Category Archives: Best Practices

How Do You Define Procurement Success?

Cost Savings? Cost Avoidance? Value Generation? Just getting through the damned day? (It is the year of Procurement Damnation, after all.)

It’s an important question. Why? Your success depends on your answer, because it is this answer, given or implied, that guides every sourcing, category management, and procurement project that you do.

If you consider the art of the Strategic Sourcing Process, the Category Management Process, or the Contract Management Lifecycle, you see that they all start about the same at a high-level:

  • Need Identification
  • Business Case
  • Stakeholder On-boarding & Management Approval
  • Strategy Formation
  • Risk Assessment & Contingency Planning
  • Detailed Specifications and Requirements
  • . . .

And if you dive in to each of these steps, you find that a key requirement of each step is an acceptable definition of success.

  • Need Identification
    There is a reason for the need, and that reason is that it is required to achieve organizational success.
  • Business Case
    A key requirement is the results that will be achieved, which should define success.
  • Stakeholder On-boarding & Management Approval
    What will they get out of it? They are more likely to come on-board if they see a result that will enable their success.
  • Strategy Formation
    What strategy will lead to success?
  • Risk Assessment & Contingency Planning
    What are the risks to success and what the contingency plans to ensure success?
  • Detailed Specifications and Requirements
    What are the steps to get to success, and what measurements will keep the team on track?

And, more importantly, if you do not define success before you go to bid, you can not expect that any response to your tender from any supplier will deliver that success.

In other words, this unwritten rule should probably get its own step in your sourcing / category management / contract management process, which should probably start like this:

  • Need Identification
  • Success Definition
  • Business Case
  • . . .

For more details on how to achieve RFP success, see SI’s series on best practice vendor selection:

And check out Thomas Kase’s recent series on “Improving RFP-Driven Technology Sourcing Outcomes” over on Spend Matters Pro if you have access.

Benchmarks Will Re-Define (Re-)Sourcing .. but that is Just the Beginning!

Today, benchmarks are used to determine how well an organization has performed to date. While constant measurement is important, it doesn’t really add value. Tomorrow, benchmarks will be used in conjunction with optimization to not only measure progress, but to help the analyst determine the most appropriate method for re-sourcing an existing category that will be the most likely method for delivering additional savings going forward.

Tomorrow, before a category is re-sourced, an optimization will be re-run on market-adjusted historical data to compute a market baseline, which is the proper definition of a benchmark, that will be used to determine a if there is a potential savings opportunity using strategic sourcing decision optimization. If there isn’t, then a better approach will be defined for the category.

More specifically, the current market pricing for the commodities, as defined by the benchmark, will be compared to current organizational pricing and the differential will be used to adjust all of the historical prices for a baseline optimization. In addition, the distribution model will be updated as appropriate (with new lanes, new carriers, and new temporary storage options added) and current rate tables will be included. If this baseline optimization indicates a reasonable savings opportunity, then the category will be re-sourced using a multi-round negotiation process backed by strategic sourcing decision optimization.

If, on the other hand, this baseline indicates that costs are likely to rise, then the organization knows that it should change the sourcing approach and instead try for a contract extension at current, or only slightly increased, rates.

More details can be found in SI’s recent white-paper, sponsored by Trade Extensions, on Optimization, What Comes Next, but this is just the beginning. Automated Optimization, Stratified Optimization, and TVM Optimization will find opportunities that your organization never knew existed (and never will without these techniques).

To find out how optimization, when taken to the next level, will completely redefine your strategic sourcing and category management, download SI’s latest white-paper on Optimization, What Comes Next.

Why TVM Optimizes Spend

Procurement needs to generate value. But Procurement is usually evaluated on savings. It’s a disconnect, but one that needs to be addressed. The best way is to start in the middle. What is the middle ground? Spend optimization. What’s the best way to optimize spend? Focus on total value.

When one focus on total value, one simultaneously optimizes

  • Total Cost of Ownership (TCO)
  • Customer Benefit and
  • Indirect Value Creation

which are the three occasions where one should spend more as per Spend Matters’ UK recent piece on “Three Occasions When Procurement Should Spend More”.

How does one focus on total value? One starts with the definition of Total Value Management as given in the e-Sourcing Wiki Paper on Strategic e-Sourcing Best Practices. In this classic wiki-paper, Total Value Management (TVM) is defined as a comparative cost metric that quantifies the overall cost of each acquired unit relative to the overall value of the spend category as it relates to the organization’s sourcing strategy and supply chain goals.

In other words, TVM not only maximizes the net benefit between the return curve and the cost line, which is computed during a calculation of indirect value generation, but identifies the cost line and associated return cost among all possible cost lines and their associated return curves that allows for the largest maximum net benefit. In other words, TVM does a Pareto optimization and identifies the maximum benefit to the business. Since cost is optimized relative to the return, not only is TCO optimized but the organization has saved as much as it could because any attempts to spend less would result in more dollars being spent somewhere else.

And when we review the three occasions where one should spend more, we now know that

  • TCO is directly optimized because it has to be to compute the cost line,
  • customer benefit is indirectly optimized because the return is only optimized if the activity results in more customer sales or more revenue per customer sale and
  • indirect value creation is directly optimized because marketing, services, etc. spend will be optimized under this model.

So you think you know KPI, TCO, and SRM? Find Out!

You might think you’ve mastered KPIs, TCO, and SRM and that you’re ahead of these trends, but here at SI, we beg to differ. But even if you have a good grasp of these capabilities, and know where the trends are taking them, these are just three of the ten trends your organization needs to be ahead of if it wants to get ahead of the game, and the competition, in 2015.

So even if you think you know what the KPI, TCO, and SRM trends are, that’s only three of the ten trends that you need to be aware of. Moreover, these are the most mature and the least forward-thinking of the current trends, so mastering these is not going to give you or your organization much of an advantage or an advantage it is going to hold for long.

Especially when current KPI definitions are anti-productive, most companies are confusing Total Cost of Acquisition and Production and distribution with Total Cost of Ownership, and Supplier Relationship Management with Supplier Browbeating. Your organization also has to stop calling top n spend reports spend analytics, understand the true cost of outsourcing, and what supply chain finance really is. So, if you’d like to understand what meaningful KPIs really are, what TCO really is, what SRM should be used for, where analysis needs to go, how to value outsourcing, what supply chain finance really is, and five other topics that you should be mastering to get ahead of forthcoming Supply Management trends, then download Sourcing Innovation’s new white-paper on Top Ten Trends for Supply Management Value Generation in 2015 (registration required).

You may have brought your costs under control in 2013 (with SI’s 2013 Top Ten) and put a proper Supply Management technology infrastructure in place in 2014 (with SI’s 2014 Top Ten), but that doesn’t mean you’ve prepared for what comes next. If you’d like a little help, download Sourcing Innovation’s Top Ten Trends for Supply Management Value Generation in 2015 (registration required), sponsored by BravoSolution, and find out how to get ahead of the trends.

After Two Series on the Future of Procurement – What Have We Learned III

In our first post we noted that, after two series, fifty (50) posts, and almost seventy five (75) pages on the “future” of Procurement, we learned that while the majority of trends being positioned as “future” trends weren’t future trends at all, they were trends that your organization will encounter as it matures and grows and the sooner your organization ploughs through them, the sooner it can get to the real future trends.

We then reviewed our series and noted that most of the requirements for dealing with these trends fall into a baker’s dozen plus one of high-level categories. Today we will break the last seven categories down into the most important sub-categories:

Regulations

  • get up to date on &
  • get systems in place &
  • get BOM visibility for
    • Environmental Regulations
    • Financial Legislation
    • (Free) Trade Agreements / Zones
    • Trade Security
  • to make sure, among other things, that you don’t
    • get activists on your case
    • join Fox in the box
    • get burned on duty rates
    • lose your cargo

Risk Management

  • supply chain visibility to detect issues and disasters as they happen, not three months later when the delivery doesn’t show up
  • mitigation planning for when disruptions occur
  • (natural) disaster response for when disaster strikes
  • rare earth minerals plans for when costs skyrocket
  • food reserves plans to reduce waste and deal with rising costs as reserves shrink
  • supplier failure responses ready

Supplier Development

  • co-design of product and services
  • cost avoidance when market costs (for labour, energy, raw materials, etc.) rise
  • new supplier identification if current suppliers aren’t improving
  • performance tracking to make sure suppliers are performing as expected and to identify areas where continued improvement is needed
  • value generation from supplier relationships

Supply Chain / Inventory Flexibility

  • Faster production cycles to keep up with faster product life cycles
  • Flexibility to ramp production up or down with demand
  • (Better) Forecasting for better volume determinations pre-contract negotiation
  • Innovation from suppliers and partners and customers for market advantage
  • Just-In-Time (JIT) production / distribution when needed

Talent

  • Development – EQ / IQ / TQ is analytical, technical, and emotional skills all need continued advancement
  • Collaboration between team members, departments, suppliers, partners, and customers
  • Fiefdoms must be disbanded and the heads cut off
  • Management to insure regular collaboration, development, and team-building

Technology

  • applicability / usage management to make sure the right technology is used for the right task
  • support the right processes subject to the 80 / 20 rule as core systems must support the common (mass) requirements (and niche solutions can be brought in for the rest only once the base-line is covered)
  • design & implementation management as many of the greatest supply chain and corporate failures have been due to failed technology implementations
  • S2C & P2P -> S2P -> S2D (Delivery) as the entire product lifecycle needs to be managed, not just identification
  • complete roll-out of the right platforms to all users who need access
  • mobile management as mobile devices proliferate like Fibonacci’s rabbits

Transportation

  • Mode Planning taking new options into account
    • Panamax vs Post Panamax
    • 787s
  • FTL & Inventory Management vs LTL & JIT to minimize cost and maximize flexibility as needed
  • Supplier vs. 3PL vs. In-House depending on efficiency and cost effectiveness

Overwhelmed? We hope not! While getting these categories and sub-categories under control is a good start for any organization wanting to progress in maturity and capability and get yesterday’s trends under control, in terms of what an organization has to know and deal with, it is just the tip of the iceberg. There’s even more a Supply Management organization has to know, and master, to be best-in-class and take the enterprise to the next level of performance. And, like you would expect, SI will address these requirements in one or more future blog series. Stay tuned!