Category Archives: Best Practices

Is Your SRM in a State of Flux? Maybe you should focus on the essentials!

Recently we introduced you to State of Flux and their Statess solution for Supplier Relationship Management (SRM), which, despite its recent market entry, is a relatively mature SRM solution as it was built on eleven years of best-practice SRM consulting and over six years of SRM Research. However, we did not cover their consulting services or research services in that series, which also differentiate them from their peers.

As per our previous series, State of Flux has been producing a Global SRM Research Report for six years, and their 2014 report summarized the results of a survey that was responded to by over 500 global organizations, including 454 buy side companies, that collectively provide deep insight into what makes a leader, a fast follower, a follower, or an average company that needs development (which is where 62% of companies fall) where SRM is concerned. (In other words, when it comes to SRM, using the classic Aberdeen groupings, 17% of companies are best-in-class and [emerging] leaders, 21% of companies are average, and 62% of companies are laggards.) This study, which is thicker than many (e-)books, is 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.

In our next post we’ll discuss the six major pillars of the SRM maturity model put forward by State of Flux, which provide a solid foundation for any organization wanting to measure its progress on its SRM journey, but first we’re going to highlight the ten SRM essentials summarized in the executive summary and dive into those essentials that SI deems most critical (as they support the other essentials and more advanced capabilities). Why? Unless an organization addresses each of these ten essentials, its performance against one or more of the SRM pillars will be limited, and it will never achieve true excellence in SRM. (In other words, these ten essentials address necessary conditions of SRM success.)

  • Benchmark where you are now.An organization that does not understand where it is, how its definition of SRM aligns to the corporate strategy and business drivers, and where the biggest gaps are will not be properly focussed and it is unlikely that it will align suppliers to the business.
  • Prioritize the gaps according to their impact on business drivers.
  • Define metrics and KPIs that quantify the financial and non-financial benefits and capture them on a regular basis.
  • Engage proactively with all stakeholder groups in a two-way dialogue.
    For a SRM activity to be deemed successful, the needs of all major stakeholders need to be met. This means that they need to be properly defined and understood at an organizational level, not just within an individual organizational unit.
  • Listen to suppliers. Understand how they perceive you as a customer, where they think you can improve, and what innovation they can offer you. This is key to defining appropriate development programs and effective performance measurements.
  • Properly segment your suppliers into critical, strategic, and non-strategic
    and then into sub-groups that would benefit the most from a formal SRM program and those that would benefit the least. It’s important to focus limited resources and efforts where they will have the most impact.
  • Ensure SRM is properly defined and attracts the best talent for the job.
  • Information is at the heart of relationship and performance management.
    Implement proper systems to capture, analyze, and distribute that information.
  • Take a proactive, collaborative, approach to relationship development.
  • Leverage sell-side strategic account management.

It’s not a complete list of tasks, or areas, but a fundamental list that provides a solid starting point for your organizational effort.

Blast From the Past: Good Advice for CEOs, Good Advice for CPOs

SI originally ran this post six years ago today. It’s as relevant now as it was then!

Chief Executive posted a good article on why you should simplify and clarify your business. According to the article, knowing where to concentrate the effort is critical. A business should focus on where it earns money now and, even more importantly (in the doctor‘s view), where it will earn money in the future (as business, and demand, is constantly changing). To help you do just that, the article presented an approach to Keep it Short and Simple (KiSS) that it believes will help a CEO do just that:

  1. Clarify and communicate what the business is, does, and delegate down the line.
  2. As CEO, aim to remove yourself as much as you can from the dayt-to-day operational business and concentrate on strategic areas.
  3. Aim to reduce meetings and have a clear (and simple) outcome for those that do take place.
  4. Reduce the number of people involved in those meetings.
  5. Communicate, communicate, communicate.

This is also great advice for CPOs.

  1. A good CPO clarifies what procurement does for the business and how it meets the strategic objectives.
  2. A good CPO empowers her people to do their jobs and focuses on the big picture.
  3. A good CPO doesn’t waste her days in meetings … she spends them charting paths to procurement success.
  4. A good CPO only includes people who need to be there in meetings … and empowers those who are there to disseminate the information as required.
  5. Not only does a good CPO communicate, communicate, communicate, she also collaborates, collaborates, collaborates.

Hi-ho. Hi-ho. It’s Off PO We Go!

Or do we?

A few years ago Jason the prophet Busch wrote a post over on Spend Matters that asked “can (and should) we eliminate purchase orders (POs) entirely”? In the post he quoted Tom Linton, CPO & Supply Chain Officer at Flextronics, who suggested that we eliminate POs entirely as a result of his mandate to eliminate work before you automate, automate work before you move it and always make sure you improve outcomes in any given scenario.

Mr. Linton is entirely right — there’s no point in automating unnecessary work. And in many circumstances Purchase Orders are entirely unnecessary. If the contract specifies a delivery schedule with approved rates, then there is no need for a Purchase Order since it would just be replicating what’s in the contract. Similarly if it’s for services and approved projects, resources, and rate-tables are defined against a project schedule (unless overtime exceeds the maximum overage allowed).

In this situation, you can just conduct the 3-way match against the goods receipt and the contract when the invoice comes in and you are still certain that you have payed the right price for the right good from the right supplier at the right time.

But what about the situation where there is no (master) contract? What then? You just match the invoice to the goods receipt? I hope not! In this situation you can verify you are paying for the right goods from the right supplier at the right time — but not the right amount. You need to verify that the price is right (because, as the line goes, it can all be yours if the price is right). So in in this case you need something. A requisition? Nope – that’s not sent to the supplier, that’s sent to your supervisor/manager for approval. A one time contract for a single purchase? Isn’t that just a purchase order?

The purchase order can’t be eliminated, because proper purchasing procedure dictates that all purchases should be for approved products from approved suppliers at approved prices and such approvals should be documented in some form — be it a contract schedule or rate card, purchase order, catalog, or approved rate range for a T&E expense — and there are some instances where the only viable option will be a purchase order.

But an effort to eliminate as many purchase orders as possible will be a good and productive one because, like invoices, each and every purchase order comes with a processing overhead cost that adds up and costs the organization significantly over time.

If One Wants to Avoid Cost, Then One Should Avoid Cost At All Costs

One would think this would be obvious by now, but it’s not. Most organizations still talk about savings, savings, savings long after there are no savings left to be had instead of cost avoidance (and the successor topic of value generation). The best way to save money is not to spend any in the first place.

More specifically, it’s great if you negotiate the cost of a case of paper from $50 down to $40 but it’s even better if you don’t buy the case in the first place! That’s a 100% savings instead of a 20%! Now, it’s probably safe to say that paper spend can’t be eliminated, but most printing goes into the recycling at most companies the day it is printed, and that certainly can. How? Look at why people feel the need to print reports, articles, invoices, etc? Is it because they are in AP and they have to manually enter data coming in on a scanned PDF that can’t be properly parsed with OCR into the AP system, and they only have one monitor? Is it because the sales team / executives only have a small laptop screen and can’t see the report details adequately? In the first situation another standard monitor for $150 will eliminate the need for the AP staff to print out paper every day and save you cases on a monthly basis for years to come! In the second, spending $300 to $500 on a large screen will save the executives from having to print.

And SI is really glad to see it’s not the only blog taking up the cost avoidance cause. In a recent post by the maverick on the new CPO site (in which the doctor is currently doing a lot of collaboration to define what a CPO is, what she needs to know, what she needs to do, and what no other site will tell you) in which he addresses how “Most Firms Ignore Cost Avoidance [And] Destroy Economic Value”, we find out that it is just important, if not more so, because, to be blunt, cost savings is just a special cast of cost avoidance where you avoid paying the supplier more than you need to in order to acquire the product (while insuring the supplier is still sustainable).

At the end of the day, it’s all about spending as little as possible to get what you need in a sustainable manner. This essentially says it’s all about avoiding as much spend as possible while still getting what you need in a sustainable manner. Cost Avoidance is key, regardless of what your definition is.

Just What is “Best Value”, Part Deux!

In yesterday’s post, we discussed an article in a recent edition of Purchasing Tips (by Charles Dominick of Next Level Purchasing) that asked What is Best Value Procurement where he stated that “best value” should be a hard metric measurable in financial terms and expressed in units of currency and not a soft metric where factors other than price are used in determining a supplier and/or product to select for purchase (as that is weighted average supplier/product scoring).

We noted that SI tends to agree, but that there are often issues with trying to assign a(n exact) hard dollar revenue increase or cost decrease to an event that has not yet happened. Even the illustrative example used by Mr. Dominick in trying to choose between machine A and machine B to automate a production line is not cut and dry. For example, if the organization stops manufacturing a product before production line end of life or has the option to lease vs. buy the machine, the calculations get complex. But this is just the beginning.

When it comes to making an IT purchase, the “best value” calculations become a bit of a nightmare. First of all, there is system cost. Depending on whether you want to go with a true SaaS, hosted ASP (which might be wearing a cloud disguise), or on-site hosted solution, as discussed in our classic series on the Enterprise Software Buying Guide (Part V: Cost Model), there are anywhere from four to eleven core up-front and on-going costs that need to be considered (plus ancillary costs for complex or special systems). (And even with the free calculation template provided in the classic SI post on uncovering the true cost of an on-premise sourcing/procurement software solution, the calculation is still a nightmare. How confident are you in the integrator’s estimate? How secure do you feel about the amount of training time (and budget) that will be required? How reliable are the ongoing support level and associated cost calculations.)

Assuming you can work through the system cost equation, which can be quite a doozy (doozy, not doozer, although you will likely need doozer cooperation levels to make any new IT system work these days), you then need to work through the value equation. Just how much value can be expected from the system over the timeframe, and how accurate is that prediction. There are multiple components to this calculation.

  • Throughput Increase
    if the system increases the number of invoices that can be m-way matched, increases the number of sourcing events that can be run, or automates the production of trade documents, this needs to be calculated first as these numbers are need to compute the savings
  • Efficiency Savings
    how much manpower is saved (and how much can therefore be reassigned or eliminated) and how much is the HR expenditure accordingly reduced
  • Cost Savings
    how much cost is expected to be avoided either by increased throughput or the increased performance offered by the system (such as defect reduction, which reduces repair costs)

Obviously, these calculations are not straightforward. In the case of efficiency savings, since every resource (and type) has a different cost (based on salary and associated benefits), the best you will be able to do is estimate an average cost for the manpower by hour (or day). In the cast of cost savings, it’s more than just an industry average, it’s an industry average for a company at a similar stage of competency, with a similar sized workforce, and a similar production or spend pattern. Let’s take spend analysis. If the company is a leader with close to 80% of spend under management, has been sourcing against industry benchmarks, and has used advanced negotiation (and optimization) techniques on high value or key categories (with the help of a third party, if necessary), the company is likely not only aware of its top n categories, but has likely strategically sourced the majority of next n categories as well and the untapped opportunities would represent less than 20% of its spend. This company would only expect to see the industry average 11% savings on roughly 10% of its spend and would likely only see a few percentage points on the spend under management in the current economy. In comparison, if it is an average company only had 45% of its spend under management, had not used advanced sourcing techniques in the past, and only sourced a few categories against benchmarks, it might expect to see the industry average savings of 12% on 40% of its spend and 5% to 6% on the rest. The up-front savings potential (over 1 to 3 years) for this average company on a new spend analysis system would be four times that of the industry leader! It might be the case that the industry leader might need the new system to properly monitor and analyze its spend going forward more efficiently to help it avoid bad decisions in the future, but now we are in cost avoidance territory, and fuzzy territory at that. In hard dollar costs, all one can argue is additional manpower reduction.

And we still haven’t dived to the bottom of the iceberg. In other words, the best definition of best value is a hard dollar metric, but it might be the hardest metric of all to calculate.