Category Archives: Best Practices

Good Enough, Best, or Next — Which Do You Choose?

A recent article in the Harvard Business Review on how “best practices get you only so far” had some good points, as did the article on how “imitation is more valuable than innovation”, which illustrated how best practices can be used to get you further than your competitors (who you borrowed the ideas from), but neither of the articles address when you need to go “next”, when “best” is the right choice, and when there’s no reason to go beyond “good enough”. This is a critical question when formulating your supply chain strategy, just as it is when formulating your business strategy, because you only have so much time and so many resources at your disposal. And with so much to do, you have to be able to prioritize to get the most bang for your buck.

According to “best practices get you only so far”, the process of identifying best practices and implementing them may allow enterprises to catch up with competitors, but it won’t turn them into market leaders. Which is mostly true, because if you read “imitation is more valuable than innovation”, you’ll find out that copying alone isn’t enough to get you in first place, you have to improve on the practice during your implementation to make it better and cheaper.

But do you really need to be best at everything?

You need to be a market leader, and you need your supply chain to be at least as efficient and cost effective as your competition, and preferably slightly more efficient and cost effective, but does this mean every process, practice, and piece of technology employed has to be best? The reality is that best-of-breed is costly. It takes time, effort, and, more often than not, very costly technology. If there is an opportunity for a significant return, than it’s worth it. But if the return is not much more than the investment, it’s not.

To illustrate, let’s take a technology focus. Everyday you are bombarded with BoB e-Sourcing, e-Procurement, Trade Management, Logistics, and Inventory Management technology. The solutions range from stand alone “best-of-breed” modules to end-to-end suites to everything in between, and the price tags range from about 50K a year to 5M a year. What should you buy? And what should you pay?

It’s a hard question. The 50K you spend on a cheap contract management system might be a total waste of money (and cost you 500K a year to maintain), while the 500K you spend on spend analysis software and services might be the best investment the organization every made! The reality is that if the savings that results from moving from “good enough” to “best practice” or from “best practice” to “next practice” is not at least 3 times the total cost, it’s not worth it, especially when there are so many practices and technologies out there today that will generate a return of 3X, 5X, 10X, or more for the organization. (Decision Optimization on the right category can sometimes generate a return of 20X or more! A proper spend visibility and spend analysis initiative can easily generate a return of 10X year after year [and some organizations have seen returns as high as 100X in peak years]). Trade management can revolutionize the trade compliance effort and save millions for just a few pennies up front. And so on.

I’m not saying don’t go “next”, because sometimes it’s the right thing to do. I’m just saying, when you go “next”, make the right choice. Business is about returns, which is necessary for sustainability of the business. Just make sure the returns will be there waiting for you before you go all gung-ho on a risky initiative.

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Tips for Evading the Black Swan

The black swan has been on a rampage in recent times, taking down supply chains, companies, states, and even countries in his wrath, which seems to have no end. It’s foolish to assume that he’s not coming for you, because, even if you’re not on his list, it’s only a matter of time before you are. He’s as determined as robot santa claus, and just as indestructible. But if you’re ready for him, even if you can’t stop him, you can survive the encounter, and with the right blast shield, even minimize the damage. So how do yo do this?

Nassim Nicholas Taleb’s exceptional article on The Fourth Quadrant: A Map of the Limits of Statistics has some great advice for minimizing your chances of encountering the black swan, and even minimizing the damage if you can’t avoid him. And to make sure there’s no misunderstanding, I will use plain English, and not statistics (which most people, including the “experts”, don’t really understand), in my presentation of these tips.

  1. Redundancy

    You can over-optimize and over consolidate. You need multiple sources of supply, multiple products, and multiple channels.

  2. Avoid the Long Tail

    Yes you can make money in the long tail, if you’re lucky, but the further you are from the norm, the harder it is to predict what will work.

  3. Don’t try to Numerically Model Atypical Events

    You can’t predict future stock-outs based on past stock-outs or the degree of future demand surges based on historical demand surges. They could be the same, or be off by a factor of 10. That’s why they are atypical. Address them generally, and you’ll be better off.

  4. Take Your Time

    Only time can reveal the true nature of a cycle. Depending on what you’re trying to model, that could be months, years, or even decades. If you avoid drawing conclusions too early, you’ll be better off.

  5. Don’t Reward Luck

    Just because someone made a foolish bet and won doesn’t mean they should be rewarded. The more extreme the bet, the more likely you are to lose. Don’t encourage ridiculous behaviour.

  6. Don’t Measure What Can’t Be Managed

    For example, the “average time” between stock-outs or demand surges is meaningless, and it will just increase the desire for your team to “model” the situation, which will give you the illusion that you understand something you don’t, and that you don’t need to have contingency plans for “unexpected” stock-outs or demand surges because you modelled them.

  7. What’s the Nature and Magnitude of the Uncertainty?

    In NPI, the uncertainty is that the team might fail given the resources assigned to it. The nature of the uncertainty is positive (if they succeed, you win) and the magnitude is limited to the investment. But in chemical processing, the uncertainty is that a storage tank could rupture, contaminating the local environment. The nature of the uncertainty is negative (if it the tank ruptures, the environment gets damaged to some level) and the magnitude is large (if the chemicals reach a lake or the groundwater table, the local population is screwed). Put your efforts on creating emergency plans for large negative uncertainties first, as those are the events that can bankrupt the business.

  8. Do Not Confuse Absence of Volatility with Absence of Risks

    For example, if you look at the graph of daily variations in a derivatives portfolio exposed to U.K. interest rates between 1988 and 2008, almost 99% of the variation occurs on 1 single day — when the EMS (European Monetary System) collapsed. On almost every other day, variation was less than 1/100th of a percent. This is not dissimilar to the eruption pattern of Mount Vesuvius (which buried Pompei and Herculaneum in 79 AD). If you plot a daily graph, it’s typically flat for 30 to 50 years, until one day a massive eruption wipes out the local area. Remember, the black swan will show up where you least expect him.

  9. Most Risk Probabilities are Lies

    A rare event that happens once every 30 years does not have a 3% chance of occurring every year. The chance is typically dependent upon whether or not there is a confluence of initiating events and factors, and could be 0.03% or 99.3%, depending. Furthermore, the presentation of a risk statistic has a significant effect on it’s impact. People are unlikely to heed a warning for anything that only has a 3% chance of occurrence, but very likely to at least give serious thought to any event that will happen once every thirty years with 99% certainty.

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A Hitchhiker’s Guide to e-Procurement: Approvals, Part II

Mostly Harmless, Part V

Previous Post 

An introduction to approvals.

The last post addressed the approvals process and its link to the budget process and business workflows. This post will address the associated challenges of the approval process, some associated best practices, and the benefits that could be expected from an appropriate e-Procurement solution.

Common Challenges

  • Who Has to Sign Off?

    The supervisor, yes. But does it have to go to the department manager? The budget manager? The CPO? All good questions that lead to:

  • Long Approval Times

    While trying to figure out whether or not she can sign off and/or who else has to sign off, the requisition gets stuck in limbo on a supervisor’s desk(top).

  • Identification of Off-Contract Spending

    Chances are, to insure that the requisitioner can keep working, anything that looks reasonable will be approved, even though it might not be the contracted workstation or the preferred vendor. And even if the pricing looks good, this can lead to cost overruns since Procurement may have calculated TCO based upon end-of-year rebates for hitting volume targets.

Best Practices

  • Automated Approvals

    If the requisition is within the buyer’s spending limits, for approved products, from approved vendors, that are needed in the performance of day-to-day company operations, the requisition should be automatically approved. Manual approval should only be required if it exceeds an approval limit, budget limit, or is off-contract spend.

  • Budget Charting

    Not only should the e-Procurement application track the budget, but it should also track what’s been spent against the budget YTD and what’s been approved, but not yet spent, YTD and whether or not it’s inline with the quarterly/monthly forecast.

  • Visual BPM Workflows for Rule Definitions

    This makes it easy to see the approval chains and insure that not only are there rules account for all of the normal requests, but unexpected requests as well. The last thing anyone wants is for an approval to be redirected to an unchecked mailbox.

Potential Benefits

  • Faster Processing

    Decreasing the time it takes to get a requisition to the right approver decreases the time for an approval, rejection or a conditional approval dependent upon a requested modification.

  • Better Budget Management

    Getting the right requisitions to the right budget managers helps to insure that budgets are spent appropriately.

  • Reduced Maverick Spend

    Similarly, the budget managers can deny any off-budget or off-contract spending that is not essential to the business.

Once the requisition is approved, a purchase order is generated, which is the subject of the next post.

Next Post: Purchase Orders, Part I

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Want To Speed Up? Slow Down!

I really enjoyed this recent article in the Harvard Business Review on “the acceleration trap” and how corporations often take on more than they can handle when faced with intense market pressures by increasing the number and speed of their activities, raising performance goals, shortening innovation cycles, and introducing new management technologies or organizational systems at a furious and frenetic pace until employee motivation is sapped, the company’s focus is scattered in various directions, and exhaustion and resignation blanket the company which enters a rapid downward spiral.

It happens more often than one might think. And even if it doesn’t bring a company down, it can bring down a department. The worst scenario is when a company, after waiting, waiting, waiting almost forever to upgrade antiquated and failing systems decides it is going to do a big-bang upgrade in record time and decides to go, go, go before anyone plans, outlines, or even thinks about what they are doing. (There’s a reason that at least 70% of technology initiatives fail to some degree. This is usually it.) That’s why sometimes the best way to speed up is to slow down, take a step back, figure out what’s important and needs to be done, develop a plan of action, and then attack it with zest, but not so much zealousness that all of the employees will burn out before it’s done and success is achieved. Otherwise, you might be the next FoxMeyer.

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A Hitchhiker’s Guide to e-Procurement: Approvals, Part I

Mostly Harmless, Part IV

Previous Post 

Requisition challenges and best practices.

The approval process needs to vary depending on what is being ordered, who is doing the ordering, the budget(s) the order is being made against, and the approval limits of the requisitioner, her supervisor, and/or the budget managers. It can be as simple as an automatic approval if the requisition is for approved items from approved suppliers at contracted rates within the purchase limits of the requisitioner, to a multi-level approval process where the supervisor has to sign off because it’s above the spending limits of the buyer, where the budget manager has to sign off because it’s for IT equipment, where the department manager has to sign off because it’s an off-contract purchase, and where the CPO has to sign off because it’s over $10,000.

As a result, the e-Procurement system needs to not only allow for the creation, management, and tracking of spend against budgets, but also needs to support the definition of very flexible routing rules of varying priority that will not only insure that all parties sign off on a requisition before it is approved (and used to generate a purchase order that is sent off to a supplier), but that it is routed to the approvers in an appropriate order. In the example above, it should not reach the department manager until the supervisor and budget manager have signed off, and should definitely not reach the CPO until the department manager has signed off. The routing should be generated automatically upon creation based upon the appropriately ranked approval rules defined in the system (which will include an automatic routing to the supervisor for definition of the approval chain for any purchase order that is not appropriately covered by other rules).

The e-Procurement system will need to either maintain an up-to-date organizational chart, or integrate with the HR system that does. This way, general rules can be written in terms of supervisors, budget managers, and other organization roles. Otherwise, rules would have to be defined using individual users, which would make maintenance a nightmare.

When evaluating the approvals capability of an e-Procurement system, which might include budgeting support and rules management, one should keep in mind the associated challenges of the approvals process, keep an eye out for best practice support, and insure that the solution will deliver the intended benefits. These topics will be addressed in the next post.

Next Post: Approvals, Part II

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