Category Archives: Best Practices

On the Sixth Day of X-Mas (e-Sourcing Strategies)

On the sixth day of X-Mas
my blogger gave to me
tactics for saving,
five golden rings,
four little words,
tri-focal lens,
two boxing gloves,
and a lesson in strategy.

Six strategies you can use to save are:

  • Reverse Auctions on Commodity Categories in Competitive Markets
  • Sealed Bids on Strategic Purchases of Custom Goods or Services
  • Decision Optimization on High Value Goods
  • Process Re-engineering with Strategic Partners
  • Lane Optimization
  • Distribution Center Optimization

Reverse Auctions on Commodity Categories in Competitive Markets

A good post on “Reverse Auction Selection Criteria” can be found over on e-Sourcing Forum [WayBackMachine], where you can also find a good post on “Reverse Auction Strategy” and “Reverse Auction Basics”.

Sealed Bids on Strategic Purchases of Custom Goods or Services

If the category is strategic, you should not use a reverse auction or open-bid methodology and have suppliers compete solely on price – after all, quality will be just as important.

Decision Optimization on High Value Goods

An introduction to decision optimization can be found in one of my first posts on this blog and in my optimization series (I, II, III, and IV) over on e-Sourcing Forum. Additional information can be found in my CombineNet (acquired by Jaggaer) series (I, II, III, and IV).

Process Re-engineering with Strategic Partners

Streamline processes increases productivity. This allows you to increase spend under management and the savings you can generate.

Lane Optimization

Make sure you are using the right lanes at the right service levels from the right carriers. Otherwise, you could be considerably overspending on your transportation.

Distribution Center Optimization

See the fourth post in my CombineNet Series, BoB’s Unique Talents for a description of this process.

On the First Day of X-Mas (Strategic Sourcing Strategy)

On the first day of X-Mas
my blogger gave to me
a lesson in strategy.

Everything should be strategically sourced.

As I’ve indicated before, this does not mean that you should apply an intense multi-stage strategic sourcing effort on everything you buy, just that you should have a strategy for dealing with every category – since that’s the key to success across the board.

Where do you start? One method would be to create a nine-cell grid that divided your purchases into direct goods, outsourced services, and indirect / MRO along one axis and strategic, non-strategic but custom / non-commodity, and commodity along the other axis and then assign a default strategy for each grid cell.

For example:

Direct Outsourced Services Indirect / MRO
Strategic Collaboration with a small set of strategic suppliers Dedicated Contract Owner Collaboration with a best-in class provider for each category of services
Custom Decision Optimization on a Pre-Qualified Set of Suppliers Managed by a Strategic Outsourcing Provider Managed by a Senior Sourcing Professional
Commodity Reverse Auction Multi-Stage RFX Lowest Bid

Another method would be the one described in Detail in Next Level Purchasing’s (now the NLPA, part of Certitrek) course “Savings Strategy Development” that I reviewed last week. At a high level, NLP recommends segregating opportunities into quick hit opportunities (which can generally be executed rapidly using best-practiced based eSourcing tools), supplier relationship / collaboration opportunities, and strategic sourcing opportunities, which can be attacked using NLP’s 10 phase approach to world class sourcing. The course is worth it for the details on these segmentation and detailed sourcing methodologies alone. ( Maybe I should be asking for referral fees. )

I’m personally not sure what the best methodology for you is, but what I have personally found is that the existence of a methodology is sometimes much more important than the actual methodology itself – and that the best methodology is usually one based on a best-practice methodology that has worked well for others, tweaked to your own needs. So if you don’t have a methodology and a coherent across-the-board strategy for your procurement organization – get one, it will enable more success than any tool ever will – since it will tell you where to apply the tool for maximum return.

And yes, I know the Christian twelve days of Christmas traditionally start on Christmas day, but this is the twelve days of X-Mas. Moreover, do you really want to be reading a series of posts that start on Christmas Day?

The Dangers of Centralized Buying

One of the more interesting talks at the “2006 Informs Annual Meeting” was Katri Karjalainen’s talk on Conflicting Goals in Centralized Organizational Buying.

Many organizations large and small pursue centralized buying in hopes of achieving the following benefits:

  • economies of scale
  • purchasing expertise
  • administrative efficiencies
  • specialization
  • volume discounts
  • optimal use of resources and process efficiencies

However, centralized buying brings with it the following corresponding disadvantages:

  • missed local opportunities
  • loss of local knowledge
  • loss of control over supplier performance

As a result, the organizational conflicts often arise due to:

  • divergence of subunit goals
  • conflicts of preference between purchasing center and remote units
  • lack of subunit inclusion
  • cost of certain purchases on a corporate contract may be higher than the subunit could achieve locally
  • quality of certain purchases on a corporate contract may be lower than the subunit could achieve locally

As a result, the benefits of centralization are highly dependent upon commitment to contracts by the organization and the subunits and economies of scale, the primary reason most organizations centralize purchasing efforts, are often the last to materialize.

That’s why I keep promoting Center Led Procurement where you can have the best of both worlds.

I know it might be difficult, as Jason Busch points out over on Spend Matters in “”Nokia, Front and Center, Led Well, Almost”* but I think it’s worth it.

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.

Savings Strategy Development, A Review Part II

To hit home my point that I believe the online course “Savings Strategy Development” from Next Level Purchasing (now the NLPA, part of Certitrek) is worth the time and investment for a purchasing professional looking to advance her knowledge and career, with kind permission, I am going to dive into a few topics covered in the course that I believe hit home on the importance of a good savings strategy and a well designed course to help you develop one.

The course begins by noting that saving money is arguably the #1 reason for the purchasing profession. Businesses exist to make profit, and that happens when the bottom line is improved. There are two ways to do that. Increase revenue or decrease expenses. Effective purchasing decreases expenses, particularly in terms of cost of products sold or selling, general, and administrative expenses.

The first lesson then goes on to define seven types of savings, including the well understood hard-dollar, the moderately realized but hard-to-calculate payment term savings, and the less common alternate condition savings. It lays out clear calculations for each of these. For example, the proper way to calculate payment term savings, which results when more favorable payment terms are negotiated, as defined in the course, is:

{(New Discount – Old Discount) – [(Old Window – New Window) * (Money Cost/365)]} * Spend

where:

  • New Discount : new discount rate offered by the supplier
  • Old Discount : old discount rate offered by the supplier
  • New Window : new number of days in which payment is due
  • Old Window : old number of days in which payment is due
  • Money Cost : annual cost of money
  • Spend : spend on products and/or services to which the new discount applies

It then clearly defines the difference between quick hit, supplier relationship, and strategic sourcing savings opportunities and defines a methodology for determining what type of opportunity a category represents. It also defines the basic strategies that should be considered for each savings opportunity. For example, a quick hit opportunity generally implies the use of competitive bidding from pre-qualified suppliers who have already accepted a contract template.

Of course, the crux of the course is the ten phase approach to world class sourcing which should be applied as a starting template each and every time you start planning your sourcing – and savings – strategy for a strategic sourcing opportunity. And unlike some approaches that you will discover reading through materials you will find on the web, which tend to focus on the technology and not the core underlying process, it includes due emphasis on a current baseline analysis (phase 2), market survey (phase 4), and success measurement (phase 9). After all, without a baseline, you will not be able to measure your success, which is key to establishing your worth, and that of your department and profession, as a procurement professional, and without a decent understanding of the market, it will be hard to determine reasonable goals, objectives, and the magnitude of your success. (A price concession in a tight market where suppliers generally have more bargaining power is a bigger win than a price concession in an open market where supply exceeds demand and suppliers have little bargaining power.)

I hope this gives you some more insight into the importance of continued education and appropriate courses for your development and why I believe “Savings Strategy Development” from Next Level Purchasing is most likely worth your time and investment as a procurement professional.