Category Archives: Guest Author

Open Call for Category Consulting Clarity

As some of you may have picked up from a recent comment of mine on Spend Matters, I got a bit of blasting behind the scenes for my recent post on how to deal with Yo Yo Contracts, with the notable exception of the constructive feedback from Barb Ardell of Paladin who was willing to publicly share her advice with you. The private feedback ranged from statements that I didn’t know what I was talking about because I’m not a “real” sourcing consultant (I never claimed to be a sourcing consultant, I’m a sourcing technology and process expert who freely admits his only category expertise is in IT … and that’s why you never seen me advertising traditional sourcing services through my consulting practice), through statements that questioned practicality (a matter of opinion), to stuff that I wouldn’t (or couldn’t) post, repeat, or respond to.

Usually my readers are pretty quiet, so I found this a bit surprising and, upon further contemplation, promising. If people are willing to get riled up over this topic, then they must be passionate enough to want to write about it. So, in lieu of the cross-blog series that I would normally try to pull together to kick off spring conference season, I’ve instead opted to run a special guest series on category sourcing, starting the week of April 27. I’ve already invited some of the thought leaders who’ve previously posted on SI to submit a piece on how you can save money on raw materials, goods, and/or services in these troubled times, but I don’t want to exclude anyone who wants to take a crack at educating the space. So, if you want to be front and center on SI, just drop me a line or send me a draft post and we’ll get to work on putting you in the limelight.

Managing The Purchasing Factory


Today’s guest post is from Pierre Mitchell, Director, Procurement Research and Advisory for The Hackett Group.

Dave Nelson, the CPO from John Deere, co-authored a book titled “The Purchasing Machine“. The book was good, but never explained the meaning of the title. It did however get us thinking about the analogy of a factory to a Procurement function, and how Procurement can apply Lean Manufacturing principles to its operations.

Many companies are currently implementing Six Sigma methodologies, and both Lean and Six Sigma emphasize a focus on the customer and the elimination of waste. Six Sigma’s “DMAIC” methodology can very easily be applied (and is being applied at some progressive organizations):

  • Defining the needs of procurement’s internal customers,
  • Measuring the criteria of success (e.g., supply assurance, savings, supplier innovation, etc.),
  • Analyzing the current situation (e.g., too many suppliers, too many ways to buy, etc.),
  • Improving the processes (i.e., the “opportunity identification” step in a sourcing methodology), and
  • Controlling processes to “hold the gains” (e.g., contract compliance) through fail-safe processes.

This is foundational and fundamental stuff. However, applying lean manufacturing techniques to the “white collar factory” of sourcing and P2P (Purchase-to-Pay) is a mostly untapped area of opportunity.
Interestingly, some procurement organizations have named themselves “Supply Chain Management” even in non-manufacturing environments (e.g., Bank of America), but yet they always haven’t taken to heart key practices that manufacturing organizations have put in place on the shop floor. This is unfortunate, because it can be done.

Managing the “sourcing factory”

One way to view strategic sourcing is that of a Configure-to-Order business that “manufactures” highly profitable services. How profitable? For every $1 invested in procurement, world-class procurement delivers $7 to the firm, and that number goes even higher when looking at strategic supply processes. Unfortunately, there is a backlog of work because there is not enough investment in the bottleneck work centers (e.g., commodity managers), and not enough profitable services are getting out the door. So, attacking the bottleneck is critical, but funds are not unlimited to purchase more capacity, and must be freed from other areas (e.g., transactional processes) while improving “yield” through better work methods and measured doses of appropriate automation (e.g., freeing up commodity manager’s time via better spend/supplier analytics).

Another issue within the sourcing factory is aligning capacity to customer expectations via a “Capable-to-Promise” model. Various types of standard sourcing services, and their associated lead times and quality levels, should be offered up to customers based on finite capacity, and then configured to order. Without segmented “flow lines” (e.g., simple negotiations versus complex ones), standard lead times, capacity planning, and demand management (e.g., setting rules by which procurement must be involved in sourcing), the factory is going to be backlogged, quality will suffer, and customers will be very unhappy.

Designing what you can manufacture

The end of the sourcing factory is not the contract. A sourcing service is only profitable when preferred agreements are actually utilized within the “P2P factory” (where orders are placed and bills are paid). Unfortunately, they often aren’t. For the average company, our benchmark data puts overall bypass/maverick spend at 10%; but the real problem lies within indirect spend. A custom study that we did with 200 firms on contract management revealed a 23% maverick spending figure for influenced indirect spend. This translates to $11 million in lost savings per billion in indirect spend for the typical company. The problem with this $11 million of “scrap” is that the design of the Source-to-Settle process didn’t adequately consider the downstream processes of P2P (or supplier management and development). Strangely, every strategic sourcing methodology includes a “stakeholder management” process, yet the methodologies rarely explicitly define how P2P processes and systems will guide users to preferred supply sources and optimal buy/pay methods. It’s important to make strategic sourcing staff accountable for maverick spending (and not just savings). Treat P2P process users as customers – key stakeholders – and utilize thoughtfully designed downstream processes such as P2P and supplier management and development.

Converting the P2P job shop to flow lines

Most companies claim they have a defined P2P process, but if you scratch the veneer, you’ll find issues — e.g., only one-quarter of typical firms have single accountable P2P process owners. Frankly, some companies’ P2P processes are positively medieval, with each transaction handcrafted in a manner befitting the purchaser trying to get it through the system. If a firm has moved into the industrial age of P2P manufacturing and does have any P2P methods defined, it is likely the venerable three-way match. In manufacturing vernacular, this is known as a “job shop” — a “one facility fits all” general purpose processing capability, where everything goes in on one side and hopefully makes it out the other. If it’s an ERP environment, it’s “one system fits all”. In Lean manufacturing environments, flow lines (or “cells”) are set up based on families of similarly-made parts; for P2P processing, firms should define tailored transactional flow lines beyond the 3-way match, to include p-cards, assumed receipts, Evaluated Receipts Settlement (ERS), invoice-to-contract matching when POs not required, etc.

Papers from Hackett’s Purchase-to-Pay advisory program describe these concepts: “”Using an Optimized Transaction Strategy to Achieve P2P Efficiency”” and “A Management Primer for Balancing Risk and Control in P2P”. By designing a “P2P manufacturing” factory with transactional flow-lines that are fit-for-purpose, efficiency and effectiveness will invariably improve.

Thanks, Pierre!

We Don’t Need No Consultants

Today’s guest post is from Patrick J. Horgan of Paladin Associates.

Why Some Companies Don’t Seek Needed Cost-Reduction Help

Cost-reduction is essential in today’s economy, but unfortunately many managers have little experience in these activities. Mistakes in cost-reduction can damage morale, productivity, and can even precipitate a corporate death-spiral. Experts recommend independent cost-reduction consultants, but most companies don’t seek external help. Their reasons sometimes make sense, but they are often emotional and thought through poorly. Here are some common rationalizations which prevent many companies from seeking the help and getting the results they really need:

“We don’t need help.”
“We can do cost-reduction ourselves”. Or, “we should be able to do it ourselves.” “We already have cost-reduction initiatives.” “We will soon have cost-reduction initiatives underway.” “External consultants will probably try to take credit for things we have already identified.”

“We don’t want help.”
“Consultants may find things that are embarrassing or that we probably should have found. We may be blamed for these things.” “We will not be able to personally control what they find or communicate.” “We are currently too disorganized to undertake such an initiative.” “We don’t want a lot of change and turmoil.”

“We can’t afford help.”
“Consultants charge a lot, usually up front.” “We have no budget for this.” “We can do it for less.”

“We don’t believe consultants can actually help.”
“Consultants just feed back what we already know. They don’t actually produce results.” “Consultants won’t understand our business.” “How would we know if we actually saved anything?” “We’ve had bad experiences with consultants and cost-reduction projects in the past.” “External consultants are against company policy, or require high-level approval.”

“We are not the decision makers.”
“We don’t really know who decides this, and we don’t want to ask.” “Someone else is in charge of this; it’s not our job.” “IT/Telecom has sourcing responsibility; not Sourcing.” “IT and Telecom are under different organizations, yet buy off of the same contract.”

“It is not in my personal political interest to support this.”
“Cost-reduction can be risky… might result in reorganization, reassignment, budget cuts, layoffs, new priorities, loss of power, change — could be bad for me personally.” “Our boss doesn’t want to do this.” Or, “Our boss might want to do this, but we don’t.” “If this doesn’t work out, we might be blamed.” (But maybe we should pretend to be interested and slow-roll this.)

“We don’t have or control the resources to support such an effort.”
“We have other priorities.” “We don’t have good data on costs and spending.” “We don’t have the staff for this.” “We have lots of contract leakage as internal components are organizationally fragmented.” “To capitalize on many initiatives may require cross-functional cooperation and coordination which we don’t control, and priorities which we don’t have.”

“We don’t want to disrupt our vendor relationships.”
“We already have great prices.” “We depend on our vendors for things other than price.” “The supplier has a personal relationship with the CXO.” “We really enjoy the annual Vendor Golf Weekend at Pebble Beach.”

The Real Facts
Sometimes these rationales are valid, but most often they are not. Companies may have excellent relationships with their suppliers, but it’s inescapable that continuous competition improves the breed and reduces cost. Cost-reduction falls directly to the bottom line, and should be pursued aggressively despite fuzzy reasons to the contrary.

Even though companies “ought” to be able to run effective cost-reduction programs themselves, in reality they frequently do not. For many reasons — budgets, staffing, expertise, priorities, timing, politics, whatever — the opportunities go unmined… and the potential savings go unrealized. Or they are done in an amateur fashion, often with unintended consequences. Most companies don’t and probably can’t have enough qualified resources to do this thoroughly.

Cost-reduction consultants do this for a living, not just during the occasional recession… they are experts and know all the tricks. External consultants can often help cut through internal politics and conflicts of interest. They can catalyze stalled activities and get them rolling.

Independent consultants can help analyze spending patterns, and specifically focus on and drive results… particularly if they are paid on a percentage of savings realized. This approach eliminates upfront fees, reduces risk, and insures an excellent ROI. The money saved can pay for fees many times over. External resources can accelerate cost-reduction savings. Additional bandwidth leverages employees, and gets more done, faster. Time is money.

External cost-reduction experts jump-start and insure execution of cost-reduction programs that can preserve a business in times like these. Cost-reduction programs should be win-win initiatives, structured and empowered to encourage cross-functional cooperation. They should be supported and regularly reviewed by high-level executives, not just lower-level employees who may fear blame or loss of status.

Thanks, Pat.

Working with Your Users III: (Spend Analysis) Reports keep changing — and that’s a good thing.

Today’s guest post is from Bernard Gunther of Lexington Analytics.
He can be reached at bgunther <at> lexingtonanalytics <dot> com.

Several years ago, I was involved in a data warehouse project. At one point in the design phase, the discussion turned to the creation of the initial reports. We discussed a number of different things we wanted from the system and explained how each report was likely to change once it was populated with data. At this point, the Programmer became frustrated, “Why can’t you guys just figure out what you want? Get those specs right and we can be done with the reports once and for all.” In his mind, Procurement was doing a horrible job because it couldn’t make up its mind about what it really needed.

This story of the frustrated programmer sticks with me as an important lesson because it highlights one of the key challenges facing users of procurement data — there isn’t one perfect report! And, even if there were, it would only be ‘perfect’ for a brief time. One observation leads to another, which leads to another, and so on. A good report should lead to questions — and the need for another report. Reports are forms of communication and they are tools for users to get their jobs done. As such, they should be dynamic not static. Once they become static, chances are good that no one is using them — either because the format doesn’t work for them or it’s no longer relevant to the current situation.

Let’s take the example of the preferred vendor within a category. Let’s pick on temporary labor for this example.

First Report: You produce a report which shows the overall spending for temporary labor by month with two columns, one for preferred vendors and one for non-preferred vendors. This gives the overall status that spending with preferred vendors has gone from 50% in January to 75% in June. Good work!

Second report: The data you provided in the first report needs to be distributed to the business units. The report now has to have the summary and the detail by business unit. Easy change, you’ve already built it into the initial specification.

Third report: The business units want to pass this report down to their managers. The report now needs to be done for each business unit. Again, a change you’ve planned on, so it’s easy.

Fourth report: The business units report that they have existing contracts which can’t be changed, so they need to tag certain vendors as “legacy contracts” so they can show that they are complying with the program and using the preferred vendors. All the reports now need a new category – “Legacy Contracts”

Fifth report: The commodity manager wants to estimate the incremental cost of using the bypass vendors. The report now needs to show this estimate for each business line based on their savings model. This needs to be done at the top level and for each business unit.

Sixth report: One of your business reports that the preferred vendor can’t supply a certain type of specialty services. You need to add a category for “specialty vendors”.

Seventh report: A manager in one division wants to eliminate the “legacy” category for her spending, “All this spending is bypass. I want my team to move more quickly to the vendors with whom we have contracts. Don’t show me any legacy or ‘specialty’ vendors”

Eighth report: The business lines are changing one of the preferred vendors. The report now needs to show the first 6 months with the original vendor, then the following months with the new preferred vendor making the spending with the original vendor as bypass.

Ninth report: The head of processing operations like the reports, but wants to make two sets of changes. He wants to change the categorization of vendors into “Primary”, “Secondary”, “Non-Group Contract” and the tagging needs to be done differently for each major production location. A vendor can be the primary in location 1; the secondary in location 2; and, non-group contract in a third location.

And the sago continues, but you get the picture. Each report was useful as it was created, but needed to be modified as users worked with it. And this is a great news story. People are using the information and acting on it. You company is saving money and the reports are highlighting the savings achieved and the actions necessary to achieve more savings. But the reports keep changing and that’s the reality of procurement information.

Buying Spend Analysis Systems: Test Drive Case Study

Today’s guest post is from Bernard Gunther of Lexington Analytics who recently brought you Buying Spend Analysis Systems: Taking a Test Drive. He can be reached at bgunther <at> lexingtonanalytics <dot> com.

A client who read my recent SI post, “Taking a Test Drive“, thought that relating the experience of their own test drive might help other readers who are investigating spend analysis approaches.

In this case, the company already had a spend analysis system, but the contract was about to expire. The test drive was intended either to provide ammunition for switching to another system that had been identified as a alternative, or justification for renewing the contract for the existing system. The company wanted to evaluate whether there were advantages with the alternative system, and whether or not the alternative system could improve performance for users whose buy-in was essential. A financial case either for making a change or for maintaining the status quo was also a deliverable.

As a result of the test drive, the company ended up changing systems, and believes that user needs are better met because of that decision. Data are cleaner, because vendor groupings and commodity mapping are more accurate, and analysis capability has improved greatly. The company reports spending less time supporting the new system. The company also added external consulting resources to work with their users each month to help extract additional value. Best of all, the monthly expenditure for the system — including the cost of the incremental external resources — dropped by more than 25%.

The Test Drive Process

To perform their test drive, the company focused on how each system would:

  1. Meet the existing user needs: “must haves”
  2. Deliver on known needs that users don’t have today: “wants”
  3. Deliver additional value that may not be understood today: “didn’t know I wanted, but after seeing, can’t live without”

The business case needed to describe how each system would deliver on these three items at either a lower cost or, if the costs were higher, how the selected system would deliver an incremental return on investment.

The test drive for the new system occupied a few days over a three week period. Since the evaluation team understood their current system thoroughly, they focused on learning where additional value might be delivered, as follows:

  1. Understand the current users of the system.
    The team interviewed users to see what they valued and what they were currently doing with the existing system, e.g. did they have features or data that they would like to see in the system, did they understand the value they were currently getting from the system, and did they know what they wanted the system to deliver in the future.
  2. Understand the “non-users” of the system.
    Individuals were identified who were not current users of the system, but who the team felt could or should be users of the system. The team worked to understand what these potential users would need to see, and the value that they would receive.
  3. Provided a sample of current data and reports to the supplier of the new system.
    Since the core data required for the demonstration was already available in the existing system, the supplier was able to produce a working spend cube for review with minimal effort.
  4. Review with the suppliers how they would meet all the “must haves”, “wants”, and “future wants”.
    Evaluate the suppliers’ offerings to determine how each element generates savings and/or adds value. Users were involved with this part of the evaluation, as they were considered to be the best judges of how a new feature compared to an existing capability.
  5. Put together the business case.
    The test drive showed that the new offering would both reduce costs and increase value, so it was not difficult to achieve internal agreement on a decision forward.

Survey Results

  • User Must Haves
    • Users said that they obtained the most value from basic visibility to the spend data. However, other than the advantage of having all the AP spend data in one place, most users felt the existing system was just a “warehouse of data” that didn’t really help them do their job much better than data extracts directly from AP. They were unhappy with the vendor grouping and commodity mapping.
    • Users had the basic ability to filter data via point and click interfaces, but were unhappy with the speed and limited complexity supported.
  • User Wants
    • Users expressed a desire for the ability to create and modify reports inside the system, without external support. The existing system had limited reporting, so in order to create all but basic data extracts, users had to dump raw data to their desktops and build custom reports and models outside the system.
    • Users were unhappy with vendor grouping and commodity mapping in the existing system. Getting changes made to groups and maps was awkward, required committee decisions, and took a long time. Users wanted to make changes to the commodity structure, commodity mapping, or vendor grouping, and immediately see the results.
  • New Features
    • Users wanted the ability to make private and arbitrary changes to a spend dataset, to see if a change in data organization could improve their understanding of the data.
    • Users wanted the ability to build new data sets from scratch, on their own, as well as the ability to analyze many different kinds of data, such as commodity-specific invoice-level data.
    • Users wanted the ability to build complex reports inside the system.

In summary, the client believes that the test drive process was very useful. The value delivered by the spend analysis system has been increased, user satisfaction with the data and the system has gone up, and the cost of the system has gone down. The client also believes that if a decision had been taken to stay with the incumbent vendor, the test drive would have provided significant leverage for renegotiation.