Category Archives: Market Intelligence

Influential Sustentation 96: Consortiums

Consortiums, better known as Group Purchasing Organizations (GPOs), will be one of your biggest organizational conundrums of the decade. Regardless of whether your organization is currently using a GPO or not, with the need to save money in every category in your tail spend, the next few years will be the years that you can’t live with them, you can’t live without them.

GPOs are going to be pushed upon you by under-informed CFOs because the believe that a GPO will be able to leverage economies of scale, in the form of more volume and more efficiencies, then the organization can achieve on its own.
For example, a supplier might offer price reductions at 1,000 units, 10,000 units, and 100,000 units and offer 2%, 3%, and 6% discounts at each price level. On its own, an organization that only buys 20,000 units would only be able to obtain the 3% discount but if it banded with five other organizations that required a similar amount of units, each organization could obtain the 6% discount. In addition, if only one contract needed to be negotiated and cut, each organization could reduce the amount of negotiation and administration overhead required to negotiate the contract and save even more. Theoretically.

But all of this comes at a cost. First of all, the GPO has to be funded — so, either the organization has to pay a fixed membership cost every year or a percentage of each transaction. Secondly, the GPO has to be managed just like every business processing outsourcing (BPO) provider. This isn’t always easy because not only does the organization have to manage the relationship and insure that the GPO is working on categories that are important to the organization, but it has to make sure that the GPO is taking the organization’s needs into account. And, the double edged sword, the best deals materialize when the combined volume allows a supplier to hit peak production (which allows them to produce the product at the lowest possible cost) and offer their customers the lowest possible cost. However, getting to peak production often requires combining the needs of a dozen or so different organizations, each of which has its own viewpoints and goals for each category. In other words, while you might prefer Supplier A’s products, because your Engineering department feels that they are of superior quality, the other GPO participants might prefer Supplier X — the least favoured supplier of your organization.

So what do you do?

1. Categorize all of your unmanaged spend.

You need to understand how much spend is each category, how much savings is likely available from (better) management, how much savings you could get if you began to manage it yourself, and how that would compare, using market average GPO statistics on savings and GPO overhead, to having a third party manage it. If you could save 2%, but the overhead to save that is 30%, that’s 1.4% savings at the end of the day. If the GPO can save 3%, and the amortization of the fixed and transaction fees work out to 40% of that, that’s a 1.8% savings, and throwing it over the wall might not be worth it. But if the GPO can save 5%, and they are really efficient on that category and their fees work out to 20% of the savings, that’s a 4% savings and you strongly consider throwing it over the wall.

2. Identify the Candidate GPO spend.

Identify all categories that the GPO could save enough on to make it worthwhile, then remove any categories too strategic to the business to hand over to a third party, and then remove any categories where they are primarily being sourced from a strategic or high-volume supplier and where they could be added on to an existing or renewal contract.

3. Estimate the Realizeable Savings from the Candidate GPO Spend

How much is being spent? How much of that could be saved based on industry average statistics? What would it cost to obtain that savings in total fees and overhead? What would really be saved? What is the real ROI?

4. Determine if the ROI is worth it.

If the ROI is not at least a factor of three, by the time you factor in all the change management, learning headaches, and delayed savings, it’s probably not worth the GPO. If it is, it probably is. Make your decision, and then present the detailed calculation to defend your position, and don’t waffle. If you can save, do it, and evaluate in 3 years. If you can’t, just get the best damn tail spend management you can and do better. But you can’t be constantly evaluating, reevaluating, and bickering about it. Do it. Or don’t. No in-between.

Procurement is Still the Rodney Dangerfield of the Organization and Land of Confusion Is Its Theme Song

Why else would we need an egalitarian Procurement Revolution where we must work collectively to shape and drive change?

But in all seriousness, the numbers don’t lie. If you check out “Five Imperatives for Creating Greater Procurement Agility”, which was recently (and still may be) temporarily free from The Hackett Group, you see that the average Procurement Function Operating Budget is forecasted to increase a mere 1.1% this year. Now, that’s better than last year where it was forecasted to increase a mere 0.7%, but when you consider the average annual US inflation rate from 2000 to 2015 was 2.25% (which you can verify on a number of sites), relatively speaking, Procurement is still getting further and further behind every year!

This is despite the fact that world-class procurement (which needs to be properly funded), has an average payback that is twice that of the Procurement peer group. And, as far as the doctor is concerned, the argument that, since world-class procurement organizations have 18% lower operating costs than the peer group, Procurement doesn’t need as much money, doesn’t pass muster because “operating” costs are different from “capital” costs and might or might not include “training” costs or “travel” costs.

If the organization is doing a lot of outsourcing, then a lot of travel is needed by procurement, engineering, etc. for relationship and quality control site visits, and if all of this has to come out of the Procurement budget, as opposed to the operations budget, that’s not fair. If Procurement is not allowed to spend “capital” to acquire a new system, but must instead use a SaaS solution so it can be expensed monthly under the “operating” budget, while manufacturing and warehousing gets a budget that does not include the ERP upkeep, that’s not fair. If Procurement is subject to the across-the-board training ban, because people should know their jobs when they are hired, and are deprived of the ability to advance their skills, not only is that not fair, but that can be costing the organization millions of dollars as sometimes a better informed and prepared procurement professional can shave an extra percentage point off of a hundred million dollar buy, which makes the 10K it cost to send the person to a 3 day workshop paltry in comparison.

Plus, when sales has to increase revenue by $10 to equal the same savings that Procurement often makes by taking $1 off of the bottom line, it should, logically, make sense to throw money at Procurement instead of the marketing mad men or the house of lies consulting firm. But it doesn’t, proving that most board rooms are still cemented in the land of confusion and Procurement is still the Rodney Dangerfield that don’t get no respect with a kick-me sign on its back.

If you want to stand out, don’t answer the top 10 procurement questions! Part I!

If you Google “top procurement question”, you get a bunch of links to articles about top procurement interview questions and how to answer them, including this Slideshare that has some decent questions and answers, but not questions the doctor would actually ask other than to see how sharp you were (at detecting hidden intent), and definitely not answers that showcase the true range of your Procurement capabilities — which is what the doctor would want to know (as he’d only interview for a senior position and only if a company wanted a true leader, which most companies, despite the talk, still don’t want — but that’s another book). To explain, we’ll take them one by one.

Question: Describe a suggestion of yours that was implemented.

Suggested Answer: Any suggestion you made that your employer adopted to some degree of success.

Problem: If your boss was the PHB’s (Pointy Headed Boss’) brother, then chances are your best suggestion wasn’t even understood, yet alone considered. Their failure shouldn’t be your failure just like their random success shouldn’t be your success. The real key to evaluating your innovation capability is the best suggestion you made (implemented or not), why, and the data you have to back it up.

Real Answer: The best suggestion that was implemented was … as it increased effectiveness/efficiency/sustainability in the following way … but … the best suggestion I ever had was … as it would have increased effectiveness/efficiency/sustainability in the following ways (and I did the following analysis to back it up) … but due to lack of risk tolerance / change management support / etc, it unfortunately never got implemented. Then ask, “how does your company support this process”?

Question: What Experience Do You Have in Procurement?

Suggested Answer Whatever you did to support Procurement, direct or indirect.

Problem: The best Procurement professionals ARE NOT from Procurement (fields).

Real Answer: I have the following Procurement experience, but the real contribution I am able to make is my background in engineering/manufacturing/IT/etc. as it will allow me to better support your engineering/manufacturing/IT/etc. as I know what they need, why, and where to find better alternatives, etc.

Question: What Is Your Greatest Weakness?

Suggested Answer What you honestly feel, why, and what you are doing to tackle it.

Problem: Your greatest weakness might be relatively harmless in your target role. Maybe it’s people skills, but you are applying to be the senior analyst to support the senior negotiator. Maybe it’s math, but the organization is one of the smart few with an optimization-backed sourcing platform. Etc. Little impact.

Real Answer: My greatest weakness is … and I am doing this to improve on it … but I feel, even though I’m relatively strong, the area I could most improve in is … as doing so would help me deliver my employer the following benefits …

Question: What Challenges Are You Looking For?

Suggested Answer Any challenge — past, present, or future — that will allow you to utilize your skills.

Problem: What you are seeking might be of zero help to your employer.

Real Answer: The challenges I expect to encounter in this position are … and I expect to be able to tackle them using … and expect these … benefits. You want to show that you’ve done your homework and know what you’d be getting into and are the perfect candidate.

Question: Have You Ever Had a Conflict? How Was it Resolved?

Suggested Answer Describe a conflict and how you handled it in a way that emphasizes your approach to conflict resolution.

Problem: If this is your first senior Procurement role, the conflicts of the past are playground to what you should expect to encounter.

Real Answer: Start out with the suggested answer, but move on to the methods you will use during communications and negotiations with stakeholders and suppliers to try and avoid conflicts in the first place. Conflict resolution is good … but conflict avoidance is better!

Want to Fail Faster? Automate it! (Repost)


This post first appeared six years ago. But it’s as relevant today as you plan your budget requests for the acquisition of new Supply Management systems, so it’s being reposted.

This article in the McKinsey Quarterly on a better way to automate service operations nailed it: processes and work practices are best designed and implemented before companies roll out the new IT. Otherwise, the COO will walk into the field operations control center after spending millions on a new automated scheduling and dispatching system (and over a year implementing the software and installing the hardware) only to find that response times have not improved, and the number of jobs each engineer handles in a day has not increased.

This experience is all to common for leaders of service operations organizations that manage large groups of remote or distributed employees, including those that have made multi-million dollar IT investments in areas such as automated dispatching, schedule prioritization, workflow automation, and performance management. This is because these systems require processes and work practices different from those used in non-IT enabled situations.

This means that before a company implements a new service management system, the company not only has to sit down and baseline its current operations, but determine how these processes need to change in order to appropriately utilize the capabilities of an automated system. This is because best practices developed over the years to insure that manual processes don’t break down tend to be over cautious due to the limitations of the average person to manually schedule hundreds, or thousands, of resources across thousands of jobs — limitations that today’s software doesn’t have.

To succeed, a company needs to go back to square one and define the goals of its service operations, the resources it has available, and the equipment at the resources’ disposal. It has to throw away all of the old rules and constraints and be sure to only define true constraints (an engineer is only available 8 hours a day, service for tier 1 contracts must occur within 24 hours, etc), not perceived constraints (an engineer can only handle two calls a day, the repair must be by an engineer at the closest office, etc.). And then it has to trust the system which can optimize across thousands of variables.


Remember, a good Supply Management function is a service to the rest of the organization, so it’s important they have the processes and platforms to serve the organization right.

Who Do Catalogs Serve? Not Who They Are Supposed to!

Over on Spend Matters, the prophet and the maverick recently co-authored a post that asked “Do Catalogs Serve Suppliers or Buyers More?”. The answer varied depending upon the (age of the) platform, the implementation, the intent, and the author, but the simple answer — which did not really come through loud and clear in their post(s) — is not who they are supposed to serve. Especially if it’s a first generation catalog.

We’ll take first generation catalogs first.

A first generation catalog is nothing more than an electronic version of a paper catalogue — and when you are in a rush to find and order a product, how good is that? With a paper catalogue, you flip to the index, hope the keywords you can think of are there, and hope the product on the page you flip to will do the job at a decent price. With an e-catalog, you are scanning through a keyword index or searching keywords and hoping the right product at the right price comes up. Not that useful, whether you are the buyer (who may or may not find what you want) or the supplier (who may or may not have their product found and requisitioned), especially when the buyer has to search each catalogue separately and will stop when the find the first acceptable product (which could be in another supplier’s catalog).

A second generation catalog is a bit better as it indexes all text, allows all supplier catalogs to be searched simultaneously, allows side-by-side comparison, single cart, and automatic PO splits across suppliers when a requisition is approved. But it’s still not perfect. The product might not be there. It might be out of stock. The price might not be right — or there may be no capability to communicate with the supplier for clarification on important details. The buyer is not served, and the supplier is not served.

Third generation catalogs are much better, and were supposed to solve the issues as they also allow punch-outs; real-time federated search across internal, supplier, and punch-out catalogs; communication; RFX; preferred and contract items to be weighted or forced to the top of the listing; budget integration; and visual guilt features, to make sure a buyer buys what should be bought when and how it should be bought. This helps Procurement help buyers buy on-contract items on-contract and steer purchases to preferred suppliers. And it helps suppliers because they know if they have a contract or are preferred, buyers will be guided to them.

But it doesn’t serve either party if the need isn’t served by an on-contract item in stock at a preferred supplier, because the buy might not be appropriate for catalogs in the first place. If the buyer buys an overpriced item via punch-out, that doesn’t help Procurement. And if the buyer buys the wrong product from the supplier when there was a better one, the supplier gets a bad rap and may not be bought from again.

The problem is catalogs, like GPOs, are presented as the be-all, end-all tail-spend management solution when, in reality, tail spend (as pointed out in Sourcing Innovation’s recent paper on An Introduction to Tail Spend — and why you need a technology-based solution, tail-spend is a very complex beast that is often only suitably served by a mix of catalog, RFX, and auction buys, often optimization-backed, with the solution varying with market conditions and particularities of the need.

And a catalog will never tell you when it is the right — or wrong solution. So unless it’s only a part of a full tail-spend suite, with expert guidance (via expert programmed workflows), it won’t even come close to serving either party. Remember that before buying a “new and improved” e-Catalog solution.