Category Archives: Best Practices

Managing Indirect Spend: An In-Depth Review, Part II.1

In Part I we began our review of Managing Indirect Spend, a new book by Joe Payne and William (Bill) Dorn of Source One that is the culmination of everything they have learned while doing nothing but Strategic Sourcing, primarily on Indirect Spend, since 1992 — before it was cool. And as SI noted in its last two posts, clocking in at 422 pages, this book is an incredible handbook for anyone who wants to get a handle on indirect spend, which has increased in organizations across the board since outsourcing and right-sizing rose to fame in the 1990s. Part I reviewed the process. Here, in Part II, we will review the tools.

The first “tool” that we are going to review is Market Intelligence. Market Intelligence can be defined as a branch of market research, involving collation and analysis of available and relevant information and data on specific market. The information that is gathered varies based on the type of product or service that your organization is purchasing and how critical that product or service is to your overall supply chain and sales of your end product. However, regardless of the product or service being researched, there are critical types of market intelligence that will always need to be collected, including intelligence on global market conditions, benchmarking data, and market pressures. For starters, a buyer needs to understand the forecasting that suppliers use to prepare for competing in a global market. For example, even though a product might be purchased for domestic usage from a domestic supplier, that supplier may be making plans based on forecasting for markets outside of your home country, because if demand for the products grows significantly in foreign markets, or if currency exchange rates shift so that it is more favourable for that supplier to sell internationally rather than domestically, it may cause a shortage off domestic supply, or higher prices.

Bill and Joe are right when they state that world class organizations spend a lot of time constantly (re)evaluating their supplier chains to identify risks and non-competitive pricing. This is how they get ahead. However, it takes a lot of time to collect intelligence, and even more time to separate bad intelligence from good. Once the global market conditions are understood, the next thing the buyers will have to sift through is benchmarking data. This can be difficult in a new, or closed, marketplace if suppliers are overprotective of their data. The best way to get this data is often by working with sales and marketing. It may sound crazy that sales and marketing should be the first stop, but when one considers that all they do is benchmark their competition every day to help with daily sales efforts, they are the perfect guides to get the market intelligence team on their way.

Market pressures are also important. Not only do they impact your organization, but they impact your suppliers’ organizations as well — and these market pressures are critical. If the supplier is cash strapped, in danger of a labor shortage, or located smack-dab in the middle of an uprising-in-the-making, that supplier could be a high risk. And since suppliers are typically an organization’s biggest supply management risk, this is important intel. (Other big risks are impending government regulations, cultural shifts, and natural disasters.)

Of course, the big question on everyone’s mind is how do you succeed with such a hard task? Dedication is key, but so is insuring that each of the components of success are there, including:

  • Right Team
    You need a technical, analytical, and communicative cross-functional team working collaboratively.
  • Sufficient Time
    Make sure everyone on the team has enough time dedicated to market research. It can’t be just another task on an already full plate.
  • Right Metrics
    The right hard metrics, that measure tangible things, and the right soft metrics, that analyze intangibles that can effect the end product or service, need to be defined. Hard metrics may include hard-dollar savings projections, payment term improvements, lead-time improvements, and measurable quality improvements. Soft metrics may include exclusive distribution rights, material changes that will change customer perceptions, better relationships, or process improvements.
  • Right Suppliers
    Researching suppliers that cannot meet organizational needs is a waste of time.
  • Component Costs
    What is driving the costs? Raw materials? Labor? Currency fluctuations? Look for, and track, appropriate indices.
  • Adjacent Technologies
    If a product is too new or there is a relative lack of data, identify adjacent technologies that can provide insights into costs and supplier performance. For example, instead of trying to find iPad component pricing, you might try to find generic tablet component pricing.
  • Right Questions
    Don’t look for a specific part or product, look for all parts or products that could potentially meet organizational needs by describing what it should do instead of naming it.
  • Know When To Stop!
    As with any investment of time, you eventually reach a point of diminishing returns. While you should have enough data to intelligently raise counterarguments with the supplier about price increases and, at a minimum, have a firm understanding of the supplier’s cost models, knowing what drives the costs of a sub-component that is only 5% of the cost might be going to far. Saving 3% on 5% only saves the organization 0.15% in the long run, and will generally not be worth the investment of time to realize that savings.

It’s great advice. Stick around for Part II.2 where we will dive into tools for gathering data and expediting the sourcing process and complete our review of Part II of Managing Indirect Spend.

Reinventing Supply Management as the “Go-To” Organization

Will Supply Management ever be the “Go-To” organization? It should be, but it many organizations it still doesn’t have C-Suite visibility. That’s why I found the fact that SIG recently published an article on “Reinventing Procurement as the “Go-To” Organization” to be quite interesting because the average organization is not yet ready for Supply Management to have the role it deserves.

SI agrees with the author who states that procurement is a vital component of any large company. It supports every department and employee in the company; it engages with every service provider the company does business with; it executes contracts that help manage the risk to the company; it commits sometimes significant financial obligations on behalf of the company; it leads supplier diversity programs; it has a holistic view of the spend of the company; and it has the ability to manage consumption. No other department has as much reach both internally and externally. But yet, it is still not seen as the “go-to” department.

Why not? The author makes some good points. Challenges include:

  • transactional nature or history of the group
  • perception that the group is a bottleneck
  • lack of leadership or mission
  • lack of technology and process investment
  • perception that the group is a necessary evil

But these challenges can be overcome. The author recommends that an organization starts:

1. At the Top.
First, the organization must obtain a strong leader (if it doesn’t already have one) with strong relationship, communication, and business skills to forge relationships between business units.

2. With a Mission.
A vibrant procurement organization needs a clear set of meaningful (and measurable) goals. Specifically, the procurement team needs to know what it stands for, what it is trying to accomplish, and what to communicate to the business units and service providers.

3. That Gets C-Suite Attention.
After all, a consistent executive message that declares procurement as a core resource for achieving the business imperatives will go a long way to build confidence from all realms of the enterprise.

4. That Empowers People.
Motivated individuals want to own their outcomes and be recognized for their contributions. The same motivated individuals that will achieve Supply Management success for your organization.

Collectively this transformation will help to create a new corporate reputation for Supply Management – which will start to spread when the organization become[s] known as the group to call when someone needs to get something done. And if this happens,

  • the transactional nature or history of the group will be forgotten
  • the perception that the group is a bottleneck will be replaced with a perception that the group is the way to clear bottlenecks
  • there will be no lack of leadership or mission to hold Supply Management back
  • technology and process investment will be made when it benefits Supply Management and the organization as a whole
  • the perception that the group is a necessary evil will be replaced with the perception that the group is a force for good in the organization

And Supply Management will have taken the first step.

Managing Indirect Spend: An In-Depth Review, Part I.3

In Parts I.1 and I.2 we began our review of Managing Indirect Spend, a new book by Joe Payne and William (Bill) Dorn of Source One that is the culmination of everything they have learned while doing nothing but Strategic Sourcing, primarily on Indirect Spend, since 1992 — before it was cool. And as SI noted in its last two posts, clocking in at 422 pages, this book is an incredible handbook for anyone who wants to get a handle on indirect spend, which has increased in organizations across the board since outsourcing and right-sizing rose to fame in the 1990s. (And if you think otherwise, download SI’s free eBook white-paper on Spend Visibility: An Implementation Guide, dive into your spend, and see just how much of it is indirect.)

Today we’re going to conclude our review of Part One — The Process, as well as review the last chapter in Part Two, on building stakeholder engagement (which, in the doctor‘s view, is as much process as tool), and discuss implementation, stakeholder engagement, continuous improvement, and, finally, what not to do if the organization wishes to conduct a successful sourcing event.

As Bill and Joe correctly point out, the vast majority of savings opportunities are squandered because there is

  • no implementation plan and
  • no supplier management strategy.

And the implementation is often the biggest challenge. It must be monitored continuously because the historical volumes that analysis and award are often based on do not predict future purchases. Users may start buying new items, more items, or a combination of items that provide new savings opportunities and, more importantly, especially in categories like office supplies or electronics, vendors may substitute other items when the items that were contracted are unavailable (or discontinued) and not give the organization the agreed upon, or even market, rates. So, not only can maverick buyers endanger organizational savings opportunities (when they buy off contract), so can suppliers.

However, monitoring is a challenge because it will require the end users that are the ones using the category to do most of the monitoring — and any appeals about organizational benefits may fall on deaf ears unless a message that resonates with the end users is given. For example, instead of talking savings numbers, which no one believes (because they were never historically achieved), talk jobs. How many jobs might the initiative save? Could it save their job(s)?

And, the organization will have to break down the traditional customer / supplier relationship view that still pervades the organization. Since most innovation will often come from outside the organization, the supplier must be viewed as a collaborator, and not an antagonist only out to get the most money from the organization for the least service possible. Treated with respect, most suppliers will rise to the challenge. Suppliers often have great ideas to reduce energy consumption, downtime, freight costs, and process slowdowns if asked. Plus, they are constantly monitoring the market to identify ways to outperform their competition. Tap into that. It’s a great way to start a continuous improvement initiative.

Of course, all of this will require stakeholder engagement. A stakeholder can be defined as any person, group or department that has influence in a spend category or is influenced directly or indirectly by that spend category. Stakeholders aren’t just end users or category owners. Depending on the project, they are also finance departments, management, shareholders, customers, and even marketing teams. Not only do stakeholders have to buy in for implementation success, but they are a key source of information. They are the often the best source of information on the current supplier, alternate suppliers on the market, the range of spend in the category, similar categories that may be leveraged with the supplier(s), and future requirements. Plus, stakeholders can provide the following value:

  • raw data
  • identification of organizational pain points and a project focus
  • research support and research enhancement
  • detailed business requirements
  • go-to-market support in negotiation and implementation management

Finally, once there is supplier and stakeholder engagement, make sure the organization doesn’t screw up and do any of the following:

  • allow misinformation to spread unchecked
    misinformation can spread like wildfire through an organization and kill a project before it starts (if a rumour that only one supplier can serve organizational needs ot that the goal is to improve efficiency so jobs can be eliminated takes hold, for example, it’s game over)
  • create overly complex or long RFxs
    this will eliminate small suppliers without the resources to complete them or the best suppliers who won’t find the business opportunity worth it when other (potential) customers are more reasonable
  • target the wrong audience / spam suppliers
    make sure the suppliers are pre-qualified as capable of likely meeting organizational needs, otherwise, needs won’t be met and suppliers will be alienated
  • ignore suppliers during the RFx process
    make sure reach-outs are performed before and after the first RFx is sent out to ensure a response
  • let the supplier write the RFx
    this is a great way to ensure no other supplier comes across as capable of meeting organizational needs as the supplier will fill the spec with useless features and functions that only they have
  • over-rely on technology
    nothing can replace the competent, creative guidance of humans
  • take an entitled attitude
    the organization is not entitled to the supplier’s offerings
  • expect a blind bid
    suppliers know that “blind bids are for suckers”; if there is no relationship before the bid, there will be no relationship after
  • forget to train
    if the suppliers can’t use the platform, they won’t bid; if the buyers don’t understand the process, they won’t follow it
  • ask the supplier to put skin in the game
    only desperate suppliers will pay to participate in an RFx, and all the organization will get are higher prices as a result. It’s the one of the stupidest things the doctor ever heard and whoever the moron is who came up with the idea should be ashamed of himself.
  • do everything on your own
    recognize when you need help — and get it!

All in all, Part One of Managing Indirect Spend contains some great advice that every indirect category manager should heed. Our next post will tackle Part II – The Tools. Continue to stay tuned.

Managing Indirect Spend: An In-Depth Review, Part I.2

In Part I.1 we began our review of Managing Indirect Spend, a new book by Joe Payne and William (Bill) Dorn of Source One that is the culmination of everything they have learned while doing nothing but Strategic Sourcing, primarily on Indirect Spend, since 1992 — before it was cool. And as SI noted in its last post, clocking in at 422 pages, this book is an incredible handbook for anyone who wants to get a handle on indirect spend, which has increased in organizations across the board since outsourcing and right-sizing rose to fame in the 1990s. (And if you think otherwise, download SI’s free eBook white-paper on Spend Visibility: An Implementation Guide, dive into your spend, and see just how much of it is indirect.)

Today we’re going to continue our review of Part One — The Process, and dive into the last three parts of Bill and Joe’s excellent adventure into the strategic sourcing process and discuss:

  • Scorecarding
  • Negotiations
  • Contracting

A Balanced Scorecard is a strategic performance management tool that tracks supplier performance against a set of metrics in order to provide a well-rounded picture of the supplier that can be used to monitor and control performance. While most organizations introduce balanced scorecards after a supplier has been selected, scorecards should also be used when determining which suppliers to invite to the table, and everything — pricing, capabilities, past performance, market intelligence, supplier responsiveness, and employee perception — should be built into the scorecard to help insure the most appropriate supplier is selected.

The chapter also makes some great points that are often overlooked:

  • Scorecarding can be a teambuilding activity
    The entire cross-functional team can contribute to the process.
  • Scorecarding fosters buy-in to the awarded supplier.
    As everyone knows that the supplier was selected only after all data and all viewpoints were carefully considered and organizational needs fully balanced.
  • Scorecarding can deliver market insights not otherwise obtainable.
    Especially when supplier references are checked as part of the process.
  • Insights only come when a full history of the relationship is obtained
    Suppliers only give you references they believe will be glowing and cast them in the best light. Thus, it is vital to ask the references what supplier interactions were like from day one, what issues were encountered, and how (effectively) they were resolved. How long before the customer reached its current level of satisfaction?
  • A lot of questions will need to be asked!
    The authors provide a starting list of sixteen on page ninety-seven, and depending on the category and its nature, this might just be the ice-breakers.

Eventually, every process results in negotiations, which are covered extensively in Chapter 6. The authors also make some great points in this chapter that cannot be forgotten:

  • Suppliers have the advantage — ALWAYS!
    Whereas a sourcing team spends 5% of its time, or less, sourcing a specific product or service, especially in an indirect spend category, the [lead] supplier negotiator is 100% focussed on selling that category of products or services every single day. They know everything about it, and the market waters around it, while the sourcing team is struggling just to tread water in the unfamiliar territory.
  • A proper negotiation strategy minimizes the chance a supplier will add extra margin in a first round bid.
    If the negotiation strategy pervades the entire process, and presents a business case to the supplier that your business is something they can’t afford to lose because they will profit immensely by gaining it, the supplier will be much more aggressive with its bidding up-front.
  • It’s Not Getting to Yes, It’s Getting to No!
    If the supplier never says no, then the sourcing team never came close to getting the supplier’s best offer.

The chapter also had some great techniques a buying team can use to improve pricing, as well as some very important things that a sourcing team should never do, which include:

  • no negotiating after a reverse auction
  • no negotiating in contracting
  • no setting artificial targets

and if it’s not clear why, then you should definitely read this chapter.

The last, and final part, of the basic process is contracting — getting it in writing. A contract should balance the need for legal protection with common sense. It should be concise and only address the relevant risks and identified resolutions. It should not be a generic — one size fits all — boilerplate MSA that is 100 pages in length where only 10 pages are really relevant. All that does is add time (for unnecessary review), cost (of the overpriced lawyers), and loss (while savings opportunities go unclaimed) to the process. With the exception of a few basic definitions, the only clauses that should be there besides negotiated terms and resolutions are a balanced force majeure clause, a right to audit clause, and, possibly, a right to first refusal clause. While the supplier should have the right to be late without penalty if an act of nature prevents it from business as usual, the buyer should have the right to seek alternate sources of supplier or terminate the contract if the supplier cannot recover in a certain amount of time and, especially in the case of software (maintenance) contracts, should NOT be required to make payments when the supplier is unable to perform. The right to audit should be for the life of the contract, the audit should be allowed to go all the way back to the start of the contract (even if four and a half years into a five year contract), and the buyer should have the right to recover all monies owed from overcharges, even if they were made four years ago.

The chapter also did a great job of explaining why:

  • legal should be brought in even before the RFP/Q to prevent issues from arising later on,
  • most favoured nations clauses, which symbolize much of what is wrong with government agencies, do nothing but bite you, and everyone else, in the @ss, and
  • continuous innovation clauses all but guarantee that there will be no innovation for the lifetime of the contract.

There’s some great advice in these pages — and more to come in Part I.3 which will discuss how to truly achieve continuous innovation, how to get stakeholder buy-in, and what not to do if the goal is success. Continue to stay tuned!

SAMBC? WTH? Can’t They Just Say Only Customer Service Matters?

Or at least a better acronym? This one is a Seriously Impractical Customer Orientation. In fact, SICO is a better acronym — Success Is Customer Oriented! Anyway, we are referring to Service As Measured By the Customer (SAMBC), the metric that is replacing “perfect order” at P&G, as described in this recent SCB article on how The Perfect Order Isn’t So Perfect.

According to P&G, the perfect order metric doesn’t get the job done because it causes your service to become very internally focussed. And as we indicated in yesterday’s post, you can’t just focus inward. First of all, as we indicated yesterday, you will fail your customer if your supplier fails you. Secondly, you will fail your customer if you don’t insure that they get what they need, when they need it — and this is often more than just delivering a product on a specified date. As noted by Deidre White, Associate Director of Customer Service, an undue focus on the perfect order results in the loss of opportunity to create value for our customers and ourselves.

As Dale S. Rogers, Professor of Logistics and Supply Chain Management at Rutgers notes, while the perfect order might offer the advantage of simplicity, it’s ill-equipped to deal with the complexities of most global supply chains today. Furthermore, the trend toward outsourcing has created a network of independent partners, each of whom plays a critical role in getting a shipment to its destination. By limiting its performance assessment to what goes on within its own plant or distribution center, a company like P&G fails to get the big picture. What looks like a smooth-running operation could easily be considered a failure by the end customer.

The lack of joint scoring on the traditional perfect order metric is what causes it to fail. For example, consider the example of a 100-case shipment that is five cases short because of space constraints. A supplier who puts the missing cases on the next shipment considers the order filled. The customer thinks otherwise. And it’s the customer’s opinion that counts. An unhappy customer can result in lost sales down the road.

So how do you implement SAMBC? That’s a good question. According to the article, there’s no one-size-fits-all solution in a SAMBC process as each customer has its unique set of metrics and priorities. The article notes that the suplier must adjust its own to meet them. And that the SAMBC metric is the percentage of measured customers at which we are at or better than expected service targets, where the targets are established by and with each customer. That’s a scorecard. And SAMBC can be implemented the same way — with a “balanced” scorecard that measures the customer goals. Specifically, a scorecard that takes into account the customer measures of success and weights each measure according to the priority placed on it by the customer. It will have many of the same metrics — on time delivery, quality, etc. — as a “perfect order” scorecard, but it will be completed by the customer and each measure will be weighted differently by each customer. That’s likely all there is too it.