Category Archives: Best Practices

Category Management Savings Drying Up? Time to Cross-Optimize!

Leaders know that the best way to savings success, especially when the CFO and CEO demand savings today (even though this could sacrifice value tomorrow), is category management — a razor sharp focus on buying like products from like suppliers that allows for apples-to-apples comparison across products on key dimensions of price, quality, warranty, lead-time, etc. so that the best buy that meets the mandatory savings target can be made every time (and as much value preserved in the category as possible).

But Leaders also know, just like the third auction in a row increases costs, good category management sees savings fall rapidly as the fat is quickly squeezed out of the margin and the waste quickly squeezed out of the production, delivery, and inventory process as everything is optimized. This means that as soon as raw material costs go up, category costs go up, and not down.

This can be problematic when (unrealistic) expectations are placed on the Procurement department year after year and savings need to be found even when, apparently, none exist. But here’s the thing, while they don’t exist in the raw materials, or even the overhead, of production, they do exist in the distribution and inventory and still exist in the volume. But only in volume beyond what’s in the category.

This means that the only way to extract them is to increase the volume, which means that you need to simultaneously cross-source and cross-optimize across categories that can be shipped together from the same supply base. For example, while it might be logical to separate brass, bronze, and copper parts from a category management perspective, considering that some suppliers will likely supply parts across these categories (considering brass and bronze are alloys that contain copper), from a sourcing perspective it makes sense to source all three categories simultaneously. This way you can optimize logistics and negotiate additional volume discounts based on spend levels.

This also works in CPG — a supplier may supply computer devices, audio devices, and home security devices — and while you may want to manage these separately, you want to source them simultaneously. And it will work across seemingly unrelated categories if you are buying from suppliers that are essentially distributors (like office supplies vendors, MRO vendors, etc.). All you need to do is find a set of categories where the majority of products come from the same supply base. How do you do this? Simple: use a modern spend analysis tool.

And how do you source multiple categories simultaneously and cross-optimize logistics, inventory, and discounts for the lowest overall total cost of ownership (while maintaining value)? Strategic sourcing decision optimization — the technology SI has been telling you to acquire for a decade. Which vendor? Whichever one suits your needs best. Coupa, Jaggaer ASO, Jaggaer Bravo, and Keelvar are all great. Determine is re-building the Iasta capability on the b-pack platform, and when complete, will join the A-list again … and BidMode is about to hit the scene. Just get one, so you’re not left behind.

Your Procurement New Year Resolutions

To save you some time, the doctor has compiled a list of the most important.

1. I WILL NOT READ PREDICTION ARTICLES

As the doctor has stated repeatedly, most predictions are old news or remanufactured shoes, as clearly explained in our long series on The Future of Procurement where we tackled the same predictions you hear year after year after year and explained how some are, sadly, as old as commerce itself. Thus, there is no need to waste your time on them.

2. I WILL IMPLEMENT AT LEAST ONE NEW BoB MODULE OR SYSTEM

Let’s face it — even if you are 1 in 12 organizations and in the Hackett Group top 8%, I can guarantee there is at least one major Supply Management system or Source to Pay module you are missing (or lacking critical functionality in). In order to do a great job, you need a great system. This year, resolve everything to do everything you can to get at least one more tool that you need to be effective, or more if you are missing any of the following:

  • spend analytics with near-real time updates (at least weekly)
  • catalog buying or e-requisitioning system
  • SRM
  • optimization-backed sourcing

Why?

  • you have to understand what you are spending, otherwise you have no baselines and can never know if you are improving — plus, you need to catch overspends before the contracts run out to get supplier credits
  • all purchases, even if they are not on contract or not sourced due to lack of time, need to get in a system for analysis and tracking
  • your suppliers’ performance is your performance, you need to understand what suppliers you are doing business with, how they are doing, and have a platform to collaboratively define and implement corrective action and development plans
  • for complex categories or high dollar events, you need to be optimized; even 2% savings on a 10M spend pays for a senior buyer with overhead and bonus for an entire year!

3. I WILL IMPROVE AT LEAST ONE TIME CONSUMING TACTICAL PROCESS PER QUARTER

There is no value in tactical work. This is where you hand over as much as you can to the machine that can do it faster, better, and cheaper than you. You can’t do millions of calculations and comparisons a second — it can. You can’t consolidate data from 20 different sources into a 20 page report in less than a minute — it can.

What you need to focus on is strategic work. Analyzing the top recommendations that come out of the Cognitive Procurement system to make sure they make sense, that the system didn’t miss anything, and that it works for your organization. And then figuring out if you have the experience and expertise to ignore a system market buy recommendation to go negotiate a better deal with top (incumbent) suppliers because your 20 years of insights gives you an edge that cannot be encoded. Or if the projected results from a market auction with the top 6 suppliers is better than your team would ever do with their complete lack of category experience. Your value is your ability to use your intelligence, not your ability to push paper. Let the dumb machines do that, and do what you were hired for!

Your Supply Base Is Too Big – But That Does Not Mean You Should Consolidate

You should right-size, but right-size doesn’t mean down-sizing the supply base like consultants in the 90′s used the term right-size when they wanted their customers to down-size their work-force. It means identifying the right number of suppliers for the category, and the right suppliers to fill those slots. If you are sole-sourcing or dual-sourcing a category, and the one or two suppliers are risky or in at-risk regions, you might need more.

The right number of suppliers is not a magic number, it’s the right number of suppliers you end up with after you have identified the right suppliers for each category. For a large organization, that has 60,000 suppliers, that’s probably a substantially smaller number (by a factor of 2 or 3), but it’s not consolidation and cutting across the board.

The reality is that most of the unnecessary supplier proliferation is in the tail spend, not the strategic spend that is analyzed every few years. There are a few extra suppliers in the strategic spend, particularly when organizational units or individual buyers go rogue and don’t buy off of contracted or preferred suppliers, but the majority of needless supplier sprawl is in the tail spend. (Where, as we noted earlier this week, you should be auto-buying.)

So how do you go about right-sizing? First of all, for each product or service in the tail spend, select preferred suppliers and make sure that they are only suppliers available in any and all solutions the buyers can use. Then, make sure that the organization puts in place a no PO, no pay policy and communicates that to all suppliers, and, in particular, the suppliers that are no longer preferred suppliers. This will minimize the suppliers who will respond, especially if the organization refuses to pay invoices that are unmatched to POs.

Then, use auto-class solutions on the transactions to try and identify products or services that could come from the same supplier and try to reduce the supply base further by eliminating those suppliers that can only supply one product or service when there are enough suppliers that can supply that product or service that can also supply other products and services.

And then stop there. While this won’t necessarily get down to the optimal number of suppliers, or ensure the optimal supplier is in each category, it will likely reduce the number of suppliers in the tail by a factor of 2 or 3 and make the tail a lot more manageable. And that’s what’s key – manageability, especially when you want your auto-buy to work quickly and efficiently and eventually consolidate enough volume that you can negotiate with the supplier in the future if you need to.

Scared of AI? Just Start with Auto-Buy.

Specifically, start with auto-buy on your tail-spend and non-strategic spend.

Seriously. If you’re a relatively mature organization using SSDO (Strategic Sourcing Decision Optimization) on your higher dollar or strategic categories, using auctions and RFX for mid-dollar and somewhat strategic categories, and GPOs or catalogs for significant spend categories, there’s still one category of spend that’s costing your organization a small fortune. That spend is tail spend. Up to 30% in some organizations, the average overspend is typically 15% or more (and can be up to 20% or 30%). Do the math in the typical case. Fifteen percent of thirty percent is 4.5%. If you’ve tackled your strategic sourcing categories two or three times now, chances are you’re trying to eek out 6% savings on the top 33% of spend. That’s about 2% savings.

What’s costing you more? If you’re an advanced or leading organization – the tail spend. But it’s not something you can do much about — it’s tail spend because you don’t have the manpower to deal with it. Yes, you can put a GPO or catalog in place, but it only works if you can force buyer to not only use it, but always select the right product when there are multiple options — not something most platforms can do (well). Especially if the preferred option is temporarily out of stock and something is needed tomorrow. (And the what’s the second preferred option? The third? And if it’s common, shouldn’t it be in inventory?)

And, more importantly, since most tail spend consists of individual requests, some of which should be aggregated, if the requests are directed to different buyers, how will they ever know if there are requests that should be aggregated? (They won’t. And that’s how it is.)

So why are your people even trying to manage parts of the tail-spend when, in fact, a modern AI platform can do it much better. It can amalgamate all similar requests, analyze usage trends, gather market prices, scour and compare options in your catalog and your GPO’s master contract, identify third party options available on the network, analyze usage and feedback reviews and data, determine the options that best meet your users’ needs, and select the one that offers the best value (lowest cost against reliability against organizational need) at a cost that doesn’t exceed market cost. So even if it doesn’t get the best deal, it at least ensures you don’t pay more than market price across your tail spend, which is 15% better than you are doing today.

So now that we have systems — including, but not limited to, Dhatim, LevaData, and Xeeva — that can auto-buy, it’s time to find one that works for you and get the tail spend under control. (And use them to recommend options for higher-value and more-strategic buys that you might not come up with on your own.)

Dear Procurement Organization, Are You Making The Big RFX Faux-Pas?

Short answer: If you have an RFX due this month, you in all probability are!

Right now, many vendors have more RFXs due this month then they have had due the last two months, and the big question we all need to be asking is why.

Are these organizations really going to make a decision this month? Are they even going to evaluate these proposals this month? The answers are, of course, no and no! So why are the proposals due?

the doctor completely understands the desire to start evaluating proposals as early as soon as possible, but when as soon as possible is probably mid-January or later (when everyone returns from holiday vacation and deals with the fires that have been lit in their absence), why should the proposal be due this week?

Yes, vendor representatives take holidays too, but the best vendor representatives for the best vendors do not take holidays when you need them — or their best. And if you delayed your proposal due date until you actually needed the proposal in January, the best vendor reps would be back to work on the 27th spending even more time on your RFX to get you all of the details, value models, and other information you need to make the right decision.

But if you insist on a proposal weeks, or even months, before you are going to seriously evaluate it and make a decision, you are shorting yourself … and your supply chain peers (and even suppliers) who also have RFXs in to the vendor and need the vendor to put its best foot forward to make a proper decision.

So, don’t ask for an RFX until you are truly ready to review it when all you need is a confirmation of intent to submit and maybe a simple RFI with basic vendor information to (pre)qualify them. Ask for what you need only when you need it and you will get better responses, make better choices, and get better results!