Category Archives: Best Practices

Just what is “Best Value”?

In a recent edition of Purchasing Tips over on Next Level Purchasing, Charles Dominick asked What is Best Value Procurement? In the article, he notes that many people use the term “best value procurement” to describe purchasing decisions where factors other than price are used in determining the supplier and/or product to select for purchase and states that he believes that this is “weighted average supplier/product scarring”, which it is.

In his view, value should be measurable in financial terms and expressed in units of currency. I tend to agree, but there are issues with trying to assign a(n exact) hard dollar revenue increase or cost decrease to an event that has not yet happened.

In his illustrative example of choosing between machine A and machine B to automate a production line and reduce the labour needed to keep it running (in an effort to, hopefully, allow the organization to either redeploy the personnel on higher-value tasks or, if not possible, replace those jobs with jobs that could generate more value for the organization down the road), it seems cut-and-dry. Just compute the value-to-cost ratio (where the value, as defined by the estimated labour savings, is divided by the cost of the new machine, which should include purchase, installation, and additional maintenance costs over the expected lifetime). In this case, one machine will generate a higher value-to-cost ratio and that is the machine you should purchase for the organization.

Assuming, of course, that you are sure the machine will have the indicated lifespan and will be useful to you for that lifespan. For example, what happens if you stop making the product in three years but your value calculations are for five years, the expected lifetime of the machine. The value-to-cost calculations will still rank the machines in relative order (as only the value changes), but the return might not look so enticing. And what about the situation where you can instead lease one of the machines from a third party (instead of buying it) and, because that machine in particular is made to a higher quality standard, get an annual lease that is only 1/10th, and not 1/5th, of the purchase cost? In this situation, a machine that cost twice as much would not only have the same value-to-cost ratio but, if you had to sell the machine you bought after three years, the leased machine would have a higher value-to-cost ratio since you’d likely not get the full undepreciated book value for the machine you bought.

And this is just a “best value” calculation on a simple piece of machinery. Consider the difficulty when trying to compute a “best value” on a technology platform purchase, where such platform is intended to improve your sourcing, procurement, supplier relationship management, or similar supply management process. It’s not just up-front cost. It’s implementation. It’s maintenance. It’s operational manpower savings on tactical tasks. It’s efficiency improvements (which have a value in terms of more events or throughput, which translates into generated value) and it’s additional cost reductions identified through the platform (which can be estimated based on benchmarks, but not predicted). How do you do that “best value” calculation? What number do you use? Do you compute a range and use the middle? Do you identify all platforms with a minimum acceptable value-to-cost ratio in terms of guaranteed hard-dollar savings and then select the best-value using the platform with the maximum value-to-cost potential?

There are no easy answers and costs alone don’t always tell the whole story.

Simply Your Procurement Life and Eliminate the 5 E-procurement Mistakes You Don’t Realize You’re Making

Today’s guest post is from Iyana Lester, a Project Analyst at Source One Management Services who specializes in contract management and negotiation, project evaluation and monitoring, and market assessments.

Along with the boom of internet-based business came the challenges of maintaining an effective supply chain in the digital space. E-procurement offers a seamless solution to streamline processes and improve compliance all while reducing cost. While e-procurement has been around for several years, there still remains several factors that impede businesses from utilizing it fully and attaining maximum savings largely based on their expectations.

A recent Procurement Insights article points out that merely assuring yourself you’re doing everything in your power to maintain supplier relationships isn’t enough. “Even if you are well-versed in procurement and can speak every language in existence, nurturing complex supplier relationships in a global spectrum requires frequent communication that often slips without a system to manage the contact.” So what does this mean for organizations considering the shift?

Inform yourself of what’s out there before committing to one e-Procurement solution. More importantly, become educated on the user short-fallings that lead people to assume that their solutions aren’t optimal. This will allow the largest-scale view of your options without any user-impairment bias. By ensuring your expectations are reasonable, you’re conveniently building yourself a ladder out of a situation coined by Sourcing Innovation as Procurement Damnation. Whether you prefer it as a remix to AC/DC’s Rock ‘n’ Roll Damnation or a procurement state of agitation, you can’t anticipate unrealistic savings and results from an e-Sourcing platform. These solutions are helpful in approaching the challenges of global sourcing, but they are only 100% effective with a strategy that supports them.

Below is a list of several of the most common shortcomings faced in e-procurement. As you develop your e-Sourcing options, keep these organizational glitches in mind:

1. Poorly Implemented Systems

This issue stems from a lack of initial planning. The systems must be integrated with existing corporate systems so that they will be interacting all the way to the end user’s interface experience. They should also be implemented quickly to accomadate any rapidly-developed new technological advancement. Failure to consider any of these focuses can result in systems that aid in one area of the procurement process but cause harmful disruption in others.

2. Partial Implementation

When implementing any large scale change, the change must be adopted and interconnected organization-wide to achieve optimal outcomes. To successfully implement e-procurement, your organization needs to carry out a detailed evaluation of its procurement processes and consider the needs for each division. Roles will continue to depend on effective collaboration between many different organizational players. This will assist in preparing proper agendas and budgets.

3. Uninformed to the Latest Technological Advancements

Monitoring advancements in e-procurement technology will serve as a guide for key risk concerns that should be in your organization’s radar. Observing technological advancements will lessen the chance of your systems becoming outdated.

4. Failure to Develop Performance Metrics

Many organizations have the mentality that once a system is in place, all advantages and will be manually achieved. Considering a comprehensive set of metrics provides a better framework for benchmarking and allows for the procurement process to be more effectively managed. Some metrics areas to consider may include effectiveness, efficiency, quality, and cycle time.

5. Unsuccessfully Identifying the Issues at Hand

A system cannot effectively solve a problem unless the true problem is identified. Organizations often identify sources and causes of the problem and look for fixes that will only temporarily improve the issue. To capture the full potential of your e-Sourcing, never close your eyes to developments and minimize your exposure to Procurement Damnation by following the above steps. The most effective procurement management systems are constantly adapting their capabilities while remaining user-friendly and consistent. Procurement departments should be mindful and eager to pursue new functionalities wherever possible without compromising supplier data quality.

Thanks, Iyana.

CPO: Are You Ready to get Mean and Lean to the Power of Six!

Do you think that Lean is just for Manufacturing and Six Sigma is just for manufacturing process improvement? That it’s only relevant if you are making automobiles (like Toyota) or consumer electronics (like FoxConn)? If so, then maybe you need to get out of the eighties and back to the future (no flux capacitor needed). (After all, remember what happened to That Guy?)

Because the reality is that lean and six sigma is not just for all types of manufacturing processes, but operational processes in general, including supply chain — and supply management — processes. The whole point of six sigma is to improve the process in a way that reduces defects and errors. And when it comes to savings, the best savings are process savings as those recur year over year over year while negotiated savings are one-time and generally not repeatable (as inflation and continued depletion of natural resources generally ensures that production costs rise every year and that costs will go back up).

And, most importantly, the core DMAIC process of Six Sigma, where DMAIC stands for Define, Measure, Analyze, Improve, and Control, is easily adapted to Supply Management as the doctor and the maverick point out in our new series on “The CPO’s Guide to Lean and Six Sigma” airing over at the new Chief Procurement Officer Spend Matters site where we are collaborating on a number of ground-breaking series over the next few months. These series, which include a massive 20-part series on The CPO’s Agenda, an upcoming series on tearing apart the CPO job description, and a deep dive into spend control, will go beyond the news and high-level puff pieces proffered up by other sites that care about your clicks more than your success to give you the information you need to succeed as a new (candidate for the) CPO (role).

So click on over to the The CPO’s Guide to Lean and Six Sigma and find out why you can use DMAIC 2.0 to Blow Up the N-step Procurement Process and find value that you never knew existing in your supply management processes. The bottom line (and even the CFO) will thank you for it.

Best Practice Vendor Selection for True Multi-Nationals Reprise Part V: Stuck with an ERP? You do have options!

This is a reprise of a series that first ran in 2012. It’s as relevant, and important, today as it was then.

Despite claims to the contrary, you are not stuck being a sap or hearing prophecies from an ethylene-gas inhaling delphi. You do have options. Acquisitions might have some analysts in a tizzy, but you only need to remember one thing. Don’t Panic.

It’s been years since the acquisitions of Ariba & Emptoris.

They were not the only best-of-breed game in town then, and they certainly aren’t the only best-of-breed game in town now. In fact, for many companies, SI would argue that they are not even in the best-of-breed category as the length integration cycles required to integrate them into their acquirer’s platforms slowed down development and now there are only a few module or functions left that, in SI’s opinion, are still best-of-breed. However, there are lots of other options, and these options exist on both sides of the Atlantic.

Best of Breed vendors eat, sleep, and drink supply management

Unlike do-it-all or ERP vendors, best-of-breed supply management vendors are focused entirely on a critical supply management process and, as a result, they tend to be much better at it than do-it-all or ERP vendors, especially supplier enablement, which we all know fuels the e-procurement benefits engine.

Best of Breed on an ERP backbone can offer significant advantages

  • Best of Breed providers often know the strengths and weaknesses of ERP systems they are replacing better than the consulting implementation partners, who care more about if they can weasel their way into long-term strategy consulting than a successful implementation. (For example, there are a couple of vendors with over 100 customer SAP implementations, who know the system way better than a Big 5 consultant on his second implementation.)
  • Best of Breed providers have enabled hundred of thousand of suppliers, maybe more, over the years … in all regions of the world … your 347 suppliers aren’t going to make them flinch (and they will be faster and cost less, because once again, they, or their carefully selected integration partners, have been there, done that … a few hundred thousand times.)
  • Best of Breed provider’s customers are all former ERP e-procurement / consulting implementation customers … that’s right, most of whom have already failed using the ERP/consultant approach, spent the millions, got 7 punch-outs and 11 catalogs implemented … now they spend thousands and get … well, you already know … actual results and benefits.
  • Best of Breed providers have to be better than the ERP or broad portfolio providers, because they can’t fall back on their CRM sales or app server license revenue if they don’t deliver.
  • And because of all of this, Best of Breed providers have way more references than the ERP providers. Those big ERP guys based in Germany have two significant e-procurement references … one they’ve been using for 3 years, and another from a company I never heard of on this side of the Atlantic … I know of one Best of Breed provider who has 19 published case studies, and has only lost one customer in 14 years, and that was after this company was a customer for 9 years, and decided to outsource IT, and the outsourcer, IBM, brought in an ERP to replace all of the internal systems.
  • Best of Breed providers’ SaaS-type offerings and supplier networks eliminate the need for your IT department or external consultants to be involved, so they implement faster and less expensively
  • The most successful Best of Breed providers have service organizations or carefully selected service partners around the globe to assist with implementations and provide stability.
  • Best of Breed providers fill in the gaps where ERP fall short. ERP may try, but it is not all-in-one and they are usually a year or more behind the Best-of-Breeds functionality-wise.
  • Best of Breed works and they have the client stories to prove it. Follow SI’s advice and check their references.
  • Best of Breed will help your SUM (Spend Under Management) soar.

Consider your options carefully. A Best of Breed solution on your ERP backbone might be the best decision you can make.

Best Practice Technology Vendor Selection for True Multi-Nationals Reprise Part IV: Open the Doors for a Truly Successful RFX

This is a reprise of a series that first ran in 2012. It’s as relevant, and important, today as it was then.

In the first three parts (I, II, and III) of this series we discussed the proper RFX process to follow when attempting to select a technology(-based) solution provider (for e-Procurement, e-Sourcing, and Supply Management solutions in particular) as a true multi-national. We noted that while most companies more-or-less understand the high level process, most get the implementation wrong, focussing too heavy on feature-function checklists (that are usually put together by vendors, even if they are obtained from third parties) and too little on a vendor’s global implementation and support capabilities.

If your organization follows the advice presented, starts with the customer references, and only spends time and energy conducting a detailed review of those vendors with a track record that suggests that the vendor could meet your global implementation and support needs, then your organization is off to a great start. But this isn’t the only best practice that your organization should be following in the selection of a vendor for your global technology needs. In this post we’ll cover five more.

The Core Solution Litmus Test

Once the vendor has passed the customer litmus test, the next litmus test is the core solution requirement litmus test. After dividing all of the stakeholder problems into must solves, should solves, and nice-to-solves, make sure that the vendor has solutions (technology, services, or a combination thereof) that address each of the must-solve problems and most of the nice-to-solve problems. The vendor is not right for you unless it is a global, cultural fit that brings the right solutions. (There’s no checking of feature/function boxes at this step.)

Third-Party Claim Verification

Most vendors will make big claims in terms of their platform capabilities. Just like a vendor’s ability to serve your organization globally should be challenged and verified with customer references, so should its ability to fill your technology gaps. Not only should you talk to their partners, but talk to analysts, bloggers, and other third-parties they have interacted with and whom have seen (part of) their solution.

Open Book Negotiations

In addition to third-party claim verification, don’t be afraid to force a vendor to prove every claim, statement, and assumption. This should not stop at current, successful, customer references. The vendor should let you speak to analysts it has relationships with, consultants who have implemented their solutions, auditors to verify their financial stability, and even ex-customers if asked.

End-To-End Total Cost of Ownership Elucidation

What is the true cost of the solution to your organization AND your supply chain? This goes beyond the end-to-end platform cost, as discussed in this classic post on Cost Model Calculations in SI’s Enterprise Software Buying Guide series, but also includes any costs that will be borne by your supply base. It’s often the case with e-Sourcing/e-Procurement/Supply Management solutions with Supplier Information Management, Supplier Portal, or Supplier Network functionality that a vendor will charge your suppliers an access fee, which can sometimes be hefty. An access fee that is just going to hit your organization with interest in a year when your suppliers raise their prices to cover the fees you caused them to incur. In Procurement, a penny saved today at your supplier’s expense often translates into a dime spent tomorrow. (And if you don’t believe me, then you need to work on understanding the cost of capital throughout your supply chain. Remember that sound, conventional financial management is NOT good for supply chains.)

Open Finals*

Typically, the final negotiations in this space are more secret than what goes on beyond closed doors at Area 51, scientology headquarters, and the back room of the club where Wall Street mega deals really happen. This is dumb. Blind auctions may be okay when buying commodities, but it’s the last thing an organization should do when buying a critical piece of functionality where a failed implementation will cost (tens of) millions of dollars or more in overspend and opportunity costs. Not only should each vendor be aware of whom it is up against, but vendors should be asked to promote their strengths and counter their opponents weaknesses. They should be instructed to tell the truth, even when asked tough questions (about customer retention and defection to a competitor), and penalized for false answers. Remember, good vendors are honest, especially about the occasional (big) mistake that they made, learned from, and put measures in place to prevent ever repeating it. And the best vendors will get up and walk away as soon as they realize they are not the solution for you (because they thought you needed primarily e-Sourcing functionality and they are mainly e-Procurement for example) and that it would take to long or cost to much to tailor it to your needs. (And these are the first vendors you should go back to as soon as you have needs that they can fulfill.)

If your organization implements the best practices covered in this series, then chances are, it will have no choice but to prepare for success!

* Nothing to do with tennis, folks!