Category Archives: Best Practices

Procurement KPIs and Business Acumen – A Review, Part II

Next Level Purchasing (NLP) recently released a new four-part express course on Procurement KPIs and Business Acumen that is available to all premium Next Level Purchasing Association (NLPA) members for free (and to all free NLPA members at a one-time price of 54.99*). In SI’s opinion, this course meets it goals of delivering one of the key lessons a Procurement department needs to master to be seen as strategically contributing to the organization given the current view of Procurement’s role, does a great job of defining business acumen and relating it to a function Procurement should understand well (Sales), and does a deft job of indicating how properly defined synergistic KPIs can generate compound effects and deliver greater results than non-synergistic KPIs. But more importantly, as indicated in Part I, it develops and presents a basic, generic, framework that ties together the key synergistic KPIs for any Procurement organization that can be used by any Procurement Professional. This framework, which is beautiful in its simplicity, is the most innovative encapsulation of a core idea that I’ve seen from a purchasing organization, analyst firm, or consulting organization in years!

So what is the framework? We’ll get to that. First we have to describe the Sales funnel. In order to measure their progress, and success, most Sales organizations use a sales funnel that represents the various stages that a potential customer goes through before becoming an actual customer. The basic funnel has three tiers: leads, prospects, and customers. A business or individual that might be interested in the organization’s products or services is a “lead”. Once the organization has taken the time to investigate the needs and desires of the business or individual and determined that they have a reasonable probability of becoming a customer, the “lead” is converted to a “prospect”. Once the “prospect” commits to the purchase of a product or service, they are a “customer”. Not all leads become prospects, and not all prospects become customers. And this is to be expected. A successful organization is one that converts a large number of leads to prospects and a large number of prospects to customers.

Using this framework, Sales can successfully define synergistic KPIs that allow it to measure how well it is doing. Unlike a Key Resource Indicator (KRI), which is a number that represents the result of a business activity, or a group of business activities, such as revenue or number of support calls, that is often mistaken for a Key Performance Indicator (KPI), a KPI is a number that represents how well a person or group performs the activities that contribute the most to a key result. In this framework, the KRIs are number of prospects, number of leads, and, most importantly, number of customers. The KPIs are the conversion rates, i.e., the number of prospects that convert to leads and the number of leads that convert to customers. The higher these conversion rates are, the better the business does. And better yet, in the sales funnel, the KPIs are synergistic, in other words, they work together and improvements in one improve the other. Let’s say the organization starts with 1000 leads, identifies 600 prospects, and gets 200 customers. In this case, it has a 60% conversion rate from leads to prospects, a 33.3% conversion rate from prospects to customers, and a 33.3% * 60% = 20% conversion rate from leads to customers. The KPIs are synergistic because a 10% improvement in the conversion rate from leads to prospect (to 66%) and a 10% improvement in the conversion rate from prospects to customers (to 36.66%) results in a 21% improvement in the conversion rate from leads to customers (to 24.2%). The effects are multiplicative, not additive.

Viewed from a high level, this funnel is a framework to get from the universe of organizations of businesses and individuals to the universe of customers — which is what matters most to Sales. What matters most to Procurement is realized savings (because that, and not value generation**, is what they are typically measured on). And this savings is relative to the universe of total spend of the organization. From the 30,000 foot view, there is no reason why one cannot create a “Procurement funnel” that takes the total spend of the organization down to the the realized savings of Procurement. And that is precisely what NLP does in this course. It defines a Procurement funnel that can be used by any organization to accurately determine it’s contributions that go straight to the bottom line while defining a framework for the definition of a base set of synergistic KPIs that can be used as a starting point for any Procurement and Supply Management organization, independent of vertical or geography.

So what is the Procurement Funnel? Come back tomorrow for Part III!

* Note that premium NLPA membership is only 99.99 annually and grants you access to all nine express course series (of one or more courses) as well as the full NLPA library. SI would recommend that you consider premium membership if you are interested in multiple resources as it is much cheaper than paying by the drink.

** Shame on the backwards thinking C-suite that still has this mentality!

Procurement KPIs and Business Acumen – A Review, Part I

Next Level Purchasing (NLP) recently released a new four-part express course on “Procurement KPIs and Business Acumen” that is available to all premium Next Level Purchasing Association (NLPA) members for free (and to all free NLPA members at a one-time price of 54.99*). The express course series is designed to cover the essential lessons required for a procurement department to strategically contribute to an organization, including what business acumen is and why it is essential for procurement success and how synergistic Key Performance Indicators (KPIs) can be used to create a compound effect on business result. In SI’s opinion, it delivers one of the key lessons a Procurement department needs to master to be seen as strategically contributing to the organization given the current view of Procurement’s role, does a great job of defining business acumen and relating it to a function Procurement should understand well (Sales), and does a deft job of indicating how properly defined synergistic KPIs can generate compound effects and deliver greater results than non-synergistic KPIs.

However, what SI really liked about the course is that it introduces a new concept poorly missing from the Procurement world that should be adopted by EVERY organization on the planet. And for this reason alone I would recommend you become a premium NLPA member. It is the most innovative encapsulation of a core idea that I’ve seen from a purchasing organization, analyst firm, or consulting organization in years! And we’ll get to it before the review is over.

The course starts off by noting that it is big news when a CPO rises to the top and becomes the CEO of an organization. Why? Because it is a rare event. Why is this the case? SI believes there are a number of factors but agrees with NLP that one of the reasons is a lack of business acumen (beyond the procurement and supply management function). What is business acumen? The Financial times defines business acumen as a keenness and speed in understanding and deciding on a business situation. People with business acumen are able to obtain essential information about a situation, focus on the key objectives, recognize the relevant options available for a solution, select an appropriate course of action and set in motion an implementation plan to get the job done. And if they discover that changes are required to adapt to unforeseen circumstances, they make the adjustments as necessary and keep the activity moving forward. And, most importantly, they are more often right than wrong (at least when it really matters).

The definition also goes on to state that people with strong business acumen use an explicit or implicit business framework to ensure completeness and integration as they assess a business situation. This is a key point that cannot be overlooked. Because, as they also state, business acumen is learned and a key part of that learning is the tools, processes, and frameworks you need to make good decisions. In the “Procurement KPIs and Business Acumen”, NLP develops a basic, generic, framework that ties together the key synergistic KPIs for any Procurement organization that can be used by an Procurement Professional. What is this framework? We’ll address that in Part II.

* Note that premium NLPA membership is only 99.99 annually and grants you access to all nine express course series (of one or more courses) as well as the full NLPA library. SI would recommend that you consider premium membership if you are interested in multiple resources as it is much cheaper than paying by the drink.

Make Sure Your Savings Don’t Perish With Your Perishables

A recent article over on Inbound Logistics on Cutting Costs When Shipping Perishables had some great tips on how to reduce your perishable related costs while shipping. This post will cover them, and provide some more tips for reducing perishable related costs while also increasing your sustainability.

All ten tips were good, but the following five were very good and often overlooked:

  • Know the seasonality trend in the regions you source from.
    This will allow you to adjust your shipping patterns to take advantage of excess capacity in advance.
  • Become a C-TPAT member.
    This expedites the release of your cargo, which is very, very, very important when shipping perishables. Sometimes it only takes a few extra hours on a truck on a scorching hot day to ruin a shipment.
  • Include ALL commodities to be imported on a single USDA import permit.
    Not only does this save time and money, but it minimizes the chance of a permit being lost and the entire truck held up for one item!
  • Purchase an annual bond.
    Not only does this save time and money, especially if you’d file a lot of single entry bonds otherwise, but, along with C-TPAT membership, it shows you are a serious, regular importer of these goods and not a fly-by-night operation which might exist only to smuggle drugs in the citrus boxes.
  • Do not load produce at night.
    When it’s easy for insects and other pests to get in unnoticed. Not only can a family of spiders ruin the grapes, but they might be illegal in the company you’re importing into, which would result in your truck getting stopped at the border and turned around.

Other ways to save money include:

  • Always home-source during harvest season.
    Unit prices might be higher, but shipping will be lower, and loss will be lower still as you won’t risk losing product in long shipments, which happens regularly when trucks break down and/or get held up at the border. Plus, many people will pay a slight premium for local produce.
  • Know the seasonality for key staples in every region, not just the ones you generally source from.
    This will make sure you’re always sourcing from the region with the most supply, which will help you to get you the lowest costs as you will be able to negotiate better unit prices and secure transportation in advance when prices are low.
  • Always import full trucks.
    With the current cost of fuel, shipping adds a considerable cost component, so you want to minimize it as much as possible. This may require an optimization solution as you have to figure out whether to:

    • order more of a seasonal item to fill the truck, and then make sure an appropriate special is offered by sales to insure the extra units are sold before they perish
    • rebalance out-of-season items from one locale to another – i.e. you would normally buy oranges from Argentina, but moving the order to Mexico during banana season will fill the truck
    • order more of an out-of-season item with a longer life span, keep it properly refrigerated, and increase the length between orders
  • If the perishables will be processed, re-optimize the processing network.
    If you’re going to can, freeze, or otherwise process the perishables into a less perishable product, do it as close to the source as possible, even if it means using new suppliers or investing in new manufacturing plants. These refined products, which are typically denser, and which may not even require refrigeration, will be much cheaper to ship and suffer a lesser risk of loss.
  • Have a plan to sell excess perishables once they reach their prime before they perish.
    50% off at the store is not always good enough, especially if they are marked down an hour before closing on a Tuesday night and will not be saleable tomorrow. For example, even overripe, tomatoes are still great for pastes and soups. You could have each store strike a deal with local restaurants that allow them to buy perishables at prime at a discount before they are unuseable, or, if you are socially responsible, setup a donation program with a local shelter or soup kitchen where the shelter can pick up perishing items each day before close before they perish (and take your cash with them). Done right, you could probably even get a charity tax write off (as long as the items were donated while still edible). You may consider these ideas beyond the scope of sourcing, but you shouldn’t when you consider that 1 in 7 people in the world are undernourished and almost 40% of food is wasted in North America. Fix this. You have the power.

Why You Need a Master Data Strategy to Properly Do Supplier Information Management

Supplier Information Management is more than just buying a Supplier Information Management (SIM) solution and plopping it into your data centre. Much more. But yet, it seems that some people — anxious to deal with the visibility, risk management, and supplier performance issues facing them — believe that merely obtaining a SIM solution will solve their problems. A proper solution properly acquired, properly implemented, and properly used will go a long way to increasing supply chain visibility, enabling risk management and mitigation, and providing a solid foundation for supplier performance management, but the mere presence of such a solution in your supply management application suite is about as useful as a drill in the hands of a carpenter holding a nail.

You see, Supplier Information will never be restricted to the SIM system. Supplier information will always be present in the ERP system used for resource planning and manufacturing, the accounts payable system, the transactional procurement / procure-to-pay system, the sourcing suite, the contract management system, the risk management solution, the performance tracking and scorecard system, the sustainability / CSR solution, and other systems employed in your organizational back-office to manage the different supply management AND business functions. Supplier data is everywhere, and without a strategy, just shoving it into the SIM system won’t help.

In order to get a proper grip on supplier information, the organization needs a master data strategy that dictates the sub-records that define a supplier record and which system holds the master data for each sub-record. What do we mean by this? For example, the ERP may hold the core supplier identifier sub-record that defines the unique supplier number in your system, the supplier name, the supplier’s tax number, and your customer number in the eyes of the supplier and be the system of record for this information. The accounts payable system, referencing the supplier by it’s supplier number, may be the system of record for the headquarters address and payment address. The contract management system may be the system of record for the list of employees authorized to sign contracts on behalf of the supplier. The CSR system may be the system of record for the suppliers’ carbon rating, third party CSR rating, and your internal sustainability rating. And so on.

If this is the case, the SIM system, to truly be a SIM solution for your organization, needs to integrate with all of these systems and encode the proper rules to resolve data conflicts as required. Specifically, three things need to happen. First of all, whenever a system of record updates data, that data must be pulled into the system and overwrite the existing data. Secondly, anytime data is updated in the SIM system for which it is the system of record, that data must be pushed out to all systems that use it. Thirdly, and this part is sometimes overlooked, whenever data is updated in a system of record, the data not only needs to be pulled into the SIM system, but it then needs to be pushed out to any system that also uses that data. The SIM solution is the centre of a hub-and-spoke data architecture — all updates flow in, and all updates flow out.

This can only be properly accomplished with an appropriate Master Data Strategy. Don’t overlook it. Otherwise your SIM solution will turn out to be a Stuck In Muck solution. An SI is not kidding about this.

Maintaining Competitiveness – Adaptable Supply Chain Structure

In our recent series on The End of Competitive Advantage, we noted that in many industries, there is no such thing as sustainable competitive advantage. The best a company can hope for is to deftly move from temporary advantage to temporary advantage in an effort to remain in the black.

In order to do this, it has to follow a new playbook with a new set of rules, which include the switch to competing in arenas and not industries, the requirement to get (out) while the gettin (out)’s good, the support of the C-suite, and the continual resource re-allocation to deftly move from one arena to another where temporary advantage can be obtained.

In order to do this, a company needs a supply chain that can keep up. Such a supply chain has an adaptable structure at its core, as per this article on the essence of supply chain flexibility. Such a structure allows a company to get back to business quickly following a disruption. Consider Nissan, the first Japanese car company to get back to business following the 2011 quake. And in the wake of the Thai floods, it was able to contain the issues locally by swiftly resourcing parts from China. It was able to do this because its low-cost “V” platform for vehicles in emerging markets allowed Nissan to extend its production base across the world using standardized parts in different production facilities.

So how do you get an adaptable structure? Start with the checklist presented in the article:

  • focus on risk management, not risk avoidance
    with a 98% chance of a disruption within 24 months no matter what you do, this only makes sense
  • develop a variable cost structure
    that can be applied on a node-by-node basis and ramped up and down as needed
  • launch flexible capacity initiatives
    to adequately handle peaks and troughs in demand
  • establish hedging strategies for critical components
    and put appropriate backup plans in place
  • acquire actual supply chain insurance policies
    and insure specific high-risk events are covered
  • explore shared services models
    and use them where they make sense
  • implement flexible pricing structures
    to support flexible capacity initiatives that allow demand to be rapidly aligned with supply
  • and form cross-functional teams, led by a C-suite officer, to get the job done!

Within days of the Japan earthquake, the CEO of Nissan and a risk management team visited the plant, surveyed the damage, and determined what needed to be done to regain normal operations. The CEO. Take note of that.