Category Archives: Best Practices

Only Supply Management Has a Future

In yesterday’s post we said that Procurement is Doomed, Entombed, and Marooned and we meant it.

No employee is going to send a paper request for authorization to Procurement to purchase a new phone when his dies, to authorize a laptop repair when his breaks, or to detail his need to purchase a few cases of paper when an emergency print run has to be done in house because the delivery from the printer got lost. They’re going to go online to Amazon or Office Depot or Apple and just order the product or schedule the service they need, and schedule the (same-day) delivery when they need it.

No analyst is going to wait for the quarterly market report from the old-school analyst firm when up-to-date online indices with past, current, and projected trends are instantly available at the click of a button. Another p-Card charge and it’s in their hands.

When demand increases rapidly, Sales isn’t going to wait for Procurement to negotiate a better logistics rate with a current carrier, they’re going to phone up the supplier and ask for expedited delivery on as many units as they can get their hands on.

And if a critical project requires additional contingent labour to be completed, HR is going to phone up the trustiest supplier in their rolodex (even if it is the most expensive) or go online to talent marketplaces to find talent for deliverables that can be outsourced and just get it done.

And so on. Procurement is doomed, entombed, and marooned.

But Supply Management is not. (And that’s why Sourcing Innovation is all about Next Generation Supply Management — the doctor saw the beginning of the end for traditional Procurement long ago and has been working hard, year after year after year, to educate you on what you need to do to transform your organization into an industry leading Supply Management organization that will not only survive, but thrive and get its seat at the table).

You see, while Procurement is focussed on buying for the organization, Supply Management is focussed on helping the organization buy. While Procurement is focussed on supply, Supply Management is focussed on supply assurance. While Procurement is focussed on supplier management, Supply Management is focussed on supplier development. And while this may sound the same, as the differences appear subtle at first glance, nothing could be further from the truth. Let’s take them one by one.

Before the age of the internet where an employee could go online, do a few searches, and not only quickly find the product she needed (and get it delivered next day), but find it at a good price too, it was difficult to research suppliers, research market pricing, cut a purchase order, and get the product in a timely manner. Without up-to-date knowledge on the supply market, market pricing, and delivery options, buying something was quite a hassle and many employees and departments were happy to hand off as much as they could to Procurement. But not anymore. People believe they can do it faster, better, and cheaper if they do it themselves — and a Procurement organization that tries to say otherwise is not looked upon very lovingly. However, a Supply Management department that realizes this and instead looks for ways to empower employees to do their own buying in a way that allows them to increase compliance is appreciated. A Supply Management department that finds a single platform that can integrate the marketplaces employees normally buy from with preferred vendor platforms, organizational pricing, and push on-contract and preferred products to the top of the search results is appreciated. Employees want one-stop-shops to buy their office supplies, software, electronics, and incidental needs just like they want one-stop-shops to book their air travel, shuttles, and hotels on a business trip. A Supply Management organization that enables that is cheered.

Moreover, a Supply Management organization that walks into Marketing and offers to teach them how to disaggregate creative spend with editing and print services so that each can be managed appropriately, which allows savings in non-critical categories identified and applied to new projects or top creative talent to insure better results, is welcomed compared to a Procurement organization that just wants to put the spend up to auction or consolidate it for discount leverage.

In addition, as SI has been stressing for weeks now, while supplier (relationship) management is important, supplier development is even more so. Having a supplier that comes to you at the first sign of trouble and works with you to resolve the issue before a delay or disruption occurs is good, but having a supplier that is able to constantly identify potential issues in its supply chain and work with its suppliers to prevent them is even better. Having a supplier that can implement any design for a custom manufactured component that you throw at it is good, but having a supplier that can provide suggestions on design improvements that will allow for lower cost materials and cheaper manufacturing processes without sacrificing quality is better. And so on.

In other words, while Procurement is focussed on cost reduction and control, Supply Management is focussed on value generation, of which cost is just a tiny component. And that’s why Supply Management has a future while traditional Procurement is doomed, entombed, and marooned.

Your Supply Chain is in Flux. Last Chance to Find Out How Big those Oscillations Are!

A few weeks ago we asked if your SRM was in a State of Flux because good SRM is critical to smooth supply chain operations. Later or sooner your supply chain is going to be disrupted, and without good supplier relations, you will not have any notice, or any help dealing with the disaster that is headed your way. (The chances of your organization NOT not having a major supply disruption in the next 12 months are less than 15%. Think about that.)

Then, a couple of weeks ago we remind you that your SRM, despite what you may think, is in a state of flux and that you should find out where. Especially now that you have the chance to do it for free. State of Flux, a provider of Supplier Relationship Management software and services, and the initiators of the ground-breaking SRM Research Report, are undertaking the seventh annual study which aims to understand not only the state of the practice in SRM, but what is needed for companies to get the executive sponsorship and support they need to not only master SRM but excel.

Last year’s 2014 publication was one of the most ambitious Supplier Relationship Management reports ever published — clocking in at 216 pages of data, results, and expert interpretation and full of valuable, actionable, insights that any organization can use to advance their SRM practices. This year’s study, which will likely have over 500 global participants, should be equally insightful and all those organizations that participate get full access to the results and underlying research ahead of the market. You can measure up against your peers, and improve, well before the average, laggard, organization (which will only have restricted data access if not a State of Flux customer), has a chance to register, download, and review the final report.

Considering that this study will only take about 45 minutes of your time, the reward is infinitely more valuable than the cost! But you’re running out of time. The deadline for participation in this year’s study is July 10th. (Next Friday.) Don’t miss out on this great opportunity — take the 2015 SRM Survey today!

Buy, Buy, Buy, Once Bitten Twice Shy

Many procurement functions and executives see price negotiation and reduction as the primary element of their role. In doing so, they run the risk of missing out on the major benefits that can be obtained by focusing on other aspects of the wider value picture.
Full Value Buying: Moving Beyond Price Negotiation, Peter Smith & Jon Milton, 2015 (Spend Matters)

Why? Is it because they think price trumps all? Is it because they don’t think there’s value in non-price factors and services? Is it because they once focussed too much on the bigger picture, didn’t do their homework, greatly overpaid, did not realize any savings, got hung out to dry, and are now once bitten, twice shy? And does it really matter?

As SI has been proclaiming for years, it’s not TCO (Total Cost of Ownership), it’s TVM (Total Value Management). It’s not how much you pay, it’s the return you receive. As Finance will tell you, it’s all about the ROI. Paying a bit more for a value-added service from the supplier that saves you money is a good return. Paying a bit more in a dual-source strategy to large suppliers with high-volume production lines to prevent otherwise likely stock-outs is often the best insurance policy you can buy. And paying a bit more to use a supplier you are certain does not use child labour, does not subject its workers to poor working conditions, and does not use conflict minerals, banned raw materials, or illegally obtained goods and services costs a lot less than the PR nightmare and lost sales that could result from a brand scandal.

But these are just some ways to increase the value of a purchase. In Mr. Milton and Mr. Smith’s latest paper on Full Value Buying they describe techniques, such as specification improvement and demand management that can generate returns above the 10%+ that an organization can typically save through skillful spend analysis or decision optimization (which are the only two traditional sourcing techniques that generate consistent year-over-year savings in the double digit percentages).

In the paper they address four major mechanisms that can affect the cost of a buy and the upper bound on cost savings that each factor can traditionally bring:

 

Mechanism Saving Potential
Purchase Price (TCO model) 20%
Specifications 30%
Whole-Life Factors 50%
Demand 50%

 

These numbers may seem high, but consider the following. Changing the specifications slightly to allow a lower cost material to be used which can also be used in a more efficient (and cost effective) production process can easily shave 50% to 90% off of 40% (or more) of the cost if a (rare earth) metal that costs $50 an ounce is replaced with a metal that costs $10 an ounce. Changing the design that allows the product to be easily disassembled and valuable metals recovered (upon forced recovery subject to environmental disposal laws) can turn a losing collection business into profitable recovery one. Buying Accounts Payable and Marketing extra monitors so they don’t have to print PDF invoices to enter them or documents they need to reference when composing project specifications can cut organization paper demand by over 50%. And these are just a few examples.

the doctor strongly encourages you to check out Mr. Smith’s (co-authored) latest piece for more details on how these mechanisms can be applied across a range of categories to not only bring costs down, but even value up to the organization. After all, he went to Washington. (Figuratively and literally.)

How Do We Solve the Top Procurement Challenge?

A few weeks ago, we mused on what is the Top Procurement Challenge when the average Procurement organization has so many challenges to deal with and indicated, for many organizations, the top, immediate, procurement challenge might be to align Finance and Procurement on the ROI of platforms and processes Procurement wants to implement for the good of the organization because, in many organizations, not only do we have the situation where Procurement don’t get no regard, but we also have the situation where they don’t get no money for essentials either, trying to survive on life-support when over half of organizational spending goes through them and organizational livelihood depends on them.

But how do we accomplish this alignment? How do we align Finance and Procurement on the value of good Procurement processes and platforms when everyday Finance sees proposals from various departments proclaiming mega (but unrealizable) savings and has an instinctive negative reaction to any savings claim put in front of them. Especially when Procurement and Finance don’t speak the same language. As far as Finance is concerned, a model only depicts savings if it is described in terms of ROIC (Return on Invested Capital) or ROE (Return on Equity) against the organizational balance sheet. It has to include not only financial outlays and expected cost reductions but overhead, indirect costs, assumptions, and potential variations due to unexpected interruptions.

The model has to be conservative, all risks have to be clearly identified, and the best and worst case savings ranges have to be precisely defined, with conservative estimates all the way. The savings process has to be outlined, the timeframes (especially if implementations and integrations have to be accomplished) and ranges have to be specified, and contingency plans have to be defined for delays. Only then will Finance even listen and start to take Procurement seriously.

But even then Finance may not understand how Spend Analysis or Decision Optimization can save 10% or more. Especially when previous investments in “analytic” technology resulted in glorified reports that resulted in no savings and previous investments in “auctions” supposed to “optimize” spending with the market, which had limited success in the beginning, ended up increasing organizational costs when demand started to exceed supply and inflation returned.

And convincing Finance might not always be the best idea because explaining that Procurement is not doing an optimal job might result in negativity, or even hostility, from Finance that might believe Procurement is doing a very lousy job if 10% savings are feasible. Finance might not be capable of realizing that sometimes global sourcing scenarios are so complex that it is literally impossible to get a grip on everything in a spreadsheet and there is no way any human can find an optimal solution to a complex sourcing problem without a sophisticated decision optimization tool that might have to analyze millions of possible award scenarios to find the best one. Nor can any human attempt to make sense of millions of transactions with a real spend spend analysis system that allows the user to cube, slice, and dice the data in a myriad of ways looking for patterns that simple reporting systems will forever miss. Procurement could be doing an exceptional job under the circumstances but still be leaving 10% on the table — 10% that can never be claimed without proper technology.

It’s a puzzler to say the least.

Your SRM is in a State of Flux. Shouldn’t You Find Out Where?

Last week we reminded you about State of Flux, a provider of Supplier Relationship Management (SRM) software and services, and the initiators of the SRM Research Report that we highlighted in our 3-part series on why you should focus on essentials, plan against the pillars, and be a customer of choice.

Your supply chain success is ultimately dependent on your supply base and their failure is your failure. Your customer doesn’t care why the order is late. He just cares that the order is late. Your customer doesn’t care why the product is crap. He’s just upset that he forked over good money for bad product and only cares what you are going to do about it. Thanks to omni-present supply chain disruptions that are increasing at a rapid rate (to the point that less than 15% of companies will not experience a major supply disruption over the next 12 months), something is going to go wrong. And the question is, do you have a good relationship where your supplier will proactively notify you of a potential disruption so that you can collaboratively work together to prevent it, or a not-so-good relationship where you won’t know the shipment isn’t coming until it’s two days late and someone calls the supplier who admits that, because of a missing raw material shipment, production line breakdown, or simply poor scheduling (which lets you know how important you are to them as a customer) it just isn’t coming.

Unlike RFX or e-Procurement, for which there are a plethora of good platforms that walk you through good workflows by the hand and make it hard for you to do it wrong (although they don’t prevent you from designing the process or event wrong), there are not as many platforms for SRM, and SRM cannot be fully automated. SRM is more than just performance monitoring and corrective action management, it’s also nurturing, development, and partnership. It’s a good process, with appropriate best-practices embedded within, that focusses on the soft factors as well as the hard factors.

But what the the best-practices that are appropriate for your organization? What’s the right process? How do you get started? And, more importantly, how badly are these needed? Unless you want to wait until a major disruption or disaster occurs, that could have been prevented with a better supplier relationship, the only way to find out is to measure up against your peers. Probably the best way to do this is to proactively participate in the 2015 State of Flux SRM Research Report and get the full results ahead of the market. Time is running out to complete the SRM Survey, which, in it’s seventh year, is focussed on helping you get executive sponsorship and support for your SRM initiative.

Follow the bright blue hyperlink today and take the 2015 SRM Survey today. Given the depth (and breadth) of work consistently produced by State of Flux (compared to the average over-priced and under-researched analyst report), the 45 minutes of time that is required makes the effort infinitely more valuable than the cost.

State of Flux Fooled You