Category Archives: Best Practices

When it Comes to Procurement, Don’t Forget Finance!

Surveys regularly ask Finance to rate Procurement effectiveness, but is this the right question to be asking? Maybe Procurement should be rating Finance effectiveness? After all, is it necessarily Procurement’s fault that there are usually noticeable gaps when the results of these surveys are published? Maybe, but maybe not.

The only way the gaps will close is if the root cause of the gaps is identified and addressed. Is Finance providing the necessary funding for the platforms, training, and resources that are required to effectively address all of the categories? Is the organization evaluating effectiveness against the right KPIs? Does the Procurement agenda align with the organizational agenda that Finance has a hand in shaping?

Now, I’m not saying it’s Finance’s fault, and I’m not saying it’s Procurement’s fault, but I’m saying there is a reason for the gap and the reason needs to be identified. Sometimes it will be a lack of effort or focus on Procurement’s part, sometimes it will be a lack of effort or focus on Finance’s part, but the doctor‘s guess is that more often than not it will not be anyone’s fault but be due to a lack of alignment.

As the maverick points out over on Spend Matters in his post on “What Does the CFO think of Procurement”, Procurement and Finance are misaligned in numerous ways, and this misalignment is costing companies a lot of money.

That’s why the maverick teamed up with ISM to conduct a new study on Procurement and Finance Alignment to help Procurement and Finance understand all the misalignment areas and the loss of value caused by this misalignment so that Procurement and Finance can work collaboratively to realign. the doctor had a chance to review, comment on, and contribute to the study before its release and can tell you that it’s well designed and well worth your time, especially since the average company will be able to complete the full study in about 15 minutes.

I strongly encourage every company, no matter how well they think their Procurement function is doing, to take this study which is designed not to assign blame but to detect areas of misalignment where Procurement and Finance can work together to improve performance.

Taking the study is easy. Simply e-mail the maverick at pierre (at) spendmatters (dot) com and you can get the study link and first access to the results.

Global Process Ownership: The Other GPO

As organizations seek to become more efficient and effective, one proven strategy is the ability to manage cross-functional processes using a global process ownership (not “group purchasing organization”) model.
the maverick, “Exploring Procurement’s Other GPO”, Spend Matters

GPO is harder than it looks. As the maverick points out, it’s ultimately about having both accountability for an end-to-end process and the ability to control the strategies and resources used for the process execution. If Procurement is made accountable, but Finance and the Engineering organization controls the financial and physical resources, then Procurement cannot control the global process. And this is another reason why the full extent of negotiated savings and identified value is never realized and end results are never as expected. Because, without control to go with the accountability, Procurement cannot execute. Planning, which is just another word for Knowing, is only half the battle. And it’s a shame the CFO and the rest of the C-suite don’t remember this single lesson that they should have been paying attention to when watching G.I. Joe every Saturday morning. (It was supposed to be about more than just blowing stuff up, even though that is what is perceived as the American way.)

Of course, this assumes that Procurement even knows what to do. As the maverick goes on to explain in his next piece on “the 3 dimensions of global process ownership”, global process ownership is more than just process breadth / scope. It’s also, as some of the leaders recognize, organizational breadth / scope as most Procurement-based processes have repercussions and effects throughout the organization, and, more importantly, category management breadth / scope. The organizations that understand, and effectively execute against, this third dimension are the organizations that truly excel and make their way into the Hackett Group top 8%. Different categories have to be managed in different ways. There is no one-size-fits-all process or organizational framework.

And that’s one of the many reasons sourcing must be strategic.

ERP is Not Enough!


When your organization was sold its Enterprise Resource Planning (ERP) solution suite back in the 1990s or 2000s, it was probably told that the ERP suite was the answer to all of its information management problems and it would be the last suite the organization would ever buy. As the evolution of Manufacturing Resource Planning (MRP) software — which was focused primarily on product planning, manufacturing, and inventory management — ERP was supposed to address all of the weaknesses in the MRP software as well as give Sales and Marketing, Finance, and Executive Management visibility into operational status. Specifically, ERP was supposed to handle sourcing and procurement, receiving and distribution, sales forecasting and integration into production planning, and provide a solid foundation for accounting and finance. ERP was supposed to provide the organization with a real-time end-to-end view of core business processes that could be used to effectively monitor, manage, migrate, and market the business. ERP was supposed to be delivering on the single system promise that you were waiting for since the dawn of MRP. But it didn’t.

“Why ERP is not Enough” by b2bConnex (Registration Required)

Those of you who are regular readers know that SI rarely promotes vendor-authored white-papers, as many turn out to be more marketing fluff than solid content, but every now and again SI finds a real gem, and this paper is one of them. Not only is it a solid, factual, educational piece, but it’s echoing a message that SI has been promoting for years (and often while screaming at the top of its lungs). ERP is Not Enough, and the continued over-reliance on ERP is why so many organizations, especially in manufacturing, are struggling to find efficiency, savings, and value in their supply chains.

Even though Sourcing and Procurement platforms are now mature technology, the number of your peers that have still not adopted modern platforms is still quite high. That’s why a number of new SaaS-based start-ups are still finding success a decade later with streamlined, on-line, implementations of sourcing or procurement modules that are almost a commodity at this point. When a company finally realizes the value, SaaS allows for a quick, easy, low-cost entry point to a modern platform.

And a modern platform is needed. Just because your ERP might support document exchange, that doesn’t mean it supports online tenders. Just because it supports price quotes doesn’t mean that it can maintain detailed price history and do trend analysis. Just because your ERP can store a contract doesn’t mean that it can store all of the delivery schedules, rate tables, and agreed upon performance metrics in formats that can be easily accessed, queried, and automatically compared to invoices and time sheets. Just because it can store a PO, that doesn’t mean it can store a full requisition and approval history. the doctor is sorry to say that he knows of more than one company that has spent over a million dollars trying to implement a good e-Negotiation platform or contract management platform on an ERP, only to fail when they could have bought a best-of-breed solution for 1/10th of the cost.

One has to remember that where ERP is concerned:

  • it is still rooted in MRP & on-site inventory management
    and distribution, logistics and supply chain optimization was never in the core vocabulary
  • it is all about reporting
    but supply chain success is all about analysis and actionable data
  • it is designed around an old-school data store with a rigid format
    and not a modern, extensible, workflow-based Master Data Management model
  • it was based on the concept of an activity journal
    not around transition management for an evolving supply chain
  • it is internally focussed
    but supply chain management needs to be externally focussed

This paper addresses all of these issues in detail, outlines the shortcomings of an ERP, and helps you understand why you need, depending on your business, a modern sourcing platform, a modern procurement platform, or, particularly in manufacturing, a modern supply chain communication and collaboration platform that handles all of the communications necessary between a provider of consumer or manufactured goods and their product and component suppliers from the initial tenders through the delivery of the final goods receipt and invoice pair when the contract has been completed. Moreover, the paper does this without any reference to any particular platform or marketing spiel and really helps you understand why your ERP is not, and will never be, enough and why you have to move to modern Sourcing / Procurement / Collaboration platforms, depending on your vertical and needs.

If you are not on a modern Supply Management / Supply Chain Collaboration platform, the doctor strongly encourages you to register for, and download, Why ERP is not Enough today and spend a good deal time of understanding the issues addressed. The sooner you understand what you need and why you need it, the sooner you can acquire the right platform and supercharge your supply chain. All the technologies you need to do so are out there waiting for you. You just need to know what to look for!

Is Your SRM in a State of Flux? Maybe you need to be a customer of choice!

Right now you are probably thinking that you are a customer of choice with your most strategic suppliers because you went through an in-depth, multi-stage, strategic sourcing event, spent a long time qualifying the supplier and emphasizing that the buy was significant and makes your organization a customer of choice, and inserted language into the contract that said you were a customer of choice and will always get preferred pricing at least as good as other customers of the same size for the same products. But are you really a customer of choice?

A supplier’s customer of choice gets more than good pricing. That customer gets preferential delivery (if inventory gets low or transportation options become limited due to strikes or other supply chain disruptions). That customer gets suggestions on how it can help the supplier serve the customer better (through timely order placement, different delivery schedules or options, or slight alterations to specifications that the supplier can produce faster or cheaper). That customer also gets first access to supplier innovation (that would allow it to use new production lines or technologies to produce superior or significantly cheaper products using different materials or production techniques). And, sometimes, it even gets operational insight into how to streamline its logistics on the sell side from the supplier. The reality is that if you’re not getting this from your supplier on a regular basis, even if you are getting what you perceive to be competitive pricing, your organization is not a customer of choice.

Why do you want to be a customer of choice? The recent Global SRM Research Report by State of Flux found that many of the organizations that were leaders, fast followers, or that realized returns that were greater than the average return in their category had one thing in common — they were all perceived as a customer of choice by their most strategic supplier(s). Also, the study found that one market segment not only understood this need better than other segments but also better understood what the requirements for being a customer of choice truly were. Can you guess which segment it was? Contrary to what your intuition might be, it was not the segment with the best cost performance in their market or vertical. It was, in fact, the producers of luxury goods who often saw more value in working with a supplier who treated it as a customer of choice and went the extra mile to understand the organization’s brand and market segment than with a supplier who could cut costs. And while it might be counter-intuitive at first that these organizations often saw more value when they paid more, when you consider that luxury good producers profit by expanding their market share to people who care more about brand and quality than price, and will pay more than necessary for the product they are buying, these companies can often profit much more by selling more units at higher double (or triple) digit markups than by saving a couple of percentage points on the unit cost.

Thus, while cost reduction and control is important to the average company, if a company wants to realize long term success from its SRM efforts, it needs to take a page from the luxury brands’ playbook and make sure it is a customer of choice with each and every strategic supplier it does business with. (The Global SRM study found that more luxury organizations were regarded as a customer of choice than any other organization type.)

Why are luxury brand organizations so successful at becoming a customer of choice? While it’s hard to zero in on just one activity that they do differently that makes a difference, there are a set of activities that, collectively, cause these luxury brands to stand out with the average supplier:

  • They proactively listen to suppliers.
  • They use collaboration to innovate.
  • They work hard to create supplier loyalty.
    — AND —
  • They recognize they are only as good as their worst supplier.

And the best part is that there’s nothing unique or special about these activities that limit them to luxury brands. Any organization that truly wants to be a customer of choice and is honestly willing to work with its suppliers can pull these activities off and become a customer of choice.

In other words, there’s no reason for your organization to be in a State of Flux when it comes to SRM. The recipe for success is easy to understand, it just takes hard work, adaptability, and perseverance to master the art of the relationship soufflé.

Is Your SRM in a State of Flux? Maybe you need to plan against the pillars.

In our last post we reminded you that State of Flux is a global leader in Supplier Relationship Management (SRM) research that has been producing the Global SRM Research report for six years. Their most recent report, which is thicker than many (e-)books, should be seen as a wake-up call to organizations that claim they understand the importance of suppliers and relationship management, but really have no idea what relationship management means and what is involved to get it right as only 17% of companies fall into the emerging leaders category and only 21% fall into the followers category, which, using the classic Aberdeen Model, says that these companies are average at best (and, to be blunt, average companies are not very good at SRM). This also means that 62% of organizations really have no clue what SRM is, why it is important, and/or how to get it right. Given the percentage of spend that the average organization directs to suppliers and other third parties (which is as high as 80% in some verticals), this is not a good thing.

The good news is that it’s not hard to be above average in SRM. All it requires is a little (okay, a lot of) elbow grease, a focus on the essentials, the implementation of good processes and supporting technology, and a plan to address the critical gaps against each of the six pillars of SRM. A company that focusses on the essentials, identifies processes and platforms to address each critical gap, implements those processes and technologies, and makes steady progress will likely find that it goes from “needs improvement badly” to “above average” in 12 to 24 months, depending on the organizational commitment and resources dedicated to SRM.

So what are these six pillars?

  • Business Drivers & ValueLike any Procurement function, success ultimately depends on alignment with organizational goals and key business drivers.
  • Stakeholder Engagement & SupportStakeholder engagement must be proactive, include internal stakeholders and executives and key supplier personnel, scheduled, tracked, and managed like any project as each key stakeholder, if she is doing her job, will provide input and insights critical to realizing value from the supply base.
  • Governance & ProcessJust like categories and sourcing events, SRM needs to be managed against a model or plan to be successful. Formal governance methodologies and processes need to be defined, tools need to be implemented, and adherence to process needs to be monitored.
  • People & SkillsRelationships are always between people. It’s critical that an organization not only identify the best people, but place them where they can have the biggest impact. This requires identifying people who are not only strong in EQ, but who have the IQ necessary to manage the projects associated with the supplier that may require a strong technical background in one or more areas.
  • Information & TechnologyThe reality is that there is more than one supply chain. There is the physical supply chain through which goods flow. There is the financial supply chain through which money flows. And there is the information supply chain through which all of the information needed to manage the physical and financial supply chains flow. This is the most critical supply chain from a SRM point of view as you have to capture requirements, performance, and capability data on a regular basis in order to properly manage a supplier relationship.
  • Relationship Development & CultureManaging is just the first step in a good SRM program. The most successful relationships are those that are collaborative, innovative, constantly improving, and mutually beneficial.

A significant amount of work might be required to identify (and then implement) the actions that need to be taken to achieve a sufficient level of competency, but its a lot easier to do so with a high-level game plan, which the pillars provide, than it is to start from a blank slate.