Category Archives: Cost Reduction

Do You Have Continuous Cost Control?

If not, you should, because with tariffs rising, markets falling, inflation out of control, sales dropping (as entire markets are cut off with sanctions and trade wars), we’ve gone beyond the point where every dollar counts to the point where every penny counts on every purchase because those pennies add up as every 100 purchases is a dollar and every 100,000 purchases is $1,000 and when money is as tight as it is now, that is actually value (especially for an organization making millions of purchases a year).

And right now, organizations are wasting a lot of dollars through the entire purchasing process. From poor sourcing strategy and process, to poor sourcing and negotiation, through poor purchasing execution, and poorer logistics management, to poor invoice and payment management. Every step without good cost control adds cost to the process, at a time when you need to be taking cost out just to survive.

And we know organizations are losing across the board because the following is required to keep costs in control:

  • good processes at each step
  • (near) real time market intelligence at each step
  • good systems supporting each step
  • continuous monitoring at each stage

And we’ve never seen an organization, even a best-in-class organization, that has all of this for their Procurement department. In fact, it’s rare to find an organization that has more than half of this. It’s now at the point where your organization may not survive if it does not have:

  • well defined processes for
    • supplier discovery and management
    • sourcing
    • contract award and management
    • procurement, on-and-off contract
    • invoice management and accounts payable
    • logistics and warehousing
    • ongoing analysis
  • (near) real-time market intelligence at each step
    • current, financially stable, accessible suppliers
    • current commodity costs, average overhead costs by region, tariffs, etc.
    • current best practices, standard clauses, and insurable risks
    • market availability, quality, delivery times, remaining contractual commitments
    • current entity information, payment terms, standard processing times, community intelligence on supplier OTD
    • carrier availability, costs, surcharges, etc.
    • changes in spend trends and curves, etc.
  • good systems/modules supporting each step
    • supplier 360 module (not just SIM/SRM/SPM .. all supplier data and interactions)
    • sourcing (RFX) management
    • contract negotiation tracking, signing, and ongoing management
    • e-Procurement that supports ALL purchases through the system
    • I2P with automated invoice processing and workflows
      (85% should be touchless on implementation, 95%+ over time)
    • logistics booking and carrier monitoring
    • best in class spend and performance analysis that updates at least daily
      (and regularly re-runs best-in-class trend and outlier analysis and alerts you to unexpected changes)
  • … with built-in alerting when something unexpected happens or doesn’t happen on schedule / as expected

And you don’t. But you need this now more than ever. So, if you don’t have:

  • processes, define them; they can be basic to start; for example, classic 7-step sourcing is enough to start (even though there are some more refined 11 step processes)
  • market intelligence, get yourself some; in particular, supplier discovery as some of your suppliers will go out of business, be unreachable, or get too expensive in the days to come; cost modelling for major spend categories to understand true costs for better negotiations because even if it only shaves half a percentage point on average, that’s still 500K on a 1M category (and you can get some of these solutions for under 100K a year), and those hundreds of thousands quickly add up to millions; and major news/event monitoring to pinpoint emerging risks as fast as possible
  • modules supporting the entire S2P process, acquire them; note that most of these don’t need to be BiC; for example, all of the major suites will tout the tens or hundreds of millions their big customers have “saved” with their solution, but what they won’t tell you is that at least 90% of that savings simply resulted from the client implementing a good process supported by a tool with a decent workflow solution; in other words, you don’t need the multi-million dollar solution (to start), you’ll see the same benefit from a six figure suite that is better than average in the key modules that matter to you (especially since it will take you years to master the new processes it will support, meaning that for a big suite, it’s usually five years or more before you can see more value than just going with a basic solution given that the journey to Best in Class, as determined by Hackett in the mid moughts, is at least eight years)
  • continuous data modelling and analysis, start now; with your spend analysis and performance tool updated at least daily

you need to make a plan to incrementally acquire what you are missing, most critical need first, until you do. (Remember, don’t try a big bang implementation. No matter what the vendor or Big X will tell you, those always end in big booms.)

Why You Need BTCHaaS!

Nine years ago we told you that you needed MROaaS, and you most definitely do, but it’s not enough anymore, now that you can’t predict what your parts are going to cost now that you’re Back in the U.S.S.R, you also need BTCHaaS: Border Transport Cost Heuristics as a Service.

Basically, now that USA border tariffs (and counter-tariffs from Canada and Mexico) are more unpredictable than the weather (where 3 day forecasts in some areas approach 97%, East Coast Canada excluded, and 10-day forecast accuracy is approaching 50%), and come and go on a daily basis, you need a border transport (BT) solution that uses predictive analytics solution that minimizes your tariff impacts that uses cost heuristics (CH) derived from similar prior patterns in similar tariff announcements and withdrawals, costs per day of delay, and spoilage risk.

Basically, you have this dilemma. When a tariff is announced on the border your truck is scheduled to cross for the day it is scheduled to cross, do you

  1. accept is a cost of business, do nothing, and have it cross as normal
  2. send it to a truck stop and tell it to wait for a revised decision tomorrow
  3. turn it back around, unload, and do without (for now)

Depending on:

  • the value of what’s in the truck
  • the risk of spoilage
  • your contractual requirements
  • storage costs on the other side of the border
  • the tariff(s) that will be applied

Your best option on any particular day will vary. For example:

  • if the tariff is likely to be rescinded in the next three days, and you can wait a day or three, maybe you tell the driver to wait and pay an extra one to three days of salary/transport fee
  • if the tariff is not likely to be rescinded in the next three days, but likely within the next few weeks, and the tariffs would be in the tens or hundreds of thousands of dollars, and you can do without the goods for a few weeks, maybe you send the truck to a local warehouse and pay a temporary storage fee
  • if the tariff is not likely to be rescinded at all, and you can do without the goods in the short term, and you are not contractually obligated to take them (which might also be the case if the tariffs are so high that they qualify as force majeure), maybe you turn the truck around and drop them off where you picked them up
  • if the tariff is not likely to be rescinded, and you can’t do without the goods, then you should just cross the border

But that’s not an easy decision to make on the spot. You need to know

  • the transport, and waiting, cost per day
  • the (potential) cost of (additional) spoilage (i.e. 5% of produce may spoil)
  • the (potential) cost of any delay
  • the cost of the tariff
  • the cost of localized storage (plus the additional unloading and loading fees)
  • the likelihood of a decision change within a short time frame (3 days) and a mid-time frame (3 weeks) based on market data and sentiment analysis to tariff announcements

and do all the calculations and make recommendations based on the possibilities for you, a human with human intelligence (HI!), to accept or reject. After all, if the truck is carrying 2 Million of electronics or auto parts, a 25% tariff is 500K, and it doesn’t cost anywhere near that to make the driver wait an extra couple of days (and to hire a few security guards to keep it safe), and will be worth it if the likelihood of a reversal, or significant reduction, is high.

So yes, MROaaS is not enough anymore … you now need BTCHaaS!

The Green Cabbage Grows Another Leaf

When we first invited you to Take a Leaf from the Green Cabbage eighteen months ago, we covered one of the most extensive services-backed indirect-focussed spend analysis players in the market (serving clients like Delta, Home Depot, Dell, Adobe, etc.) with deep support for:

  • SaaS Subscriptions: going well beyond many of the dime-a-dozen SaaS cost analyzers (and there are quite a number of those now, see our coverage of the Sacred Cows), Green Cabbage can unpack the purposely confusing consumption models the big players throw at you (to try and get you to spend more than you need to), do SKU level price comparisons, provide you deep insight into negotiation opportunities, and, through their MITs, provide guidance into how to achieve actual savings
  • Contingent Workforce (CW): detailed insights into over 70,000 position-level-market (geography) combinations for deep negotiation insights across 120 countries
  • Clinicals: deep knowledge and insights into clinical SKUs and sourcing
  • Invari: their Invoice management platform, which allows invoice and payment data to automatically be extracted into the appropriate spend cubes while also providing core I2P capability (and eliminating the need for YAP — yet another platform)
  • MITs (Market Intelligence Theses) across SaaS, CW, and Clinicals: which could be lightweight, comprehensive, or competitive; guaranteed to be completed within 3 days, and usually completed in 1 to 2 days for lightweight and comprehensive
  • Contract Library: Green Cabbage starts by loading your contracts, not your spend data, extracting the key terms and pricing, and then loads your spend data, tying as much as they can to your contracts (for immediate insights into any pricing violations); this is important because this is the foundation for the deep insights they can provide via Elegion, which we mentioned, but didn’t get into as it was in earlier stages at the time

Now, since it’s only been six months, you’re probably wondering how much new stuff could there be that would entice Sourcing Innovation to pen an update after such a short time. Quite a bit actually. There are five improved and new offerings in particular that need to be addressed:

Elegion (formerly GC Legal)

Elegion, their in-depth contract clause repository, contains hundreds of business, commercial, and legal terms; conditions; and standard contract clauses with an explanation of what each term is along with best-in-class definitions of each clause.
The platform makes it a point to call out the highly-relevant “mousetraps” that suppliers will use to (often unfairly) protect themselves through inclusion, exclusion, or modified language. The best-in-class definitions are drafted by licensed attorneys with expertise in the relevant subject matter and areas specifically supported by Green Cabbage (IT, Marketing, and Contingent Workforce). Moreover, the attorneys who drafted these clauses have collectively negotiated thousands of deals from both sides of the table in these areas.

In addition, directly through the platform, via secure end-to-end encryption, users can use their credits* to asynchronously request input on specific clauses in the agreements presented to them during their negotiation with a response guaranteed within 48 hours. Moreover, they can also request synchronous 30 min or 60 min 1-on-1 consultations with an on-staff Green Cabbage Attorney who is an expert in the contract they are currently negotiating. (Green Cabbage‘s top attorneys used to work for the top tech giants and contingent workforce providers.) This service, of course, uses up credits much faster than one-time asynchronous message requests, but can be invaluable when negotiating a multi-million dollar contract. However, the best part of the offering is the deep insight into terms, conditions, clauses, and best language/practice that can allow a buyer to address most of their legal questions self-serve with confidence!

* each subscription comes with a certain number of credits, and clients can always buy more

Better Support for Corporate Hierarchies

As we indicated in our first article, Green Cabbage supports a number of big Private Equity firms, including Private Equity Firms that manage a number of other Private Equity Firms (where each has specialized funds). As such, they have built an infinitely extensible corporate hierarchy with appropriate view and access permissions, that allow an individual, with the right permissions in any department or company, to see all of the spend in all of the departments and companies under their purview down the chain to identify opportunities for contract (re)negotiations through the utilization of a common platform provider, CWM provider, etc. (You may not believe it, but even the mega-corps will respond to a renegotiate now or we stop using you across 10 of our companies … no need to wait for the renewal.) This helps them answer questions like “how much do I spend across my portfolio with supplier S or on category X”, which is very powerful information to have for leverage and can often support contract negotiation at a group or higher level.

Receptio Integration (GPA)

If you’re a large mid-market or Global 3000, you use a lot of tech. These will range from small task/function/department specific small SaaS apps that go on the P-Card to multi-million contracts with the likes of Microsoft, Oracle, or Google. And while there is savings available in virtually every contract in every price range, for a large mid-market or global multi-national, it’s not worth chasing 5K on a 50K contract when there is likely 200K to be saved on a 1M contract. In this situation, you’ll just blindly accept the renewal for the small SaaS app if the price increase is 10% or less, and spend your hours negotiating an extra 10% from the behemoth because that’s big bucks. But what about the mid-range? The 50K to 250K contracts where there’s likely 5K to 50K of savings? That’s nothing to scoff at, but the cost of the effort involved, especially if you need to involve Legal, sometimes negates the value you realize.

So what’s the answer? Pre-negotiated Terms and Conditions from specialized GPOs that specialize in the best rates, on average, from these providers by bringing these, usually smaller, providers more business volume than they’d get on their own. That’s Receptio — an integration platform that connects you to Green Cabbage‘s Group Purchasing Arm partners that can get you better deals from many SaaS providers and Contingent Workforce providers than you can get on your own when your needs fall into the mid-range of spending.

Supplier Newstand

What’s the one thing missing from most supplier management and contract management platforms? Supplier Insights that are meaningful at contract negotiation and renewal time. Why is this typically missing? Because it requires scouring the internet to find relevant news that relates to the supplier, pulling in the links and creating summaries (hallucination free), and then tagging the articles to relevant subject matter (ownership, management, product, etc.) to allow a buyer to determine not only the org type and management but whether that’s likely to change (e.g. the organization just brought in an expert consultant on going public, announced a new CEO, etc.).

Green Cabbage recently released the first version (that currently scours over 750 news channels and vetted news sources) of this that allows you to see and search all of the recent news associated with a supplier — including, but not limited to: acquisition/merger activity, pricing changes, layoffs, executive movement, etc. — and is currently working on the next release that will associate these articles with pre-defined tags to provide quick insights.

Marketing Spend Intelligence

This is the newest offering of the Green Cabbage platform — deep, specialized insight into marketing spend. IT Spend may be the biggest at 5 Trillion Spend, but Marketing is no slouch either at an extrapolated estimated value approaching 2 Trillion when you correlate various sources and metrics, with Advertising spending alone topping 1 Trillion in 2024 (with the E&M industry being a 2.8 Trillion industry in the US alone). And, like SaaS, there is a huge amount of overspend in this category as well, especially in the non-creative spend in production and distribution when material and standardized service costs are not analyzed. Moreover, very few spend analysis, procurement software, or consultancies can provide these deep insights and guidance — and fewer still with guidance for marketing professionals with little-to-no Procurement experience. This alone almost warrants an update as market intelligence alone unveils huge opportunities, but, as you just noticed, this is just one of many improvements.

In other words, Green Cabbage has been advancing their offering at a rapid rate, as they also expand globally, with offices in the United Kingdom and India to complement their US office, and expansion into AustralAsia imminent.

Myth-busting 2025 2015 Procurement Predictions and Trends! Part 9

Introduction

In our first instalment, we noted that the ambitious started pumping out 2025 prediction and trend articles in late November / early December, wanting to be ahead of the pack, even though there is rarely much value in these articles. First of all, and we say this with 25 years of experience in this space, the more they proclaim things will change … Secondly, the predictions all revolve around the same topics we’ve been talking about for almost two decades. In fact, if you dug up a Procurement predictions article for 2015, there’s a good chance 9 of the top 10 topic areas would be the same. (And see the links in our first article for two “future” series with about 3 dozen trends that are more or less as relevant now as they were then.)

In our last instalment, we continued our review of the 10 core predictions (and variants) that came out of our initial review of 71 “predictions” and “trends” across the first eight articles we found, in an effort to demonstrate that most of these aren’t ground-shattering, new, or, if they actually are, not going to happen because the more they proclaim things will change …

In this instalment, we’re again continuing to work our way up the list from the bottom to the top and continuing with “Cost vs. Value”.

Cost Vs. Value

There were 3 predictions across the eight articles which basically revolved around a shift from “cost cutting and management” to “value creation”. As with almost every “prediction” and “trend” in this series, this is yet another prediction that makes headlines every year, no more important this year than the last, and still as unlikely to actually happen because, despite all the lip service around value, at the end of the day, all the CFO and CEO ultimately care about is increased profit from cost-cutting to make the Board happy. Before we discuss further, here were the three predictions:

  • Cost Management and Value Creation
  • Cost Management vs. Value Creation
  • Shift from Cost Cutting to Value Creation

Every year is the year Procurement is going to switch en-masse from cost cutting and cost management to value creation, and every year it doesn’t happen. We’re constantly being told that Procurement is not a cost center, it’s a value center, and proper Procurement adds value to the business, as a foundation for the “visionaries” to preach the power, and future, of Procurement.

However, as we stated in our discussion of “Strategic Value”, there’s a lot of talk about value creation, but at the end of the day, the majority of CFOs and CEOs define “Value” as “Cost Savings” and, unless Procurement cuts costs, they are not seen as “valuable”. And all of the proclaimed focus on “value creation” gets left on the cutting room floor (where Gen-AI should have been left with the rest of the discarded manuscripts).

However, once Procurement acquires the right technology, it will be super simple to make the right buy at the right price every time. (More specifically, optimization backed sourcing and procurement platforms that build baseline models, capture real-world constraints, import risk data, build minimally constrained risk-aware models, auto-solve them, make the optimal low-cost recommendation, and make what-if analysis easy if the buyer wants to see what would happen by substituting a preferred supplier. Not BS AI!) This means that Procurement will have all the time it needs to focus on strategic value vs. just finding the lowest cost (which takes up all its time now). So this is someplace Procurement should get to relatively soon — but considering we’ve had modern SSDO (Strategic Sourcing Decision Optimization) for almost 25 years, and that for the last decade it could solve large models in real-time with the computing power available, and that the vast majority of Sourcing and Procurement departments have not adopted it, our guess is that they won’t. And Procurement will thus continue to spend the majority of its time focussed on cost cutting.

What Should Happen? (But Won’t!)

If it doesn’t have it already, and it probably doesn’t, Procurement should immediately acquire SSDO (Strategic Sourcing Decision Optimization Technology) and use it for every sourcing event, even if to get a baseline to understand the cost baselines (and how much more they are going to pay regardless of inflation no matter how much they try to negotiate or buy). In addition, if they don’t have it already, they should acquire subscriptions to market cost data (commodity markets, public sector contracts, GPO data, etc.) to understand baseline commodity and product costs.

Then, when they understand the expected cost, use a combination of constraint-aware optimization and analytics to make the right decision as expediently as possible — and not waste time on futile spreadsheet analysis or negotiations that can’t go anywhere (because a price reduction from a supplier would mean the supplier’s bankruptcy).

Then, the focus should shift from minimizing costs, because that’s only going to get an organization so far, and finding value in every buy it makes, partnership it takes, and direction it breaks. It needs to, as per previous entries in this series, focus on maximizing the value of each supplier relationship through performance management and any collaboration required to make sure the expected value is realized for both parties. Focus has to be not just on the lowest cost, but quality and features that buyers will pay more for. Focus needs to be on identifying new products and services that are simultaneously more sustainable and more desirable to the market. And on curbing demand for MRO products and services to prevent spend in the first place. (Just make sure you have the Procurement Infrastructure to support you.)

That’s eight down, two to go.

Forget Cost Reduction. It Ain’t Happenin’. Best you can hope for is Cost Avoidance!

Costs are going up. And since you spent decades, including a decade and a half where those of us who could carry the thought experiment to its logical conclusion told you not to, outsourcing everything you can to China and low-cost locales in Asia and Eastern Europe, there’s nothing you can do.

The sanctions on Russia, which are skyrocketing energy costs in parts of Europe, are raising prices.

The logistics challenges, as a result of lost capacity from perfectly good ships being scrapped during the Pandemic and a new requirement to sail around the capes again (Houthis in the Red Sea, droughts in Panama reducing canal capacity), is raising prices.

Just the threat of thumping tariffs from the incoming President in the US is already starting reciprocal threats and trade wars (because the billionaire the US elected doesn’t seem to understand it’s the working class people who pay the tariffs, not the countries being sourced from, and that tariffs are to prevent markets from being flooded with goods that citizens can buy at home … and shouldn’t be used to prevent citizens from getting goods they can’t get otherwise).

China is cutting off access to critical raw materials and rare earths, when it represents the majority of the global supply (and where Russia was second or third).

Year-over-year increases in natural disasters (which are only going to increase in frequency as the US abandons any efforts whatsoever to curb carbon and GHG emission and slow global warming) is destroying larger and larger portions of global crops annually while global population is still increasing.

We could go on, but you get the point. You’re not reducing cost anymore. The best you can do is control it, and that’s going to take all of the strategic sourcing strategies available to you, as well as the best sourcing platforms to make it happen.

Which means you need to focus on cost avoidance. More specifically, we mean reducing the amount you have to buy, not just mitigating expected cost increases through better buying practices. More specifically, we mean minimizing waste and eliminating the needs for a purchase in the first place. This means, among other things:

  • eliminating disposed/fire-sale inventory at end of life (and up-front buys)
    optimizing the production relative to the demand (and eliminating the bullwhip effect)
  • reducing defects AND returns
    defects cost money to process, even if the buyer gets credit; and returns cost a company many times what the product costs — the product needs to not only be defect free, but right for the customer
  • reducing MRO
    this involves not only buying only what you use, but only using what you really need;
    i.e. does the executive need to print out all the reports? probably not, and maybe it could be prevented with a one time buy of a second monitor or an iPad Pro
  • reducing services
    do you need your office cleaned every night? probably not! (and if your employees are that messy, tell them to grow up or get out); do you need PR services if you’re in enterprise to enterprise sales? most likely not! do you need an annual Big X operations review just because the former CEO always did it? definitely not! (you just need to identify your inefficiencies and get point-based help to remove them)
  • reducing long-term inventory
    long-term, not mid-term, and definitely not short term; we’re well aware that the move to JIT ultimately crippled manufacturers during the pandemic, and it was something we foresaw when we first advised you to stop offshoring everything, but that being said, if it typically takes 30 days to restock, given that there is often the option of airfreight in a worst case situation, more than 90 days inventory is likely excessive and costly; and if you’re holding inventory for 180 or 360 days, that’s too long, and too costly; optimizing inventory to sensible sizes reduces inventory cost as well as minimizing the chance of end-of-life/expired inventory that has to be trashed

In other words, you have to go beyond the buy to analyze if the buy is even needed in the first place, if the demand can be reduced (optimizing production to realistic projections, reducing demand for paper with tablets), if the quality/targeting can be improved to reduce returns, and so on. The only way you are going to save with certainty in the economy that is coming is to NOT SPEND IN THE FIRST PLACE!