Category Archives: Market Intelligence

When A Vendor is Selling (Cognitive) AI, What Are You Really Buying?

AI is the buzzword, or, more precisely, the buzz acronym. Just about every enterprise vendor is claiming they have AI, even if all they have is RPA (and even if what they have is pushing the definition of RPA). However, whether your vendor has AI or not (and the answer is that they probably don’t, as most of the best vendors just have ML, possibly enabled by AR, but probably not), it is coming, and if you don’t adopt (at least) the (precursor) technology available today, your Sourcing and Procurement organization may be left in the dust.

And by now you are probably firmly bamboozled, so let’s set the record straight, starting at the bottom of the AI technology ladder.

At the bottom of the technology ladder we have RPA, short for robotic process automation, which is generally used to automate what would otherwise be very manual processes, usually by way of a rules-based workflow engine.

On the next rung we have ML, short for machine learning, which applies (usually improvements on, or variations of) open-source or standard algorithms that can extract a model from a set of inputs to produce the associated outputs with high probability. The better platforms use machine learning to tune, if not define, the rules used by the workflow engines embedded in the platforms.

Sometimes the mix of ML and RPA is so good that for certain, focussed, applications that the platforms almost seems intelligent, and this is often what passes for AI these days. But it’s not real artificial intelligence, it’s assisted intelligence as it helps you do a better job, but your intelligence is still required to identify the right recommendations and approve the right actions.

The next rung up is AR, automated reasoning, which can take a set of assumptions, encodings of logical rules and predictive models, and compute derivations that can surpass even a human expert most of the time for very well (and narrowly) defined applications or problems. It’s basically the modern equivalent of an expert system that can compute millions of inter-related logical inferences until new realizations are discovered.

The next rung up is the version of AI that exists today, augmented intelligence, which expertly integrates RPA, ML, and AR to produce applications that more-or-less mimic what an expert would do the majority (but not all of) the time. And that allows an organization to automate some low-value tasks that would otherwise require manual effort as they were generally identified as strategic, but not always worth the effort.

If it existed, the next rung would be the AI that is touted, true artificial intelligence, which does not exist today. (And that’s a good thing, because if there was true AI, would the C-Suite need you? Yes. But would they realize it? Probably not.)

But the final rung, and where everyone wants to get to, is cognitive. AI technology that is not only intelligent, and that can make great decisions unassisted every time, but make the decisions the best human buyer for every situation would make considering all hard and soft variables.

And that’s the technology ladder you are dealing with, and now you know that where you are is likely not where you want to be. But don’t fret, things are getting better. Stay tuned!

Detecting that Fraud Permeating Your Supply Chain!

As per our last post, fraud is permeating your supply chain and your current iZombie platform needs to take a lot of the blame as it lulls you into a false sense of security when it should be sounding all the warning bells and sirens at its disposal.

So what kind of platform do you need?

Simply put, a platform with good market intelligence, encoded expert intelligence, (hybrid) AI algorithms, and other modern features that can detect common types of fraud and stop it dead in its tracks. To give you a better idea of what these platforms look like, we’re going to address each type of fraud an organization may encounter and what a platform would need to detect it.

Unacceptable Cost Inflation via Metric Inflation

If the platform monitors all historical performance metrics and computes trends, it will be able to detect when a quality or reliability metric is out of whack.

If the platform also monitors market costs for the product or raw material according at different volume tiers, it will be able to detect when a cost is most likely more than percentage point above average.

If the platform uses smart algorithms, it will be able to compute a high probability of something being off when the two factors coincide on a category being sourced and alert a senior manager or executive to explore and verify the situation before a buy is made.

Double Fuel Surcharges

A good platform will also integrate with fuel price indices and transportation exchanges and know the average surcharge on fuel for any given region as well as the limits imposed by the organizational contract and immediately detect when a surcharge is out-of-whack, unjustified, or against the contract and prevent a buyer or AP professional from paying the invoice until it is corrected.

Duplicate Invoices

When an invoice comes in, a smart platform will not only insure there is a corresponding PO before it is accepted, but that the total sum of invoices against the PO doesn’t exceed the total value of the PO (and the total number of any unit invoiced doesn’t exceed the maximum authorized amount). Furthermore, it will not allow payment until the total sum of unpaid goods received at least equals the amount invoiced. This will not only make it easy for a human to identify duplicate invoices (where only the invoice number is changed) but duplicate billings, where similar invoices (for unshipped goods) are submitted with only minor changes.

T&E Fraud

You need a T&E system that can enforce spending limits, match establishments with blacklists, find duplicate charges for similar expenses on the same day, pull in expected airline fares in the proper bracket to identify policy violations, and other capabilities that can detect policy violation or over spend.

Distribution Theft

Now, if your organization is large enough, it’s pretty much a guarantee there is going to be theft somewhere along the chain. And if its external theft, that’s not something your system is going to be able to predict. But internal theft, that’s something it should be able to detect.

The fact of the matter is that if there is repeated internal theft, it will follow a patter. Similar types of inventory, coming from similar suppliers, on a small set of routes used by a smaller set of carriers — usually with a small set of common drivers involved. With enough data and data mining, a good platform can identify patterns indicative of inside jobs that can be investigated, identified, and stopped.

 

While platforms aren’t the entire answer, as they can’t detect, for example, true inside jobs by an employee cutting a camera feed or power feed (in a blind spot) on the way out, they are a very large part of the answer.

Fraud Permeates Your Supply Chain …

As per yesterday’s post, chances are that fraud is running rampant throughout your supply chain. It might not be all that significant in the grand scheme of things — a few points here, a few K there, a few items go missing from the stock room — and might be costing the organization less than an effort to stop the fraud would cost. Or, the organization might be losing 5% of its total revenue, which could be 5M annually if the organization does 100M annually, or 50M annually if the organization does 1B annually. And it’s very likely that you have no clue which end of the spectrum the fraud occupies.

You might be thinking that there’s no way we’re losing 50M a year — all of my categories over 5M are contracted, we monitor inventory and invoices, and all spend over 5K is tied to an invoice or a PO and the rest of the spend is so minuscule that the most we could be losing is 1M or 2M a year but, as we tried to point out yesterday, just because things look good, that doesn’t mean that they are.

For example, your buyer could be colluding with your primary supplier in your 100M category to inflate the quality and reliability metrics to the point that the overall weighting scheme chooses the supplier despite a 3% markup that is going 100% into the seller’s commission, with a 10% kickback to the less-than-honest buyer who inflated the scores. There’s 3M on one category. It’s a far cry from 50M, but let’s say that your organization also lost 20M this year from a “theft” on your main warehouse that was pinned on an organized crime ring. Was it an organized crime? Or an inside job where an employee cut the power on the way out for a big wad of cash and a local band of unorganized yahoos stole the goods? There’s 23M. Then you have carriers charging double fuel surcharges on 100M of freight and another 4M goes down the drain. Then you have the supplier of 20M worth of inventory that submits the same invoice twice with different invoice numbers 50% of the time, which the system doesn’t catch because it matches a PO and/or goods receipt and you overspend another 5M. There’s 28M. And then there’s the high-powered elite sales team that likes to charge “champagne” at the strip club for their “clients”; the marketing elite that thinks high-end dog kennels are “hotel” charges; and the C-Suite that only flies first class, against policy that flights under 4 hours must be business. And all of a sudden that’s another 2M of employee fraud that is slipping through the cracks and we’re at 30M. And we haven’t looked hard yet.

Get the point?

So why is your supply chain rampant with fraud? Simply put, because you don’t detect it.

Why not?

Platform iZombie.

Your platform blinds you to it. Your outdated, last decade platform that barely gets you through an average sourcing event that hasn’t kept up with the time, hasn’t made you smarter, and, in fact, takes you down the same old, beaten, dying path that you’ve been down before again and again.

So what do you do?

Get a better, more modern, platform.

What do you look for?

Stay tuned!

Does Trouble-Free Mean Fraud-Free?

Of course not!

Sourcing Innovation has been informing you for years about how fraud can permeate a seemingly trouble-free supply chain and how the following, seemingly mundane, situations can hide serious fraud.

  • Abnormal Vendor Selection
    especially if the vendor has poor quality ratings or significantly higher costs compared to peers
  • Payments Outside the Normal Accounting System
    when it should be easy to ACH or wire the supplier a payment
  • Unusual Payment Patterns
    when most suppliers in the category get paid monthly and one supplier is getting paid bi-weekly
  • Rates Out of Line with Your Company’s Standing in the Market
    when you typically pay 5% less than market average but instead you are paying 5% more
  • Unexplained Lifestyle Improvement in an Employee or Manager
    who used to drive a beaat-up 10-year old Chevy Aveo but now drives a shiny beamer
  • Complaints or Tips
    from whistle-blowers who notice unusual activity beyond the norm

But the following can also indicate fraud:

  • automatic order triggers in a VMI system
    a vendor can manipulate stock levels to indicate a re-order prematurely to increase their revenue
  • more purchase orders than usual
    although it looks like your team is doing a good job by getting more purchases through the system, this could represent collusion between your buyer and a seller to inflate either the sales person commission or the buyer’s bonus by submitting false orders that will just be cancelled or returned at a later date
  • an unusual number of returns
    your buyer could be colluding with an individual at a shipper’s facility to create orders for unwanted goods which will be filled incorrectly; the buyer will then demand a refund and the goods will get lost during the return process
  • more defective returns than usual
    your quality assurance personnel might be accepting inferior products for bribes

The reality is that the supply chain is ripe with opportunities for fraud. These include:

  • Fixed Asset Fraud
    Fixed assets might be used for purposes other than what they are designated for, or used more than they are supposed to be. This misuse can damage the asset or reduce its useful life-cycle.
  • Inventory Fraud
    Your employees help themselves to your inventory and falsify records so that you don’t notice the loss until weeks or months later. They might even falsify good receipts to indicate less was received than actually was.
  • Manufacturing Fraud
    Your supplier might send you a high quality product (from another supplier) during the evaluation process for testing, but then send you inferior products made from inferior materials after the contract is signed that look the exact same – and you don’t notice the problem until you get an extraordinary number of returns due to defects or inferior quality.
  • Picking and Return Frauds
    Your order pickers in your warehouse might be picking extra items during shipment preparation and pocketing them for private off-the-books sales.
  • Distribution Fraud
    One or more boxes of your shipment will not be loaded by the shipper who will falsify records and blame the third party carrier for the loss.

And this is just the tip of the iceberg. So what do you do?

You’re Under-Resourced and Over-Challenged, So Remember that Consultants are Cheap!

There are two schools of thought out there when it comes to catching up with crushing workload and/or crushing customer demand (which may only be seasonal).

ONE: Consultants are parasites that charge ridiculous rates, waste precious time, and present obvious conclusions so you should hire the minimum number of FTs you need to “get by” with everyone working crazy over time until things settle down.

TWO: FTs are expensive. They demand benefits. They take fixed overhead. And, if they don’t work out as well as you’d hoped or demand drops, in many locales, you can’t just fire them, or even if you can, you have to give them severance and long-term health-care or other benefits or you can be sued or fined. So just hire third parties. Sometimes consultants, but usually service organizations (who likely employ contingent workers, but not highly skilled consultants).

Both of these schools of thoughts are wrong. Why? In the latter case, for the right job descriptions, FTs are the best resource to have as they build organizational knowledge and get more efficient over time. (But not all jobs fall into the right categories.) In the first case, while consulting does draw some of the sleaziest individuals out there, it draws less than highly demanding sales jobs or executive jobs (that statistically often have more psychopaths than law firms and media organizations). The majority of consultants want to deliver ROI. The only question is how far out of their “comfort zone” can the consultant deliver the ROI you want. (But that’s the beauty of using consultants, you can find specialists for each problem you need solved and guarantee an ROI – more on that below).

As you know, the doctor won’t pay two bits for traditional rhetoric and likes arguments that are backed up with facts and numbers. So he’s going to remind you of the nice little calculations that he presented a decade ago about why you should hire consultants to not only help you with your problems today, but help you design better processes to be more efficient, profitable, and less reliant on contingent help or consulting for repetitive tasks on a regular basis tomorrow.

First of all, we need to cost a top performer.

  1. A top performer demands a high salary.
    Usually 200K to 300K for a high-performer. Let’s say $250K.
  2. A top performer demands pricey benefits.
    Health insurance (10K+), life & disability insurance (5K), 401K matching (10K), and a performance bonus of at least 10% to 20% (25K to 50K) in a good year. This will cost you another 50K to 100K. Let’s be very conservative and say 50K .
  3. A top performer comes with overhead.
    First off, there’s all the standard overhead of maintaining the nice office, the telecommunications equipment, and the IT equipment. There’s also a share of an administrative assistant’s salary, a transportation budget, and a reasonable expense account. This could easily eat up 25K to 50K (or more). Let’s be moderate and say 30K.
  4. A top performer needs a decent vacation to recharge.
    Depending on how long this performer has been with the company, we’re probably talking 4 to 6 weeks. This is a hidden cost, as it means you’re only getting 46 to 48 weeks of work, at most.
  5. A top performer needs to keep his skills up to date, and this will require good training.
    You should allow at least two weeks for any employee. For a top performer, I’d highly recommend three or four weeks of training and education related activities. Let’s be conservative and say this person is an extremely fast learner and you can get away with two weeks. Now your top performer is only working 44 to 46 weeks, at most.
  6. Training costs money.
    Whether it’s courses, workshops, conferences, or self-study guides, expect to shell out for this. A couple of conferences and a couple of courses could easily run you 15K to 25K to keep your top performer at above average performance levels. We’ll be realistic and say 20K.
  7. There will be other costs that arise with respect to raises, promotions, recognition, and performance.
    However, since you can always make them next year’s budget problem, we’ll ignore them for simplicity.

This says that your 250K top performer, that you believe is only costing you approximately 1K a day is actually costing you over 1.6K a day in a conservative estimation, and possibly over 2.1K in reality. (350K to 450K+ over 220 days, vs 250K over 260 days)

This is pretty damn expensive. And while it’s still less than a top consultant, who will charge you 4K to 40K a day (depending upon how much market intelligence she brings with her and how much of that valuable IP she is going to perpetually license or give you), we cannot forget the following:

  • Your top-performer will have most of his or her time consumed with the tactical day-to-day operation of the business.
  • If your top-performer is struggling to complete two weeks a year of training or education related activities, he or she is not going to be up to date on new ideas, technologies, and movements within the marketplace.
  • If you’re starting to run into stiff competition or problems within your business, you can be too close to the problem to make good, objective decisions.
  • Even a top-performer can only be an expert on a handful of technologies, processes, or business functions. At least collectively, outsiders will always know more about the best way to run your business with today’s technology in today’s market than you do.
  • It’s an innovate-or-die marketplace out there today. And if we’re in a recession, that’s doubly true.

In comparison,

  • A consultant can focus purely on the strategic, and purely on the problems you need help with.
  • A consultant will spend a considerable portion of his or her time keeping up to date on new processes, technologies, and advancements. Their knowledge is there to be used.
  • A consultant can be much more objective. Furthermore, a consultant probably has a better comprehension of the state of the market you compete in than you do.
  • Even though, like any top performer, a consultant can only be an expert on a handful of technologies, processes, or business functions, you are free to pick the consultant with the skills you need to advance your business.
  • When a consultant puts in a day, a consultant puts in a day. Usually 10 to 12 hours, compared to the 9-5 with a 2 hour lunch an employee will often try to get away with when he or she can. Plus, a good consultant can’t stop thinking about your problem until she goes to sleep at night, and usually starts thinking about it the minute she wakes up.
  • Consultants live by the innovate-or-die mantra.
    and, most importantly,
  • When the project is over, you can cut the consultant loose without any additional cost. In contrast, it could easily cost you six figures to cut a top-performer loose. Furthermore, if you’re smart and do a short initial engagement with a new consultant before agreeing to a long term engagement, the loss associated with hiring the wrong consultant is next-to-nothing. In comparison, the loss associated with hiring the wrong person for a director or vice president job will be hundreds of thousands by the time you add up the losses with dismissing the current employee, finding a replacement, and getting that replacement up to speed.

So, given that a consultant can bring you the badly needed 1) expertise, 2) objectivity, 3) credibility, 4) leadership, and 5) time that you need to be successful, don’t balk at standard consulting day rates. It’s a bargain compared to the value they can bring, especially when you remember that it’s not tactical day-to-day operations that bring you substantial cost savings and new markets, but strategic improvements that consultants can bring with them.

How much?

Let’s say with your current Sourcing / Source-to-Contract / Source-to-Pay platforms, your top buyer can only do 7 major sourcing events (10M + a year) a year which garner an average negotiated savings of 6% (and the total spend under her purview is 100M), which typically result in an average realized savings of 4%. That’s not a bad ROI in this particular situation, given that your organization just saved 4M on a fully burdened superstar that cost you 400K, a 10 to 1 ROI. In fact, you’re probably saying to yourself — how could a consultant beat that.

Let’s say you brought in a powerhouse consultant for a 6 week process evaluation, strategic realignment, and platform redesign project who, for a modest fee of 300K helped you design new processes and select new systems that, when fully implemented a year later, allowed this same senior buyer to handle 15 major sourcing events a year representing 180M worth of spend (not unreasonable at all — some modern platforms and processes take events that used to take 3 months of buyer effort a year ago down to 3 weeks) and identify an average negotiated savings of 8% (and then realize 6%). In other words, 300K of consultant time allowed your top buyer to go from saving you 4M a year to 10.8M a year. Even if you gave the buyer a 20% bonus, 300K more than doubled your ROI from that buyer even after subtracting the 300K for the consultant (as the ROI went from 10 to 1 to 21 to 1). That’s FRAKING cheap! So next time a top consultant proposes to help you, ignore the top line. It’s only the bottom line that counts.