Category Archives: Best Practices

Procurement Needs to Expand its Horizons

On Friday, Pierre Mitchell published a great piece over on Spend Matters on how “Procurement Needs to Stop Benchmarking Itself Against Procurement”. According to the post, most procurement organizations know to benchmark themselves against others outside of their own industry, but they often don’t look to completely different functions, processes, technologies, techniques and even cultures to help them find and deliver new sources of value, of which there are many.

Some of the best ideas presented in the post are to:

  • use knowledge management to gather/store intelligence, catalog transformation projects for storyboarding, and model skill supply for resource planning like management consultants
  • get a grip on supply chain network design
  • master competitive intelligence and content/intelligence tools
  • predict model building using all data available to you
  • transition from quality control to supplier enablement and
  • manage the Procurement brand .

Taking these one by one, Procurement can definitely improve by:

  • documenting what it learns from every project and using that to define improved processes and transition management,
  • looking at the entire supply chain before defining the category and the bid,
  • making use of all of the market data available to it to determine how well it is doing and how well it could be doing,
  • building predictive trend models to understand likely order volumes for seasonal / limited life span products,
  • find new potential sources of innovation, and
  • improve the Procurement brand and the reach of Procurement.

We’ll discuss a few of these in upcoming posts, but for now check out Pierre’s post and remember, as we’ll also discuss in an upcoming paper series later this fall, improvement comes from reaching beyond Procurement’s current limited boundary.

Why Bidding Flexibility Is Important to e-Auction Success

Regardless of what you want to call it — expressive bidding, lotting, market baskets, informed sourcing, etc. — the ability to let a supplier bid the way they can give you the best price is very important to e-Auction success. If all you can support is simple auctions on an item by item basis, and quotes on an item by item basis, you are not going to get the best deal.

This is rather easily illustrated. For example, let’s say your business is clone computer assembly for mid-sized businesses who don’t want the Dell or HP premium. Let’s also say that you buy six different components for these computer assemblies: cases, power supplies, motherboards (with on-board everything to keep it simple), memory, hard drives, and cable packs.

If you are forcing a supplier into separate bids by item, and the level of detail they can quote is price per unit, shipping per unit, and extended warranty per unit, you’re probably going to end up with quotes looking like this:

Supplier 1 Supplier 2 Supplier 3
Component Unit Freight EW Unit Freight EW Unit Freight EW
Case 20 5 1 22 4 1 18 6 0
Power Supply 40 3 6 36 4 3 38 4 2
Motherboard 199 5 24 195 5 19 189 5 30
Paired Memory Pack 49 2 4 47 3 6 51 3 4
Hard Drive 78 4 12 74 3 8 81 4 7
Cable Pack 22 4 0 24 3 1 19 5 0
Total 49 2 4 305 12 30 37 11 0
Grand Total 450

Not bad for a clone server, but if you bid out the basket and allow the supplier to bid on just the components they want and do so as a bundle, you might find that you get this result:

Case Power
Supply		 Mother-board Memory Hard
Drive		 Cables Freight Warranty
S-1 B-1   19   38   20   8   5
S-1 B-2   45   71   5   8
S-2 B-1   20   33   6   2
S-2 B-2   195   14   5   10
S-3 B-1   45   72   5   9
S-3 B-2   185   14   7   30
Grand Total 414

An 8% savings by allowing a supplier to bundle bids according to their operational efficiencies!

Get it now?

Why Don’t We Hear Anything About Market Informed Sourcing?

Because the acronym is a MIS!

While I agree that we need more discussion around Sourcing Optimization, I don’t think calling it Market Informed Sourcing is going to help any just because people are afraid of the “O” word. Even though good optimization is “market informed” and uses up-to-date market data, people don’t really understand what “market informed” really is. When people hear informed, they tend to not only think of fact but opinion, and optimization is all about fact, not fiction.

In a recent 3-part series on Sourcing Optimization (Part I, Part II, and Part III) by Alan Geelson over on Spend Matters UK, of Keelvar, a company which SI reviewed in its recent post on Strange Name. Uncommon Results, he notes that while there is no consensus on the name that best describes the approach — Market Informed Sourcing (MIS) Sourcing Optimization, or Collaborative Sourcing, the view at the heart of these propositions, namely, that suppliers should be afforded the opportunity to have greater flexibility as to how they engage with buyers, is an important one. And optimization is what enables this.

Furthermore, it also enables all parties to play to their strengths without discriminating against any one group. Suppliers can submit “sealed bid” bids bundling and packaging lots together as they see fit, offering price breaks and rebates for certain volume purchases. And buyers can weight the advantages and disadvantages of aggregating spend with less suppliers, finding the right balance between economies of scale and risk mitigation should one supply source go down.

However, sourcing optimization still has not enjoyed mass adoption. Some reasons for this, as noted by Alan, include:

  • lack of process, technology, and key benefit understanding,
  • cost, which is believed to be prohibitive, and
  • perception of complexity.

In other words, as SI pointed out in its recent post on how, When It Comes to Optimization, You Need Every Insight You Can Get!, it all comes down to

  • misinterpretation and misinformation,
  • cost, and
  • fear.

Even though it should all come down to, as Alan points out,

  • finding savings without “squeezing” suppliers,
  • gaining greater control over outcomes with business constraints,
  • while keeping acquisition cost and operating costs down.

Maybe some day the truth will be known and accepted, but, until then we have to keep spreading the truth.

Doing Procurement Right Regardless of Organizational Size

A few days ago, in our post on how You’ve Negotiated but you still might not be realizing savings on marketing print, we pointed out two great guests posts by Santosh Reddy of GEP on how just throwing a problem over the wall to an expert doesn’t necessarily save you money — it just guarantees that someone else, namely the Print Management Company (PMC), makes money on your behalf.

Today, we’re going to point out another guest post by a GEP consultant, Sanyam Khurana. In his recent post on Spend Matters on “Procurement Lessons for Small Businesses and Large Multinational Corporations”, he notes that some strategies work well regardless of organizational size. Thus, if you are a small business that wants to get bigger, you should take take these lessons to heart and work on these strategies.

Flexibility

If you’ve been paying attention, you know that Sourcing Innovation has been emphasizing the importance of the 3T’s to successful Supply Management — Talent, Technology, and Transition Management. Transition Management requires a lot of things, but above all else, flexibility as your organization needs to adapt to, and be in, a state of constant change, in order to navigate the ebbs and flows of today’s global economy.

Cost Optimization

Whether you’re buying 100 units or 100,000 units, you still have to make sure you’re paying the right price for the right product. Over paying by 10% is still overpaying by 10%, and with smaller budgets, and margins to work with, 10% is still a lot.

Supplier Rationalization

Whether you’re a 1 Million, 100 Million, or a 1 Billion dollar company, you still depend on your suppliers for your success. In Sanyam Khurana’s post, he gives the example of a bakery that requires raw material, namely flour, to produce its goods. If the suppliers don’t deliver, the bakery can’t bake its bread. Having the right suppliers that you can depend on through thick and thin is important regardless of organizational size.

Data Management

Not only does each of the above strategies require good data to be effective, but so do other organizational strategies. For example, you can’t optimize cost unless you know how much you are paying, how much you could be paying and the value you are getting. You can’t rationalize on the right suppliers unless you are keeping good performance metrics. And while you can always be flexible, there’s no point in being flexible unless you know the direction that you should be be flexibly moving in! Plus, in today’s economy, social media is often critical to marketing, sales, and advertising — and in order to focus on the right channels, you need data!

Data, data everywhere
And all the tables burst
Data, data everywhere
It can not get much worse!

 

Easy Question. Easier Answer.

A recent post over on Strategic Sourcing that asked “Executives:Do You Have the Right Resources” asked an easy question with an even easier answer. NO.

How does the doctor know this?

1) Not only did The Hackett Group 2014 Procurement Key Issues survey report that 76% of companies stated that they needed to expand Procurement’s scope/influence, but previous studies have shown that as little as 8% of organizations are world class.

2) Large organizations that embark on a Procurement transformation journey generally take 5 years or more to become world class, and by the time they reach this point, a number of technologies or processes that were upgraded in the first stage remained untouched for three years, meaning that these organizations have to go back and start a transformation journey all over again just to stand still.

3) Since the definition of the right resources changes with operational changes, product and services changes, market changes, and new developments in talent management, technology, and operations research, even if you had the right resources yesterday, you may not have the right resources today.

When you put all this together, the chances of a large organization having all the right resources are so astronomically small that they are effectively zero. A few organizations, which fall into the Hackett Group’s world class organization bucket, are close, but the vast majority, which make up the average or laggard category, are nowhere close.

So what are these resources? For a start, as pointed out in Mickey’s post, they are the right talent, technology, and transformation (capability) resources — the 3Ts that form the base of a successful, aligned*, organization.

Talent

Even though everything changes as time goes on, one thing has been the same since global trade began. Ever since goods first floated down the Nile or first travelled the Silk Road, people ran the supply chain. And even though they may employ a wealth of tools and be hindered and aided by a plethora of government regulations, they still do. You need the right talent to succeed.

Technology

Always in a state of change, and sometimes flux, you have to not only identify the best products for your organization, but implement and utilize them properly.

Transformation Capability

Remember, it’s not people, technology, process; it’s talent, technology, and transformation because you need the ability to constantly evolve your process as needed to meet the current needs of the supply chain. If you don’t have transformative capabilities, buying the best processes and practices from a big 6 consulting firm won’t do you any good.

You need to not only acquire the right talent, technology, and transformative capability but you also need to maintain the talent, technology, and transformative capability as time goes on to truly succeed. And if you ever say you have the right resources, in today’s economy, you’ve lost the supply chain battle before it has even begun.

* More to come on this!