Category Archives: Best Practices

Procurement Myths Debunked! Part II

Over on spendmatters.com/cpo, the maverick has been doing a great job knocking out Procurement myths one by one, with twenty (20) down and five (5) to go. While the doctor did not co-author this series, as per a post this spring, he did consult on them and believes that all of these are myths that you need to be aware of.

The next 10 myths are:

  • Sourcing is Better than Supplier Management for Value Creation
  • Efficiency and Effectiveness: You Can’t Have Both
  • Apply the Kraljic Model to Spend Category Procurement
  • Technology is Only a Tool
  • Procurement Owns Spend Management
  • Procurement ROI is the Single Best Procurement Metric
  • “No PO, No Pay” is a Best Practice
  • Spend Category Taxonomies are Hierarchical
  • Procurement Needs a Mandate
  • Supply Management is a Department

Of these, the doctor‘s favourites are:

  • Technology is Only a Tool
  • Efficiency and Effectiveness: You Can’t Have Both
  • Spend Category Taxonomies are Hierarchical

Technology is not just a tool, it is a transformation engine that allows its users to be more efficient, effective, and transformational. It’s a process enabler, and the process at the same time. The level of your technology is directly proportional to the level of your Procurement maturity.

With the right platforms that enable the right processes, Procurement can be efficient and effective. It can also save money and provide increased value generation opportunities. For example, using technology enabled marketplaces to identify more sustainable suppliers can not only cut costs but also increase value as it gives marketing more to work with and allows the organization to increase brand value, which correlates to sales, with less effort and less money.

Finally, there is no one taxonomy, and if there was, it definitely wouldn’t be hierarchical. Products can be grouped by function similarity, component similarity, and department or geographic utilization, for example. Services by function, geography, and strategic nature, for example. Products and services can be mixed or kept separate. The best category definition at any given time will depend on market conditions, supplier capability, and projected utilization over the expected duration of the contract.

Supply is fluid, and Procurement must be as well to keep up. And it definitely must avoid the traps laid by the common Procurement myths.

Procurement Myths Debunked! Part I

Over on spendmatters.com/cpo, the maverick has been doing a great job knocking out Procurement myths one by one, with twenty (20) down and five (5) to go. While the doctor did not co-author this series, as per a post this spring, he did consult on them and believes that all of these are myths that you need to be aware of.

The first 10 myths are:

  • Hit Your Metrics
  • Pay No Heed to Cost Avoidance
  • Stay Away from Maverick Spending
  • Surveys are Silly
  • The Shared Services Model is Bad
  • PMOs and CoEs are Bad
  • Spend Should Always Decrease
  • Category Management is Best
  • Take Negotiated Savings Out of Budgets
  • Sourcing and P2P Definitions are Set in Stone

Of these, the doctor‘s favourites are:

  • Stay Away from Maverick Spending,
  • Spend Should Always Decrease, and
  • Take Negotiated Savings Out of Budgets.

While avoiding maverick spend is generally a best practice, sweeping it under the rug, even if it is small, is not a best practice — nor is mandating a stop until you understand why there is maverick spend. Is it because the buyer doesn’t know, doesn’t care, or thinks he has found a better deal? If the buyer didn’t know, then there is an issue with the process (of communication) somewhere, and fixing it will prevent future maverick spend. If the buyer doesn’t care, then there is a personnel issue that needs to be dealt with. If the buyer thinks he has a better deal, why? Lower cost, higher quality, quicker acquisition, or false perception. In the first three cases, the Procurement pro needs to investigate to see if there is a new opportunity she was not aware of, in the last case, an education program is probably required.

While spend is important, it is not the most important thing. Organizations exist to make profit for their shareholders. Profit is revenue minus expenses. That means that profit is increased when spend is decreased, or revenue is increased faster than spend is increased. The best way to to increase revenue faster than spend is to increase value. That’s why value creation, and not spend reduction, is the most important thing.

Savings are not a means to cut budgets — they are a means to find additional revenue for investment into opportunities for future value creation. These days, no department has enough money, and no one has enough money, or time, for training. If budget is freed up, it should be used to invest in training and new technologies, not to blindly increase shareholder dividends.

But these are just a few of the myths. More to come!

A CoE in a CoE? Are we going too far?

SI is all for Centres of Excellence, CoEs, but when he read the recent post over on Spend Matters on “Why Your Procurement Organization Needs a Market Intelligence Centre of Excellence”, one has to wonder if we are taking the CoE concept a bit too far.

Now, the post is not really advocating for a CoE in a CoE, as it is advocating a Market Intelligence Centre of Excellence (a MI CoE) in any organization with over 2 Billion of spend, which is a reasonable suggestion given the importance of market intelligence in Sourcing endeavours, but one has to ask, where is this CoE going to live? Presumably it will live in Procurement. But managing a CoE is no small endeavour. A CoE requires good management practices, and good management practices generally stem from a CoE. In particular, a Procurement CoE should manage the MI CoE. And the net result is we have a MI CoE within the Procurement CoE.

A Procurement CoE should have functional excellence in all of the functional areas relevant to Procurement. It should have excellence in market intelligence, spend analysis, should-cost modelling, sourcing best practices, optimization, contract negotiation and management, order and inventory management, payment management, and procurement project management. But these should not be individual centres of excellence, as many of these activities overlap and support each other and market intelligence supports all, and is supported by all, of them.

The Procurement organization Centre of Excellence should definitely build its Market Intelligence competence up to the level of functional excellence, as that will improve all of its Sourcing and Procurement activities and enable it to realize better results, but it shouldn’t take the CoE concept too far. A CoE in a CoE just gets a little redundant.

What Does it Take to Be CPO?

The short answer is, fulfill the CPO Job Description, even though the order is as tall as it is wide. Use their skills, education, and experience to execute the primary responsibilities efficiently and effectively.

However, this doesn’t help you understand how to

  • define the organizational Procurement strategy
  • create and manage short, mid, and long-term goals and objectives
  • create and leverage on-going value from the supply base
  • manage BPO activities
  • identify, realize, and maintain cost-saving and cost-reduction opportunities
  • etc.

So what do you do?

First of all, become A Procurement Leader.

Then, understand the primary responsibilities.

Support these responsibilities with the right procurement technology.

Use your leadership skills and technology platforms to both manage staff and develop staff.

Then, be sure to practice good budget management and align procurement with the other business functions.

And, finally, don’t forget to focus on continual learning and self-improvement. While the maverick and the doctor covered a lot in our series on the CPO job description and what it takes to succeed as a CPO, one thing we didn’t spend a lot of time on was the importance of continual learning. Nothing about Procurement and Supply Management is static. Everything changes, and everyday provides a new challenge that must be death with. New disruptions. New innovations. New opportunities. New threats. That’s why SI and the new spendmatters.com/cpo site exist. To help you identify new practices, process, technologies, and ideas that will help you deal with all of the change to come but yet get through it.

There’s Nothing Wrong With Using Upstream vs. Downstream

Only with trying to fix a continuous process to a discrete point in time.

Confused? Let’s back up. Last Friday the doctor‘s co-conspirator in the definition of Contract Lifecycle Management (CLM) went on a rant about the use of upstream and downstream without a paddle in contract management. In his Friday rant, the maverick claimed that if you put supplier management in the upstream bucket, you’ve violated the whole naming convention and that upstream can have a time dimension to it and represent earlier processes, but it can also have a supply chain connotation and represent multiple tiers farther upstream in the inbound supply chain – working back to raw commodities. So, it’s confusing in that regard in terms of time vs. space. However, the maverick‘s biggest gripe seems to be it puts the signature of the contract artifact as the singularity of the procurement universe – sort of like using B.C. and A.D. to define world history to non-Christians.

So what? We need a way to measure time and a milestone against with to measure progress.

As humans, we don’t know exactly when we first evolved (or, if you follow a religion based on a form of creationism, were created), so we can’t choose that date as a reference point for a precise timeline. We barely have decent records back to 0 AD, and if we go back more than a few hundred years beyond that, we don’t really have enough to establish a good date system. So the date chosen is just as good as any other date during that period.

Similarly, if you look at the full contract lifecycle, just when does the project start? When is the first analysis or opportunity identification performed that leads into the business case. Hard to say. We know the date a sourcing project is approved, but just like 0 AD, before that gets a bit fuzzy, but there could still have been significant events that led to approval which are really part of the Procurement process and which should not be overlooked just because a date can’t be fixed. Similarly. When does it end? The date the contract officially finishes? The date the post mortem is done? The date a new contract is signed? The date the switchover actually occurs to a new supplier? The date the supplier is officially retired from organizational service? Hard to say.
So choosing the date of signing as a reference point is a logical choice for dividing up the process and English commonly uses the same word to mean different things in different contexts so there’s no reason it shouldn’t be clear when someone is talking about upstream in the contract/category management process and upstream in the supply chain. (After all, we live with sourcing and sourcing in Procurement is much different than sourcing in HR.)

In other words, the definitions make sense and since they are now commonly accepted, let’s not bicker about how they are defined but about how some providers and analysts tend to misuse them by trying to fix-point activities that actually need to occur throughout the process, like category management, supplier management, compliance management, and risk management. Use upstream and downstream to indicate when particular activities in a process should occur, not to categorize processes that exist simultaneously with the contract lifecycle, and that build off of the primary artifact, the contract, in new and interesting ways (when done right).

Not everything fits in a one or two dimensional model, and we need to be prepared to accept the true complexity of the situation. That’s why many tenders these days are complex and why organizations that don’t have spend analysis can’t identify the inherent complexity and why organizations that don’t have strategic sourcing decision optimization can’t adequately deal with the complexity. Just like the world is not flat, neither is the sourcing model or the necessary execution process that follows. A spreadsheet won’t cut it and neither will point-in-time processes. However, we still need fixed points in time to measure against (forward and back), and at least the date a contract is signed is a point in time everyone across all departments in the organization can agree on.