Category Archives: Best Practices

Why You Should Not Build Your Own e-Sourcing System, Part II Spend Analysis

In Part I, where we noted that Mr. Smith was right in his recent post on “thinking of building your own esourcing system please don’t” over on Spend Matters UK where he pleaded with those organizations, and particularly those organizations in the public sector, who thought they could build their own e-Sourcing system not to, we gave a host of reasons why only those organizations with the core business of software development and delivery specializing in Sourcing or Source-to-Pay should even consider the possibility. We also agreed with Mr. Smith that any other organization that even considered the possibility was

  • going to waste OUR money building it,
  • waste exorbitant amounts of money keeping the system up to date and compliant with ever-shifting legislation, and
  • only feed those dangerous delusions at best (and possibly create an epic disaster worse than the Smug cloud that ruined South Park because, of the 11 greatest supply chain disasters of all time, 8 were caused by technology failures and 6 by software platform failures!)

But we know this isn’t enough to convince the smuggest and most deluded from considering the notion. So we’re going to dive in and address some of the difficulties that will have be conquered, one primary module at a time, starting with spend analysis.

Even though every vendor and their dog thinks they can deliver a spend analysis system these days, the reality is that most vendors, including those with a lot of database and reporting experience, can’t. If vendors with significant experience in data(base) management and reporting can’t build a decent spend analysis system, what makes you think your organization can?

A spend analysis solution must be:

  • Powerful
    and support multiple spend analysis cubes, with derived and range dimensions, stored in public and private work spaces;
  • Flexible
    and support multiple categorization schemes, vendor and offering families, and user defined filters and drill downs;
  • Manageable
    with user defined data mappings and cleansing rules, hierarchical rule priorities, and easy enrichment;
  • Open
    and easy to get data in, out, and mapped; and
  • Informative
    with built-in report libraries, a powerful report builder, and an intuitive report customization feature.

This is not easy. Let’s start with flexibility. Most vendors probably have their goods and services mapped against UNSPSC, which your buyers of domestic goods are familiar with, but globally traded goods are probably mapped against HTS, which your tax division wants, your organization probably has its own GL codings that are required to keep Accounts Payable happy, and none of these categorization schemas are suitable for real spend analysis. As a result, you probably need to maintain at least four separate categorization schemas (for buyers, traders, accounts payable, and real analysts). If you think you can easily achieve this by slapping a report builder on top of an open source relational database, think again.

Let’s move on to power. One cube is never enough. If you’re an organization of reasonable size, doing year over year spend analysis over a reasonable time frame, you’re looking at millions, if not tens of millions of transactions. If you believe that you can dump all of that in one cube, and make sense of it, assuming you can design a system that can even build that cube without crashing (it’s big data, remember), you’re probably living in ImaginationLand (which is a very dangerous place to be).

We cannot forget about openness. The data you need will not live in the Spend Analysis system. It will live in the ERP (Enterprise Resource Planning). It will live in the Accounts Payable System. It will live in the TMS (Transportation Management System). It will live in the WIMS (Warehouse Inventory Management System). It will live in the VMS (Vendor Management System). And so on. Every one of these systems will have a different schema, it’s own data master, and, probably, duplicate vendor and product entries with various spellings of the name, locations, and so on.

Nor can we forget about manageability. It must be easy to map, normalize, clean, and map all of the data that is pushed into the system — by hand. AI doesn’t work. Every organization uses its own classification and shorthand, every department uses its own variations on the theme, and no system can figure out every error a human can make. All AI systems do is pile on rules until there are more collisions than correct exception mappings. That’s why a spend analysis system not only has to support multi-level rules, but help the user define appropriate multi-level rules and understand, when a transaction is mis-mapped, which rule did the mapping, what exception rule is required, and how broad that rule should be.

This leaves us with the need to extract useful information that can be used to identify real saving or value generation opportunities. No canned set of reports can do this. Standard reports can indicate where we can begin to look, but simply knowing a spend is high, or higher than market average, does not indicate why (locked in prices, bundled in services, quality guarantees, maverick spend, supplier overcharges) or what factors, if addressed would decrease spend.

And while this is just a high level overview of the challenges, the hope is that it is sufficient enough to convince you that development is not an easy task and not something that the average organization should remotely entertain.

Why You Should Not Build Your Own e-Sourcing System, Part I

In a recent post titled “thinking of building your own e-sourcing system please don’t” over on Spend Matters UK, Mr. Smith (who went to Washington, as per Buy, Buy, Buy, Once Bitten Twice Shy) asks you to please, please, please not build your own e-Sourcing system because, apparently, a few public sector organizations have this crazy idea that they can build their own and that it can compete with best-of-breed solutions on the market today.

Wow! Today’s best of breed systems have been built on fifteen-plus (15+) internet years of development, implementation, integration, and customer support experience by seasoned professionals who have had numerous bouts with weariness and wisdom. (And since we all know that internet years are measured in cat years, that’s really ninety-plus years of experience.) How could any average organization, especially in the public sector which is typically behind in technology and running on the B-Team (since unionized pay scales typically mean that they can’t afford the A-Team that commands private sector pay scales) really think they can come up with anything close?

In addition to Mr. Smith’s arguments that, especially in the public sector, you are:

  • going to waste OUR money building it,
  • waste exorbitant amounts of money keeping the system up to date and compliant with ever-shifting legislation, and
  • only feed those dangerous delusions (until the Smug reaches critical mass and puts us at risk of a disaster of epic proportions),

there are dozens of reasons NOT to build your own e-Sourcing system, or to even think that there is the slightest of chance you could build your own.

In addition to the standard reasons of:

  • Lack of Sourcing Domain Experience
  • Lack of Software Design Skills
  • Lack of A-Team Software Development Talent

in Sourcing, you also have to deal with the traditional software challenges of:

  • Big Data
  • Real-Time Requirements in a Distributed System
  • Variable Workflows

as well as a host of challenges in each of the main, traditional, areas of:

  • Spend Analysis
  • e-Negotiation (RFX & e-Auction)
  • Decision Optimization

which, to make it abundantly clear that no public and private organization should even remotely consider building their own e-Sourcing system, will be discussed in detail in the next three posts. Unless your core business is a software development and delivery organization specializing in Sourcing or Source-to-Pay, when it comes to building a modern e-Sourcing system to meet the needs of the organization and identify savings and value, just don’t do it. Put those Nike’s back in the closet and break out those Carolinas.

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.)