Category Archives: Procurement Innovation

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.

  1. Offer Guidance
    Make sure internal customers are given proper guidance on what their requirements should address.
  2. Assess Project Risks
    Identify what can go wrong, take steps to prevent the risks, and make contingency plans.
  3. Involve Stakeholders
    Make sure they all get a chance to review the package before it goes out to bid.
  4. Seek External Expertise
    Make sure you have sufficient knowledge before the project is begun.
  5. Insure Sufficient Resources
    Be sure the financial and human resources are in place before the project starts to prevent it from stalling.
  6. Form an Acquisition Plan
    Identify how transactions will occur, how goods and services will be tracked, and how the project will be completed.
  7. Target the Right Bidders
    No project will succeed if the right suppliers are not in the mix.
  8. Evaluate Bids Correctly
    And according to the evaluation methodology set out up front (that was included in the bid package).
  9. Involve Legal and Technical Experts
    These can be internal or external, but all legal and technical aspects are reviewed by competent professionals.
  10. Involve Key Players Early
    And make sure this involvement goes beyond a simple review of the draft bid package.
  11. Monitor the Project
    Projects tend to stall and die when not monitored.
  12. 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

where

Profit Improvement = Working Capital Improvement + Risk Mitigation + Capital Acquisitions + Market Share Improvement + ….

Will 2011 Be The Year Supply Chains Go Purchase Order Free?

Back in the early days (of Sourcing Innovation), I suggested purchase-order free supply chains — and not just because such a strategy could reduce buyer direct material by 30% and supplier component inventory by 25%, drastically reducing inventory costs in addition to eliminating the thousands of man hours spent by the organization each year processing meaningless purchase orders.

And yes, purchase orders are meaningless if they are for a good or service on contract. If you did your job right during the sourcing event, you know what you need, when you need it, were it has to come from, and where it has to go to. And you can provide this information to the suppliers up front during bidding and then revise it for the winning supplier when the award is made. Suppliers can create appropriate schedules and the inventory will be ready when it is required. Then, when the goods are needed, they can be ordered with a call (or an electronic demand signal).

While purchase orders are a good policy for any goods or services of significant value not on contract, when you have a contract that specifies volumes, delivery schedules, etc, why should you waste time and effort with purchase orders? You’re just doing the work twice! And since you’re not hiring more people to help you clear the increasing workload (as per yesterday’s post), this is only going to create headaches. Either your people will work overtime, tire themselves out, and/or get sick, or they’ll try to work faster. Either way, they’ll make careless errors and more man-hours will be needed to accomplish the m-way reconciliation to try and figure out why the invoice doesn’t match the PO which doesn’t match the contract.

So ditch the purchase orders for contracted goods and services. If you collaborate with your suppliers and implement sales, forecast, and demand-supply synchronization systems, they won’t be needed. Your buyers, accounting personnel, and suppliers will thank you. And so will the company bank account when you’re not wasting up to one or two hundred dollars processing each purchase order you don’t need.

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To Be a Good CSCO, Don’t Forget the Don’ts!

A recent article over in eyefortransport on the “DOs and DON’Ts for Chief Supply Chain Officers” had a good list of things to do to be a successful CSCO (or CPO) but what really got my attention was the list of things not to do, because it’s so easy to do five things right and then watch everything unravel when you do only one thing wrong. Here are some of the most important don’ts from the article:

  • don’t create a separate KPI team
    KPIs should be created by the people who are performing the functions they measure. Otherwise, you’ll have good-meaning people who don’t truly understand the function deciding that the right metric is average order completion time and not on-time shipments as you can have a great average order completion time but still be late for 30% of your orders.
  • don’t create a function without a well defined purpose
    Just like you shouldn’t outsource to China because the company down the street is doing it, you shouldn’t create a new function because the company next door is doing it. Your team is already overworked, so don’t add something unless you know why you’re adding it and what benefits it’s going to bring.
  • don’t cut the training budget
    This cannot be stressed enough — you need highly skilled and educated people to make it in this knowledge economy. (That’s why we can have 15% unemployment and still have millions of jobs unfilled.) If you’re people don’t have the necessary skills, they won’t get the job you need done.
  • don’t speak supply chain language with other departments
    They won’t understand a word you’re saying and will think that you need a “vacation” at the local “resort“. That’s why you need to learn to lean to speak the language of the CFO.
  • don’t let the board think supply chain is just about cost
    If you do, they’ll have you cut, cut, cut until the quality falls through the floor and there’s melamine in the milk, salmonella in the spinach, lead in the paint, or asbestos in the insulation and your supply chain falls apart.

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