Category Archives: Procurement Damnation

Societal Damnation 47: XaaS

This is a damnation so damning that it was one of only two damnations that required two entire posts just to overview (and one of the few damnations the doctor could literally write an entire book on)! So just what is XaaS?

XaaS, short for Everything as a Service, is the latest craze that is going to cause your Supply Management organization nothing but suffering and pain. While it sounds really cool, because, historically, the transformation of a non-core but essential function (legal, accounting, etc.) or utility (water, electricity, waste disposal, etc.) into a service made your life easier. But, as with any good thing, it’s always possible to have too much … and with XaaS, to have too much forced down your throat even if you’re already choking on your own regurgitations.

And while the right services can provide an organization with advantages that include, but are not limited to,

  • expertise,
  • cost reduction, and
  • efficiency

for an organization that does not have the dedicated personnel, or expertise, to perform the function as good as a third party, if the wrong services (or service providers) are provided (or selected), the organization will instead be burdened with a number of considerable disadvantages that included, but are not limited to:

  • cost increase,
  • efficiency decrease,
  • loss of control, and a
  • 3rd Party Management (3PM) nightmare.

And if different business units decide to start outsourcing what they perceive as non-core functions (which are in fact core to the business or which should be managed by Supply Management or a different business unit), functions for which the service provider cannot achieve economy of scale, or functions that have not been optimized for outsourcing (which will result in an efficiency decrease as a best-practice provider will not be able to optimize inefficient workflows) willy-nilly, Supply Management will have quite a third party management mess to deal with.

In a nutshell, services are good, but, as clearly illustrated in our second damnation post on the subject, Everything-as-a-Service is a ridiculous concept and any organization that buys into it is just asking for trouble.

So what can you do when you are pushed to buy into this latest outsourcing craze?

1. Get an organizational policy in place that all services spending goes through Procurement.

This will be very hard, but unless Procurement knows about an outsourcing initiative or a XaaS buy, it can’t make sure that the organization makes the right buy, if a buy is even required at all!

2. Do your homework on each request.

Why is the service being requested. What does it do and what processes or services does it replace. Why could a third party do it better and are the third parties being considered capable of doing it better. If the process is outsourced, will the organization lose important skills or knowledge. Should a traditional product to enhance in-house be considered instead?

3. Figure out what processes are truly strategic and what process are just tactical.

Strategic processes should be kept, or at least managed, in house while tactical processes are the prime candidates for XaaS providers. From the list of tactical processes, identify those that would be best suited for outsourcing through efficiency gains or cost savings.

In other words, the key to sustentation is not jumping on the bandwagon and doing everything you can to prevent the rest of the organization from jumping on when you’re not looking.

Environmental Sustentation 20: Oil & Natural Gas

Oil and Natural Gas is an environmental damnation in more ways than one. It’s dirty fuel, that is regularly subject to price shocks, and it’s collection and transport often result in significant disasters to the environment, your bank account, and your reputation.

And even though you should move to greener power, in some cases you can’t. Biofuel is not always a viable alternative for transportation, especially for ocean freight (where it takes a lot of combustion to move those mega-carriers) or air travel. And you still need to power your current energy production systems until the new ones come online. So you are stuck with using oil & natural gas for at least some of your energy needs for the time being. (But hopefully with a plan to use less and less over time.)

And, as a result, have to live with the risks of shortages, price spikes, disasters, and the resulting financial and reputational damage that will result. So how do you survive?

Accurately predict future needs.

If your demand is going to spike because of expected sales spikes, or projected energy shortages in other areas, that is something you want to know in advance so you can be sure to contract for sufficient supply. Similarly, if demand is dropping, that is also good to know as maybe you can cut shorter contracts and buy more on the spot market without serious repercussions.

Acquire expert supply and price projections — from various sources.

Don’t just monitor supply and prices, try to understand where it is going so you can source, or re-source, at the best times. While an unexpected disaster, political decision, or pumping slowdown can change everything, the more informed you are, the better off you’ll be.

Have disaster recovery plans in place.

If there is a shortage due to a disaster, you want an alternate source. Don’t sole source if you can avoid it, and make sure you include a provision with the provider who gets the smaller award to increase business over time and that they can support a spike if you need it. If there is a transportation disaster, hopefully you don’t take possession or responsibility until it’s in your storage tank, but either way, you better have a plan to get another shipment sent through an alternate carrier, possibly from your other supplier, ASAP.

Start sourcing clean power and building your own power plants.

Most places in the world can produce a lot of power from wind, solar, or hydro-power, and not only should you be looking to buy from energy companies that produce this power, which can power your equipment, buildings, and even short-haul transportation (that run on battery packs), but if you are a large factor or office building that uses the equivalent of a small power plant of energy, you should be building your own, and only taking off the grid when you need supplemental. With so many regular failures in overtaxed and antiquated power grids, this is just good planning.

While we can’t rid our dependence on oil and natural gas just yet, we can certainly reduce our need for it and this type of planning will not only make it more affordable (if demand lessens), but also make energy consumption and transportation safer and more reliable.

Authoritative Sustenation 65: Solution Partners

In our post on authoritative damnation 65: solution partners, we noted that solution partners are their own breed of damnation and can be much more annoying than activist investors and boards of directors, that you might only hear from at quarterly or annual meetings (who will stomp their feet, bang their drum, but eventually settle down and go away for a while), as they could be a pain in the backside on a daily basis.

We said this was because you often depend on these solution partners to serve your customers, run (parts of) your organization, and bring you innovation that you can’t develop in-house (due to lack of time, money, or external ideas). As a result you can’t just tell them to sit-down, shut-up, and wait their turn … especially if their support is essential to keeping a million dollar client happy or a multi-million dollar category stocked and selling.

So what is an organization to do? Especially if it can’t reasonably meet all their demands, err, requests in a short time frame?

Include them in roadmap planning for products and services.

If you include them in roadmap sessions, where they can see all the requests and demands being placed upon you by the organization, customers, and other solution partners, they will understand better that you can’t do everything they want now and that will focus them onto platform, product, or support enhancements that they really need versus those that they think they really want. For example, they might want more do-it-yourself configuration options when they are supporting your software in their country or in their client bases, but if you can typically turn requests around in 2 business days and they see how new features could benefit the customer base more and possibly help them sell more (and earn more commission), they will quiet down about saving 24 hours on a new configuration or install.

Offer them your innovations in Procurement, Planning, and CRM.

Chances are your solution partners are great in manufacturing, production, solution delivery, support, etc. but pretty bad in procurement, project management, or CRM (and why even their best bid doesn’t match your should-cost model with a fair margin). Offer to help them innovate their processes and platforms in exchange for product innovation, production cost savings innovation, and service level improvements.

Help them sell to your customer base.

If it’s a product provider, offer to help them understand what your customer base values most in terms of product purchases (low cost, reliability, innovation, etc.) and what the supplier needs to do to win more of your business. If it’s a service provider, help them understand not only what you need of them to support your customers, but what common services your customers need that you don’t provide, that the provider might be able to up-sell to them (without violating the terms of agreement). This will be a big plus in their eyes and they will start treating you as a customer of choice (who is their favourite customer to work with) and the complaints will go away, with only the odd helpful suggestion here and there.

Solution Partners can be a pain in the backside, but inclusion and support can replae the thorn with the rose. It’s up to you.

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.