Category Archives: Best Practices

Procurement Leaders Listen to Roxette!


How do you do (do you do) the things that you do?
No one I know could ever keep up with you
How do you do?
Did it ever make sense to you …

A recent article over on Procurement Leaders asks CPOs why do you do and notes that a recent exercise they’ve been carrying out has been to ask CPOs to share the value propositions they have in place for their function.

Procurement Leaders’ goal was to force extremely busy people to take a step back and think deeply about why they do what they do. What are the ultimate goals of those negotiations with suppliers? Why are they spending time building relationships with certain suppliers and not others? Where should scarce resources and investment dollars be spent? This is because while a value proposition for a Procurement department is not an easy thing to produce and even more challenging to agree and implement, the provocation can allow a Procurement Department to get back to strategy, think about how our decisions affect our stakeholders, suppliers and the communities we do business in.

And while a Procurement department should understand its value proposition, because it helps it focus and relay its value, getting everyone in the organization to agree can be a very extensive effort and extremely time consuming. Furthermore, when you consider the possibility that the “value proposition” ultimately agreed on could be such a mish-mash of different viewpoints and demands to the point that it adds absolutely no value whatsoever, just like a corporate “mission statement” when everyone gets to add their bit to it (and the end result is no different than what the Dilbert Mission Statement Generator used to generate).

However, if you look at the example questions Procurement Leaders’ quoted, you realize that while a vision might be a good goal, a better effort, or at least a better way to start, is to ask the C-Suite to outline it’s top goals for the year, and then for the Procurement organization to identify the best ways they can meet those goals. From there they can identify: which categories should be strategically sourced, which products or services are critical for them, which suppliers are likely critical, and then, for each project, define the value and the goal and not spend effort building relationships with suppliers who are supplying tactical products or services that can be just as easily obtained from the next three lowest bid suppliers and instead spend time developing relationships with suppliers who are critical, even if the overall spend is low. For example, control chips in cars and power regulation systems are extremely critical and often only (capable of) being produced by a few suppliers due to highly specific requirements or proprietary natures. Compared to the costs of the steel, the transmission, the engine and/or the batteries, and even the tires, the total spend might not even register when the chips are only a couple of dollars each — but if a supplier failure, logistics delay, or raw material shortage shuts down your entire production line because you didn’t see a shortfall coming and either work with your supplier to build up an inventory or work with the backup supplier to allow production to be ramped up quickly, hundreds of millions of dollars in revenue could be at stake.

Furthermore, no effort should be spent “strategically” sourcing a product or category where the payback isn’t at least 3X the cost of the manpower required to do so. If an automated multi-round RFX with automated feedback or a reverse auction will get you 99% of the savings and the last 1% won’t even pay for 3X the salary and overhead of the buyer, it’s just not worth it if this prevents the organization from sourcing a lower cost category with a 5% savings potential through better analysis and negotiation. Know the value, define the value, and only put effort in where there is real value to be gained. Otherwise, use appropriate automation or redefine categories and projects. (Definitely don’t go nuts and RFQ everything, because even the squirrels will know you’re nuts if you do. But maybe do some overarching sourcing or negotiation that you can just cut POs or one-time orders against for a year. Sometimes just negotiating for 20% off of lowest list price in a 30 day window [and carefully tracking and documenting those prices to prevent invoice overcharges] is enough to automate catalog orders.)

And similar logic applies to all Procurement (related) activities. While machines can’t replace procurement professionals, they can take over the tasks where their intervention doesn’t add value. That’s the point. So think before you act, and act appropriately.

You NEVER Have to Go Crazy on 3 Bids and a Buy!

This is a follow-up to last Friday’s article on RFP Everything? Are You Mad? Even The Squirrels Will Think You’re Nuts!,
which was in response to a LinkedIn Post where a consultant noted that a remarkable example of AI was autonomous tail spend RFP’s generating over 15,000 RFP’s annually through a programmed bot. the doctor‘s response to this was that it was absolutely terrifying. Sales professionals who are already over-inundated with ever more demanding RFQs where they know, statistically, they will only get 20% to 33% of the business if they are on par, and less of the business if they are not, are going to be so overwhelmed that they are going to have two options:

  • pick favourites and stop responding, or selling, to clients that over-inundate but under-buy or
  • acquire an auto-responder and counter auto-generated RFQs with auto-generated bids from their catalog, which may be good, bad, or pointless

Neither is good for the buying company. The counter to this was that there is a category of services which is one off and needs the collection of a number of competitive bids. The value of these services in the €10-100k bracket needed a tail spend management program for which we developed the automated ‘3 bids and a buy program’ … and there is no better way to organize it.

Which is totally not true, because the doctor saw a better way successfully implemented 16 years ago. Back in the day, Iasta (acquired by b-pack, renamed Determine, acquired by Corcentric) identified that one of the BEST uses for strategic sourcing decision optimization was services procurement (when most firms were still using it for indirect or fledgeling direct).

What they did was:

  1. identify all of the services their large mid-market clients would contract over the course of a year with typical durations
  2. collect bids from national, regional, & local providers
  3. build a huge optimization model which would identify the lowest cost providers for each service in each area and then make an annual award to a mix of national, regional, and local providers guaranteeing a certain volume / $-value of services across a certain number of service categories / roles across awarded service areas as long as the provider locked in the rates for a year

It was ingenious because, when the service was needed, the company simply sent the requisition to one of the chosen providers (lowest-cost first if available, or second-lowest if not or if they weren’t sending enough business to the second-lowest in other categories to meet the commitment).

ONE single RFQ event. One year of quotes negated. The approach regularly identified up to 40% savings, and realized up to 30% savings. David Bush and team were geniuses!

The morale of the story is this: if you think you need to send 15,000 auto-generated RFQs to get tail spend under control, you haven’t done enough thinking about, or analysis of, the problem!

All Hail The Gruntmaster 6000!

It was more influential than you think!

The Gruntmaster 6000, first introduced in the The Name, and eventually realized by Infomercial is, more importantly, a great foundation to explain why the doctor started Sourcing Innovation and why it is still going SIX THOUSAND (6,000) published articles later (even though the GruntMaster 6000 ended up being an exercise machine with a graviton generator)! (And yes, this is the 6,000th published article on Sourcing Innovation.)

In The Name, it all starts with the team, including Dilbert, being challenged by the PHB (Pointy-Haired Boss) to come up with a new product (to replace the product that killed everyone who used it), starting with the name — which he believes is more important than whatever the product ends up being! A name that has to ultimately be approved by the CEO, who, of course, also believes that the name is the most important thing ever!

It’s an attempt to clarify, in a humorous fashion, both the absurdity of modern marketing for technology products and modern “suit” management who, when they are running a company they fundamentally don’t understand (still a big problem today, and we’ve had multiple recent examples of why accountants, bankers, and lawyers should NEVER run tech companies), over focus on details that just don’t matter.

And, more importantly, propagate the belief that all you have to do is select the “right” product, where the “right” product is obviously the one from the most successful company, because if a company is successful, the product must be good, right? And how do you identify the most successful company? The one that looks most successful, and, obviously has the most successfully sounding product name, right? Right?

WRONG! It’s the propagation of this problem into Procurement which is why Sourcing Innovation exists. The belief that you can pick a few successful companies, throw a problem over the wall, and get a good solution. And while you theoretically can, if you don’t pick the 3 best companies for you, the odds of you getting a good solution are not good. In fact, the odds of you getting a good solution are vanishingly close to zero! (That’s why at least two thirds of technology projects fail. Standish Group’s CHAOS 2020 report analyzed 50,000 global projects and reported 66% failure rate. And that’s one of the lowest reported failure rates the doctor has ever seen. Many of the reports he’s seen over the last two decades report 70% to 85% technology project failure.)

And you can’t pick good companies unless you know

  • what makes a good product
  • what makes a good company
  • … and, most importantly …
  • what you need the product to do
  • what you need the company to do

And that requires education. Continual, never-ending, education. Education that no one was giving you in the sea of (marketing) madness. That’s why Sourcing Innovation exists, and why it is still going SIX THOUSAND published articles later.

And, FYI, because the focus is on education, with the exception of a few hundred posts on products that no longer exist, the vast majority of what was written in the early days is as valid today as it was then. For example, the doctor, thinking ahead to the inevitable conclusion of outsourcing (and understanding EVERYTHING wrong with it*), has been preaching the desperate need to return to on-shoring, near-sourcing, and even home-shoring for the past fifteen (15) years! And every single one of the 101 Procurement Damnations still exists today! So feel free to jump back to the second post on Strategic Sourcing Innovation Defined published on 2006-June-10 and start reading forward. the doctor is sure you’ll learn something from almost every single post! And the best thing about going back to the beginning, you can read an hour a day every day for the next year and still not make it to 2024! (At roughly 5.8 MILLION words, and an average reading speed of 238 words per minute, the average reader will have over 406 hours of reading!)

* as he did study the history of trade as well as pre-recorded history, early history, archaeological, and anthropological methods [even though sometimes he thinks a better understanding of cryptozoology might help him understand modern business better] … and he’s even gave a presentation on the archaeology of spend analysis, as many of the best algorithms for spend analysis have their roots in the algorithms developed by mathematicians for archaeologists …

RFP Everything? Are You Mad? Even The Squirrels Will Think You’re Nuts!

A recent post on LinkedIn that proclaimed Exciting News! (and which should have exclaimed Good News Everyone*) worries the doctor greatly because a remarkable example of AI was

autonomous tail spend RFP’s, generating over 15,000 RFPS annually through a programmed bot!
 

EEEEEEEEEEEEEEEEEEEAAAAAAAAAAAAHHHHHHHHH!!!!!

15,000 more RFPs for inconsequential tail spend might sound exciting to buyers, but it’s terrifying to sales professionals who are already over-inundated with ever more demanding RFPs where they know, statistically, they will only get 20% to 33% of the business if they are on par with their peers, and the odds will be worse if they are not.

More RFPs, or even just quick-quote RFQs, is NOT the answer to good tail spend management! If you try it, you’re just going to end up:

  1. losing potential suppliers who just drop you because you can’t keep up with the volume or
  2. getting auto-generated responses from suppliers who “wise up” and counter idiotic tech with idiotic tech — and these may be good, or may be pointless …

You need to use tech to find the best deals on tail spend WITHOUT overburdening the supply base. This means, at a minimum, you need tech that:

  • allows you to find potential products/services in your catalogs / covered under your agreements
  • find potential products/services from your GPOs
  • find potential products/services from preferred suppliers
  • … and identify the lowest cost items from the groups above
  • identify potential products on the open market
  • … and identify the expected lowest cost as a baseline
  • identify past events, possibly in an anonymized community intelligence database,
  • … and how much the price was reduced against catalog/market price
  • and then let you know whether or not an RFQ will likely result in a significant savings (not just 1% or 2%, it’s tail spend, after all), and, if not, present the best option that will NOT over-inundate, and deprive you of, good suppliers in your supply base

Just like AI in marketing, too many RFPs is just adding to the noise, and no one wins when neither side can hear what needs to be heard!

* It was NEVER Good News!

Proper Solution Selection is Harder Than You Think!

In Jon The Revelator‘s recent post on what can 2005 tell us about Procurement AI in 2024 he listed a dozen vendors from 2004 that no longer exist and asked if we recognized these names. To this, the doctor replied every single one and noted that the market is even more fragmented today than it was in 2004 and pointed you to the Source-to-Pay+ Mega-Map. Jon then asked if history will repeat itself, and as per the doctor‘s recent post on Market Madness, it will … with a vengeance!

This response prompted The Revelator to ask which companies would join their brethren from 2004, to which the doctor provided some indications, which were many (and even more numerous in the Market Madness post). So The Revelator then asked what do practitioners need to do during these pending turbulent times? The real answer is quite a bit and, in fact too much to address in a single article, or even a book, so the doctor decided to focus in on stable solution selection.

And while the doctor made it look as easy as 1, 2, 3 in his comment, when he said:

  1. first identify what kind of solution you need
  2. then identify which providers actually offer those solutions for their geography – market size – vertical
  3. then restrict down to those that are *stable*

It’s a lot more complicated than that, and for some companies, some of these steps will consist of many steps within themselves.

What kind of solution is complicated! At a minimum, one needs to consider:

  • what processes are you doing
  • … and which of these are properly, or not, supported by your current tech
  • what processes should you be doing
  • … and what tech will support those
  • and which subsets of tech are the most relevant (and make sense to focus on)

Which providers is harder.

  • many providers will claim to be everything to everyone, but that’s not true
  • the big analyst firms over-focus on the big vendors, because that’s who they have to (contractually) spend most of their time on
  • smaller firms will focus on the smaller vendors, because some of the big ones believe their big cheque to the big firm(s) covers all their marketing/market needs, and may not have the time to dive deep into geography – market size – vertical appropriateness
  • and logo maps don’t give you near enough detail to even get a short list

In other words, it’s a heck of a lot more than just choosing the first 5 names that come back in a Google or a “chat, j’ai pété” search!

You want a vendor that is going to be around, or if acquired, a solution that is going to be maintained because it’s growing year-over-year, wasn’t built on an oversized investment (pressuring the firm to increase prices or cut costs or grow too fast), 10+ to 50+ customers (depending on solution type and implementation / replacement time and cost and risk tolerance), etc. Where do you get that data? How do you ask in a way that won’t result in the sale person clamming up?

It’s more than most Procurement organization’s can handle as they just don’t have the TQ (Technical Quotient) or the market knowledge. They need to get help from an expert who does who is not biased towards any particular vendor and will follow a proper process, not just throw an RFP over the wall to three providers they have worked with before (as that’s no better than a refined “chat, j’ai pété” search)! And it can be hard to identify the right expert (and the only hint the doctor will give you now is you’re less likely to find one at a random Big X or Mid-Sized Consultancy — some of the Big X, especially those that have been acquiring expert AI and Analytics firms over the past few years, and mid-sized consultancies have them, but these experts are few and far between, spread thin, and unless you are a Fortune 500 / Global 3000, at most of these firms you will be fighting for the senior expert’s time). You might just need a niche consultancy with experts who specialize in this. There are a few, but not as many as the space needs.  [Take into account when you should use a Big X and that it is up to you to properly specify the project, evaluate the proposal, and vet the personnel proposed.  Otherwise, it’s your failure.]