Category Archives: Best Practices

Is Bad Procurement Responsible for the Proliferation of Snake Oil?

Once upon a time in China, medicine was based on ingredients found in nature. One such ingredient was snake oil (from a water snake) that was used to treat joint pain (which we now call arthritis and bursitis) because it gave relief when rubbed on the skin at a painful site. This is because real snake oil contained a lot of omega-e fatty acids which not only reduce pain but also reduce inflammation. While not necessarily a powerful medicine, it is a medicine nonetheless.

When the Chinese worked on the first transcontinental railroad (in the US), they introduced this medicine to fellow workers (which included native and working class Americans) who had never had such a medicine. They were, naturally, impressed by it … as were salesmen looking to make a quick buck with this “miraculous pain cure” which, at a time when western medicine was relatively weak, was desired by the population at large. So, long before the creation of the FDA (1906) when anyone could sell anything they wanted, these salesmen created fake snake oils (which often didn’t contain any oils from snakes) that they hawked as “cure-alls”. These roaming charletans, who often paid assistants (who would travel separately, act sick and injured, take the cure-all, and immediately exclaim cure), did well, until people who bought the tonics realized they din’t work. But by then they were on to the next town.

However, people did travel and eventually realized that all these salesmen and untrained / unlicensed doctors were, as we still say today, quacks (which is short for the Dutch quacksalver who would use home remedies to “cure” everything, whether there was any real basis for the cure or not), and gave a name to these cheaters and the product they sold. Because the first cure-all tonics were called “snake-oil”, any medicine with a ridiculous claim was “snake oil” and any peddler of such a ware was a “snake-oil salesmen”. However, these salesmen and products are not restricted to the consumer world, and soon those claiming to have the ultimate solution to all of a business’ process, sales, or cash management problems, etc. were deemed snake oil salesmen, selling processes or products that didn’t work. And we still have these salesmen today, often pitching great investment opportunities (especially in high tech, which we call silicon snake oil) that don’t really exist.

But to make matters worse, we don’t just have snake oil salesmen to deal with, we have snakes in our business (which the snake-oil salesmen claim they can deal with, but we’ll get back to that). What kind of snakes? KPI snakes. As the procurement dynamo explains over on procurement.world, most enterprises are chock-full of Cobra KPIs.

Why Cobra KPIs? Blame the British for that and their folly of offering a bounty for every dead snake the locals brought them in 19th-century Delhi. If you were an enterprising, but struggling, vaishya, and you received rupees for every dead snake, and the British were handing over rupees by the snake, you’re going to want to get your hands on as many snakes as possible. What’s the easiest way to do that? Breed them in droves, and kill them in droves.

As the British discovered, Cobra KPIs are those that eventually rise up, strike, and inject you full of poisonous venom. All the British got for their efforts were drained coffers and more live snakes then they wanted (when the merchants released them all on the streets when the bounty was cancelled). And if your organization has Cobra KPIs, all it will get for its efforts is loss — lost time, lost money, and lost opportunity.

Organizations, including Procurement organizations, are chock-full of these Cobra KPIs. Like FTE per dollar of spend, supplier count per category/region, p-card spend per total spend, sourced spend over total spend, etc. (Why? It’s not how much is spent on Procurement resources, it’s the value they generate. It’s not how many suppliers, it’s the right number of suppliers, which varies by product, region, and numerous other factors. It’s not how the bills are paid, it’s whether or not the bills are for the right stuff. And sometimes it’s best to renegotiate with incumbents and seek out value-add innovation versus unrealizable or unsustainable year-over-year cost reductions.)

But even worse, because organizations are sometimes too obsessed with KPIs, they overload themselves with overly intensive tracking, scorecarding, and reporting initiatives that take time away from value-generating sourcing activities. And then they decided they need a solution to automate this or reduce the stress. So they go to market. And who responds? Snake-oil consultants who offer their next generation tracking, scorecarding, and reporting platforms that, for a “very reasonable” one-time set-up fee (in the tens or hundreds of thousands, depending on how big the organization is and what they think they can get), and an ongoing “expensable” license and maintenance fee that just fits under the P-card limit on a monthly basis, the organization will be provided with an automated system that will do all the data collection, normalization, integration, scorecard generation, trending, and reporting the organization needs. And if needs change, changes can be made for a “modest” daily consulting fee (of only a few thousand a day). It’s the KPI cure-all! And it’s snake oil. Snake oil that the organization proliferates by defining too many KPIs, which always contain too many wrong KPIs, that entail too much work that needs to be automated.

In other words, don’t define KPIs needlessly. And don’t define any until you not only understand what the goal of the KPI is, but how the KPI will help the organization achieve that goal. (With reference to our examples above, it’s ROI per FTE above a threshold, it’s a supplier range for each product-region pairing determined by way of stakeholder collaboration and analysis, p-card spend under management above a threshold, and spend under management — where spend under management is any spend where a conscientious decision was made to tackle the spend that way after an analysis. Now, the ROI calculation will have to carefully thought out and reviewed regularly, the supplier ranges revisited regularly, and the threshold reviewed to make sure it doesn’t trigger a red light on emergency spend, but at least these metrics are designed with a value focus in mind.)

(And if you’re not careful, you might end up with real snakes! Just ask the airline industry, that, just two days ago, made Samuel L. Jackson’s nightmare of motherf*ckin’ snakes on the motherf*ckin’ plane a reality for some passengers of the Air Mexico Torreon-Mexico City flight! [One Source!] If you have too many useless KPIs, as Douglas Adams tried to warn us years ago [as you can wait forever for lemon-soaked paper napkins and never get enough], the attendants will be too busy running through time-wasting checklists rather than making sure that only authorized, paying, passengers are in the cabin!)

 

SRM Case Studies Speak for Themselves

On Friday, we noted that State of Flux just released their eighth annual SRM survey, entitled “Digital SRM: Supplier Relationships in the New Technology Landscape”, and with it the surprising revelation that while leaders are taking steps forward, Procurement organizations as a whole might be stagnant or taking steps back! This, of course, is not a good thing because the best sourcing event in the world is useless if the plan (encapsulated in the contract) isn’t followed through and the expected savings or value never materializes. SRM is the key to realizing sourcing success, and too many companies overlook that (and wonder why 30% to 40% of identified savings never materialize).

We’ve written many posts over the years not only on the importance of SRM but how to implement it and support it with technology, so this time, instead of doing another multi-part series (which can be found in the archives), we’ll just skip to some of the case studies covered in the report and hope that maybe they are enough to convince you to get your SRM act in gear and go forward!

Telstra, a big name in Australian telecoms that is relatively unknown outside of Australia, implemented a SRM program that not only put more structure, process, and value around SRM but repositioned the perception of Procurement from a function that is only focussed on cost saving to one that works with suppliers and stakeholders toward the realization of business goals. As a result of this change in mind set, and more collaboration between different departments and suppliers, Telstra has met 10% of savings targets through increased revenues, showing that SRM can do more than save money, it can increase sales and revenues by finding ways to create new value that end customers will pay (more) for.

But that’s a small win compared to Ladbrokes who saved £18 M by taking the gamble out of SRM. Since beginning their SRM transformation in 2014, they hit a 3-year savings target of £ 18M a full year ahead of schedule, demonstrating the true savings potential of a well defined and well executed SRM project, which is huge in an industry where the majority of indirect spend has to go to a very small supplier base and where competitive bidding has little effect.

And the value of SRM has not been lost on the giants. For example, if Mars were a public company, it would be a Fortune 100 company as it regularly sells in excess of $ 33 Billion a year in food products (as it manufacturers more than just the iconic Mars bar). Even though it is a top procurement organization (that employs many leading supply management technologies and processes), it has recognized that SRM can help it get even bigger and better still, and that is part of the ambitious plan it has for SRM. While its initial SRM program is still in rollout, it’s starting to see a lot of enthusiasm from stakeholders and suppliers alike, which is a hard momentum to build in an organization of 77,000 employees with a dedicated commercial team of 1,200 individuals! Whereas most organizations might have a few dozen people on the commercial side, and maybe a few hundred, and can thus build enthusiasm for new initiatives and roll them out quickly, getting a thousand people on board is no easy feat. But the potential of SRM is such that even an entire organization can get behind an initiative that can cut costs, increase value, and even encourage innovation in the supply base.

In other words, there’s a lot of gold in them thar SRM hills, and any organization that doesn’t mine for it is leaving a lot of money and value on the table. To find out how much money and what kind of value might be left on the table, check out “Digital SRM: Supplier Relationships in the New Technology Landscape”. It’s worth your time.

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.