Category Archives: Market Intelligence

How Much Unmanaged Tail Spend Should You Have?

It’s hard to say, but it should be a lot less than you do. In most organizations, “Tail Spend” is 20% to 40% of total spend that should be managed by Procurement, but isn’t for various reasons.

It includes a whack of spend that includes, but is not limited to:

  • one-time buys for a new hire
  • short term buys to replace supply lost to a supply chain disruption
  • temporary services
  • one-time buys for a trade-show or event
  • one-time MRO buys for replacement parts
  • “small” purchases for recurring orders under a certain volume or cost
  • etc.

But how much of there really deserves to be there? In theory, none of it, but in practice, some of it will always be, but it should be less and less as time goes on … and certainly a lot less than 30%.

Why?

Let’s start with the above:

  • one-time buys for a new hire should be a standard kit, which shouldn’t change more than once a year, and since volume can be projected based on hiring patterns, any significant spend is good fodder for, and should be, either a sourcing event or a pre-negotiated catalog-based buy
  • if proper sourcing was done for a critical part or item, then it should be easy to switch supply to the secondary supplier with only a minor disruption
  • temporary services that recur should also be on a master contract that should be strategically sourced
  • trade-shows and events costs tens of thousands these days; if you’re holding the event, you should have an RFI to select the most cost effective venue and most of the items you buy are in bulk and should be auctioned or 3-bids-and-a-buy sourced
  • replacement parts could be put on a master contract when you buy the equipment that you know will need replacement parts; you can define a max price and have the option to buy or go to a third-party if a third-party alternative comes along in the future and have the spend at least partially managed
  • just because volume is only a few thousand or spend is under 100K or 1M does not mean the category shouldn’t be sourced; if there’s 15% overspend that’s 15K that could be captured even in a simple event that might only cost 5K of resource time or 150K that could be captured only in 15K of resource time; and if 2/3 rds of that could be captured by automation (automated auctions, etc.), why not?
  • etc.

The reality is that you should not have very much tail spend.

Be Sure to Check Out the Prophet‘s Treatise on Industry vs. Technology Analysts

Before you fall for the advice of an industry analyst when making a critical long-term S2P technology platform selection. (Just today I heard about a company four [4] years in to a six [6] year Ariba implementation. That’s right! Six years! Wowzers. I’m not even sure Slow Poke Rodriguez could do an implementation that slow! But I digress … )

You see, as the prophet clearly states in Industry Analysts vs. Technology Analysts, industry analysts provided company/solution-level analysis and evaluation while technology analysts provide product/module- and architecture-level focus and comparative solution analysis. That’s a big difference.

In other words industry analysts tell you about the stability and market acceptance of the company while technology analysts tell you about the stability and market appropriateness of the technology, as well as the future outlook of its effectiveness post-implementation. [Just because your hardware is obsolete the minute you open the box doesn’t mean your software should be.]

Furthermore, what’s going to give you more reliable insight into a potential platform — information gathered by phone-based customer discussions, powerpoint presentations, and the odd customer survey — or — ground-up technology evaluation through interactive, in-depth, live product demonstrations focussed around granular RFI questions and important platform elements. If you trust an industry analyst, the best you’re going to get is second hand insight from happy customers where the blush is still on the rose and a review of the UI — from static screen captures in a powerpoint presentation. Not good. Not good at all.

For more insight on what makes a technology analyst, and just how rare they are, check out the prophet‘s article. FYI: as far as the doctor is concerned, the chances of encountering a true technology analyst is less than 100 to 1. Especially when you consider the educational and experiential background needed. (FYI: operations, MBA, psychology, history, etc. are NOT the right backgrounds to understand algorithms, software architectures, and modern technology at a deep technical level.)

Digging into the S2P Tech Foundations

In our post yesterday in what makes a good foundation for S2P Tech, we noted that if you wanted to have any hope of “future-proofing” your platform, then it was critical that you acquired a platform with the following four capabilities.

  • Configurable Workflow preferably with RPA support
  • Open / Extensible API that supports integration into and out of your platform
  • Dynamically Extensible Data Model that can be extended by the customer
  • Globalization Support for language, currency, data location, and more!

And we gave some preliminary reasons, but today we’re going to dig into some of the issues that really concern us.

  • Changing Governmental Regulations as governments introduce e-commerce, they are introducing e-invoicing requirements that can change your P2P flow (like requiring invoices to be sent through government servers or payments sent through government servers) and as governments introduce more regulatory compliance, the ability to report the complete origin story of a product, to the source of each raw material, is going to require more cross-platform and cross-enterprise data collection
  • Data Bifurcation as more and more platforms proliferate across the supply chain, the data will continue to proliferate as well … and without the ability to connect all the platforms, the data will exist in separate islands
  • Increasing Supply Chain Segmentation across more and more companies across more and more companies across more and more global users
  • Platform Obfuscation because the platform can’t keep up

These issues are the main drivers for the foundational platform requirements we outlined yesterday. Without

  • Configurable Workflow
    the platform won’t keep up with changing government regulations as it won’t be able to adapt the process
  • Open/Extensible API
    the platform won’t be able to manage the data bifurcation or prevent platform obfuscation as it won’t be able to adapt as required to manage the data tracking or integrate with new modules as they come online
  • Dynamically Extensible Data Model
    as future data requirements dictated by future regulations and future applications can’t be predicted in advance
  • Globalization Support
    as your next supplier could be in a different country, on a different continent, with a workforce whose primary language is one you haven’t dealt with yet … and that could be tomorrow!

Now, these aren’t the only issues we’re worried about, but they are big ones and they are guaranteed to materialize — soon (and before your contract comes up for renewal) — which is why we’re really concerned about them, and about insuring you get the right platform for the long term.

What is a Good Foundation for S2P Tech?

A couple of weeks ago in our posts on What Elements Should You Be Looking For In A Platform (Part I and Part II) we outlined some of the key platform requirements we are looking for in the new Spend Matters SolutionMap (where Sourcing, SXM, Analytics, and the vast majority of Common Platform requirements were defined by the doctor) to give you a hint, but it’s a lot to take in.

And might be more than you need today when you just need to solve a few major pain points and advance on your S2P journey, especially if you still don’t have any dedicated modern technology or are still on Procurement 1.0 when most of your peers are on Procurement 2.0 and the leaders are starting on the Procurement 3.0 journey. (As per another recent post, while there’s a lot of talk about Procurement 4.0, we won’t see it for another 8 years based on history. 1.0 started around 97 with FreeMarkets and the emergence of stand-alone players. 2.0 started around 2007 with the first mini-suites [S2C or P2P]. 3.0 began around 2017 with the rise of the true [mega] S2P suites and integration that allowed for the pursuit of value where the whole is greater than the parts. 4.0 will began around 2027 based on the rate of historical development.)

But it’s not necessarily more than you will need in time. Especially if you want to reach the height of Procurement 3.0 with your peers when it materializes later next decade.

But we do recognize that you won’t need it all today. So what do you really need to look for in the first go-round? Especially if you can’t have it all or can’t become enough of an expert to evaluate it all?

While the most important capabilities do depend on the specifics of the technology you’re buying and the problem you need to solve, there are a few general capabilities that need to be there regardless, and these * capabilities in particular must be there in every solution you buy if you want to have any hope of “future-proofing” your platform.

  • Configurable Workflow
    Preferably with RPA support. Let’s face it, whatever process you use today won’t be the process you use tomorrow, especially as you mature in your processes and best practices, the partners you work with change, and governmental regulations continue to change the way you have to report.
  • Open / Extensible API
    that supports both 3rd parties integrating with your platform and the development of interfaces to integrate with third party platforms through their open API. Your platform will never do everything, no matter how much you want it to. It’s software, not sorcery. So the ability to extend it with ease is critical.
  • Dynamically Extensible Data Model
    that you can do, not a third party or the provider. Because you never know every piece of data you’re going to need until you need it.
  • Globalization Support
    including the ability for a user to select their language and overrides, the organizing to define new currency exchanges and projections, and IT to define where the application instances are hosted and where the data is stored (which may need to be segmented for a global organization)

This is not to say that other technical requirements are not important, but that without these, the life expectancy of your platform is limited, to say the least.

Realizing Those Savings Is No Easy Feat

Especially when it requires achieving the perfect order.

So how can you maximize the chance of a perfect order, which, by definition, is acquired at just the right cost (which, technically means there are no savings to be had beyond what you negotiated when you signed the contract).

As per this post, for savings to materialize, the following necessary (but not sufficient) conditions have to be met:

  • the order has to be placed with the contracted supplier
  • with sufficient lead time
  • and then shipped by the supplier on-time
  • using the approved carrier and shipping arrangement
  • with the required third party and government fees promptly paid
  • and paperwork promptly filed
  • so there are no delays and the product arrives at the warehouse on time
  • where it is properly received, inventoried, and shelved
  • and then the invoice is verified against the good received and the PO
  • and paid at the right time when everything is okay.

This is a tall task, taller than accepting the tall tale of Jonah and the whale, but not an impossible one, and no miracles are required to make it so. Just the acquisition of the right technology, implemented in the right framework, supporting the right processes, and tailored to support your organizational talent. It will take some terrific transition management to get the right organizational alignment, but such alignment is possible, and the leaders are getting closer — especially now that we are beginning to realize Procurement 3.0.

So where do you start? Acquire the core technologies you need to streamline your supply management practices.

  • a CLM solution to manage your contracts
  • an e-Procurement solution that only allows orders for products on contracts from approved suppliers
  • a demand planning solution (which may be part of a next-generation ERP solution) that integrates with your e-Procurement solution and notifies you when order deadlines are approaching and automatically submits auto-fill orders
  • a 3PL solution that tracks shipments in real-time
  • a Trade Management solution that automatically generates the required paperwork, computes the required fees, and manages, tracks, and confirms their submission
  • an Inventory and Warehouse Management System that integrates with the e-Procurement Solution that manages receipt, shelving, and distribution
  • an e-Procurement solution that also does invoice management and m-way matching
  • an e-Payment solution that integrates with the e-Procurement solution and includes Supply Chain Finance Capabilities (including dynamic discounting, supplier financing, and pre-shipment finance, for example) to help the company determine the best payment time

It’s just the beginnings, but it’s a good start.