Category Archives: Market Intelligence

How Do We Solve the Top Procurement Challenge?

A few weeks ago, we mused on what is the Top Procurement Challenge when the average Procurement organization has so many challenges to deal with and indicated, for many organizations, the top, immediate, procurement challenge might be to align Finance and Procurement on the ROI of platforms and processes Procurement wants to implement for the good of the organization because, in many organizations, not only do we have the situation where Procurement don’t get no regard, but we also have the situation where they don’t get no money for essentials either, trying to survive on life-support when over half of organizational spending goes through them and organizational livelihood depends on them.

But how do we accomplish this alignment? How do we align Finance and Procurement on the value of good Procurement processes and platforms when everyday Finance sees proposals from various departments proclaiming mega (but unrealizable) savings and has an instinctive negative reaction to any savings claim put in front of them. Especially when Procurement and Finance don’t speak the same language. As far as Finance is concerned, a model only depicts savings if it is described in terms of ROIC (Return on Invested Capital) or ROE (Return on Equity) against the organizational balance sheet. It has to include not only financial outlays and expected cost reductions but overhead, indirect costs, assumptions, and potential variations due to unexpected interruptions.

The model has to be conservative, all risks have to be clearly identified, and the best and worst case savings ranges have to be precisely defined, with conservative estimates all the way. The savings process has to be outlined, the timeframes (especially if implementations and integrations have to be accomplished) and ranges have to be specified, and contingency plans have to be defined for delays. Only then will Finance even listen and start to take Procurement seriously.

But even then Finance may not understand how Spend Analysis or Decision Optimization can save 10% or more. Especially when previous investments in “analytic” technology resulted in glorified reports that resulted in no savings and previous investments in “auctions” supposed to “optimize” spending with the market, which had limited success in the beginning, ended up increasing organizational costs when demand started to exceed supply and inflation returned.

And convincing Finance might not always be the best idea because explaining that Procurement is not doing an optimal job might result in negativity, or even hostility, from Finance that might believe Procurement is doing a very lousy job if 10% savings are feasible. Finance might not be capable of realizing that sometimes global sourcing scenarios are so complex that it is literally impossible to get a grip on everything in a spreadsheet and there is no way any human can find an optimal solution to a complex sourcing problem without a sophisticated decision optimization tool that might have to analyze millions of possible award scenarios to find the best one. Nor can any human attempt to make sense of millions of transactions with a real spend spend analysis system that allows the user to cube, slice, and dice the data in a myriad of ways looking for patterns that simple reporting systems will forever miss. Procurement could be doing an exceptional job under the circumstances but still be leaving 10% on the table — 10% that can never be claimed without proper technology.

It’s a puzzler to say the least.

Your SRM is in a State of Flux. Shouldn’t You Find Out Where?

Last week we reminded you about State of Flux, a provider of Supplier Relationship Management (SRM) software and services, and the initiators of the SRM Research Report that we highlighted in our 3-part series on why you should focus on essentials, plan against the pillars, and be a customer of choice.

Your supply chain success is ultimately dependent on your supply base and their failure is your failure. Your customer doesn’t care why the order is late. He just cares that the order is late. Your customer doesn’t care why the product is crap. He’s just upset that he forked over good money for bad product and only cares what you are going to do about it. Thanks to omni-present supply chain disruptions that are increasing at a rapid rate (to the point that less than 15% of companies will not experience a major supply disruption over the next 12 months), something is going to go wrong. And the question is, do you have a good relationship where your supplier will proactively notify you of a potential disruption so that you can collaboratively work together to prevent it, or a not-so-good relationship where you won’t know the shipment isn’t coming until it’s two days late and someone calls the supplier who admits that, because of a missing raw material shipment, production line breakdown, or simply poor scheduling (which lets you know how important you are to them as a customer) it just isn’t coming.

Unlike RFX or e-Procurement, for which there are a plethora of good platforms that walk you through good workflows by the hand and make it hard for you to do it wrong (although they don’t prevent you from designing the process or event wrong), there are not as many platforms for SRM, and SRM cannot be fully automated. SRM is more than just performance monitoring and corrective action management, it’s also nurturing, development, and partnership. It’s a good process, with appropriate best-practices embedded within, that focusses on the soft factors as well as the hard factors.

But what the the best-practices that are appropriate for your organization? What’s the right process? How do you get started? And, more importantly, how badly are these needed? Unless you want to wait until a major disruption or disaster occurs, that could have been prevented with a better supplier relationship, the only way to find out is to measure up against your peers. Probably the best way to do this is to proactively participate in the 2015 State of Flux SRM Research Report and get the full results ahead of the market. Time is running out to complete the SRM Survey, which, in it’s seventh year, is focussed on helping you get executive sponsorship and support for your SRM initiative.

Follow the bright blue hyperlink today and take the 2015 SRM Survey today. Given the depth (and breadth) of work consistently produced by State of Flux (compared to the average over-priced and under-researched analyst report), the 45 minutes of time that is required makes the effort infinitely more valuable than the cost.

State of Flux Fooled You

Economic Damnation 9: Oil & Gas Price Shocks

Take a look at the West Texas Intermediate Crude Oil Price chart for the last twenty (20) years over on Macrotrends.net. It’s bouncing up and down like a yo-yo. And any chart you pull up for international oil and natural gas prices is going to look similar. In the chart, we see oil goes from a high of about $38 in 1997 to a low of about $16 in 1998 to a high of about $47 in 2000 to a low of about $26 in 2002 and then a series of gradually increasing perturbations until it reached a high of about $145 in 2008 before it crashed down to about $43 in the same year. And so on.

In other words, within a one year period, prices can double or be cut in half without almost any warning. And either situation can run havoc with your supply chain. Let’s tackle the obvious situation first. Prices double seemingly overnight. Your costs are going up – if not right away, very very soon. If you have a contract, you might be able to insist that your supplier absorb the increase since they were, at signing, charging you higher than market cost since they were taking a risk over a predefined period. But, at some point, their margins go to zero, and soon after that, they are not going to put up with it anymore, especially if they are struggling financially. They are going to insist upon fuel surcharges, or simply stop honouring your contract and fail to pickup. Now, of course, you can try taking them to court, but in the interim, no shipments, no sales, and screaming customers which cost your organization much more than it could recover in a legal battle years down the road. If you don’t, you are buying on the spot market, paying 10%, 20%, 30% or more than expected for transport, eroding your margins, and possibly even losing on every delivery to your customers if you are working on thin margins to a competitive marketplace. You can either try to pass the costs on, and risk angry customers, or try to ride it out.

The non-obvious situation is when prices drop. Suppliers are the first to cry foul when prices increase rapidly but the last to insist on being fair when the drop. When was the last time they voluntarily dropped a fuel surcharge after fuel prices dropped back to the levels they were when they cut the contract to begin with? Never! You will have to spend a lot of time and effort to negotiate prices down to reasonable levels, and even more time tracking prices to benchmarks to know when you need to start those negotiations — this takes resources, and that costs money. This is a situation where you’re damned if prices rise and you’re damned if prices fall. It’s damnation all around.

And that’s just the short term damnation. If prices drop too much, the first thing the producers are going to do is pump less oil, reduce production, and wait until demand nears (and maybe even exceeds) supply, so that prices will start to rise again. In other words, as soon as you manage to successfully negotiate the price reduction, you’re only a few months away from the supplier coming back with a new surcharge request. The pendulum always swings and knocks you in the head upon every return.

Why Is No One Using Big Brains?

Apparently one of the best presentations at Coupa Inspire earlier this month was a presentation by IBM on Procurement Transformation and Big Data. (Needless to say that this does not inspire the doctor.) Ouch! Big Data is good, but only if it’s a big bucket of relevant data, but that’s not usually the case. Usually it’s a big bucket of random data where only some of the data is relevant and the statistical relevance is low. This is bad because if an organization takes big data as gospel, it can be led down the wrong track. (And we’ll get back to this.)

And given the examples that the prophet is presenting in his post on “When Watson Meets Procurement” on Spend Matters, the doctor is a bit worried. Why? Let’s take them one by one.

Parsing unstructured data to extract “soft facts” and information from news feeds and social media to line up against traditional risk management data feeds to drive a new level of supply risk management intelligence.

Okay, this is smart, because it can identify potential problems, but not necessarily all that useful. For example, let’s say it detects a few dozen instances of consumer unrest due to product defects. If the product is one with a warranty, chances are your customer service department already has a few dozen instances of warranty claims. No new information. Let’s say it detects a few hundred instances of consumer duress because one of your suppliers was using slave labour – but that resulted from a news story that was already picked up by your supply chain visibility and risk monitoring system. Nothing unexpected here. All you can really pick up on is general consumer sentiment, but only the consumer sentiment of the consumer base that is online, and, more likely, the consumer base that is unhappy with the product, since people who are unhappy are more likely to complain that people who are happy are likely to go online and give good reviews.

Ask Watson about Procurement that can leverage natural language processing to extract data buried in contracts, documents, and other organizational systems such as AP.

Okay, this is kind of smart too, but this is not so much big data processing but natural language processing and query formation as this is no different than implementing a meta interface that parses a query and translates it into a format that is appropriate for each system that may contain related Procurement data. Yes, the number of systems that could contain related information magnify the data magnitude problem, but since you can search separately and then only integrate relevant data, this is really not that much of a big data problem.

Build My Briefing, Watson that aggregates information about a Procurement entity (category, supplier, etc.) into an auto-generated deliverable for anyone who needs it (for sourcing, supplier review, etc.)

Okay, this is also smart, but not big data. This is just aggregating data from multiple systems and shoving it in a pre-built template. It’s just a reporting engine on steroids.

the doctor would like to see a good use of Big Data for procurement to solve a problem that could not have been solved otherwise, but he hasn’t seen it yet. The reality is that, as he has been saying for years, Big Brains Will Win in the End.

Is Your SRM in a State of Flux? Maybe You Should Find Out!

Earlier this year we introduced you to State of Flux, a provider of Supplier Relationship Management (SRM) software and services, and the initiators of the SRM Research Report which we highlighted in our 3-part series that highlighted why you should focus on essentials, plan against the pillars, and be a customer of choice.

SRM is very important because supply chain success is ultimately dependent on your supply base. Your organization can have the best marketing and packaging in the world, but if the supply base delivers products that are rubbish, your organization’s brand reputation is tainted, and the damage can well exceed even double-digit savings identified during the sourcing phase.

But it’s not easy to effectively manage supplier relationships because SRM is more than just performance monitoring and corrective action management, it’s also nurturing, development, and partnership. Furthermore, effective SRM requires quite a bit of work to get a proper framework in place (as reinforced by Sigi Osagie’s recent Procurement Mojo), which will need to be implemented while keeping the ten essentials in mind that were highlighted in State of Flux’s 2014 SRM Report (and summarized in our post on the essentials).

And it’s even harder to find out how well you are doing until, of course, a major disruption or disaster occurs when a shipment doesn’t arrive or, even worse, arrives with a 10%+ defect rate (because, otherwise, it seems like everything is hunky-dory even when the relationship is spiralling out of control). But there is a way — you can proactively participate in the 2015 State of Flux SRM Research Report and get the full results ahead of the market. You can measure yourself against your peers, find out where the market is, and get the first insights into new best practices.

You have until June 26, 2015 to complete the SRM Survey, which, this year, is focused on helping you get executive sponsorship and support for SRM. Executive sponsorship is critical because SRM needs to be viewed as an organization enabler for the required transition management program to be adopted and enforced.

While this survey will take 45 minutes of your time, the reward is infinitely more valuable than the cost. This year’s publication was one of the most comprehensive compendiums of SRM insight ever produced with 216 pages of data, results, and expert interpretation. Imagine the value that will be yours, for free, as a participant in the seventh annual study.

So, follow the hyperlink and take the 2015 SRM Survey today. Given the depth of the work consistently produced by State of Flux compared to the average analyst report, you won’t regret it!