Category Archives: Procurement Innovation

The Forrester Wave …

Ocean or Kiddie Pool?

As one of the flagship publications in the space, this is one that, for better or worse, a lot of people look forward to come decision making time. So, just like SI tackled the Gartner Quadrant last year, it’s going to tackle the latest Forrester Wave on eProcurement Solutions (Q1, 2011) to help you understand what’s good, what’s bad, and, in some cases, what’s downright ugly. Because, in the end, if you don’t know how to ride the wave, you might just end up digging your own grave.

First off, I agree with Jason (who commented that “Forrester’s eProcurement Wave Captures the State of the Market” on Spend Matters) that the Forrester ranking methodology, generally, does a better job than Gartner because it provides better transparency into the criteria that contribute to a ranking on each axis, that this report in particular does a solid high-level job of creating a credible segmentation for a sub-set of the vendors in the market, and that “there was little to broadly differentiate” among providers, at least on a feature/function level for providers that were included in the report. But better is not sufficient, high-level segmentations are pretty easy, and if you limit your report to the 800lb Gorillas, all of the solutions are going to pretty much look alike.

For example:

if you have to get from New York to Los Angeles quickly, rail is better than car (because even though it makes lots of stops, the train runs 24 hours a day and you can’t drive 24 hours a day), but doesn’t match the efficiency of air and a direct flight
there are lots of ways to credibly segment vendors — product focus vs service focus, e-Procurement focus vs ERP focus, generic solution vs vertical solutions — but such segmentation is meaningless to a buyer if it doesn’t segment according to the buyer’s particular needs
if you limit your search to slivery mid-sized sedans, from a distance, there’s not much difference between a Toyota Camry, Ford Fusion, Nissan Altima, Honda Accord, or a Hyundia Sonata (and you’re likely to confuse them if you’re driving fast and just take a quick look)

In other words, while this was a little better than last year’s Tragic Quadrant from Gartner — where strict guidelines were set down but vendors allowed to slip in on exceptions or technicalities anyway, where some of the evaluation criteria didn’t make any sense at all, and where some non-standard definitions were used — it wasn’t much.

Basically, for just about every fundamental it correctly included, there was an accompanying flaw. And while most of the flaws weren’t that bad, the net result is that the overall report isn’t that useful unless you’re a 1000 lb Gorilla trying to figure out which 800 lb Gorilla you should buy from. And since there are only 1000 companies in the Fortune 1000 club, this means that the number of companies that will find this report useful are few and far between, and, as usual, the burgeoning middle-market, where most of the need is, goes unserved again, and the tsunami you might have been expecting is nothing more than a weak 6-foot wave that won’t do anything more than get you a little wet.

So what were the (major) flaws? That’s the subject of tomorrow’s post.

Innovation is Not Baloney

Unless, as this recent post on the HBR Blogs on “the power of a common language”, you don’t have a common definition and understanding of what innovation means to your company. At which point, one of you will be thinking “absurdity” while another will be thinking “lunchmeat”.

As the article notes, in order to achieve innovation, a company must have:

An overarching, commonly understood, definition of innovation.
Well defined innovation categories, and a primary focus.
An owner for each innovation category, and each approved innovation project.

Otherwise, one team will be working on process streamlining while another tries to reinvent the process. And both will announce success at the same time, only to realize failure.

Procurement and Sales Don’t Have to Trust Each Other …

… but they should focus on TCO or TVM.

Unfortunately, as per a recent Procurement and Sales Survey by Greybeard Advisors, discussed in this recent article over on Supply and Demand Chain Executive on “When Procurement and Sales Collide”, price is still the dominant factor in negotiations. This is problematic. Even though some savings can be found in a price reduction, price can only be reduced so much. A supplier cannot reduce price below cost and stay in business. And price reductions, even if they materialize, are not sustainable in the long run.

As Jim Baehr said, procurement executives need to recognize that as we move into a healthier economy, they need to start doing things differently, and they need to start thinking much more strategically. It’s not just price, it’s quality, it’s sustainability, it’s value-add, it’s inventory, it’s delivery, and a host of other factors that contribute to overall cost and limit organizational profit. So while it’s probably healthy that Procurement and Sales don’t trust each other, since this will keep both sides alert and on their toes, it’s unhealthy that they choose to just focus on price when that energy should go into understanding total cost.

A Brief Guide to Procurement Success in the Public Sector

SupplyManagement.com recently ran an article on “12 tips for effective processes” that your public sector organization can use to get the most out of your upcoming eSourcing / eProcurement project if your organization is new to eSourcing / eProcurement. The hope is that there will be a quest for purchasing fire, but even if there is not, these tips will still help.

Offer Guidance
Make sure internal customers are given proper guidance on what their requirements should address.
Assess Project Risks
Identify what can go wrong, take steps to prevent the risks, and make contingency plans.
Involve Stakeholders
Make sure they all get a chance to review the package before it goes out to bid.
Seek External Expertise
Make sure you have sufficient knowledge before the project is begun.
Insure Sufficient Resources
Be sure the financial and human resources are in place before the project starts to prevent it from stalling.
Form an Acquisition Plan
Identify how transactions will occur, how goods and services will be tracked, and how the project will be completed.
Target the Right Bidders
No project will succeed if the right suppliers are not in the mix.
Evaluate Bids Correctly
And according to the evaluation methodology set out up front (that was included in the bid package).
Involve Legal and Technical Experts
These can be internal or external, but all legal and technical aspects are reviewed by competent professionals.
Involve Key Players Early
And make sure this involvement goes beyond a simple review of the draft bid package.
Monitor the Project
Projects tend to stall and die when not monitored.
Record Savings Made
And report progress regularly.

These are all good tips, and not hard to implement. It basically all comes down to preparation, preparation, and more preparation … and the willingness to work with others and, if necessary, share the success.

Is It All About the P&L?

In a recent editorial piece over on Supply Chain Digest, the Editorial Staff asks if Procurement and Finance [can] Get on the Same Page in Measuring Savings from Supply Management Improvements. The article notes that a major challenge to this effort is the fact that procurement and financial managers are often talking a somewhat different scorebook. While procurement managers focus on savings as cash improvement, finance types tend to focus on profit and loss, and accrue all the while.

However, according to the article, the two don’t have to be fully reconciled for both departments to find common ground. All that is required is a common calculation that both departments can accept. According to the article, this calculation is:

Savings = Secured P&L + Deferred P&L + Mitigated P&L

where

Secured P&L = savings where favourable terms of purchase are acquired through changes in pricing, mix, demand, or quality

Deferred P&L = measure of the benefit delivered to the balance sheet for the current financial period (through capital purchases or pre-payment scenarios, for example)

Mitigated P&L = savings that come from agreements in which favourable terms of purchase are retained (cost avoidance)

Simplified:

Savings = Cost Reduction + Balance Sheet Improvement + Cost Avoidance

This is a good calculation, but I’m not sure balance sheet improvement captures all of the benefit supply management can bring. Is risk reduction (and minimized disruption costs) captured on the balance sheet? Is working capital optimization captured on the balance sheet? (And is procurement credited for reduced finance charges?) Simply put, the value of good Supply Management is:

Value = Cost Reduction + Cost Avoidance + Profit Improvement