Category Archives: Market Intelligence

How Should You Define Procurement Success?

This question is encased in a nut that’s quite tough to crack. We hinted at the importance of defining it three years ago in our post that asked how do you define Procurement success which noted that if you consider the art of the Strategic Sourcing Process, the Category Management Process, or the Contract Management Lifecycle, you [not only] see that they all start about the same at a high-level but that a key requirement of each step is an acceptable definition of success.

This means that if you want to be successful, you need a good definition of success but what should it be?

If you ask the CFO, she will say it should be cost savings! Reduce the outflow!

If you ask the Chief Engineer, it should be the best quality and reliability money can buy!

If you ask the Production Chief, it should be rock solid supply availability.

If you ask the CMO, it should have the most unique gee-whiz features on the market for the biggest marketing splash.

If you ask the VP of Sales, it should be the product that comes with the most value-adds so they can command the greatest price.

And so on.

On SI, we have repeatedly said the definition of procurement success should always be the outcome that brings the most value to the organization, but this can be hard to define when there are a number of competing viewpoints on what value is.

However, we can define Value as the outcome that balances the tradeoff between the goals of the respective stakeholders for maximum return against an agreed upon value scale that normalizes a dollar of savings (for the CFO) against a reliability metric (for the Chief Engineer) against an expected availability metric (for the Production Chief) against a feature differential against the market average (for the CMO) against a value-add differential (for the VP of Sales) [etc].

Now, you might be wondering how you do that? The answer is simple: define an expected dollar value. It’s not as hard to do as you think (as long as you have the [big] data and the model and the software to calculate it)!

The CFO metric is easy, a dollar of savings is a dollar of savings.

The reliability metric is not that much harder. A failure rate of 90% vs 93% during the warranty period has an incremental cost equal to 3% of the units times replacement cost (which is base product cost + processing cost if outside of supplier warranty or processing cost + return cost if inside supplier warranty) and this cost can be amortized per unit.

The supply availability metric is involved, but still easy to define. First you have to calculate an expected chance of disruption based on it. Once you do, the cost can be approximated as follows: (% chance of disruption * % length of disruption x cost per day of disruption) amortized by units. If there is 10% chance of disruption, then you expect one every 10 years, for the estimated length of time, at the estimated cost per day, and amortize that cost over each unit purchased each year. Not perfect, but a good approximation. To find the conversion from expected availability percentage to chance of disruption, you mine your data and extrapolate the multiplier. Easy peasy (with a modern cognitive or deep analytics platform).

The CMO metric is tricky. Just how much better is that gee-whiz feature? Probably not nearly as important as the CMO claims. To figure out an approximate dollar value per unit here, you will have to mine historical data to see the incremental marketing value from the company’s “most differentiated” or “feature rich” products compared to its “least differentiated” or “feature poor” products as compared to the estimated market share each product obtained. If “feature rich” products typically command an extra 10% of market share, each unit is valued at a premium of 10%.

The value-add is easy — mine the historical data to extract the dollar value of each “value-add” available to the company.

Then, to find the optimal trade-off during a sourcing event, build a multi-objective optimization model that maximizes the overall value generated from these goals.

In other words, what used to be downright impossible is now pretty straight forward with strategic sourcing decision optimization and cognitive sourcing.

What Should Drive M&A?

Last year was obviously the beginnings of a new M&A frenzy cycle in the Procurement Vendor space. Big names were scooped up by bigger names in an effort to expand their reach and/or capability in an effort to become the biggest name of them all. But is this good for Procurement departments? It depends on the synergy inherent in the acquisition. As summarized in the doctor‘s guest post over on the Synertrade blog on Surviving a M&A: The Customer Perspective, M&A synergies come from operational synergies, customer synergies, or solution synergies.

And these synergies will either come from complementarity or redundancy. Both can, theoretically, have a big impact on the bottom line, but one impact will likely be viewed much more positively than another from the eyes of customers. While bankers and financiers might be satiated with redundancy synergies when overhead prices get slashed and immediate profits rise (thanks to SaaS deals that insure license revenue keeps coming in month after month in the near term), customers are not always happy when their support teams, with whom they have built a relationship with over months or years, are eliminated overnight in one fell swoop.

That’s why the doctor believes that complementarity should drive synergies. For the big wanting to get bigger, they should seek to acquire a smaller provider that provides them with the synergy of complementarity across the customer, solution and operations dimensions. Specifically:

  • Customer

    the provider of interest should have a largely non-overlapping customer base that could make use of the company’s solution in unison with the smaller provider’s solution — for e.g., if a S2P company without in-house analytics is trying to acquire a BoB analytics firm, that firm could likely use part or all of the acquirer’s platform

  • Operations

    the unison of the providers should allow both parties to do more with the same back-office staff; i.e. the combined company should be able to grow without adding staff (and, moreover, the current staff should, more or less, be the best staff to grow the combined company)

  • Solution

    the solutions should complement nicely without too much work and should not overlap too much

Vendors should not pursue mergers that get synergy from redundancy. Having to scrap platforms, cut people, or, even worse, having to make decisions that negatively impact the current customer base (that talks to their peers).

It might be the case that the best provider is not as big as desired, or that the best provider doesn’t have all the desired solutions, but, as the tortoise taught us, slow and steady wins the race. And even if the new combined company has to build a bit more than they would like to, a combined, synergistic, team always has an edge.

Will this be the year we traverse the supply chain plateau? Part II

In yesterday’s post, we noted that five years ago we covered a piece by the Supply Chain Shaman who believed we had reached the supply chain plateau. And while SI did not agree, SI agreed that progress had completely stalled. And SI believed that the root cause of the issue was manpower capability. Precisely, the fact that most executives do not understand the supply chain from a holistic perspective, treating each step as its own function (and disassociating NPD/Design from Sourcing (a manufactured product) from Logistics and Distribution, when they all have to be examine and managed as part of an integrated supply chain. And the fact that neither do the function managers. Moreover, these function managers often do not even understand the best practices associated with their job.

And SI believed the root cause of this was a lack of education — most Supply Chain / Supply Management / Sourcing / Procurement / etc. managers don’t leave college or university with a solid supply chain background, as few institutions offer such programs, and they haven’t been properly trained. Add this to the fact that year over year training budgets are slashed and leaders are run ragged fighting fires and dealing with tactical issues instead of being given time to focus on long-term strategy, how the supply chain works, and how it should work for optimal performance and optimal corporate gain.

Now, it’s true that the education issue hasn’t improved much in the last few years, but what has improved is the technology to provide executives and function managers both with a more holistic view and guidance as to directions they can take. Modern cognitive technologies backed by machine learning and automated reasoning, which can process millions of data records in near real time, identify trends, identify outliers, identify normal behaviour, identify typical responses, and so on, can present executives and managers with holistic views that let them understand not only what their options are, but what impact it has on the immediate problem and the supply chain as a whole. Ripple effects through the organization and the chain can be predicted and an informed decision made with the known impacts in mind.

Companies will know not only the impact of a delayed payment, but the benefit of an early payment as well as the trade-offs between JIT delivery and maintaining raw material inventory or the benefits of combining volume with a single supplier for more cost-effective shipments from a closer supplier. And so on.

If we can’t fix the education, at least we can fix the holistic understanding of the impact of a decision. And while we don’t have systems for all situations yet, you can bet they are in development. Maybe 2020 will indeed bring 2020 vision to some supply chain areas!

Will this be the year we traverse the supply chain plateau? Part I

Five years ago today we commented on a piece by the Supply Chain Shaman who believed we had reached the supply chain plateau. While SI always believed there is innovation to come, the Shaman presented some pretty damning evidence. Analyzing the balance sheets of process companies over the course of a decade, she found that the average process manufacturing company has reached a plateau in supply chain performance. As she stated:

Growth has stalled. To compensate and stimulate revenue, the companies increased SG&A margin by 1%. However, the conditions were more complex; the average company, over the last ten years, experienced a decline of 1% in operating margin, and an increase in the days of inventory of 5%. While cycle times have improved, the majority of the progress has come from lengthening of days of payables and squeezing suppliers.

And it’s certainly the case that delaying payments and squeezing suppliers is NOT progress!

And while SI believed, at the time, that we had not reached the plateau, SI certainly believed that growth had stalled. But why?

The Shaman conjectured that while complexity has increased, many well-intentioned executives lack the understanding of the supply chain’s potential or how to manage the supply chain as a system. So, while individual projects are getting great results, departments as a whole are not performing as well, and being managed even worse. SI had to agree.

And while SI also had to agree with the Shaman that there is a discontinuity and we need to declare the APS and ERP systems of the 1990s obsolete and start again, SI did not believe it was the core problem. SI believed the core problem was manpower capability. Not only do most executives not understand the supply chain from a holistic perspective, treating each step as its own function (and disassociating NPD/Design from Sourcing (a manufactured product) from Logistics and Distribution, when they all have to be examine and managed as part of an integrated supply chain, but neither do the function managers. Moreover, these function managers often do not even understand the best practices associated with their job.

SI conjectured the manpower capability issue was a lack of education, and hasn’t changed it’s belief. But even though little has changed on this front, there is a light in the sky now … we can see the day when we cross the plateau and see the peak ahead. How?

Your Procurement New Year Resolutions

To save you some time, the doctor has compiled a list of the most important.

1. I WILL NOT READ PREDICTION ARTICLES

As the doctor has stated repeatedly, most predictions are old news or remanufactured shoes, as clearly explained in our long series on The Future of Procurement where we tackled the same predictions you hear year after year after year and explained how some are, sadly, as old as commerce itself. Thus, there is no need to waste your time on them.

2. I WILL IMPLEMENT AT LEAST ONE NEW BoB MODULE OR SYSTEM

Let’s face it — even if you are 1 in 12 organizations and in the Hackett Group top 8%, I can guarantee there is at least one major Supply Management system or Source to Pay module you are missing (or lacking critical functionality in). In order to do a great job, you need a great system. This year, resolve everything to do everything you can to get at least one more tool that you need to be effective, or more if you are missing any of the following:

  • spend analytics with near-real time updates (at least weekly)
  • catalog buying or e-requisitioning system
  • SRM
  • optimization-backed sourcing

Why?

  • you have to understand what you are spending, otherwise you have no baselines and can never know if you are improving — plus, you need to catch overspends before the contracts run out to get supplier credits
  • all purchases, even if they are not on contract or not sourced due to lack of time, need to get in a system for analysis and tracking
  • your suppliers’ performance is your performance, you need to understand what suppliers you are doing business with, how they are doing, and have a platform to collaboratively define and implement corrective action and development plans
  • for complex categories or high dollar events, you need to be optimized; even 2% savings on a 10M spend pays for a senior buyer with overhead and bonus for an entire year!

3. I WILL IMPROVE AT LEAST ONE TIME CONSUMING TACTICAL PROCESS PER QUARTER

There is no value in tactical work. This is where you hand over as much as you can to the machine that can do it faster, better, and cheaper than you. You can’t do millions of calculations and comparisons a second — it can. You can’t consolidate data from 20 different sources into a 20 page report in less than a minute — it can.

What you need to focus on is strategic work. Analyzing the top recommendations that come out of the Cognitive Procurement system to make sure they make sense, that the system didn’t miss anything, and that it works for your organization. And then figuring out if you have the experience and expertise to ignore a system market buy recommendation to go negotiate a better deal with top (incumbent) suppliers because your 20 years of insights gives you an edge that cannot be encoded. Or if the projected results from a market auction with the top 6 suppliers is better than your team would ever do with their complete lack of category experience. Your value is your ability to use your intelligence, not your ability to push paper. Let the dumb machines do that, and do what you were hired for!