Category Archives: Procurement Innovation

It’s Hard to Find Fraud in Big Spend Stacks …

Let’s start with T&E spend. While most organizations might believe that this spend, which is primarily for low value amounts on fairly well understood products and services, does not hide much in the way of fraud, that’s not always the case. Nor is the fraud limited to employees upgrading to business class, upgrading from rooms to suites, and spending a bit too much on drinks at the client dinner. (But even this can be very expensive. If this off-policy spend results in negotiated volume-based rebates failing to materialize, this can be very costly.) But that’s not the case. It cal also contain:

  • the same receipt for a $500 business entertainment submitted two (three, or even five) times, one month apart, on different claims and never noticed
  • a pet hosteling bill that looks just like a hotel bill
  • an invoice from Benny’s buddy Bob for 20% above market rates who drove him to the airport (instead of a licensed service at market rates)
  • that double billing by your no-longer favourite hotel for a room charged to your guest and then charged on your tab is really hard to spot (especially when some rooms were picked up and some rooms weren’t at your recent event)
  • collusion between an employee and a spouse who owns a travel “services” company can account for a lot of extra travel “services” billings that weren’t delivered
  • suppliers who know you have holes in your T&E monitoring can submit fake invoices for services never delivered
  • etc.

It’s really hard to find these low-impact fraud needles in a T&E haystack, but these needles can add up quickly — especially for products and services never even delivered! Only automated processing that can compare multiple entries across multiple dimensions and learn typical patterns can identify the majority of errant fraud that passes through your T&E system.

Moreover, as an organization learns to detect certain types of fraud, the fraudsters get smarter. No static system can keep up! AI based systems are key to an organization’s success.

In particular, AI-based systems that can work on multiple types of spend. T&E is just one category. There’s also invoice data for sourced and procured products and services that can be six to eight times the T&E volume in an average organization. And when we go broad, there are even more options for creative fraud from less-than-honourable parties. For example, you could see things like:

  • $4.95K shipping fees for $5 items because the tolerances in the system don’t kick anything up for review with shipping less than $5K
  • invoices from fake suppliers with the same name as your tendered suppliers with faked registry numbers and different bank information for payment
  • invoices from corporates owned by spouses of employees for services not delivered submitted by the employees and approved by colluding associates doing the same thing
  • etc.

For some of these instances, humans have almost zero chance of surfacing the infraction when its 1 invoice in 1000. A new solution is needed. A number of players are tackling the problem with modern AI solutions, but do the approaches have what it takes to find the gold in them there hills? Only time will tell.

How Do You Identify The Day After Tomorrow’s Supply Chain Paupers?

Well, assuming the day after tomorrow comes and they are still around the day after tomorrow, they will be easy to spot. Not only will they still be trying to use Excel, but they will still be using Excel and will only recently have started exchanging documents using XML, using last decade’s e-Procurement technology.

They will not have advanced to modern e-Procurement applications, yet alone modern sourcing or supply chain visibility solutions. They will be in the process of simply moving from paper to e-Paper, trying to still conduct RFIs through e-mail with Excel (and just uploading the results to the first generation decade(s)-old e-Procurement solution), and generally trying to keep their outdated procurement processes in tact.

However, as we now know, first generation procurement and sourcing, focused primarily on e-document exchange, simple RFXs, the odd auction, and basic reporting is not enough. You need modern e-catalog management for procurement spot buys, analytics for opportunity identification, optimization for at least TCO management (if not TVM), and SRM for supplier information, relationship, and performance management.

But this is not enough. These day’s, there’s never enough time to sift through all the data to identify the opportunities, never enough time to collect enough market data to qualify even the ones you have identified, and certainly never enough time to construct category specific models on even a fraction of those to determine if they opportunities will be realized with an appropriate sourcing event — which can take years of experience to properly identify.

You need a next generation solution that can automatically collect, maintain over time, and trend market pricing data; run all your data through multiple types of automatic analysis and compare your spend against historical spend and market data (and look for variances); pull out the categories with opportunities; run trending algorithms to project your demand against expected contract prices based upon projected market demand, supply / demand (im)balance, and economic factors; calculate the potential savings if nothing was done; use historical data and automated reasoning (enriched with context) to (probabilistically) identify the best sourcing or procurement strategy; and then use appropriate workflow automation to automate as much of the event as possible (and if it is a spot-buy under a threshold, automatically procure from a catalog, an approved supplier under contract, or a three-bids-and-a-buy RFQ against approved suppliers).

In modern terms, the next generation solutions will be Cognitive Sourcing or Cognitive Procurement solutions. While they are not true artificial intelligence, with enough data and great models, you don’t need true AI to automate acquisitions where there is no strategic value and no significant value to investing human time. Good examples are office suppliers, janitorial services, and sometimes even laptops. Yes, replacing laptops across a large office can be in the millions, but laptops against a standard config are commodity. Just do an automated auction [with ceilings and floors] against a set of approved suppliers and let the most aggressive supplier win.

Logistics is the new Black, but Procurement is the Rodney Dangerfield of the corporation!

the doctor recently stumbled on a piece published last year by Jeff Ashcroft over on LinkedIn where he said Logistics is the New Black where he noted that the word “logistics” has subtly worked its way further and further into the common lexicon thanks to massive marketing campaigns of courier, rail, and forwarding companies. This is making it the new black.

However, while it was never the Rodney Dangerfield of the Corporate World, as that distinction is reserved for Procurement, it was the black sheep. Needed, but kept at arms length … just in case.

However, now that savvy merchants are realizing that in their logistics function may lurk the well spring of the truly exceptional customer experience they seek, and must now deliver, logistics is taking center stage. This is good, and bad.

It’s great in that good logistics is a necessary condition for supply chain success, and if it’s not successful, the supply chain will never be, but it’s bad in that it’s only one half of the coin for supply chain success, the other being good Procurement. But, as SI has been saying for years, Procurement is the Rodney Dangerfield that don’t get no respect in the average organization (otherwise, why would almost half of Procurement organizations be without modern platforms).

When there is no easy correlation to the average consumer, when organizations like the Dairy Farmers of Canada say they are supply management, when HR organizations say they do Sourcing, and when even Apple, which has been repeatedly recognized to have the best supply chain in the world doesn’t talk about it (with the closest they come being Supplier Responsibility, probably as a result of breathing all that California smug), how is anyone to be expected to understand what a modern Purchasing, or Procurement, organization does? Especially when the term procure is often used in stories about rebels procuring supplies from the government (and this is the example of procure used on the urban dictionary, the military procuring what it needs from the private sector, or, even worse, often linked to prostitution. And purchasing, that’s what the office manager (in charge of office supplies) does.

In fact, all things considered, Procurement is probably lucky to even be the Rodney Dangerfield of the corporate world. While it might not get any respect, at least it gets recognition.

Maybe someday someone will find a way to bring sexy back to Procurement and then it will get some respect, and take the first step towards becoming the new black.

Is There an Objective Reality to Procurement?

Recently, the public defender penned a post that asked should Procurement be more specific? where he asked if we have an ‘objective reality’ of how procurement works. Are we like scientists; trying to develop more understanding, willing to be challenged, looking for objective ways of proving what works and what doesn’t? Or are we more like the journalists and politicos who express a point of view and get upset if anyone argues strongly and objectively against us?

We think, for the most part, the answer is, unfortunately, a sad no. Why do we think this? Is it because we agree with the public defender in his observations that you never hear “I don’t agree with you” or “I don’t think that’s the best way of doing that” when you go to Procurement event and that you never see an academic paper that objectively measures the success of a particular procurement approach, strategy, or process. No. It’s because, as pointed out in yesterday’s post, there’s still too much magical thinking in Procurement, born in arrogance and self-conceit. Too many people who think that just because they’ve been doing it for 20 years, they’ve been doing it right and all they need is a few more resources and a little more time.

As a result, we wholeheartedly agree with the public defender when he says:

Procurement is THE least scientific of all major business disciplines.

– and that this is the result of –

the lack of clear and objective understanding and
the lack of clear metrics that measure the success of procurement.

As the public defender points out savings are pretty much impossible to measure, and most of the “true” savings is just cost avoidance anyway, and any reduction in cost that was spend above market average can never be counted as savings. If you were paying 10% more than you would in a spot buy, a reduction to market average is not even true cost avoidance that comes from demand management or product redesign, it’s just spending what you should have been in the first place. And other common metrics are equally abhorrent.

And we are still trying to get most organizations from landed cost (which is just one step up from unit cost) to total cost of ownership, which is not the right metric — it should be total value management — the cost relative to the performance (or profit if you want to be so narrow minded) of the buy.

So, no, in the average organization, there is no objective reality to Procurement. And, as it stands now, only the true leaders (the Hackett Group 8%) are even close to getting there (or at least trying). However, like the public defender, we will continue to educate you to the best of our ability so that someday, there may be an objective reality. (But not necessarily the one that will allow a senior buyer to be replaced by a bot. Assisted by, but not replaced.)

Is There Magical Thinking In Your Procurement?

Recently over on the Dilbert Blog, Scott Adams penned a post on The Magical Thinking Opposition where he noted that his hypothesis was that the political side that is out of power is the one that hallucinates the most -– and needs to –- in order to keep their worldview intact.

And this got the doctor thinking if there is a corollary that says the Procurement department that is getting the worst deal is the one that hallucinates the most — and needs to — in order to keep their worldview intact.

Why does he posit this? Typically the Procurement departments most against modernizing their processes or platforms are those that are doing the worst and think they are just fine with the processes or platforms they have. These laggards are not only without modern platforms, but resistant to their acquisition and implementation. They are not modern Procurement departments, but traditional Procurement departments that still run on the island of misfit toy principle — staffed with people who are nearing retirement (and being rewarded with a cushy purchasing job), related to the boss (because you can’t fire a relative of the boss), and who have been in the
organization too long to let go (but who are not suited for their current jobs anymore).

But this is not the only way to identify these Procurement organizations. You can also tell them by these telltale arguments against modernization:

  • Our processes are fine, we just need more people to implement them.
    They think that their lack of results is lack of resources, not the processes or the platform.
  • Out platform is just fine, we just need more people to maximize its potential.
    They don’t believe that the throughput is a problem of an outdated platform, just a lack of resources.
  • It’s not worth the cost, and it will slow us down.
    They fight modernization and change, usually based on outdated views, beliefs, or stereotypes.

They feel that all they need is a little more time, a few more resources, and then everything will work out a-ok with the help of a little pixie dust. It’s magical thinking, and there’s no room for it. Just like alchemy needed to be replaced with science, magical thinking needs to be replaced with realist thinking.