Category Archives: Market Intelligence

Sourcing Adoption Addresses Key Procurement Priorities

Earlier this year, the Hackett Group released it’s Procurement Executive Insight on “The CPO Agenda: Reduce Purchase Costs, Improve Agility, and Become a Trusted Advisor” that summarized the Hackett Group’s annual key issues study that was undertaken to define the top issues that would shape the procurement executive agenda for 2016.

As a result of this study, Hackett identified two major facts:

  1. The Top Four Priorities are, bottom up:
    • improve agility
    • increase spend influence
    • become a trusted advisor
    • reduce and avoid purchase costs

    which is bad, because costs should be well under control by now and Procurement should be seen as a trusted advisor by those that spend the most and

  2. Procurement’s Operating Budget is expected to grow by a mere 1.1%which is worse because most Procurement departments are under-staffed, under-resourced (technology wise), and under-funded (even though they can often make the greatest contribution to the bottom line of any department in the organization).

It’s another year of doing more with essentially less (as 1.1% budget increase doesn’t even cover the cost of inflation), which means that you have to be more efficient, and effective, than ever. You need to push your Procurement Value Engine into overdrive.

How do you do that?
(Hint:  It involves heeding the advice in Higher Adoption is Where True Value Lies, and we’ll get to that.)

There are a number of ways to do this, but probably the most critical thing to do is start at the beginning and get your Strategic Sourcing under control, especially for any non-direct category where you are not locked into a very small group (sometimes a very small singular group) of suppliers. And how do you do this? You get your optimization-backed sourcing platform adopted throughout the organization. (Don’t have an optimization-backed sourcing platform, than maybe you need to talk to one of the sourcing samurai.)

The reason Procurement is still in the “dark ages” in most organizations is because less than half (40%-) of organizations have any sort of platform. Of those, some have Sourcing, some have Procurement, some have Contract Management, some have Supplier Management (SIM/SPM/SRM/SxM), and some have another point-based solution that solves one particular pain, but leaves most of the pain of the Procurement organization unaddressed.

The most common solutions are either e-Procurement platforms, typically with some sourcing capability (namely, RFx), or e-Sourcing platforms, typically with Spend Analysis, Contract Management, and/or some procurement capability (usually order or invoice management). However, just because these solutions are in place, it doesn’t mean that they are used. In many organizations with a sourcing platform, only a small team of senior buyers working on the most strategic or highest dollar categories use the tool. This is costing the organization a lot of money, as the opportunity cost of not applying the platforms across the board (and identifying cost savings or cost avoidance across the board) is huge.

Consider our recent post on Why You Need Mass Adoption of an Optimization-Backed Sourcing Platform, a traditional organization without an optimization-backed sourcing platform will typically only source, at best, 9% of spend strategically with optimization and 18% of spend strategically without using the platform, for a total throughput of a mere 27%. For an organization that sources 50% or more of its spend every year, that’s half of its straight-to-the-bottom-line savings opportunity up in smoke!

But if the organization doesn’t use an optimization-backed sourcing platform, instead of an average of 1/4 of spend being strategically sourced in one way, the fraction decreases to 1/5 (or even 1/6). Think of the opportunity costs! Instead of losing 3% against the bottom line, the organization is now losing 5% or 6%! The reason for this is that the sourcing platform is always in the hands of the few. Why? Sometimes it’s a lack of licenses, but often it’s the complexity of the solution, which is seen as too complex by the majority of the buyers who have to push through volume, complex requirements, or special situations that are, in their view, easier to deal with outside of the platform.

That’s why you not only need adoption, but you need a platform that can, and will, be adopted by all of the buyers so that 90%+ of sourced spend goes through the platform. This will not only increase savings, which addresses the top priority of Procurement executives, but also addresses the priorities of spend influence and agility. How? A good platform allows a sourcing team to move faster, and speed up events by weeks or even months, and it allows the organization to tackle critical projects within different organizations that can increase Procurement’s influence.

So to find out how to get your Sourcing Platform adopted, download Higher Adoption is Where True Value Lies today and find out the tips and tricks that will make your sourcing a success.

Consumer Sustentation 74: Demand Planning

Demand Planning is a damnation. Why? As per our original damnation post,

  • traditional demand planning models require historical data
  • traditional demand planning models require market predictability
  • traditional demand planning models require market foresight
  • traditional demand planning requires knowledge of the expected price point

And how often in today’s constantly changing consumer marketplace, with new product releases coming faster and faster (to the point where your phone, laptop, and music device is out-of-date by a whole new release within a year), do you have good historical data, market predictability, and foresight? And how often can you be confident in the price-point, as a skunk-works product release by a competitor between sourcing and sale can force a price reduction to prevent inventory sitting on the shelves indefinitely.

So what can you do? (Besides burying your head in the sand like an ostrich?)

1. Get as much market data as you can.

Collect as much data as you can on your competitors imports, sales, and revenue using publicly accessible import data, analyst data, and company annual reports. It won’t be accurate, but with enough data you can often identify better trends than you could on the most similar product in your own inventory (which might not be similar, or recent, enough to be sufficiently relevant).

2. Have third parties conduct surveys on your behalf.

Sometimes the best way to gauge a market forecast is to actually conduct customer surveys and have a third party use the data to estimate demand for you. If you have no clue, the best thing you can do is admit it and get an expert to help you come up with a realistic demand forecast range.

3. Don’t focus a number, focus on a range and a potential rate of ramp-up or ramp-down.

If you know the demand is expected to be in the 100K to 200K units a month range, and the demand could double overnight, then you know that you need to contract for the low-end, but with a supplier that could ramp up to double production in a matter of weeks if necessary. And you have to negotiate a contract that allows orders to escalate, with pre-defined increases if the supplier is forced to work overtime (so you don’t get any billing surprises or animosity down the road).

4. Keep on top of sales data in real-time.

Be sure to get at least weekly PoS updates, and re-run the projections on a regular basis to detect an upswing or downswing early, so that you don’t get caught with your pants down, or, even worse, your pants off.

If you follow these tips, then you can get a reasonable grip on demand planning while your competitors flounder with the flounders.

Trend Analysis: Mantic or Misguided

Trend Analysis, formally defined by Wikipedia as the practice of collecting information and attempting to spot a pattern, or trend, in the information is typically presented by providers of analytics packages as the miracle your organization has been looking for to power your productivity and process improvements. After all, if you can’t use the data you have to get a good sense of how you are doing, how are you going to figure out how you are doing, if you can improve, by how much, and what you should do.

This is true, provided that the trend analysis is statistically reliable, on accurate data, and comparable to a meaningful benchmark. But this is not always the case, and when the trend analysis is poorly implemented or applied to poor data, definitely not the case. In fact, if the trend analysis is not accurate, it will cost the organization precious time, money, and resources and result in considerably worse, instead of better, performance. And even though you don’t hear about it (as the last thing a major provider of analytics solutions wants to do is scare you away from their very complicated, and extremely expensive, solution that is supposed to save you 3X to 7X its annual cost), analytic-based screw-ups happen more often than you think. And if they happen to you, you will be cursing the analytics package until it’s off the asset sheet (and beyond).

the doctor is being dead serious here. Trend Analysis (like dashboards) hide half a dozen serious dangers that can seriously hinder productivity, savings, and even innovation. Half of these are common to internal trend projections and half to external trend projections.

One of the most significant dangers of internal trend analysis is missed opportunities. If an analysis of fulfilment time analysis over the past six months indicates that the organization is likely to continue to hit its 90-day delivery guarantee by at least 3 days, the organization may think that all is fine and well, but not realize that just hitting the 90 day delivery guarantee is costing the organization money. What if the average stock-out rate is 10%, and 6% of that are stock-outs that are less than 40 days. What if the organization could change lanes and carriers and get the delivery guarantee down to 50 days? This could reduce the stock-out rate by as much as 60%, and if this stockout rate is costing the organization 10M a year, that could be a 6M savings overlooked because the trend analysis creates an all-green dashboard.

One of the most significant dangers of external trend analysis is innovation stunting. For example, the trend analysis could show that the organization’s conversion to sustainable energy is outpacing its peers by 5% and think that it is doing great. But what if it has the opportunity, due to its locale, to switch to solar or hydro at a rate that would outpace its peers by 10% and take another 20% off its annual energy bills? Without knowledge of the possible, the analyst could completely miss that innovative opportunity.

But these are only two of the six major hidden dangers that can rear their ugly heads as a result of the misapplication of trend analysis. For a detailed insight into the other four, download the doctor‘s latest white-paper (sponsored by Trade Extensions) on The Dangers of Benchmarks and Trend Analysis (registration required) today. You need to know these inside out before even considering using trend analysis (which, when improperly constructed and improperly interpreted, can be just as deadly and dangerous as a dashboard).

Benchmarks: Blessing or Bane?

Benchmarking, formally defined by Wikipedia as the process of comparing one’s business processes and performance metrics to industry bests and best practices from other companies, are typically presented by consultants as a boon for business managers and a reason to buy their services and/or solutions. After all, if you can’t benchmark, not only do you know how good you are doing (compared to the industry), but you do not know if you are improving or deteriorating, at what rate, and what the potential is.

And all this is true, provided the benchmarks are accurate, apples-to-apples, and actionable. This is not always the case, and when the benchmarks are poorly designed and implemented, definitely not the case. In fact, if the benchmarks are not accurate, they can cost the organization precious time, money, and resources and result in worse, instead of better, performance. And even though you don’t hear about it (as the last thing a Big 6 consultancy wants to do is scare you away from one of their most profitable service offerings — as it takes a long time to design the scorecard, collect the data, and interpret the findings [which translates into a huge number of top dollar billable hours for the House of Lies] — it happens more often than you think, and if you end up being one of the unlucky, you will be cursing benchmarks until the end of your Procurement career (and beyond if the word ever again arises).

the doctor is being dead serious here. Benchmarks (like dashboards) hide at least six serious dangers that can seriously hinder productivity, savings, and innovation. Three of these are very common to internal benchmarks, and three of these are very common to external benchmarks.

One of the most significant dangers of internal benchmarks is hidden opportunities due to false negatives. This often arises when monitoring best-price contracts. A classic example is that of enterprise desktop systems. Considering that technology depreciates the time it hits the market, just like a car depreciates from the time it leaves the lot, the price of these systems should decrease over time. If the benchmark says that the contracted configuration decreased over the 12-month contract by an average of 0.5% a month, for a total decrease of 6%, the buying organization might believe that the vendor is honouring the best-price clause. But if the buying organization isn’t aware that the average depreciation of these systems is 12% to 18% and doesn’t monitor market pricing, the buyer might not know that the pricing should have decreased an average of 1.25% a month, and would have lost 0.75% a month on purchases. If the organization was buying 500 systems a month as part of a phased replacement for 1.5K each, or spending 750,000 a month, that’s a loss of $5,625 a month for a total loss of over $60K, or another help desk resource! (And if all hidden opportunities were this small, it might not be too bad. But this is more of a best-case loss example.)

One of the most significant dangers of external benchmarks is wasted years due to lack of validation. One common example is that of contingent or manual labour spend analysis. For example, consider the analysis of warehouse (contingent) labour across the enterprise. An enterprise could quickly find that its paying, on average, a fully burdened rate of $17 an hour for workers to stuff boxes while its competitors are paying, on average, a fully burdened rate of $14 an hour for workers to stuff boxes. This might lead an analyst to believe that the organization is paying 30% more than it should be and that it should seek out a new contingent labour provider to get costs down, and waste months on RFX and analysis only to find out that the most it can lower its costs from the quotes is 10%. At this point, the analyst might go back and do an analysis of what it would cost to take the labour management back in house (which would require building a Contingent Labour CoE, staffing it, etc.) and still not see a savings when it replaces the outsourced management cost with the internal management costs applied to the total wages paid out. At this point the analyst would give up, or spend even more time investigating the reason only to find out that the organization’s main warehouses are in California, New York, and Massachusetts, the states with the highest minimum wages in the nation, while most of its competitors keep their warehouses in the mid-west / south-west states that only mandate the federal minimum wage of $7.25 (vs. minimum wages north of $10). Benchmarks only capture price and performance tiers, not the realities that led to them.

But these are only two of the six major hidden dangers that can ruin any benchmarking project (and the efforts that they will kick off, for better or worse). For a detailed insight into the other four, download the doctor‘s latest white-paper (sponsored by Trade Extensions) on The Dangers of Benchmarks and Trend Analysis (registration required) today. You need to know these inside out before even looking at a benchmark (which, when improperly constructed and improperly interpreted, can be just as deadly and dangerous as a dashboard).

Organizational Sustentation 53: Engineering

Engineering designs the products that represent a product-based company’s life-blood, as they generate the cash necessary for operations. No company exists without revenue (NO Sale, NO Store), and revenue only comes from the sale of products or services. And those have to be designed by someone, and that someone is typically an engineer. And while Engineers are the top talent in the company, as well as the best educated talent, they can also be stubborn rigid perfectionists.

As per our damnation post, each engineer has a process, a design, a set of approved raw materials, and that is the process, the design, and the set of approved raw materials. Trying to convince them that there is another process, alternate design, or other raw material that could be useable is like trying to force molasses to flow up a glacier, as this would mean that they would have to accept that there are better processes, designs, and raw materials, and that they exist today (despite the engineer’s expensive research and experience).

And even if they are willing to accept there are better processes, design, and approved raw materials — they are perfectionists. The cost model might say that 98% reliability is good enough because, in practice, only 1% of units will break down before the warranty period expires and the cost of flat out replacement will have little impact on profit margin, but Engineering will say otherwise. They will insist on the supplier with 99% reliability even with a 30% cost increase because a good engineer makes the best product they can make, cost be damned.

So how do you deal with this damnation so Procurement can achieve some sustentation? Education.

The first thing you need to educate is that reliability is not the number one concern, safety is. If a laptop, music player, TV, etc. stops working, it doesn’t harm anyone. The buyer might be annoyed, but if you immediately rush out a brand new replacement, the buyer won’t be annoyed for long. As long as the product doesn’t short out and electrocute the user, there’s no issue with a little less reliability.

The second thing you need to educate them is that sustainability trumps supplier longevity. A company has to plan for the future, not rest on past laurels, especially if those past laurels are suppliers that have never been questioned. While every supplier was likely a great choice for one reason or another at the time the supplier was selected, the supplier might not be such a great choice today. All suppliers have to be reviewed at one point in time, and if there are more sustainable suppliers, they have to be investigated.

The third thing you need to do is educate them that you can help them identify suppliers that could have better processes, designs, or raw material formulations and save them a lot of time searching for new alternatives, as you will be scouring the market on their behalf and only bringing them suppliers that might truly have a better, or different, option. As the gate-keeper, you will save them a lot of time.

Engineers are your best allies – they are educated, rational, and want to do the right thing for the organization, like you. So show them how you can help, and be willing to listen (and learn) from them, and you will be able to overcome this organizational damnation.