Category Archives: Best Practices

Value-Based Sourcing in Complex Direct Supply Chains

… is something every single organization that relies on direct sourcing needs, but something that few organizations have.

Not only do most organizations not have the right system for direct sourcing (relying on first generation e-Sourcing systems designed for indirect sourcing), but they have no idea how to do value-based sourcing. With an undue focus on unit cost, transportation cost, and delivery dates, most organizations don’t realize that success requires good direct category management, which requires more than just cost transparency.

Successful direct sourcing also requires risk transparency and good supplier management, as quality and performance are as, if not more, important than cost in direct sourcing. Think about it. If the component being sourced is poor and breaks down rapidly, then the product breaks down rapidly. If the product breaks down rapidly, while still under warranty, that’s not just a huge cost to the organization, but also a huge hit to the brand. Not good at all.

But direct sourcing is more than just focussing on supplier demo product quality, or overall supplier performance, it’s focussing on the big picture. What is the big picture?

For deep insight, download Sourcing Innovation’s latest white paper on Value-Based Sourcing in Complex Direct Supply Chains, sponsored by Pool4Tool. In this white paper we discuss the six value levers that allow you to get more out of your direct categories when sourcing, with a deep discussion on quality and performance and risk management, which give you a fuller view of the category than you will get focussing on costs and supplier scorecards alone.

3 More Terrible Reasons NOT to Use e-Procurement

Over on Procurement.World, the procurement dynamo gives us 3 Terrible Reasons NOT to Use e-Procurement, which, sadly, are still used by many organizations in the bottom 40% to 60%, to fight the implementation and adoption of e-Procurement systems.

If the reasons given in the procurement dynamo‘s post were the only reasons, that would be bad enough. But these are just a few of the reasons that Procurement organizations don’t use e-Procurement. In this post we are going to discuss other reasons, and, in particular, reasons that are a bit more believable — which are the worst kind of reasons.

1. Our Processes are Not Supported in the New System

While it’s true that the processes used by organizations that are still operating like it’s the last century are not supported out of the box, modern procurement platforms come with adjustable workflows that can be tailored to support just about any process the organization needs, good or bad. This may have been an excuse with first generation systems with fixed rules and workflows, but it’s not an excuse anymore.

2. The system won’t work with our current ERP or AP system

Most organizations require that all POs get in the ERP, all invoices in the AP, and all goods receipts in the inventory system. Because no recommended e-Procurement system will integrate with these systems out of the box, anyone against the implementation of such a system will insist it won’t work. And, again, wile this may have been an excuse with first generation systems that were almost impossible to integrate with anything, it’s not an excuse anymore when most e-Procurement vendors realize that their systems have to integrate with other systems and have published data models, open APIs, and middleware that enables the easy integration with such systems.

3. We don’t need Supply Management System X, we need Supply Management System Y.

Sometimes, knowing that a system they don’t want is inevitable, an opposing employee will suggest that a system is needed, but the system under consideration is not the right one and a totally different system is needed. For example, you are looking at a P2P and they will insist that a S2C is needed, or vice versa. Or they will insist that the ERP needs an upgrade. Or so on. But it will all be a distraction.

Systems will always be opposed, but when they are needed, they need to get implemented. The key is to select the right one. But with proper homework (and many posts on this blog will tell you how to do it), the right one can be selected.

London Bridge is Falling Down

But this time, it’s not the vikings*, it’s the procurement. And this is not a good thing. Bridges need to be built, not put on indefinite hold while enquiries are made into funding proposals. But then again, why does a foot bridge cost £185M?

As per a recent post by the public defender over on Spend Matters UK on how “Procurement and Funding [is] To Be Reviewed”, while a previous internal review by Transport for London did not find any evidence that would suggest that the final recommendations did not provide value for money from the winning bidders, the report did find major breaches of good procurement process. From allowing a supplier to submit a bid after the formal deadline, to a lack of documentation, to changing the evaluation process once bids were received, to treating suppliers differently – as we said, if any unsuccessful bidder had challenged in court there is no doubt that they would have won their case.

While this is bad, and provides a solid reason to put everything on hold for further examination and inquiry, this situation should never have happened in the first place. With so many resources on good public procurement available from the EU, the OECD, and private government oversight organizations, there’s no excuse, and no call, for any government procurement body in any advanced country to conduct an event like this — especially when there are good public procurement platforms (including, but not limited to Intenda, Causeway, Perfect Commerce, and others) to prevent situations like this from happening (and some are custom built for big procurement projects). Modern platforms block late submissions, allow evaluation criteria to be locked down before the bid goes out, allow initial submissions to be reviewed blind, and so on.

So, we beg you, before any more bridges fall down (or literally fall down because the funding to fix them has to be put on indefinite hold while the Procurement process is reviewed), learn the rules, follow the best practices, and put good platforms in place that prevent bad processes from ever happening in the first place.

* While the popular rhyme has to do with London Bridge falling down, the reality is that the rhyme might be the result of the destruction of (a) London bridge by Olaf the II of Norway somewhere between 1009 and 1014.

What Procurement Processes Should Be Automated?

The big push in Procurement Automation is typically the automation of invoice processing: automatic matching, verification, and when possible, payment because paper-based invoice processing in an average organization can cost $30 or more (with some estimates that paper-based invoice processing can cost an organization as much as $60). But when an organization switches to automated invoice matching, processing, and payment with a best-of-breed system that can automate processing the 85%+ of invoices that are problem free can reduce invoice processing costs to somewhere between $3 and $8 an invoice, depending on the system and the overhead costs.

And while this cost savings is great, it shouldn’t distract from the other cost savings opportunities that can come from automating other procurement processes, which eat up valuable time and resources. In this post we will discuss three other areas of Procurement that should be automated.

Requisition Approvals

Not every requisition needs a manual review. A requisition for a standard office supply reorder from the office manager, a requisition for a standard setup for a new hire, or a requisition for standard travel expenses for a pre-approved conference can all be automatically approved if the expenses are within the expected range and budgets are not exceeded. A requisition system that supports the definition of rules that can allow requisitions to be auto-approved can save the organization a lot of time and resource energy.

Automated MRO re-orders

A system that can support the definition of minimum stock levels, maximum stock levels, and perfect re-order levels can allow stock to be automatically re-ordered when a threshold is met. This negates the need for an MRO clerk to regularly check inventory levels and compute re-order levels.

Supplier Profile Maintenance

Supplier profiles need to be kept up to date to enable the organization to contact the right people, select the right locations, keep track of current products and services, and make payment. People change roles, and jobs, office locations move, products get discontinued, and so on. Keeping this information up to date takes a lot of time and effort – with a good portal, that reminds suppliers of their need to auto-update, suppliers can maintain their information, upload insurance certificates and certifications, and provide the organization with requested information on an as-needed basis.

Good Procurement systems automate the tactical and allow procurement professionals to focus on issues, not paper pushing.

Category Aggregation – How Far Do You Go?

Category Aggregation is one of the tried-and-few methods for spend leverage in Procurement — aggregate a bunch of items, go to market simultaneously, and demand big discounts for big awards. The first time a significant category of significant size is aggregated, and offered up, the organization will see savings … often significant savings.

But does the spend have to be aggregated to get the savings? Let’s examine the likely reasons why a supplier will offer up savings.

  • They were making a fat margin and could give it up.
    For example, maybe a healthy margin for the industry, unbeknownst to your organization, is 10% and they were making 15% (because of internal efficiencies or collusion that prevented you from knowing the true margin). In this case, they would be happy to sacrifice 5% to triple their business.
  • What’s lost on unit is made up in volume.
    If volume allows them to not only maintain their profit level but potentially increase it, they are likely to go for it.
  • Big orders allows them to get discounts on raw materials.
    Smarter suppliers may realize that the more volume they can commit to, the better prices they are likely to get and offer discounts based on projected cost savings on raw materials.
  • Big orders allows them to operate more efficiently.
    Some suppliers might have plants that operate most efficiently at large volumes, and will take slight margin cuts to maintain peak production level (and enough cash flow to pay the workforce without expensive “payday” loans).

If you look at these reasons, it would seem that the best way to get better savings is through aggregation as this is the only way to make the buy more enticing. But is it?

Not necessarily. Let’s start with the fact that suppliers might be willing to give you price reductions if they get price reductions. You could always give them price reductions from the get go by buying raw materials your organization uses a lot of across categories at prices better than smaller suppliers could get and, as part of every bid, noting that they will have access to necessary raw materials at a reduced cost when serving your organization. They can pass this savings on to you as part of their bid.

You can also engage your best engineers and production consultants to create detailed should cost models that take into account market pricing on raw materials, labour rates, energy costs, and average production line maintenance costs, tack on a fair margin, and use this information as leverage in negotiations in conjunction with open book costing requests. You can ask not only for a price breakdown, but compare it against expected prices and see which suppliers are trying to keep the wool over your eyes, eliminate them, and work with those focussed on win-win cost reductions. (You’ll allow them to maintain a healthier than average margin if they cut your costs by using your lower cost supply, optimizing production runs, and implementing the lean process improvements you dictate.)

You can guarantee them a certain revenue in the following year if they meet performance targets. (For example, if they maintain an on-time delivery of 90%, a defect rate of under 2%, and costs are maintained, in 12 months you will guarantee their annual revenue will increase by 50%.) Now, you might think this is hard to do, but with an optimization-backed sourcing platform, you can dictate minimum award requirements in a scenario, or determine impact across a set of scenarios, and pick the categories where an additional award will most benefit your organization.

You can allow them to specify optimal order sizes based on their factory. For example, if they produce 10,000 units a day, you should order multiples of 10,000 at a time — otherwise, they might have to switch dies, etc. during the day and take down the production line while staff are still on the clock. Tying order sizes to production runs means that they only have to reset the production line once a day, before or after a shift, and the supplier can keep their overhead down.

Aggregation is not always necessary, but sometimes it does make sense. Why do three sourcing events for essentially the same product or service? Especially when you can do one, implement one or more of the above strategies, and potentially identify more value than your peers. In other words, you should aggregate when it makes sense, and be aware of the “6 Critical Success Factors for an Aggregation Approach”, as summarized by the public defender, but not depend on this strategy or overuse it.