Category Archives: Procurement Innovation

2020 is Less Than a Year Away. And we still haven’t crossed the supply chain plateau. Part II

In yesterday’s post, we referenced a post from six years ago where we commented on a piece by the Supply Chain Shaman who believed we had reached the supply chain plateau. And while we do not agree that the plateau has been reached, despite the extensive objective analysis of balance sheets, we certainly agreed that progress was, and still is, stalled.

We also referenced our post from a year ago today, where we asked will this be the year we traverse the supply chain plateau, that we believed the root of the issue was manpower capability. And we conjectured the root of the issue was a lack of education. But good information, good training, good consulting, good peer groups, and good courses — while still few and far between — have been available for years now but there has not been much improvement in the overall education level and manpower capability.

And while it’s true that most Supply Chain / Supply Management / Sourcing / Procurement / etc. managers don’t leave college or university with a solid supply chain background, as few institutions offer such programs, with the right foundational program in STEM (Science, Technology, Engineering, and Mathematics), the fundamentals of supply chain can be rather easily taught to intelligent and capable STEM grads.

So why aren’t they properly trained — especially when there are professionals out there more than capable of training them? And while supply is scarce, and they command top consulting dollar, when you think about the ROI a top performing team can deliver in just a few weeks (which can be in the millions), even a top dollar trainer can deliver the organization a ROI 10 to 50 times her price.

Well, because at the end of the day, management is not as well-intentioned as the Shaman or the doctor gave them credit for. Or, more accurately, their good intentions are more focussed on what’s good for them or their management peers today, not what’s best for the organization (and, at the end of the day, the shareholders) over the long-haul.

That’s why, year after year, when dollars get tight, the training budget is the first to get cut. Management believes that when times are tight, spending should be cut, and rushes to be the first to cut their budget to look good in the eyes of the CFO and CEO. Instead of investing today to take more off the bottom line tomorrow, they take the short-cut to look good today.

Instead of going over budget and buying a modern, 3rd generation, S2P platform, they cheap out and buy a first generation or low-cost, low-capability, second generation platform with limited capabilities that limits the eventual performance gains the system can provide to one that barely makes sense. A 3x ROI with an average 2% to 3% savings vs a 5X to 10X ROI with a 5% to 10% savings.

Instead of owning up to their own incompetence and own short-sightedness, they hire analysts and consultants to do market assessments and find ways to blame the market, the supply base, the systems, or even the staff instead of themselves.

In other words, we haven’t reached the plateau yet because less-than-well-intentioned management won’t do what is necessary to hire and elevate the organizational manpower to the skill levels necessary to scale the walls that surround the plateau and hide the even higher plateau blocked from view.

And while this is a dark and dreary view, what other reason could one give?

2020 is Less Than a Year Away. And we still haven’t crossed the supply chain plateau. Part I

Six years ago tomorrow we commented on a piece by the Supply Chain Shaman who believed we had reached the supply chain plateau. This was based not on a gut feeling, but on an objective analysis of balance sheets of process companies over the course of a decade. The result: the average process manufacturing company has reached a plateau in supply chain performance. As bluntly stated:

Growth has stalled. To compensate and stimulate revenue, the companies increased SG&A margin by 1%. However, the conditions were more complex; the average company, over the last ten years, experienced a decline of 1% in operating margin, and an increase in the days of inventory of 5%. While cycle times have improved, the majority of the progress has come from lengthening of days of payables and squeezing suppliers.

And while SI still believes, as it did last year, that we have not reached the plateau, SI believes that growth is still stalled. As the Shaman conjectured, complexity has increased, but many well-intentioned executives still lack the understanding of the supply chain’s potential or how to manage the supply chain as a system. So while select projects in the hand of gifted buyers, departments as a whole are not performing as well, and often being managed even worse.

The core problem has not changed — manpower capability has not kept up. While leading vendors are building assisted intelligence technologies (and a few are experimenting with augmented intelligence technologies on the way to delivering cognitive, almost AI, experiences), the average organization, if they are lucky, are running on first generation Sourcing and Procurement systems from the early 2000s. And if they aren’t, they are running on spreadsheets and thoroughly outdated ERPs (as noted by the Supply Chain Shaman in the aforementioned article).

A year ago tomorrow we conjectured, in our post where we asked will this be the year we traverse the supply chain plateau, we conjectured the manpower capability issue was a lack of education. While the average practitioner is not educated enough, it’s certainly not a lack of education opportunities, so we’re obviously still missing part of the puzzle.

So what are the missing pieces?

Category Management Savings Drying Up More? Time to Cross-Strategize!

Last year we asked you in jest if category management savings were drying up, because we knew we were. We told you that the way to prevent this was to cross-source and cross-optimize across categories that can be shipped together from the same supply base. For example, while it might be logical to separate brass, bronze, and copper parts from a category management perspective, considering that some suppliers will likely supply parts across these categories (considering brass and bronze are alloys that contain copper), from a sourcing perspective it makes sense to source all three categories simultaneously. This way you can optimize logistics and negotiate additional volume discounts based on spend levels.

And this is still a great idea, but sometimes it’s not enough to achieve savings. Volume leverage is only one half of the equation, at the best of times. The other half is the strategy. Simply bundling additional volume and shipping it out for a bid isn’t going to do the trick if demand exceeds supply. Nor is putting a large volume up for an auction going to guarantee results even if supply greatly exceeds demand. Especially if the auction is not going to the right supply base.

The key is the right strategy for the right sub-set of the category. As the doctor penned in his series on AI in Procurement (Today Part I, Part II; Tomorrow Part I, Part II, Part III; and The Day After Tomorrow), and in his upcoming series on AI in Sourcing (over on Spend Matters Pro, membership required), it’s all about the right strategy for the right sub-category at the right time.

The key is, for each category product, service, or raw material, to analyze the state of the market and determine whether the best result is going to come from a catalog buy, a (3-bids-and-a-buy) auction, or a (multi-round) (optimization-backed) RFX and then slice up the category appropriately — then piece those slices together across related categories to get the necessary volume leverage to ensure savings in auctions, (optimization-backed) RFX events, or re-negotiations with incumbents. Just like there is no one-size-fits-all approach to categorization, there is no one-size-fits-all approach to sourcing events — even if everything worked the last time around. Markets change. Supply/Demand imbalances change. Buying power changes. Everything is in flux. And sometimes the third time is the charm … for your suppliers that can achieve a windfall at your expense.

Domo Arigato, Mr. Roboto Patoron!

A decade ago, Sourcing Innovation published a piece on how Every Check Has a Cost which echoed a point made by Paul Graham that one of the big differences between big companies and startups is that big companies tend to have developed procedures to protect themselves against mistakes while a startup walks like a toddler, bashing into things and falling over all the time and, as a result, over time, gradually puts in place rules and procedures and associated checks and balances to prevent it from falling over itself, especially when the fall results in a mini-disaster (such as a contracted supplier going bankrupt).

Thus, as the company grows, it will invariably accumulate more checks, either as responses to disasters or as a result of hiring people from bigger companies who bring more checks with them for protecting against disasters which have not yet happened (and which may never happen).

But this isn’t necessarily a good thing. Unnecessary checks cost time to document,, implement, support, and maintain, especially if it’s for a situation unlikely to happen or a situation that, when it happens, will cost the company less than the cost of the check and balance it has to go through day in and day out. For example, like checking the references and solvency of an office supplies, furniture, or an off-the-shelf electronics provider. Who cares. One goes out of business, 10 more down the street.

Or mandating committee review and on-site demos for what should be a $10,000 piece of software. As described in our classic piece, the more expensive you make a sale, the more expensive that sale is going to be. If it costs a vendor $30,000 to sell you what should be a $10,000 piece of software, they’re going to charge you $50,000 — $10,000 for the software, $30,000 for the cost of sale, $5,000 for the additional support they expect, and an extra $5,000 to make up for the commissions they are losing spend all that time with you.

Similarly, it’s costly to have a manager check every purchase over $250 made by an employee just because someone decided that should be an arbitrary threshold.

Ten years ago we said review all your checks and balances and get rid of the ones that don’t make any sense or cost you more than they would save in the worst case.

But now we are saying don’t just get rid of those, get rid of ANY manual check that doesn’t add value the majority of the time — and replace it with an automated system check backed by RPA (robotic process automation) driven AI (assisted intelligence) that determines whether or not there is enough risk to warrant a manual check.

With good risk models, good training data (common situations when a “mandatory” check resulted in an approval, common situations where a “mandatory” check resulted in a denial, and exceptional situations where a “mandatory” check resulted in a request for more information by the approver), good budget/spend data, contract/catalog data (and preferred suppliers), and organizational hierarchies (with well defined roles), a system can not only easily map into (definite) yes / (definite) no / more information / forced manual review buckets and improve its knowledge of typical organizational purchase and approval patterns over time and reduce the number of manual checks to those situations that are truly risky or truly unclear. Which is, to be precise, the only time a check should be applied. (And over time, it will be able to suggest better and better check rules that help an organization understand what, and only what, it should truly be checking.)

And when you implement the right software to automate these mostly unnecessary checks (on the road to eliminating them), just like you can slowly take the foam off the table corners and the training wheels off the bike, you will grow up as a purchasing organization and, after finally finding a proper use for RPA and AI, you will say:

Domo Arigato, Mr. Roboto Patoron!

Finding Wealth in the Year of the Pig

In yesterday’s post we noted that next year is the year of the pig, and that it could bring greed and obnoxiousness to Procurement, as per the western stigma, or it could bring wealth and good fortune, as per the eastern stigma, but that your fortunes all depend on whether or not you make the effort to acquire a next-generation best-of-breed system. If you acquire a next-generation best of breed system that uses analytics, optimization, advanced modelling, machine learning and/or AI, you can realize value and wealth. If you don’t, well …

So what should you look for? As per our upcoming series on AI in Procurement Tomorrow on Spend Matters Pro [membership required], there are a number of advanced functionalities coming your way that will add value. These include [but are not necessarily limited to]:

  • Overspend Prevention
  • Invisible Buying (of all types of MRO products and services)
  • Automatic Buying (including basic sourcing)
  • Automatic Opportunity Identification
  • Automatic Category Analysis and Emergent Category Identification
  • Procurement Method Identification

To convince you of the need for advanced (AI-based) applications to find the wealth you need to make Procurement profitable again, and the importance of reading the doctor‘s in-depth thought leadership pieces (if you have Spend Matters Pro membership), we’re going to give you a preview of the power of a platform with invisible buying capability.

While current systems can automatically re-order MRO and stock room items when minimum inventory levels and EOQs are defined, the reality is that MRO and stock room items change over time as old products are retired, new products are selected, and organizational needs change. And it can be a lot of work to maintain these items accurately over time.

But why should you have to? After all, the system can infer when a product is retired … as orders stopped being placed. The system can infer what product replaced it, as it’s not only in the same sub-category but ordered when the previously item would have been ordered by the same department and stocked at the same location in a similar quantity (under an appropriate metric). And so on.

But a modern Procurement platform, with augmented intelligence technology, can:

  • Auto-detect regularly needed items through repeated orders
  • Auto-compute usage schedules by tracking inventory levels and computing trends
  • Auto-predict best order quantities based on projected trends, re-order times, shipping costs, and inventory costs
  • Add the items to the MRO repository with minimum stock thresholds and projected EOQs
  • Use the embedded assisted intelligence to re-order the MRO items on schedule
  • And re-calculate the inventory levels and EOQs on a monthly basis using actual usage data to update the trends

And you don’t have to do tactical inventory review and re-ordering when that time can be better spent on value-generating strategic sourcing events.

So keep your eyes open for the doctor‘s upcoming series on AI in Procurement Tomorrow over on Spend Matters Pro [membership required] and, if you haven’t already, read the doctor‘s series on AI in Procurement Today (Part I and Part II) if you haven’t already.