Category Archives: Best Practices

Maybe It’s Time You Go Direct … Part I

Most sourcing platforms were designed for indirect sourcing, commonly described as the sourcing of finished/consumer goods and services, because it was easy, quick, and allowed an average organization, even a manufacturing, pharmaceutical, or Oil & Gas company, to get big savings (as most of these organizations spent all their time and effort on direct sourcing). Why? These were typically the least well managed, and the most bloated, categories and simply inviting more suppliers, who had to complete a pre-defined RFX that allowed for apples-to-apples comparisons, pushed prices down, and if the market conditions were right, auctions pushed prices down further and it was not uncommon to find a number of categories where 20%, 30%, or even 40% savings could be found during the first event simply by squeezing the unnecessary fat out of the margins.

But this is the very reason why the first generation sourcing platforms boomed and busted, and why auctions rose and fell in an average organization during the noughts. The organization would save a huge amount the first auction, typically at least 15%. They’d then save a respectable amount during the next auction, say 5%, because all the suppliers came back with their pencils sharpened ahead of time. But the third auction would fail miserably, and most of the time prices would increase. Once all the fat is squeezed out of the margin, competitive RFX or auction will not save any more and, in fact, over time, inflation will creep in, the supply/demand imbalance will shift, and, without something new, costs will rise.

The next step, if the organization is analytical, is generally to bring in analytics, identify the categories with the best opportunities due to market price trends, supply/demand imbalance, or sheer volume leverage the organization had. Careful picking, even if the category was sourced twice, or thrice, before will still lead to some savings. At least once.

And when those savings run out, then you look at optimizing TCO when all costs, discounts, transportation costs, discounts, and associated lifecycle costs are modelled. You build your risk mitigation rules and by splitting the award, choosing the carriers and lanes carefully, and just being smart, more savings materialize. Typically over a few events as your volume leverage increases, your sophistication improves, and your events get bigger.

But there’s always another brick in the wall, and you’re always going to hit it. Unless you go direct. Why? Guess you just have to come back for Part II!

Can we stop calling cost avoidance “soft savings”?

Today’s guest post is from Torey Guingrich, a Senior Consultant at Source One, a Corcentric company, who focuses on helping global companies drive greater value from their expenditures.

I’ve heard it time and time again “we don’t count soft savings” — which at times translates to “we don’t consider value beyond unit cost and volume reduction“. In recent years, many companies seem to have taken an overly broad definition of soft savings to include cost avoidance, budgeted-cost reduction, and other ways that Procurement adds value to the organization through their sourcing and negotiation efforts. Much of the work that Procurement does isn’t just reducing costs on recurring purchases, and what we consider a strategic partner from a sourcing and procurement standpoint, is helping business units to source and put in place solutions that meet their evolving needs.

So should Procurement not get any “credit” for this work?

Below are a few scenarios where Procurement professionals may struggle in quantifying savings/impact and where the bottom line cost may actually see an increase (gasp!)

New Recurring Purchases: When a new need arises for a department, Procurement can add value by helping to support the requirements definition, RFI and eventual RFP process — this is where Procurement’s role is to help business users understand the options in the market and make the best-fit decision based on their needs. Consider an organization that is growing and needs to implement an applicant tracking system to better manage their recruitment process. This is certainly a process improvement measure to better the recruitment process for the HR department, hiring managers, and the applicants themselves — but one that is not going to yield a tangible cost reduction result (and is going to add a new expense to total cost).

Should Procurement not support the RFP to put the solution in place because they cannot quantify the process improvement or completely offset the new expense?

Capital Purchases: Organizations typically define a capital plan for the year based on upcoming large-scale purchases. For instance, within the Facilities spend category, there are a number of systems that get replaced infrequently, but that represent a large financial outlay. Say an organization is looking to replace the HVAC system at a given facility or perhaps changing the doors at a warehouse — these are both scenarios that should have some degree of competitive bid associated to ensure the project is cost competitive.

Should Procurement really be comparing proposed pricing to the cost paid 10 (or more) years ago or not support the effort because there are no “hard savings”?

Increased Volume: As organizations grow, or most obviously, as they increase production, their volumes associated with direct and indirect goods will scale to some degree. Procurement may have negotiated a great deal on electricity price per kWh in the deregulated market, but once production ramps up your total electricity cost is going to increase.

Should Procurement not bother negotiating a price reduction because the total cost will increase anyway? Note, this is probably the most extreme view of “soft savings”, but is something that Procurement should align on with Finance to ensure savings are being calculated based on unit cost reduction against actual volumes!

Dynamic Requirements: Plenty of categories are driven by constantly changing requirements or where similar services may be required, but the specifications drive the cost. Commercial print is a common area for this — the print needs of an organization may be driven by their specific campaigns, events, or one-off marketing needs. Print costs don’t get broken down into the cost per coloured pixel — they are made up of various specs that come together for a complete need.

Should Procurement not support an RFP for a large scale print campaign because they can’t count savings or be forced to measure outcomes against different specifications?

Market Changes: Certain products and categories within direct and indirect spend are more prone to price fluctuation due to the raw materials that make up the final product. Take packaging for example — due to some of the extreme weather scenarios in 2017, we saw many packaging suppliers pushing increases on final product given the rise in the pulp and paper costs as the supply market was impacted. Many times these increases were mitigated or minimized through negotiation, but that did not actually result in reduced unit cost.

Should Procurement not negotiate with these suppliers or in these markets because the mitigated increases “don’t count” or wait for the cost increase to be billed just to show tangible savings?

I hope you’re all yelling a collective “no!” to these questions, but so often ideas like cost avoidance or reduction from first proposal are written off as “not real“. Understandably, as a Procurement organization looks to build its credibility within the organization and invest in new talent and solutions, hard-dollar cost reduction tends to be a big focus. But once the group moves from a tactical to strategic approach and supports business units in managing their suppliers and sourcing events, the way value and results are measured needs to reflect this changing dynamic. For the scenarios above, maybe it’s measuring impact/value from the average of bids received, or from first proposal to final value, or coming up with a NPV for that HVAC system from 10 years ago — Procurement should define the methodologies for these common scenarios and define for finance and leadership how they will be capturing value and what it means to budgets and bottom lines.

If we expect Procurement to support the evolving needs of the organization, then we must also evolve the way that Procurement and the broader organization as a whole sees and communicates the value of the sourcing and negotiation outcomes from the Procurement team.

Thanks, Torey.

P2P: Points 2 Ponder when People are Pushing Off S2P Platforms

Years are passing and still not enough companies are using good, modern, fully electronic, Source 2 Pay Technologies when they should be. (We’re using technologies and not platform because it doesn’t necessarily have to be one platform from one vendor, as long as the S2C can be tightly integrated, even if by way of a third party like Per Angusta, and the P2P are tightly integrated and the S2C and P2P are integrated at the end points, that is sometimes the best solution for some companies.) Even worse, many of these companies have realized the importance of good Supply Management and adopted point-based Sourcing, Procurement, and/or and Supplier (Performance/Information/Risk) Management software. But that’s not enough. SI has been ranting for years about the fact that it’s Sourcing AND Procurement and that if you don’t implement the full cycle, you’re not only leaving savings on the table but failing to capture all of the value available to you.

Why are otherwise smart, moderately progressive, companies doing this? Because they have deep concerns that the platform won’t do what they need it to do and fears that the only reason these platforms exist is to eliminate their jobs the same way machines and automation have led to our manufacturing woes. And while they have good points, since some of the early solutions didn’t do everything they needed to do in order for the company to obtain the promised benefits, and since automation of any sort typically leads to elimination of workforce in the function, when you look at some of the current solutions and look at the goal of Procurement in the right light, their points are no longer valid. And this is true even if the platform has cognitive or auto-buy elements. There’s still only so much it can do, and so much more you have to analyze these days when doing high-dollar or strategic buys.

Nevertheless, if the points of trepidation are not addressed, the solutions won’t be considered, the function will not advance, and, vendors, you won’t survive. So, because SI encourages the proper use of technology platforms to increase efficiency, eliminate non-value-add tactical tasks, and augment the capability of your workforce (which is different from replacing it), SI is going to give the vendors building these solutions a helping hand by identifying the common trepidations, the solution requirements needed, and, as a result, the message you have to get across to calm the prospective buyer’s nerves (provided, of course, that you do have the solution requirements).

Trepidation # 5: It Won’t Save Money. There will always be exceptions to manage, suppliers who can’t use it, and administrative requirements and the costs will just be shifted.
Many early systems claimed big savings, typically in the 80% range, but never really delivered. The reality is that if the organization still has to support offline paper processes, still has to review all the invoices for errors, has to have an IT person administer the system, etc., the costs just shift. A modern S2P system has to support, and be usable by, all suppliers (and not just the top X that constitute 80% of spend), has to automatically detect errors and unmatched bids, invoices, and documents and has to be low, or no, cost to administer for the 80% savings to materialize. Otherwise, the buying organization won’t be able to achieve the 3X to 5X ROI the system is supposed to deliver and will not want it.

Trepidation # 4: We use X for purchase orders and / or Y for payables tracking and / or Z for Strategic Supplier Management. We can’t replace these systems.
A lot early systems expected that they would be the system of record for whatever the system did, and that all the system had to do was export the payments to a flat file for importing into the finance system. This is not the case. The platform has to integrate, in a straightforward manner, with the systems the buying organization uses for Purchase Orders and Inventory Management and Supplier Masters and the systems the buying organization uses for Accounts Payable.

Trepidation # 3: It Won’t Work For Us. Our Processes are Unique.
A lot of early systems followed the Henry Ford philosophy in that “you can have any colour as long as it’s black“. This doesn’t work for organizations that have distinct sourcing processes depending on the category type and value, distinct supplier relationship management processes depending on what the supplier supplies and where the supplier is located, distinct contract negotiation processes depending on contract value and risk, unique invoice approval workflows, distinct payment procedures, and different master-data storage policies. While the basic workflow is the same at a high level, it is different in the implementation across companies and the platform needs to support workflows that can be customized.

Trepidation # 2: Our Suppliers Can’t Use It / It’s Too Much Work for Our Suppliers
A lot of early systems took the view that “we have a portal that accepts EDI format and/or manual data entry and that’s good enough“. The problem is that supply organizations, like buying organizations, have different systems and different processes and, typically, don’t have the manpower to support a different bidding, data submission, and invoicing mechanism for each customer and, frankly, won’t. The system has to support the common processes and technologies used by suppliers in the buyer’s market. A few (small) suppliers can be given a single “portal” solution, but this has to be a minority.

Trepidation # 1: They Took Their Jobs and Now They Will Take Our Jobs!
A good S2P system with guided buying and auto-buy for low-dollar / non-strategic categories, which is exception-driven and requires a buyer to only manually review buys above a certain dollar amount, supplier approvals for key categories, and invoices that don’t match POs and / or exceed a certain dollar value, and which provides mechanisms all suppliers can use to submit electronically, should reduce the tactical invoice processing effort by 80% or more. This means that if the people doing the invoice processing had no other skills, then 4 out of 5 would lose their jobs. But if these are true procurement people, their job function would just be shifted to a more strategic role as redeploying these resources to spend more time on strategic supplier management, category management, and risk management would provide the organization with a value that (far) exceeded their cost. You don’t get rid of smart people just because you got a new system. You just ask them to deliver many times more, which they can do thanks to the new system.

Why You Need a Master Data Strategy for Proper Supplier Management (Repost)

This post originally ran on June 24, 2013, but seeing as it’s still a relevant message five years later, it is being re-posted to educate newcomers on the importance of Master Data Management strategies in this data-centric era.

Supplier Information Management is more than just buying a Supplier Information Management (SIM) solution and plopping it into your data centre. Much more. But yet, it seems that some people — anxious to deal with the visibility, risk management, and supplier performance issues facing them — believe that merely obtaining a SIM solution will solve their problems. A proper solution properly acquired, properly implemented, and properly used will go a long way to increasing supply chain visibility, enabling risk management and mitigation, and providing a solid foundation for supplier performance management, but the mere presence of such a solution in your supply management application suite is about as useful as a drill in the hands of a carpenter holding a nail.

You see, Supplier Information will never be restricted to the SIM system. Supplier information will always be present in the ERP system used for resource planning and manufacturing, the accounts payable system, the transactional procurement / procure-to-pay system, the sourcing suite, the contract management system, the risk management solution, the performance tracking and scorecard system, the sustainability / CSR solution, and other systems employed in your organizational back-office to manage the different supply management AND business functions. Supplier data is everywhere, and without a strategy, just shoving it into the SIM system won’t help.

In order to get a proper grip on supplier information, the organization needs a master data strategy that dictates the sub-records that define a supplier record and which system holds the master data for each sub-record. What do we mean by this? For example, the ERP may hold the core supplier identifier sub-record that defines the unique supplier number in your system, the supplier name, the supplier’s tax number, and your customer number in the eyes of the supplier and be the system of record for this information. The accounts payable system, referencing the supplier by it’s supplier number, may be the system of record for the headquarters address and payment address. The contract management system may be the system of record for the list of employees authorized to sign contracts on behalf of the supplier. The CSR system may be the system of record for the suppliers’ carbon rating, third party CSR rating, and your internal sustainability rating. And so on.

If this is the case, the SIM system, to truly be a SIM solution for your organization, needs to integrate with all of these systems and encode the proper rules to resolve data conflicts as required. Specifically, three things need to happen. First of all, whenever a system of record updates data, that data must be pulled into the system and overwrite the existing data. Secondly, anytime data is updated in the SIM system for which it is the system of record, that data must be pushed out to all systems that use it. Thirdly, and this part is sometimes overlooked, whenever data is updated in a system of record, the data not only needs to be pulled into the SIM system, but it then needs to be pushed out to any system that also uses that data. The SIM solution is the centre of a hub-and-spoke data architecture — all updates flow in, and all updates flow out.

This can only be properly accomplished with an appropriate Master Data Strategy. Don’t overlook it. Otherwise your SIM solution will turn out to be a Stuck In Muck solution. An SI is not kidding about this.

Make Sure Your Perishables Don’t Perish!

With natural disasters on the rise, and late frosts already minimizing or eliminating the crops that will be available in the fall, it’s more important than ever to minimize food waste throughout the supply chain.

Thus, SI would like to remind you of some important tips that can have a big impact on keeping your perishables from perishing!

  • Do not load produce at night.
    When it’s easy for insects and other pests to get in unnoticed. Not only can a family of spiders ruin the grapes, but they might be banned in the country you’re importing into, which would result in your truck getting stopped at the border and turned around.
  • Always home-source during harvest season.
    Unit prices might be higher, but shipping will be lower, and loss will be lower still as you won’t risk losing product in long shipments, which happens regularly when trucks break down and/or get held up at the border. Plus, many people will pay a slight premium for local produce.
  • Know the seasonality for key staples in every region, not just the ones you generally source from.
    This will make sure you’re always sourcing from the region with the most supply, which will help you to get you the lowest costs as you will be able to negotiate better unit prices and secure transportation in advance when prices are low.
  • If the perishables will be processed, re-optimize the processing network.
    If you’re going to can, freeze, or otherwise process the perishables into a less perishable product, do it as close to the source as possible, even if it means using new suppliers or investing in new manufacturing plants. These refined products, which are typically denser, and which may not even require refrigeration, will be much cheaper to ship and suffer a lesser risk of loss.
  • Have a plan to sell excess perishables once they reach their prime before they perish.
    50% off at the store is not always good enough, especially if they are marked down an hour before closing on a Tuesday night and will not be saleable tomorrow. For example, even overripe, tomatoes are still great for pastes and soups. You could have each store strike a deal with local restaurants that allow them to buy perishables at prime at a discount before they are unuseable, or, if you are socially responsible, setup a donation program with a local shelter or soup kitchen where the shelter can pick up perishing items each day before close before they perish (and take your cash with them). Done right, you could probably even get a charity tax write off (as long as the items were donated while still edible). You may consider these ideas beyond the scope of sourcing, but you shouldn’t when you consider that 1 in 7 people in the world are undernourished and almost 40% of food is wasted in North America. Fix this. You have the power.