Category Archives: Cost Reduction

Does ProcureTech Generate Billions While Practitioners Lose Trillions?

A couple of weeks ago, THE REVELATOR, in his AI Whispering asked Why does the ProcureTech solution side of the table make billions, while the practitioner side loses trillions (and more)? And it’s a fair question. Because even though the practitioners don’t lose trillions on ProcureTech and ProcureTech consulting (as that’s only in the Billions), they DO lose Trillions on Tech and Tech Consulting that the ProcureTech Consulting and ProcureTech providers SHOULD be helping them save money on.

To be precise, at least 1.8 Trillion is going to be lost by Practitioners this year on Technology and Technology Consulting. Earlier this year, in our post on SaaS Spending, we predicted that at least 1.5 Trillion would be wasted based on total industry spend and an average waste of AT LEAST 30% (due to overspend, unused applications and project failure), but we are now revising that up to 1.8 Trillion based upon a minimum projected spend of 5.4 Trillion based on recent Gartner estimates.

To put this in perspective, only 15 countries have a GDP in excess of 1.8 Trillion! In other words, the total technology spend wasted is greater than the individual GDP of 92% of the countries on earth.

But it gets worse.

If you add up the global revenue of the 23 Big Consultancies, which you will be using for ProcureTech, FinTech, and related consulting, it comes to 551 Billion.

Accenture 65
Bain 7
BCG (Boston Consulting Group) 13
Capgemini 25
Cognizant 20
Deloitte 67
E&Y 51
Fujitsu 26
Genpact 5
HCL Technologies 14
Infosys 25
Kearney 2
KPMG 38
McKinsey 19
Mercer 2
NTT Data 30
Oliver Wyman 3
Publicis Sapient 18
PWC 55
Recruit 23
BAH (Booz Allen Hamilton) 1
Tata 31
Wipro 11

And if you add up the global revenues of the 9 big analyst firms, which you will be using for ProcureTech and Fintech advisory, it comes to 51.5 Billion.

Clarivate 0.5
Forrester 0.5
Gartner 6.5
Hackett 0.5
IDC 4.0
IQVIA 15.0
Kantar 3.5
Moodys 7.0
S&P 14.0

That’s a total of 602.5 Billion you’re spending for ProcureTech and FinTech consulting and advisory in return for a loss of roughly 1.8 Trillion!

In other words, for every dollar you spend, you lose three. That’s the reverse of the ROI you should be expecting. You should NOT be investing in Technology or Technology Consulting unless you will get a 3 to 1 return. But what you ARE doing is investing in Technology Consulting and Advisory for a 3 to 1 LOSS! That is the EXACT OPPOSITE of what you should be doing.

So what should you do? STOP!

Or, if you can’t stop, change the game. More to come …

What Are the Biggest Organizational Cost Saving Levers?

Every year there is a new survey or research report that will name one to three levers as the biggest cost savings levers in an organization, but it’s really not that simple. For example, the SCMR last year reported on a BCG study and the Hackett Group 2024 Procurement Key Issues Report and said, in Managing Procurement in a Price-Sensitive Environment, that:

  • supply chain costs and
  • manufacturing costs

are the biggest levers for cost savings. And while generally true if more than 50% of revenue is being spent outside the global organization’s many four-wall structures, it’s not true if most of the spend is internal (on headcount, property, etc.).

And it’s not true at all in the current environment in America where now tariffs are increasing costs by up to 145% (and there’s no solution, beyond BTCHaaS) and everything is unpredictable.

Moreover, supply chain is generic — is the cost inefficiency in the manufacturer (and if so, is it in their material and component supply chain or in their operation), the distributor, the logistics partners, or the organizational warehousing and inventory management. And if its manufacturing costs, is the bulk of the costs raw materials governed by commodity markets or in the production process? If the former, you can’t do much. If the latter, the assembly line is your oyster.

And then, even if you find the lever, where is it located? Who has access? Do they have the strength and permission to pull it? It’s tough!

Let’s look across the spend (ignoring tariffs because they are beyond your control):

  • products: low quantity, no lever; high quantity, sourcing if the market conditions are in your favour (or about to not be in your favour, so you lock a contract in early for a small hit); if the product was never sourced before, it’s tail spend which typically sees 15% to 30% overpsend
  • services: low quantity, tiny lever; high quantity, across a nation or the globe, if you take a multi-level view, are willing to work with multiple providers, and apply SSDO (Strategic Sourcing Decision Optimization), 30% to 40% can be shaved off with no detriment in service level
  • logistics: mode matters; intermediate storage matters; FTZs matter; source and sinks matter (if you’re selling in multiple countries, you might want to consider producing from multiple countries); easy to take 10% off just with a better network design, sometimes 20% off with a better network design, smarter load distribution across carriers, more cross-docking (and less intermediate storage), and the most appropriate (mixed-modal) transport plan
  • taxes and tariffs: source and sink matters! and, in some countries, so does minority/diversity/etc.; you can cut these in half (or even eliminate them) with better planning; when tariffs can be 20% or more, this matters
  • warehousing: major cities and hubs are expensive, secondary locations can be a fraction of the cost; and if smartly located, can cut your “local” distribution costs to your “local” stores, plants, offices, and/or customers; for years all the studies said inventory cost can be as high as 25% of product cost; better management (not just JIT, that can lead to more stock-outs and losses than a few extra percentage points) can halve this while reducing stock-out rates
  • facilities: if you’re willing to consider a balance between on-site and remote, shared spaces (and designated lockers), locale of choice, costs (and savings) can vary wildly; millions can be saved here in larger companies;
  • personnel: you pay the best people the best rates and you keep them as the best deliver an ROI multiple that is many times an average Joe; but that doesn’t mean you have to overpay for benefits (and with good negotiation, you can get great benefit plans at below market average rates); this can be hundreds of thousands to tens of millions

There are many levers, and the savings potential differs by industry, company size, organizational Procurement maturity, and individual company.

In other words, don’t just look at the top two or three levers, look at all of them and focus on the ones with the most potential, even if they are on the bottom of the “expert lists”.

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!

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.