Category Archives: Market Intelligence

It’s NOT a Suite, It’s JUST Sourcing, Part II

In our last post we made the rather bold claim, which is probably going to irk a lot of vendors, that it’s NOT a Suite, It’s JUST Sourcing. SI likes vendors that are trying to build solutions to solve their customers’ pain points, and has chronicled the efforts of many over the years, and isn’t doing this to be irksome. SI is doing this because it’s not 2005 anymore, it’s 2015 and the nature of, and need for, Sourcing has changed. Today, Sourcing absolutely has to be more strategic and Suite Sourcing is NOT Strategic Sourcing. In today’s post, we’re going to begin to clarify why.

Then, also in our last post we outlined a hypothetical, but realistic, example in the high-tech space, discussing a typical, primary, sourcing event for a company that assembled custom-built high-end workstations for software developers and engineers. We started by discussing the primary factors that the Sourcing analyst was likely to identify as well as two strategies the analyst was likely to take. This led to a perceived event progression and a plan that looked like it was easily executable in you average modular sourcing suite. We did this to make it clear why many companies fall for the falacy that you can attack sourcing in a step-wise fashion using a modular suite, and, as a result, why some vendors still believe that a modular suite is the way to go. The reality is that, at a quick glancce, it does look like this is the right approach and that there is no reason to question it — even though there is a big reason. Namely, this approach is wrong.

The reason being is that, in reality, the event is not going to go as planned.

Specifically, it will not be an analysis followed by an RFP followed by a single auction / optimization analysis followed by a push into the contract management system. One or more, with emphasis on the more, of the following will happen:

  • the RFX will come back and some of the requested bid fields will be empty because the supplier is no longer producing the product
  • the RFX will come back and there will be new products that the buyer did not know about with new bids (and new interdependencceis to be mapped)
  • the logistics carriers will come back with quotes much higher than expected and/or a logistics carrier or 3PL will withdraw (due to overcommitments) and lanes will vanish
  • stakeholders or key customers will change requirements post RFX issue and you will have to go back and ask for prices on next gen products, which might still be in final design stages
  • the baseline optimization will come back with completely unexpected results and once the analyst uses spend analysis to dive in, will find a number of outliers in the incumbent bid and realize that she has to go back and ask for verified or corrected data
  • the auction will end with three suppliers almost equal on baseline scoring and extensive analysis will be needed to determine which supplier gets 50%, which supplier gets 30%, and which supplier gets 20% in the 50/30/20 split dictated by the shareholders to minimize risk

In these situations, respectively

  • the analyst will have to identify a larger supply base and send the RFX to more suppliers
  • the analyst will have to research the new products and decide whether to accept them or not and then, possibly, ask the supply base to bid on (comparable) products in a revised RFX
  • the analyst will have to invite more carriers to bid and consider alternate lanes, possibly from secondary (air)ports to secondary (air)ports
  • the analyst will have to create revised specs and go back to the supply base for additional prices and options
  • the analyst will have to backtrack to the spend analysis step on the submitted data, followed by a request for bid verification and a repeat of the optimization on revised data
  • the analyst will have to go back to the analysis step to identify which bid components were strongest for each supplier and then compare that to existing supplier scorecards (to determine likelihood of on-time delivery, quality guarantees, price consistency, etc.)

In other words, the event is not going to go as planned and it’s not going to be a sequential progression from analysis to RFX to auction/optimization to award. Moreover, most events are going to see multiple occurences of the above hiccups and require an almost random workflow that uses all of the sourcing capabilities of a suite multiple times.

Moreover, the transitions back and forth will need to be seamless. If an analyst has to push data out of the optimization “module” into the “analysis” module for detailed data and outlier analysis, than push the data, with insights, back into the “RFX” module for revised RFX data collection, and than push the revised RFP data back into the “Optimization” module for revised analysis only to find out that the lane cost is coming out higher than expected in the preferred award, indicating that there is still an additional opportnity if logistics costs can be lowered, then this “modular” workflow quickly becomes a nightmare.

Plus, in this situation, the analyst will have to do an in-depth analysis of the logistics cost to determine if costs can be lowered simply by inviting more carriers to bid, analyzing primary and secondary lanes, or doing something progressive like using the organization’s sourcing expertise to help a provider lower their overhead with better insurance rates, communication plans, and office & computer supplies from the organization’s GPO contract. Then, after this analysis has been done, which will likely take the form of multiple what-if optimizations using various cost models, the analyst will have to go back to the RFP, issue the revised RFP with more options to current and new suppliers, push the data back into the optimization module and continue.

In a modern Sourcing project, one cannot separate data collection from cost modeling from analysis from bidding from optimization — it is all one integrated sourcing process that lathers, rinses, and repeats until the solution is found and the event is done. And any provider that thinks you can separate pieces out and take a modular, piecemeal approach and build up to a suite is still living in 2005 and should be approached with caution. It’s not a suite, it’s just Sourcing. And, as indicated in our previous post, and as will be discussed in more detail in a future post, it’s not optimization, it’s strategic sourcing.

It’s NOT a Suite, It’s JUST Sourcing, Part I

In Wednesday’s post, we made what some might consider the rather bold statement that it’s not optimization, it’s strategic sourcing and we will get back to this statement shortly, but first we’re going to step back and make a statement that some may feel is an even stronger claim. It is certainly a statement that is going to irk a number of vendors, but we’re not in 2005 anymore. We’re in 2015 and the market, and the game, has changed.

Thus, It’s not a suite, it’s just Sourcing.

What do we mean by this? Simple. These days, Sourcing needs to be much more strategic and is thus not an activity that can be accomplished as a descrete set of loosely connected tasks where you can pick and choose what you need ahead of time. Strategic Sourcing is an activity that needs to both analyze the need and the market situation and respond to the stimuli the market is providing in a dynamic fashion.

This can not be done according to a pre-planned, limited set of tasks. To clarify, let’s take a hypothetical, but realisitic situation. Let’s say that the company is a high-tech retailer selling custom assembled high-end development boxes to software development and engineering shops. This company will not be buying pre-configured Dell and HP machines, targetted to the consumer market, but custom configured boxes using high end motherboards, which may be manufactured by the same production houses that manufacture boards for companies like Dell and HP, high end Intel and AMD processors, ultra-fast high density DRAM, high-end Solid State drives, mid-tower cases with extra fans, etc.

This might sound like a relatively easy sourcing event as there are a relatively small number of acceptable MB manufacturers, DRAM manufacturers, drive manufacturers, case manufacturers, and only two chip manufacturers, but even 5 * 5 * 5 *5 * 2 = 1350 and each manufacturer might have over a dozen acceptable options — and it’s hard to say up front how many of these combinations are not only viable, but acceptable (as even though it might be feasible to connect the components, there might be driver or other issues that affect compatibility or performance). In addition, new manufacturers arise once in a while and old manufacturers fail or sell out. Last year’s customer spend pattern is not the same as the spend pattern two years ago, and until year-over-year is analyzed for multiple years, you have no idea of the average deviation.

In other words:

  • you may or may not need a pre-event spend analysis to determine potential volume leverage points, the opportunities with supply base consolidation, and expected savings potential, all depending on when the last event was run, how much data you have, and current market data points
  • you may or may not need optimization; if you restrict the bid to pre-configured systems, because business is up 40% and you need a quick event to get through the rest of the year with plans to do a more detailed analysis in 6 months, you can probably get away with a weighted auction, but if bid options are open, you will probably need optimization to handle all the data
  • you may or may not need multiple RFX rounds, so you may or may not need a supplier portal to handle the communication necessary for a multi-round event

And this is all fairly obvious, so you are probably thinking

  • if I need the analysis, I invoke the spend analysis module, get my insights, and plan my strategy
  • then I invoke the RFX module to create the RFX
  • if I am doing multiple rounds — I have to configure the Supplier Portal instead of just sending out the Excel spreadsheets (which I would import on return otherwise)
  • when the data is retrieved, validated and cleaned up then I either
    • push it into the auction for a weighted auction or
    • push it into the optimization module for optimization-backed analysis
  • when I have my winners, I push the data into the contract management module for draft contract creation

… easy-peasy, right?

Wrong!

This is the real world and it never works this way.

Organizational Damnation 55: Sales

You may have thought we reached the pinnacle of organizational damnations when we discussed damnation 54: Marketing, and while Marketing can be bad when they stretch the truth, promise products months before they can be developed even if everything were to go absolutely perfect (which it won’t), and create a hype that the organization may never be able to live up to, but it’s nothing compared to sales. It’s one thing to sell an expectation, especially when one can always weasel one’s way out with an “it’s all a misinterpretation” argument, but it’s another to sign a contract knowing that there is no way the organization can possibly deliver. That’s why the Sales damnation often trumps the Marketing damnation (even though the two are often intertwined).

Why is Sales so bad?

They often live by the mantra that the customer gets what the customer wants.

Regardless of reality, sanity, or the huge loss that could ensue when the product is not delivered, a penalty clause kicks in, and a large lawsuit is filed for incidental damages when the customer finds out that the organization(‘s salesperson) made a promise with the full understanding that it could not keep the promise (because the salesperson wanted to make a quota to get a year-end bonus).

Moreover, the customer gets what they want when they want it.

Sometimes sales will actually limit themselves to selling a product or service the organization actually has today, but promise unrealistic delivery times. For example, Sales might promise 100,000 units of the new motherboard next Monday, when they haven’t even been produced yet by the Factory in China which can only produce 10,000 a day working double shifts and requires 72 hours to air-freight a rush order when you add in packaging, customs clearance, and ground-transportation time.

Even if what the customer asks for is not what they really need.

Not satisfied selling deep freezes to Eskimos, or heat lamps to Colombians, some salesmen have to one-up their peers and sell complex products and services they don’t need to gullible CXO’s who, after seeing the success their peer organization’s supposedly achieved with the same service, acquire a “me-too” mentality. For example, BPO for invoice and payment processing when the organization is a staff augmentation operation and needs deep insight into it’s T&E cost in order to accurately bill and price it’s resources under different cost models. Or lean workshops when all the organization does is joint product design with strategic suppliers and the bottleneck is not the design process, but the suppliers with inefficient plant floor setups. Or customized web-based order entry screens for the sales-team to input orders when in fact the real bottleneck is inventory visibility and availability – not the time to enter an order. Or, even worse, a new ERP to support that new Procurement platform when, in fact, the current ERP is just fine and the data migration effort is monumental.

And more horror stories than you care to count. As long as compensation is immediate on signed deals, instead of long term based on customer retention (for example, instead of 30% of deal value, 10% of annual revenue for as long as the organization is a customer, even if the sales person leaves the organization or retires), Sales will do whatever it takes to line their pockets, even if it means promising the impossible (which will, in the end, come back to bite Procurement in the rear end when they have to source additional product or service support that just may not exist). So keep an eye on Sales, and be prepared to step over their head if need be before deals are signed that Procurement cannot possibly deliver on.

Societal Damnation 39: Brand

Joan Jett may not give a damn ’bout her bad reputation, because when you’re a rock star (or a bad girl movie star), that’s actually a good thing, but when you are a consumer-driven corporation, these days, that’s about the worst damnation that can be thrust upon you. Brand disasters can far outweigh the average 10%+ decrease in shareholder value found by Hendricks & Singhal back in 2003. As per a recent study by CIRANO on Corporate Reputation, not only is there an 80% chance of a company losing at least 20% of its value at least once during a five year period, a major incident that significantly impacts the brand can wipe out over half of a company’s value overnight! Just look at what happened to BP after the Deepwater Horizon disaster. BP’s share price experienced a 52% drop in 50 days. Brand has went from that crazy ethereal concept unnecessarily promulgated by marketing mad men to that very real, critical, corporate requirement that must be maintained at all costs. Why?

Bad press results in backlash and consumer boycotts.

Any indication that your corporation is not the most sustainable, ethical, and corporately responsible organization on the planet can land your organization in the news. A minor supply chain infraction will result in a back page story that will be picked up and circulated by bloggers and activists until every concerned customer notices it and decides to write you angry letters and stop buying your products, resulting in that 10% decrease in sales and value found by Hendricks & Singhal while major supply chain oversights such as using suppliers who experienced preventable (man-made) disasters such as the factory collapse in Bangladesh (which should have not only been condemned but demolished) or the Philippines factory fire (in an overcrowded factory with no fire exit) that resulted in large death tolls will get your organization in front page headlines. This will result in significant backlash and widespread consumer boycott. If consumers will boycott a franchise for its beliefs (such as the boycott of Chick-fil-A for its beliefs on same sex marriage, as opposed to an actual refusal to serve the LGBT community), imagine the backlash and widespread boycotts your organization is going to get if child labour, slave labour, or human trafficking is found in your supply chain as a result of lack of oversight.

Bad decisions result in NGO and governmental investigations, fines, and seizures.

If your company gets caught holding the bag when someone finds melamine in the milk, diethylene glycol in the toothpaste, or BPA in the baby bottle plastic, it’s going to have every governmental agency with authority investigating, watching, and looking for ways to fine it even if it was a supplier two tiers down in the supply chain that did the dirty deed. And every NGO in the sustainability and Corporate Social Responsibility space doing a 360-degree supply chain review to find out what other skeletons are hiding in your closet and what snakes are lurking in your supply chain. So, not only will the government seize any products it finds that violate any environmental laws and fine you as much as it can under environmental, supply chain, and human rights / trafficking legislation, but the NGOs will be feeding the media that will in turn be feeding the consumer backlash and consumer boycotts. Losses will multiply quickly.

And both result in lost investor confidence and severe value drops!

As soon as something goes wrong, even if Procurement had absolutely nothing to do with it because a decision was made, or forced on it, by another department and/or it followed organizational protocol in supplier evaluation and selection, it is going to be blamed by the Investors and the Board who are going to be quite perturbed at the egg on the company’s, and their, face, and want someone else to point the blame at. Procurement’s going to be hung out to dry and if the situation is perceived to be bad enough, someone is going to be made a scapegoat that will be sacrificed in efforts to appease the masses.

It’s extreme damnation, and any Procurement department that wants even the slightest hope of being able to deflect the blame is going to have to go well above and beyond the call of duty in supplier evaluation, selection, monitoring, development, and, if all else fails, dismissal if it wants to survive any attack on the corporate brand intact.

Economic Damnation 3: (Un)Employment Rate

You’re probably asking why this is a Procurement damnation because, on the surface, it doesn’t appear to have anything to do with Procurement. And it’s a good question, because, on the surface, it has to do with the health of the overall economy, and nothing to do with the supply and demand (im)balances that drive day to day Procurement decisions, especially for those organizations still using the Kraljic (Portfolio) Purchasing Methodology.

And from that perspective, you would be right. But here’s the thing. The employment rate is related to the overall health of the economy and the amount of disposable income in the economy. The amount of overall disposable income combined with views on acceptable (consumer) debt levels determines how much consumers have to, and will, spend. The amount of spend determines overall demand for unnecessary and necessary products alike. (Yes, people need to eat and will always spend on food, as long as they can afford to, but if money is tight, “essentials” gets redefined to low-cost basic essentials and high-end food products like prepared meals, imported fruits and vegetables, and lobster are off the menu.) This, of course, determines demand, and demand determines not only your volume leverage in negotiation, but the overall profitability and health of the business, and, thus your overall budget. (Remember, no sale, no store.)

And even if you are in B2B sales, because you supply office supplies, MRO, technology, or equipment, you still depend on consumer spend because if consumers aren’t buying from your customers, your customers aren’t buying from you.

But that’s just one side of the equation. The other side is the talent side. If employment is high, people are buying, but talent, which you so desperately need to take your Procurement organization to the next level, is scarce, and your only option is to hire them away from a rival. This means a big bump in expected salary and lots of perks (and training, so bring that budget back or else) to get them to stay.

In other words, there is no good (un)employment situation for you because either unemployment is rising, which means falling demand and reduced leverage in negotiations and operating funds, or unemployment is falling, which means a lack of available talent and more funds dedicated to talent to keep the talent base you have.

In other words, the eternal damnation of (un)employment rate is not restricted to governments and economists. It affects Procurement quite heavily too.