Category Archives: Best Practices

The Category Sourcing Scorecard – An Essential Tool for Collaborative Category Sourcing

Collaborative Category Sourcing is the foundation for eSourcing 3.0, whatever that happens to be. Why? As pointed out on SI, it is the only way to achieve savings above and beyond the limits of spend analysis and/or decision optimization, which max out at an average of 11% and 12% respectively, and this is especially true when the category has been strategically sourced (repeatedly). And the savings can be substantial. As pointed out in SI’s recent white-paper (sponsored by BravoSolution) on the “Top 10 Technologies for Supply Management Savings Today” (registration required), if the right combination of technologies are applied in the right way, they can often deliver 15%, 20%, 30%, and even 40% savings on hundred-million plus categories which were heavily scrutinized in the past and where little or no savings are expected. That’s why collaborative sourcing — which works best when it’s category focussed — is needed.

But how do you select the right category to start with? It’s certainly not as simple as selecting the category with the largest spend, the category with the least recent sourcing exercise, or the category coming up for renewal in six months. There are a number of internal, market, supplier, buyer, and category-specific factors that need to be taken into account — and this recent post on The Category Sourcing Scorecard over on CPO Rising did a great job of summarizing the vast majority of them.

Internally, the right category is the one with a contract maturing at the right time (which is typically three to nine months in the future, depending on the time it will take to do the sourcing project right), a documented sourcing history, a number of concerned stakeholders — who are willing to be engaged, and an accessible spend history (which, although not clear from the summary, should also contain usage, return, and inventory history).

From a market perspective, there should be enough competition to make an event worthwhile, the availability of one or more substitutes (if the current product has one or more patented, single-source, components), some bargaining power for the buyer, and barriers to market entry for both the product the buyer is producing and the capabilities offered by the suppliers (as, otherwise, new suppliers could set up shop overnight, sell to new buyers at cut-rates to establish business, and hurt your entire supply chain). In addition, the supply/demand (im)balance, which factors into the buyer’s bargaining power, should be known and relatively predictable.

From a supplier perspective, it should require some specialization (that the supplier can use to set itself apart), provide for profit margins, contain value-add components (valuable to the supplier and your customers), and a level of technical excellence. In addition, there should be suppliers who are financially stable, innovative, and willing to work with you to find substitute raw materials, components, designs, or production processes that will take costs down and push quality up.

From a buying perspective, there should be the potential to achieve some supply assurance, minimize production impact, save money, and require a production volume that will be attractive to the suppliers. In addition, there should be some signs that costs and risks can be reduced significantly enough to make the project worthwhile. This could take the form of falling raw material prices, the recent introduction of innovative new manufacturing technologies, or increased market competition.

From a category perspective, impact, complexity, and lead time will definitely be key factors, as noted by the post, but so could organizational importance, sustainability, and C-suite support. This will often be the hardest category to judge and score.

Which brings us to the following question – how do you score the scorecard? Do all the categories have equal weight, or are some more important than others? Making them all equal is certainly a valid starting point, as it will let you quickly eliminate categories that are really bad (with low scores in multiple categories), but may not be enough to let you choose between a category which scores great except for market factors, another which scores great except for supplier factors, and a third which scores great except for category factors.

In reality, the right scoring framework will be dependent upon the ultimate goal. If the ultimate goal is (still) to reduce cost, then the market factors should get the most weight. If supply assurance is the most important goal, then the buying factors should get the most weight. And if innovation is the desired outcome, the supplier factors should likely get the most weight. While it’s hard to make a hard and fast rul, here’s a good starting point for weighting.

 

To Focus On: Put a Higher Weight On:
Cost Market Factors
Supply Assurance / Risk Mitigation Buying Factors
Innovation / Value-Add Supplier Factors
Stakeholder Inclusion Internal Factors
Organizational Strategy Category-Specific Factors

 

Where’s the Supply Management Technology Usability Guide?

There are a lot of guides out there as to what a good Supply Management Tool for Sourcing, Procurement, or Logistics is supposed to do, including a number of very detailed posts on SI (and wiki articles on the e-Sourcing Wiki that the doctor wrote, or co-wrote), but are there any guides for usability? (A google search for ‘supply management software usability guide’ comes up empty in the doctor‘s view.)

I couldn’t help but wonder this after reading an article by John A. Gentle that gave the sage advice: provide better instructional tools that offer real value. It clearly pointed out the challenge of “ineffective instructions” that logistics teams create for their suppliers, especially for how vendors are expected to complete forms, input data, and operate software that was provided by your company for warehouse and trucking operations, billing, and reporting. Now, if the provided software was so obvious and easy to use that even a fifth-grader could figure it out, then the issue of “ineffective instructions” is a small one. But the reality is that, even with most platforms that are attempting to adopt consumer-style interfaces, most procurement and logistics software is still reasonably complicated due to the complex nature of what a Procurement or Logistics package capable of supporting global trade needs to do.

Even though the functionality is well understood, the best way to lay out the functionality, and underlying workflow, is not well understood in comparison and, unfortunately, if one company builds an interface that is too close to a competitor’s for some standard functionality, instead of the formation of a standard, in America, we get a frivolous lawsuit (courtesy of the patent pirates). So even though there should be design standards, there usually aren’t.

And the poor supplier, who probably has to manage five such systems which all have completely different workflows and user interfaces, experiences more frustration than John and his Ph.D. wife who had to experience two weeks of trial and error just to reset the time on a poorly designed watch (with even poorer instructions).

I know that the very nature of software, which is always evolving, makes such a guide difficult (and that this particular challenge is compounded by the fact that America still allows software to be patented), but there should be at least some standard workflows and processes that all sourcing, procurement, and logistics software should attempt to follow in a reasonably standard way. It will make things easier for all supply chain partners, minimize unnecessary stresses and bumps, and help us evolve the profession as a whole.

What’s Worse Than a Walmart Consultant? A Sleazy Consultant!

After my recent post on how Walmart Changed the World … But Not Necessarily for the Better, I reminded my Twitterers* about what happens when you use Walmart Consultants. In a nutshell, when you pay a cut rate, you get a cut job … and the pleasure of the consultant blaming you for his or her incompetence.

However, this is still better than what you get when you use a sleazy consultant (who, in another life, was probably a lemon, err, used car salesperson). As per this great post over on the Enterprise Irregulars on “Screwing the Customer” (Tales from the Crazy Consultant File), we can still be surprised by the antics of some consultants. The post chronicled two stories.

In the first story, a small, profitable business that was a multi-million dollar money machine, bought on-premise ERP software from a reseller that poorly fit their needs. Since the reseller did not specialize in implementation, the firm wanted the vendor to find them another implementation services company. But since the vendor had no relationship with the buyer, the buyer was dependent on the reseller to find, and manage, the implementation of software that poorly fit their needs. The buyer has outsourced control, leverage, and judgment to an unworthy consulting firm. Translation — the customer is screwed.

In the second story, a small consulting organization has a multi-million dollar change management contract with a large state agency. Part-way through the project, the consulting company unilaterally shifted its focus to advising on tools and methodologies. The state agency threatened termination, and the consultancy responded with a large invoice and threats of legal action. Meanwhile, the agency hiring manager has limited options since any change would involve delays and additional expense. Translation — this customer is also screwed.

Unfortunately, the sleaze is not limited to these two examples. The Supply Management space also has its share of sleazy consultants, which are our equivalent of the the used car (lemon) salespersons, and many of them fall into the following two categories:

Slippery Spend Analyst

Yes, it’s true, that the doctor promotes a good spend analysis almost as often as he promotes a good optimization-based sourcing project, but there are two types of spend analysts in the world. Those that educate you, and those that just tell you where your spend is too high and offer to negotiate it down for you. In the short term, this works great — the consultant identifies a category, like telecom, where you are 15% over market average and the consultant negotiates your rates down to 5% below market average and you save 20%. But in the long term, as users are added to and removed from the plans, and usage changes, rates creep back up and in three years your organization is again paying 15%-plus over market average. And, again, you have to pay the consultancy to do the spend analysis to reduce your rates. Now, if they had trained you on their process and one or more tools, you’d have the option to do it yourself, or to just use them for the negotiation. But since they didn’t, you’re left in the dark.

Recovery Specialist

This is a wonderful racket. Almost every big organization overpays its suppliers due to duplicate payments on the same invoice (by accident, when it is resubmitted due to a late payment), duplicate payments against the same products (as the organization will resend the invoice with each shipment corresponding to the same PO), overpayments (because negotiated payments were misapplied), and failed deductions (because parts were bad and payment was not refunded). But not every organization catches all of these overpayments, which can add up to Millions for Global 3000s. There are consultancies out there that specialize in this recovery, and this is a good thing as long as they don’t take advantage of you.

The problem is that most of the consultancies that specialize in recovery use “black-box” methods to identify these overpayments, which are guarded more securely than Fort Knox. So even though they might find an organization a Million in savings, and take Two Hundred Thousand as a Fee, the organization isn’t that much better off than if it hadn’t hired the consultancy because. In as little as eighteen months, there will be another Million in overpayments hidden in the books because the consultancy didn’t tell the organization how the majority of overpayments originated or what best practices the organization could adopt to minimize the amount of overpayments it made. This could allow the organization to go longer between significant recovery audits, and the organization would likely pay less, and lose less, over time. A good recovery firm will do this, and a really good recovery firm will even advise you on the software options that exist to plug some of the holes in your payment processes and/or tolls that will automate part of the recovery process.

* Yes, the doctor is on Twitter, riding the Fail Whale as he chases the Twitter Bird (because the doctor wants his marbles back)!

How to Ignore Bad Advice

Last month, Forbes ran an article that needs to be in every Supply Manager’s toolkit. Given that the number one priority of most Supply Management organizations is to gain trust across the organization and get more spend under management (SUM), an average Supply Manager, as she gains trust, is going to get a lot of advice from the individuals on the cross-functional teams she is going to build. Some will be good, but some will be bad (and downright ugly). A good Supply Manager knows how to latch onto, implement, and encourage the good advice while carefully avoiding the bad advice.

Ignoring bad advice, especially if is from an individual who’s buy-in you need and who thinks it’s really, really good, can be tough, so I’m glad Forbes ran this article. Even though the article was written more for entrepreneurs about to embark on a startup, it is just as applicable to Supply Managers about to take on a new category. So what was the advice?

  1. Look Forward – not back.
    Study trend lines that correspond to what you need to buy, not historical demand levels. Demand could be falling. The last thing you want to do is be stuck with a warehouse of obsolete inventory. So make sure you don’t just get last quarter’s numbers, ask for the last three years.
  2. Ignore Your Friends – talk to customers.
    It’s not what engineering or marketing wants — it’s what the end consumer wants. If you don’t procure the products and services that the end consumer will buy, it doesn’t matter how good you do your job as the organization won’t last long without sales. So no matter how good they claim the advice is, be sure to say that sounds like an awesome idea, let’s run it by our customers to see if they are ready for it.
  3. Consider the source.
    Everyone has their own bias and point of view. It’s important that you balance all the views in your sourcing decision to arrive at what’s best for the organization as a whole, not just what’s best for engineering, marketing, or even your own Supply Management organization. The best Supply Management organizations increase overall value. So when engineering gives you a great idea, be sure to say that’s great, now how do we sell it to marketing and vice versa. When everyone gets on the same page, the advice is likely to be better, or at least consistent.
  4. Learn to Love the Word No.
    Some requests will be so bad that there will be no way to address them besides just saying no. For example, marketing will insist on a certain print shop which costs 50% more than the next highest bidder because of a great relationship. There’s just no way to deal with this situation delicately. Print is print. It’s not creative, and there is absolutely no rationale argument for such a premium. In this situation, you will just have to say no and move on.
  5. Bet on yourself – always.
    At the end of the day, you have to make the decision, and, most importantly, as you are being held accountable, you have to make the right one. If you’ve done your homework, that’s something you will be able to do. You just have to have the confidence that you can do it, even if everyone else is pulling you in a different direction. Don’t expect other organizations to echo your views, they won’t. They have their own goals. Your job is to get everyone on the same page when you can, and make the tough call that is best for the organization when you can’t. C’est la vie de gestion des approvisionnements.

As the article says, simply put – advice is an input. Treat it as one of many.

Informationalization Is Important

Simply put, the more informed you are, the better you are going to be able to source and procure. And this recent article over on the HBR blogs on why you need to integrate data into products, or get left behind just scratches the surface.

As the post notes, virtually every product and service can be made more valuable through informationalization. The GPS example provided is classic. Turn-by-turn directions make the car more valuable as the driver can keep his eyes on the road, get to his destination faster, and, during delivery, avoid left turns that just lead to extended idling at busy intersections. And, as predicted by Stewart Taggert, half of the value in the delivery of a shipping container from halfway around the world would be in the data associated with the container. Good information allows you to calculate in-transit time, and associated costs, loading and unloading costs, storage costs, insurance costs (as you can appropriately determine the chance of accidental loss or theft), etc.

But the best example of the value of informationalization is how it allows you to optimize your sourcing decisions. The more you know about your product options, shipping options, associated costs, and the inherent value of each product versus your other options, the more accurately you can model your options. The more accurately you can model your options, the better chance you have of determining the solution with the lowest cost, the lowest risk, the highest value, and the best value (defined as risk reduction, profit generation capability, etc — whatever makes sense) to cost ratio. And this is how leading Supply Management organizations can save 12%, on average, off-the-top in an optimization-enabled sourcing event — and even more if they collaboratively work with their peers to identify all of the options that may be available and all of the associated tradeoffs. As pointed out in SI’s recent paper on “Top Ten Technologies for Supply Management Savings Today”, integrated, collaborative sourcing can often identify savings opportunities of up to 30% or 40% on categories that were exhaustively combed for savings in the past.

Plus, good information allows your organization to:

  1. constantly improve products and services by way of the fact that you are able to
  2. collect more relevant, timely, accurate, detailed, and integrated data.

And when you have relevant, timely, accurate, detailed, and integrated data, you can take out your best-of-breed data analysis tool, use the tips and tricks SI outlined in it’s free e-book (co-authored by Bernard Gunther of Lexington Analytics, now a division of Opera Solutions) on Spend Visibility: An Implementation Guide, and extract even more value for the organization by optimizing not just Supply Management spend, but utilization, service, warranties, Marketing & Legal spend, and every other product and service activity that burns capital and/or creates organizational value.