Category Archives: Best Practices

Procure-to-Pay cycle Best Practices

I’ve been thinking about the P2P cycle in general and how it could be improved across the board. Remembering that CAPS published a piece on the issue relatively recently, I decided to look it up. The piece, titled “Best Practices in the Procure-to-Pay Cycle: Perspectives from Suppliers and Industry Experts”, was published back in March in the Practix series and described key findings that can lead to improvement in the P2P cycle.

Even though there were no surprises in this piece, as all of the suggested improvements were essentially just good business processes adapted to the procurement cycle, the report is worth a read as it was based on a study that collected the major problems as identified by your suppliers, not third party consultants or analysts.

The Procure-to-Pay cycle, which generally consists of the following steps:

  1. Forecast, Plan & Coordinate
  2. Need Clarification / Specification
  3. Sourcing Decision
  4. Contract / PO Generation
  5. Receive Materials & Documents
  6. Settle & Pay

contains many opportunities for errors without good, documented, processes streamlined and managed by appropriate technology. Furthermore, an organization in non-compliance may be incurring significant costs without even realizing it (through maverick spending, late payments, etc.).

If a broken P2P process is not fixed, the following problems can arise:

  • deteriorating response time from suppliers
  • lower service levels from suppliers
  • deterioration as the customer of choice
  • delivery delays
  • higher pricing (due to cost attributed to late payment)
  • increased manpower on non-value-added activities
  • loss of the supplier as a critical supply chain link
  • higher internal costs

Therefore, a company should review its processes regularly, fix any problems it identifies, and make effort to streamline processes. A good place to start is by insuring that your P2P cycle does not suffer from the top four problems identified by suppliers.

  • manual workarounds / high manpower requirements
  • long cycle time / late payments / aged invoices
  • no central point of contact
  • PO / invoice match problem

These problems are often the result of the following root causes:

  • poorly designed process
  • no relationship manager / point of contact
  • lack of system / portal interface
  • too much complexity in the catalog / too many line items

Furthermore, as per the report, these root causes can often be addressed by the following solutions:

  • redesigned P2P process deployment
  • dedicated relationship management position
  • a supplier portal
  • spend analysis and a catalog line item reduction initiative

In addition, the report also presents six key findings that can lead to improvements in the P2P cycle. These are:

  • robust processes and training
  • onsite relationship managers to allow field maintenance to focus on doing its job
  • robust technology using a single point of contract; i.e. a supplier portal
  • improved forecasting for maintenance and planning for emergencies that can “flex” with different situations that arise
  • reduced complexity in catalogs and buying channels to streamline procurement
  • top management support

What about BoB? (Best-of-Breed)

One of the articles in the Summer issue of CPO Agenda asks “One tool or a whole toolbox”? Another viewpoint in the never-ending ERP vs. Best-of-Breed debate, it notes that despite the improving functionality of ERP systems, many companies still turn to Best-of-Breed ( Bob ) vendors to meet their procurement and supply chain needs.

The article notes that some ERP-centric organizations, such as committed customer Delta Air Lines which deploys a single company-wide installation of SAP, runs e-Sourcing and spend visibility software from VerticalNet (acquired by BravoSolution, acquired by Jaggaer). The reason, according to Bob Currey, General Manager of Sourcing Information and Supply Management, is that ERP systems are excellent at what they were originally designed for – accounting and transaction processing – but when areas of the business such as the supply function want to extract information from that accounting and transaction data, it can be difficult for them to locate and access the right numbers. In terms of procurement, the information on spend is there alright, but not in a user-friendly format. The ‘canned’ reports don’t meet all our requirements, and custom-developed reports take time and programmer effort. … In any business, programming resources are often at a premium. You can build a business case and wait in line – and then carry on waiting, perhaps indefinitely, for the resources that you need to be made available. Or you can go to a ‘best-of-breed’ vendor, and buy what you need, off the shelf. For us, the time-to-benefit of the VerticalNet solution made a lot of sense.

Of course, as the article points out, from an IT perspective, the ERP solution has obvious merits: better integration, an existing commercial relationship, simpler implementation – and, as the Americans say, “one throat to choke” if something doesn’t work as it should. In contrast, a best-of-breed vendor may offer software that proves troublesome to integrate, might be difficult to deal with, and can lack long-term commercial viability.

So what should you choose?

Both!

After all, even as Simon Pollard, Vice President for Discrete Manufacturing at SAP notes, Although we believe customers much prefer to buy a suite of software built around a single platform, our assumption going forward is that we will cohabit with specialised best-of-breed vendors. We can’t do absolutely everything, and wouldn’t want to.

The reality is that there is no Magic-Bullet One-Size-Fits-All One-Software-Package-Does-All solution for any area of your business — and that we’re probably years, and years, away from getting close. My rationale — the pace of innovation in software is still increasing, indicating that there are still miles and miles to go.

Best-of-breed applications tend to fill niches that the big (ERP) systems will overlook, either because the vendors of the big (ERP) systems will not assign the same importance to them or determine that the cost of offering those solutions does not justify the expected benefits (especially compared to another potential offering). In addition, best-of-breed solutions are often years ahead of their traditional ERP counterparts. And when you consider the double-digit percentage improvements these tools can often have across the board, it just makes sense to augment your traditional enterprise systems with best-of-breed solutions.

Furthermore, now that many of the best-of-breed solutions are delivered on-demand using the software-as-a-service model, you can be up and running almost instantly since on-demand solutions have been found to perform better than traditional installed applications, upgrade easier, and install faster, on average, according to Aberdeen Group’s recent study “The On-Demand Supply Management Benchmark Report: Enterprises Turn to the Web and Find Quicker and Better ROI to Help Achieve Supply Management Goals” (sponsored access was available for a limited time). Furthermore, when enterprises deploying on-demand solutions improve spend under management by 28%, which could lead to additional savings of 1M to 3M above and beyond what you would get without the best-of-breed on-demand tools (see: The On-Demand Supply Management Benchmark Report), the business case becomes overwhelming to at least give it a shot.

It Pays to be World Class (in Cost Reduction)

The Hackett Group recently held their 2006 Best Practices conference where participants were able to hear speakers from a number of leading global companies, including Alcoa, Citigroup, Constellation Energy, HP, Greif, Nissan and U. S. Steel. I was not fortunate enough to attend this conference, so I’ve been searching for press and review articles on it since The Hackett Group is known for its top notch research.

My searches have not been in vain, and I have been lucky enough to stumble onto a few articles, including “World-Class Companies Move Beyond Cost in G&A in Response to Globalization” by the Editorial Staff of Supply & Demand Chain Executive. This article in particular, which starts off by noting that Globalization is creating new challenges and opportunities for today’s companies, and one way world-class executives are responding is by demanding that their general and administrative (G&A) operations deliver more than just the lowest cost, received my full attention because it revealed some research statistics from Hackett’s upcoming 2006 Book of Numbers.

In particular, the article echoes Hackett’s finding that world-class companies are now spending 40 percent less than typical companies overall on SG&A (9 percent of revenue versus 15 percent) and as a result generate $60 million in savings/billion of revenue. By function, they spend 45 percent less on finance, 13 percent less on HR, 25 percent less on procurement and 7 percent more on IT. That’s six million of savings for every hundred million of spend – and that’s significant! Some companies are saving more than this. For example, U.S. Steel, which Hackett has determined to have a world-class finance operation, has achieved a reduction of 30 percent in its administrative workforce and annual acquisition synergies in excess of $400 million over the last 3 years. Moreover, that could be a 30% redeployment of resources to strategic sourcing to allow for more advanced negotiation strategies and analyses in more high dollar buys. When you consider that last year Aberdeen Group found that the application of optimization tools to analyze total costs, and of flexible bidding functionality to uncover creative supplier solutions has enabled early adopters to identify an average incremental savings of 12% above those that basic, price-focused auctions alone have generated in its “Success Strategies in Advanced Sourcing and Negotiations: Optimizing Total Costs and Total Value for the Next Wave of e-Sourcing Savings” report, the potential for significant savings in world-class procurement and sourcing organizations becomes phenomenal.

Moreover, despite what you may hear, the road to riches, or in this case, to being a world class company isn’t paved with rocket science equations that need to be solved at each step. I think the quote from Rob Zimmerman, Vice President of Corporate Business Development of Greif, Inc, says it best. When the transformation [to improve our operating efficiencies, cost structure, procurement activities, and working capital] began, we had little visibility into our customer profitability, were far from being the lowest cost producer and dead last in working capital compared to our peer group … but by standardizing processes, gaining visibility into our data, creating the right analytical tools and building the capabilities of our employees, we’ve been able to surpass some of our original financial targets“. In other words, even though the road to success entails a lot of hard work, it’s within the grasp of every company willing to put in the effort (and bring in the right people at the right time to help them get there).

Avoiding The Talent Shortage

Regular readers of Supply Excellence [WayBackMachine] will recall Tim Minahan’s recent post “New Supply Risk: Losing Your Top Talent” where he noted that talent poaching has reached new heights in the supply management arena and pointed out a new study from Denali Consulting and SupplyStaff that examined the labour challenge of how to retain your best people.

The Denali study reported that the typical company experiences a nearly 40% voluntary turnover rate by employees. It also reported that a good salary is often the top indicator of employee retention. Neither of these results should be startling when you consider the recent articles on the European Leaders Network and SupplyManagement.com that highlighted the Increased Competition for Procurement Professionals and that Interims Cash in on Demand Boost, with top-skilled individuals easily able to command $1000/day, or more.

Fortunately, management approach and work environment also affect employee retention, with top performers preferring a work environment that continually challenges them, provides a clear career path, and autonomy. The study, as Tim Minahan pointed out, highlights the following secrets:

  • Keep the work challenging
  • Nurture highly skilled candidates
  • Encourage and support a work-life balance
  • Deploy Mentoring programs to encourage advancement

An article in the summer issue of CPO Agenda also took up the issue of how to retain your best people. The article, by Sharon Jordan-Evans of the Jordan Evans Group, offers three additional suggestions.

  • Conduct a ‘stay’ interview
    Instead of guessing, find out what your staff really want. Ask meaningful questions such as: Are you challenged in your day-to-day work? What would provide more interest? What could I do more/less of? What will keep you here? What might entice you away? What do you want to learn this year?
  • Give them some space
    Provide the freedom that allows people to get the job done in ways that work best for them. Telecommuting, flexible work schedules, casual dress, etc.
  • Mine for Opportunities Link arms with your best people to mine for the next opportunity. They might enjoy heading a new project or spend category (marketing or legal services, for instance). Let them touch the end customer or build relations with a key internal stakeholder. Rotate assignments to deepen or broaden their skills. Support their investigation of new supply markets.

And, finally, even though you might not always be able to compete on salary, remember that there’s nothing to stop you from competing on performance-based incentives. After all, when every dollar of bonus they get is the result of tens of dollars of captured savings to you, it’s a win-win situation. (If you’re having trouble measuring savings, I would suggest you start with my Cost-Reduction and Avoidance write-ups {Introduction, Metrics, and Incentivize for Success!} over on e-Sourcing Forum [WayBackMachine].

Cambrian House: Crowdsourced Software

Not long after my Crowdsourcing post in the Purchasing Innovation series went up over at e-Sourcing Forum, JR posted a comment letting me know that a company up here (North of the Border) was already doing it commercially, in one of Canada’s IT hotspots (although you might not know it if you visited during stampede week). Cambrian House, located in downtown Calgary, has been up and running since February and has already turned out some revenue generating products. To date, they have launched CVR for Parents, AdWord Alerts, Pod Blast Video, Prezzle , Renoworks Homeowner Edition, Desktop Playground , and Cambrian Code.

It’s true that a couple of their projects have already been suspended due to lack of interest, but its also true that some are going stronger than ever. One of the advantages of the crowdsourcing model applied to software is the ability to greatly accelerate initial development lifecycles and get working betas to market really quickly. Instead of waiting months or, more often, years to find out if a new product idea is going to fly, you can now have the answer in months, or sometimes even weeks!

Furthermore, they’ve also proven that when crowds of like minded people get together, they can have an impact on communities, locally and globally. They’ve already made charitable donations as an organization, including one to the local Mustard Seed (a non-profit, Christian humanitarian organization that responds compassionately to the needs of the inner-city’s less fortunate) and fed Google worldwide.

So how does Cambrian house work? It’s simple. An idea is submitted, be it from an employee, an advisor, or a random individual who stumbles across the site, the best ideas (as judged by the team) are thrown out to the crowds (through the world wide web) to test and comment on, those that get traction are then built by development crowds constituted of those individuals interested in seeing the product brought to market, Cambrian House handles the sales and marketing, and those who worked on the product (including the idea generator) get royalties. And for those who like graphics, Cambrian House has a nice assembly line graphic (Flash 8 required) for you.

Right now, most of the projects are pretty small – but there’s nothing stopping crowdsourcing from working at the enterprise level. After all, viewed the right way, it’s just a logical extension of open source development, the difference being that the contributors get paid (allowing them to develop the software they want to work on full time, instead of in what hours they have left after fulfilling the requirements of their full time job, since we all need to pay the bills) and there is a support organization to help them market and sell the product, allowing them to do what they do best – develop great products!

In my crowdsourcing post, I predicted that “the view of sourcing will slowly shift from that of a reactive business unit that aggregates needs and demands into a proactive business unit that is looked upon as an enabler, problem solver, and even forecaster of future trends and consulted by the other units of the business“. In software terms, where many professionals now work as contractors and independent consultants, I believe that the innovative organizations will shift from outsourcing projects to big traditional consulting firms that throw whatever warm bodies happen to be on the bench at the time at the project, with varying degrees of success, to using crowdsourcing firms that specialize in large-scale and distributed project management and bringing together the right resources for the task under the crowdsourcing model.