Category Archives: Best Practices

Is Your Supply Management Organization Being Held Back?

A recent article over on the CPO Agenda on “Fresh Thinking”, which noted that Procurement must be bolder in bringing about wholesale change that delivers effective results for the business, highlighted a number of areas that could be ripe for change. These areas need to be looked at carefully because their current state could actually be holding the Supply Management organization back. In order to advance, Supply Management cannot accept the status quo when the status quo is an outdated, ineffective, and or costly way of running the business.

The following five areas are ripe starting grounds for a Supply Management organization that wants to take its operations to the next level.

  • Organizational Rules
    Are organizational rules limiting opportunities for efficiency and effectiveness? There are a number of ways organizational rules could be impacting the Supply Management organization, including, but not limited to:

    • Diversity/Buy American Mandates
      While it’s often a good idea to diversify spend and buy at least some products or services at home (to address offshoring risks), excessive diversity or buy american mandates can severely limit options and have a dramatic impact on efficiency and effectiveness.
    • Payment Terms
      If finance is imposing egregious payment times on suppliers (of 90 days or more), this will limit the supply base that is available to the organization as some suppliers won’t stand for such BS.
    • Approval Chains
      If Procurement has to get a sign-off from each affected organization before every buy, and executives for buys over a certain dollar limit, they will be spending more time trying to get signatures than doing their job. Sign-offs should only be required for critical buys or very high dollar buys, not for office supplies or temp services.
  • Specifications
    The specifications could be outdated, non-standardized, or overly specific and all of these can add cost and drain efficiency.

    • Overly Specific
      If the specifications call for specific components from specific suppliers that are essentially commodities, they are overly specific and limiting competitiveness.
    • Non-Standardized
      If each department has their own specification for a workstation with a different configuration, this can limit leverage — especially since it’s very easy to standardize on an office workstation configuration for business people and one for technical people.
    • Outdated
      If the specs are calling for components that are now only being manufactured by a 10th of the total supply base or using materials that are no longer in common use, then the specs are outdated and should be refreshed.
  • Marketplace
    The marketplace could be holding Procurement back by holding on to outdated products or insisting on a wide-diversity of products when only a few should be required. For example, customers may love the old, regular un-concentrated laundry detergent which costs more to package and transport and is less environmentally friendly than the new concentrated formula or may be split between six scented varieties of your dish detergent. In the first scenario, Procurement will need to work with Marketing to push the new, environmentally-friendly, product while phasing out the old product and in the second, Procurement may have to work with engineering to find a way to mass produce the base detergent and mix the scent in later to avoid six low-volume, high-cost production runs.
  • Perception
    If the rest of the organization thinks of Procurement as the back-room, paper-pushing organization where careers go just before they are put out to pasture, it is going to be challenging for Procurement to gain respect, exert influence, and get a majority of spend under management. Procurement will have to work on its image first, get some quick successes, and leave major organizational change to later.
  • The Ideal Solution
    If the concept for the “ideal solution” is outdated, then Procurement’s efforts will be outdated. Before effecting significant change, Procurement has to know what the optimal state is and why.

Are Your Employees Disengaged or Frazzled?

A recent article in Industry Week on “putting brain science to work in your company” that reviews Daniel Goleman’s The Brain and Emotional Intelligence: New Insights, which addresses the question of how you get the most from your people, is right when it notes that disengaged and frazzled employees aren’t really contributing to your organization.

Disengagement, where an employee is in a low-motivation state where they are distracted and inattentive to the task at hand, occurs when an employee is not inspired, motivated or engaged in the work they do. A disengaged employee performs well enough to keep his job, but no better.

Frazzled, where an employee is flooded with a cascade of stress hormones that causes the employee to focus on the problem bothering him rather than his job, occurs when the employee is upset with something. A frazzled employee can only address the problem, not the solution.

Only an employee in the flow, a state of neural harmony, where only what is relevant to the task at hand is what is activated, can be truly productive. The flow maximizes cognitive abilities and puts people are at their best. An employee in the “flow” isn’t the problem.

Moreover, not only will disengaged or frazzled employees not be productive, but their disengagement and frazzledness can spread to their coworkers. It’s hard to give a cr@p when no one around you does. And if everyone is stressed out, chances are you will get stressed out to.

Thus, if an organization wants to be productive, and take it to the next level, the first thing it should do is identify those employees who are disengaged or frazzled and figure out why. If an employee is disengaged because tasks, in an effort to become lean or efficient, have been broken up to the point where they are monotonous, then the organization should address its processes and procedures. Sometimes assembly-lining tasks is a good idea, sometimes it isn’t. If all a person does is check totals on reports, that’s not a good procedure. And if a group of employees who are always frazzled have the same boss, chances are that the boss is the problem. Shape him up (with training) or ship him out (with a pink slip). Next level requires productivity, productivity requires engagement, and engagement requires being in the flow. Make sure your employees are there before trying to knock it up a notch.

To Maximize Value, Don’t Overlook Tail Spend

A recent article in the Sourcing Interests Group Newsletter on “understanding tail-spend management” noted that while ROI for tail spend categories will generally be lower than for core categories, those companies that keep their eye on the efficiency/effectiveness equation and approach tail-spend intelligently can still find significant savings that make the effort worth while. So how does an organization properly approach tail spend, which:

  • rarely includes direct materials
  • contains a disproportionately high percentage of spend from the furthest-flung subsidiaries
  • contains suppliers that no one in procurement has heard of
  • contains large percentages of non-compliance and maverick spend

Intelligently. And iteratively. Data must constantly be reviewed in the light of changing business requirements to determine the best course of action using the following process:

  1. Spend Analysis
    Focus in on the tail-spend data and figure out what is being bought, from whom, where, and for how much compared to market value.
  2. Filtering
    Focus on commodities that can be reclassified into a category that will have enough spend to be worthwhile.
  3. Sourcing Strategy
    Once the category with the biggest opportunity has been identified, determine the right sourcing approach. If a sourcing project is the right approach, accelerate it with standardized templates, RFX, and/or auctions.
  4. Spot Buy
    If the right strategy is to spot-buy in a weak market, then aggregate demand across the organization and spot-buy through e-RFX or automated auctions.
  5. P2P
    And, regardless of the right sourcing strategy, drive as much spend onto technology platforms, like P-cards, so that it can be tracked and analyzed.

And, most importantly,

  • use procurement technology
  • simplify processes and increase controls
  • establish resources and manage performance

There’s More To Risk Than Natural Disasters

As per this recent article in Industry Week on how “manufacturers must brace for global uncertainty and risk”, the following, entirely predictable, events can be just as devastating to an organization’s supply chain if not planned for.

  • Rapid Growth
    What if sales double overnight? Can the supply chain keep up?
  • Facility Expansion / Opening
    Can the organization ramp up supply, staff, and logistics fast enough to maintain productivity levels?
  • Massive Churn in Product Offerings
    If the organization has to continually offer new versions of products, or rapidly expand its product offerings, can the supply chain adapt quickly enough?
  • New Customers that Account for Double-Digit Percentage Volume
    Can the supply chain keep up? Can it provide any new services that will be required at the agreed upon service levels?
  • Substantial Changes in the Supplier Base
    If current suppliers go out of business, can new suppliers be incorporated into the supply chain fast enough? Will new suppliers be able to meet demand? If new suppliers enter the space, will the organization be able to identify them and take advantage of new technologies they offer?
  • New IT Systems
    A failed IT implementation can bring down a multi-billion dollar company. A poor IT implementation can cost millions and stop production in its tracks. It’s rare occurence when an IT system upgrade doesn’t result in at least some downtime. IT system implementations and upgrades need to be planned for carefully.

So, if your Supply Management organization is not yet thinking about risk on a daily basis, maybe it should be.

Common Challenges of Indirect Procurement

A recent article on “How to Leverage Outsourcing” over on Efficient Purchasing did a good job of summarizing the common challenges of indirect procurement across sectors and industries. Regardless of what industry your organization is in, chances are it has many of the following challenges, as illustrated by a recent NelsonHall study:

    • Effective Interaction with the Business Units
      While many executives are satisfied with the caliber of the personnel in their indirect procurement function, many are not satisfied with their ability to manage indirect procurement across the organization and control spend levels. Working with business units requires “softer” skills and the ability to act as “sourcing consultants” to the business.
    • Achieving Broader Category Coverage
      Indirect procurement is constrained by resources and by the huge range of indirect purchases made by a large organization. As a result, it is virtually impossible for an organization to have category coverage and market knowledge across all areas of indirect spend.
    • Efficiency
      The amount of indirect spend that is e-Sourced and the amount spent on indirect procurement personnel as a proportion of indirect spend under management is low in many organizations.
    • Process Improvement and Standardization
      There are generally huge issues around inconsistency of sourcing across subisdiaries or georgraphies in an average organization.
    • Lack of Time and Resources
      As a result, supplier databases and catalogs / punch-outs / product portals are generally out of date.
    • Lack of Management Information
      Detailed spend analysis is often unavailable for indirect spend.

Out-dated IT
Many companies, which take their time updating IT for direct spend, take even longer to update systems for indirect spend.

Now, the authors would have you overcome these shortfalls by outsourcing, but the reality is that many are overcome by implementing better technology and better processes, starting with spend analysis. If an organization can quickly identify which categories will yield sufficient savings to make a sourcing project viable, then it can integrate high-opportunity projects into the strategic sourcing plan, put mid-opportunity projects out to auction, and simply ignore low-opportunity categories as the 20/80 rule generally applies to indirect Procurement as well. Of course, if the department can’t get better systems, better processes, and more / better personnel, then it may have to consider outsourcing for results.