there to …

Oops! Can’t tell you that … yet. Trade Extensions has a few surprises this year for its attendees beyond holding the event at Emirates Stadium (which is home of the Arsenal Football Club, and a known haunt of many Premiere League legends who seem to get lost in the halls and never leave) and the dinner at the British Library. Let’s just say that even the gift bag might knock your socks off.

So, if you are a practitioner (or a consultant practitioner who is not locked into an exclusive engagement with a provider) who would like to learn more about sourcing best practices and advanced sourcing, this could be your lucky day. But you need to book quickly. When the seats are gone, the seats are gone. And this is one event you don’t want to be left out of.

Best Practices: What Are They?

There’s a lot of talk about best practices these days, but not every site will tell you what a best practice is. Technically, a best practice is a process that consistently demonstrates superior results compared to other processes that accomplish the same task. Best practices are necessary because, without them, an organization will not advance up the hierarchy of supply (as discussed by the maverick and the doctor in their article on “availability and delivery in a hierarchy of supply”) and will always be worrying about simply insuring supply and never able to truly focus on cost reduction, demand control, or value generation.

To illustrate why best practices are needed, let’s consider one activity at each level of the hierarchy of supply: supply (chain) visibility, cost modelling, demand management, and value management.

Supply Chain visibility is not as simple as getting all of your contracts in the system, mapping the supply chain for critical products down to tier 3 (or tier 4) raw material suppliers, and then setting up automated monitoring of news sources for potential disruptions. To simply take a supply chain map, set it (in the system), and forget it until an alert comes in is a disaster waiting to happen. First of all, the supply chain is not static. New contracts with new suppliers will be cut. Disruptions will force emergency substitutions to different suppliers. And the map will quickly get out of date. Moreover, not all disruptive events will make the (English) news sources the semantic event monitoring software will be parsing. For example, maybe the mining company went bankrupt, didn’t file for bankruptcy, and didn’t tell anyone. They just stopped shipping. The first inclination won’t be until a tier 3 component supplier realizes a shipment is a couple of weeks late. They may or may not tell the tier 2 subassembly supplier, who won’t realize this until a few months later when the tier 3 supplier’s shipment doesn’t show up because the tier 3 finally ran out of inventory. But it might still be a few more months before the tier 1 supplier realizes the assembly, which was being shipped slow ocean freight, doesn’t show up.

In order to ensure that the organization actually has supply chain visibility and a realistic chance of detecting supply chain disruptions, the organization will have to create procedures and processes to make sure the supply chain map is kept up to date, that regular communication happens up and down the supply chain, and that multiple news and data sources are monitored to catch indicators of potentially disruptive events. And then it will have to implement best practices to see that this is done, and verified, on a regular basis.

Now consider should cost modelling. A should cost model is only accurate as long as each of the cost components are valid. Just because the should cost model that was done two months ago indicated the likelihood of a potential savings opportunity, this doesn’t mean that the opportunity is still there today. A spike in oil prices (due to a disaster that required the temporary, or permanent, closing/capping of a well) could have jacked energy, and, in turn, production overhead and transportation costs that negated the savings that came from a demand/supply imbalance. Alternatively, if the projected cost trend was an increase, mandating the quick lock in, shifts in the market could have flipped the cost trend, which is now downward, and the organization may want to just spot buy for the next few weeks, or months, until the optimal buy time comes around. In order to benefit from cost models, the organization needs to have processes in place to make sure cost models are verified before each sourcing event, that each data feed is verified, and that the time is still right for the sourcing event.

When it comes to demand management, it’s good to identify a demand management opportunity, such as reducing the paper required by Accounts Payable by providing them with a second monitor so they don’t have to print out scanned invoices to re-key them in the system, but that only happens if the second monitors get bought, setup, used, and the AP staff change their tree murdering ways. There needs to be a process in place to follow up on the strategy, monitor consumption, and plot usage trends on a regular basis to insure that the projections are being met and that the plan is coming together.

Finally, when it comes to value management, not a single strategy can work without good processes and even better practices. Just specifying a MDM strategy is not enough to insure that it is properly implemented and followed. Cross-Functional Collaboration is more than a C-Suite mandate. SRM is both a process and a set of practices implemented by your relationship managers. And so on.

As we can see, each level of the hierarchy requires best practices to make sure the right workflows are followed and the expected results achieved.
Best Practices are what supply management thrives on. Furthermore, there is no single definition of a best practice for any function because any function that does better than the other practices available to you is a best practice, and it is not necessarily the best practice used by your competition.

How Should Your Procurement Department be Organized?

Earlier this week we talked about the importance of a Procurement Centre of Excellence (CoE) with functional excellence in key processes that can elevate the efficiency and effectiveness of the organization against its goals and objectives (as well as stating that this does not mean you form CoEs within CoEs as that’s just redundant), but this whole topic begs the question, how should the Procurement department be organized?

When it comes to a departmental organization, there are three common theories as to how a Procurement department should be organized, which included decentralized, centralized, and centre-led. These days most consultants either preach centralized or centre-led. There are advantages and disadvantages to each model, and the best model will depend on the needs of the organization and, often overlooked, the suitability of the organization to the CPO’s leadership style.

In a centralized Procurement model, all Procurement is directed through a single, central organization. This has many advantages as it allows corporate spend to be fully leveraged, sourcing processes to be standardized, team knowledge to be captured and documented, and best practices to be improved through continual execution by a central team. However, the localized expertise that was specific to a business unit is often lost, maverick buying increases when local site managers do not agree with the centrally mandated decisions (and there is no technology platform that can be used to enforce the decisions), and reaction time to localized disruptions increases.

In order to try and minimize, or negate these disadvantages, some of the more advanced Supply Management organizations moved to centre-led models to try and achieve the best of both worlds. In the centre-led model, the organization forms a a centralized procurement centre of excellence (COE) focused on corporate supply chain strategies and strategic commodities, best practices, and knowledge sharing that leaves individual buys and tactical execution of categories that are not worth sourcing centrally to the individual business units. With appropriate category balancing, the centre-led model is believed to provide the best of both worlds — all of the advantages of the centralized and classic decentralized model of Procurement with minimal disadvantages.

However, until the specific needs of the organization are analyzed and the management style of the CPO is taken into account, it is hard to say which model is better. For example, if the organization is very centralized in its operations, and the individual departments, or heads of, are all in the same geographic area, then the perceived disadvantages of centralization are not there. There are no geographically dispersed units that can easily ignore the directives from a centralized organization, no delayed reaction times as the centralized team can quickly interact with the individual departments, and the localized expertise can be involved whenever it is needed. Moreover, there’s nothing to prevent a centralized organization from having a centre of excellence. The centre of excellence (CoE) is simply part of the Procurement team that focusses on best practices, market intelligence, education, and support for the rest of the team.

So the answer is, it depends on what’s right for the organization, as long as what’s right is identified, and built, with the goal of enabling and supporting a CoE in mind.

In Sourcing, B2C cannot replace B2B, but B2B can learn from B2C.

As long as it doesn’t go app crazy. For years the doctor has been hearing about how mobile is the next big thing in Procurement, and even though mobile hasn’t really caught on, now a handful of vendors are staring to talk about how apps are the next big thing in Procurement. This is a bit ridiculous. When it comes to Procurement, there’s not an app for that. Can you really get market intelligence from an app? Can you really do spend analysis in an app? Can you really do should cost modelling in an app? Think about what “apps” on your “smart”phone really do. Take a few notes. Convert a few units. Play a simple game. Check your bank balance. Store your boarding pass. Simple, discrete tasks. Nothing about strategic sourcing or enterprise Procurement is app friendly.

But enough ranting. Today’s post is about how B2B can learn from good B2C technology. In particular, how B2B can learn from B2C for:

  • total purchase cost calculation
  • order and requisition management
  • collaboration management

These days, thanks to a number of web sites, consumers are becoming smarter when it comes to analyzing the total costs associated with big purchases like cars and houses as a number of sites, including AAA/CAA and BoA/CMHC, have calculators that allow the buyer to understand the total cost of buying, and maintaining, the vehicle or house they are considering including taxes, insurance, and other incidental costs. These consumers, who are not experts in car or house buying are using templates built by people who are experts to do total cost calculations.

B2B Procurement can learn from this and create sourcing and procurement platforms that come with built-in cost model templates for common categories of direct goods and RFX templates that can be used in sourcing common indirect categories to ensure that the organization asks the right questions, collects the right costs, and makes the right decision. The reality is that across an industry, indirect spend categories are common and there’s no reason that an organization can’t source a solution with pre-built templates for the common indirect categories it sources, which will likely constitute 90%+ of indirect spend. Unless the category is high-dollar, there’s not much point paying a large amount of money to a third party organization, even if the third party is an expert, because it is not likely that the savings will be enough to justify the cost. For most indirect categories, this is likely to be the case.

In 2009, AMR did a study that found that, in an average organization, 30 cents to 40 cents of every negotiated dollar of savings never hit the bottom line. There are a number of reasons for this which include, but are not limited to expedited shipping, volume increases, and maverick spend. In many cases, the biggest culprit is the latter — maverick spend. Maverick spend typically happens because a purchaser is unaware of a contract, unaware of how much it costs to buy off contract, or frustrated with the difficulty of buying on contract with current systems. (It can also be the case that the purchaser doesn’t care because they’re not in Procurement, but this usually isn’t the case.)

This situation can easily be rectified by incorporating some features of best-of-breed consumer shopping technology, such as that employed by Amazon.com, that not only allow a buyer to find the product or service they need, but see which of those are on contract. In other words, just like a search on Amazon.com can find all instances of that book you want, and, if you desire, only show you those eligible for Prime, a Procurement platform that enables a buyer to find all instances of a product they are searching for in an integrated catalog that contains all products and services available from approved vendors — whether in a punch-out site, an online database, or an offline catalogue (maintained by Procurement) — and see which of those are on contract can enable on-contract requisitions and purchase orders. Plus, since it will be easier to buy on-contract than to buy off-contract, there will be a lot less circumventing of the system.

And when it comes to collaboration, B2B can actually learn from best-of-breed professional, and even social, networks and communication platforms. For example, Linked-In not only allows a user to post their resume and connect to fellow professionals, but it also allows them to join discussion groups that allow them to post relevant information on a topic and comment on it. And sites such as join.me and Webex allow for real-time virtual meetings and collaboration.

Incorporating these types of technologies into a Procurement Project Management program allows for collaboration to not only take place on line, but all collaborative communications to be maintained and archived in the platform. This not only helps with conflict resolution, but it goes a long way to preventing disputes in the first place as the platform captures all communications and allows each party to see what it agreed to.

B2B technology can be improved by taking the best B2C innovations and appropriately incorporating them into B2B platforms, but it has to be done intelligently. Not all consumer technology is B2B appropriate, especially if it was designed for C2C purposes, and apps are prime example. However, as it has historically been the case that many innovations start in the consumer space, it’s no surprise that B2B can be improved by appropriating appropriate consumer technologies. It just has to be the right technologies appropriated in the right way and put to the right use.