Category Archives: Procurement Innovation

Finance Needs Spend Analysis and e-Procurement, Part II

In our last post, we noted that Basware recently released its annual “Cost of Control” study for 2010 and pointed out that Finance’s top 10 challenges could be easily solved with good, modern, spend analysis and e-Procurement solutions. The study also outlined the top 10 strategic finance priorities for 2010 … which can also be addressed by the adoption of good spend analysis and e-Procurement systems. For example:

Spend Analysis would address:

  • Increasing Profits and Top Line PerformanceProfit = Cash In - Cash Out

    Spend analysis reduced cash out.

    Therefore, spend analysis improves profit margins.

  • Maintaining or Improving Profit MarginsSpend analysis allows you to consolidate spend among fewer suppliers and fewer SKUs. This reduces overhead and increases profit margin.
  • Planning, Budgeting, and Revenue ForecastingOnce you know your actual year-over-year spend, volume trends, and market trends, your forecasts and budgets improve greatly.
  • Risk AnalysisAugment the data with (financial) risk information and quality/performance metrics, and you can quickly see which suppliers likely pose the greatest risk to your operations.
  • Regulatory ComplianceYou know what suppliers you’re spending on and how much is going to socially responsible suppliers and how much isn’t. Augment the product data with carbon emissions spending and you know if you’re within limits or not. Etc.

E-Procurement would address:

  • Reduce Overall PurchasingA modern e-Procurement system with approvals, checks, and balances would insure nothing is bought that isn’t approved, on-contract, and within-budget without managerial exception.
  • Cash Flow and Working Capital ManagementYou can see how many purchase orders are outstanding, how many invoices are upaid, what discounts are available to you if you pay early, how much cash is actually free, and even take advantage of receivables financing.
  • Improving Short and Long Term Operational EfficiencyYou can cut DPO and DSO in half, eliminate paper processing, and make your team 80% more efficient. Over the long term, you can reduce the headcount devoted to tactical “paper pushing” and increase the headcount dedicated to strategic spend analysis and sourcing, which increases organizational savings per employee.
  • Environmental PracticesNo paper. Spending to environmentally irresponsible suppliers can be denied. Etc.
  • Accessing CreditIf you know what you have, and you can demonstrate the reliable payment history, even if the banks turn you down, you can get receivables financing.

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Is There a Hole in CPO Agenda’s Synergy Strategy Bucket?

A recent article on CPO Agenda that asked if there is “a hole in your synergy strategy bucket” made some very good points about how Procurement can often help to identify the right IT strategy and synergies to make a merger or acquisition a success.

However, what it failed to mention is that in addition to contract analysis and risk assessment, market research, negotiation management, and should-cost analysis, procurement can also serve as the mediator who helps the organization identify the IT needs and the most appropriate strategies. Furthermore, until the desired go-forward strategies are identified, contract analysis and negotiation management are irrelevant — who cares about license rights, location of use, competitive intelligence, or contract consolidation if you’re no longer going to use the system.

Furthermore, trying to determine the right IT solutions to keep based on license agreement analysis is worse than putting the cart before the horse. If you can get the horse angry enough, maybe he’ll kick at the cart until it moves forward. But if you keep the wrong IT solution, your employees won’t even kick at it … they’ll find every means possible to go around and bypass it completely.

Procurement can play a crucial role here as well. As the one unit that has to continually negotiate with all organizational units with respect to purchases, it can lead the analysis team that reaches out to every organizational unit to understand not only what software they are currently using, but what their needs actually are and work with IT to come up with a strategy that addresses the anticipated needs of the merged organization. Furthermore, as the central mediator and (hopefully) technology-savvy market analysts (who should be using modern e-Sourcing and e-Procurement systems) who talk to both IT departments and external entities, they have a better chance of figuring out when an objection is due to platform limitations (hardware, software, etc.) or simply a resource limitation (the support techs don’t know the software or don’t think it’s the right solution). In the end, the biggest negotiation will likely be with the organizational units that want to merge, and not the vendors, who will probably be more responsive to demands in exchange for a bigger customer and more dollars in their pocket in the long run.

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Finance Needs Spend Analysis and e-Procurement

Basware recently released its annual “Cost of Control” study for 2010, which contained, among dozens of other statistics and tables, the top 10 challenges for Finance over the past year. Reviewing them, it immediately struck me how most of them would be addressed with the adoption of good, modern, spend analysis and e-Procurement solutions. For example:

Spend Analysis would solve:

  • Spend VisibilityYou’d instantly see what you are spending, with who, for what, and by whom
  • Difficulties in Realizing Cost Saving OpportunitiesA good spend analysis system instantly presents you with the low-hanging fruit and gives you the power to easily explore over twenty different types of savings opportunities, as discussed in the recent Illumination on Strategic Spend Visibility.
  • More Visibility into Contract ManagementIt’s easy to integrate contract management into a modern spend analysis solution, even if you don’t have a contract management solution! Just create a contract dimension, as per this post on integrating contract management and spend analysis, and you’ll see not only what you are spending on contract, but what’s not being spent on contract. This visibility into contract and non-contract spend gives you an instant read on contract management, and what you need to do to fix it.
  • Difficulties in Realizing Cost Savings Across the BusinessBy integrating AP, Invoice, and Contract data, you can see not only what spending is on contract, but what spending is at contract rates, or, in the case of best-price contracts, where pricing isn’t trending down where it should be. This allows you to go after overpayments to realize the negotiated savings. Also, you can see when you are hitting discount or rebate thresholds, and aggressively go after those as well.
  • Need to Squeeze Suppliers on Payment TermsWhen you are realizing your negotiated savings, there will be less of a need to squeeze suppliers on payment terms. Plus, improved visibility into spend puts you in a better position to take advantage of early payment discounts, which will help you save even more!
  • Increased Supplier RiskMany modern spend analysis systems integrate, or allow for the integration of, third party data feeds from the credit agencies that track financial risk. This will give you a quick insight into the majority of suppliers who are most likely to go bankrupt. While it won’t be perfect, it’s much better than nothing.
  • Environmental Regulations / Compliance Integrate ERP data, and you can calculate carbon output, energy usage, water usage, etc. and automate production of your social responsibility and carbon footprint reports!

E-Procurement would solve:

  • Need to Improve Invoicing and Payment ProcessingE-Invoicing allows for automatic receipt, matching, and, if it meets the defined payment rules, automatic queueing for payment and e-payment systems allow payments to be queued and made automatically.
  • Need to Automate Financial Processes More QuicklyNot only does e-Procurement allow every step of the procurement process to be automated, but it allows your procurement professionals to process POs, invoices, payments, etc. on an exception basis only — which means they only have to get involved when there’s a problem.
  • System Integration / Technology ChallengesMost modern e-Procurement platform providers already integrate into most of the major ERP and relational database systems on the market, and there are scores of specialist shops that can assist with custom integrations.

In other words, if Finance wants to solve it’s greatest challenges, spend analysis and e-Procurement solutions are the answer.

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Should Your Supply Chain Be Frugal?

After reading “first break all the rules” in the special report on innovation in emerging markets in the April 17th edition of The Economist, I have to wonder if the charms of frugal innovation will be the salvation for supply chain leaders who have hit a brick wall in supply chain optimization.

According to the article, the future lies in “reverse” or “constraint-based” innovation, which is being relabelled as “frugal” innovation. In frugal innovation, product companies take the needs of the poor consumer as a starting point and work backwards. Instead of adding ever more bells and whistles, the products are stripped down to their bare essentials. This goes beyond simply cutting costs to the bone as frugal products need to be tough, easy to use, and have a low environmental impact. In short, frugal does not mean second rate.

Frugal innovation involves rethinking the entire production process and business model. Companies need to compress costs to reach more customers and accept thinner profit margins to increase volume. Under the frugal innovation mindset, three ways of reducing costs are proving quite successful:

  1. Increase Contracted-Out WorkBharthi Airtel, a 30B Indian mobile company with some of the lowest fees in the business, contracts out everything but its core business of selling phone calls. Ericsson handles network operations, IBM handles business support, and an independent company manages transmission towers.
  2. Use Existing Technology in Imaginative New WaysTCS wants to use mobile phones to connect TVs to the internet through a set-top box because PCs are rare in India while TVs are ubiquitous.
  3. Apply Mass-Production Techniques in New and Unexpected AreasDevi Shetty, India’s most celebrated heart-surgeon, is attempting to make the industry more efficient through application of Henry Ford’s management principles to create a combination of economics of scale and specialization that can radically reduce the cost of heart surgery. His flagship Narayana Hrudayalaya Hospital in Bangalore has 1,000 beds (compared to an average of 160 in American Heart Hospitals), a team of 40+ cardiologists who perform about 600 operations a week, and generous backup facilities that allow the surgeons to concentrate on their speciality and not administrivia. The hospital charges an average of $2,000 for open heart surgery compared with $20,000 to $100,000 in America and has success rates that rival the best American hospitals.

And all three ways are appropriate to your supply chain. For example, an efficient operation focusses on its core strengths and contracts out support operations a partner can do better, faster and cheaper; a forward thinking operation will realize that RFID is sometimes more useful when applied within your four walls to automate tracking of all of your assets (as asset tracking and inventory is one of the most time-wasting administrative practices your people will need to engage in); and will automate repeated RFX and Auction events on a massive scale to reduce the amount of tactical data collection efforts that their buyers will need to engage in (which will allow them to focus on strategic efforts).

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b-Pack: Packing It In for A Brave New World, Part IV

Three weeks ago, in Part I, we told you how b-pack, hot on the heels of Ivalua, had decided to cross the Atlantic and join in the conquest to bring the bohemian revolution to the world of Procurement and P2P with their extensive solution suite that actually closes the P2P loop. Then, two weeks ago in Part II, and last week in Part III, we expounded on some additional capabilities, relatively unique in the marketplace, that extended the basic value offering beyond basic P2P. Today we’re going to address one of the advanced P2P capabilities, the tightly integrated document management feature, administration, and the supplier portal. But first, a quick recap of the story to date.

Part I described the base b-pack platform that takes you from the start of a traditional sourcing cycle (RFx), through a contract, to a requisition (which may be from a catalog), against a budget, to receipt of the goods (which can include asset tracking information), and the invoice, to payment, reporting, and supplier management. It covered the requisition, approval, receipt, invoice, matching, payment, and reporting cycle in detail as well as the solution delivery options that are available.

Part II detailed some of the integrated applications that build out the core capabilities to also provide the organization with expense and travel management, asset management, dispute resolution, and procurement business intelligence reporting and Part III addressed inventory management and its integration with asset management, budget management, fleet management, and internationalization.

Invoice management, which was initially discussed in Part I, is fairly sophisticated with a built-in invoice viewer (which can handle invoices in e-mail, EDI, and PDF formats, among others), auto-match capability (at the line-item level against original purchase orders), and multi-way match capability between purchase orders, contracts, and/or good receipts. The auto-match can be manually overridden (and maintains a running total of the reconciled amount against the entire invoice amount so the user can track her progress) and an invoice cannot be approved until it is fully matched against one or more purchase orders (at the line item level) and until all disputes against it are resolved. This goes a long way to insuring that incorrect and fraudulent invoices are never paid, which happens way to often when certain commodities, like office supplies, electronics, and storage space, are being purchased regularly and in large volumes.

Like reporting, document management permeates the system and allows each document to be tracked by way of associated meta-data which includes type, creation date, version, author, language, and other information relevant to the document type. In addition, (related) documents can be organized in a tree structure and a new document can be defined as sequential merge of a set of documents organized in a tree. Contract management is then built on top of this capability and allows contracts to be built up from component documents, where each component is a distinct section or clause, with its own meta-data information that aids in searching during contract construction. Through versioning, a user can quickly build a starting contract from standard clauses and then edit them accordingly using the built in word processor. The contract can then be output to PDF or Word, and if edits are made in the Word version (by the supplier), it can be imported back into the system as a successive version.

In addition, the document management system can store e-mail templates which are sent out when an action is triggered in the system, such as the transmission of a purchase order, the formal notification of a dispute, an automatic alert that inventory replenishment is required, and so on. These templates can be stored in multiple languages, and the proper version will be selected according to the language of the recipient. Furthermore, it’s integrated with the auto-translation utility which, although not perfect, gives you a starting template in another language, which can then be quickly reviewed and corrected by a native speaker.

Administration allows the user to define global display properties, procurement specific workflows, batch processes, usage rights by user, help file additions, and log access rights. Global display properties include price display rules, date rules, fonts, and themes. Procurement workflow properties include request limits, default payment modes, templates, and terms. Batch processes include data cache maintenance, undelivered e-mail management, user session management, database optimization, and invoice file management. The buyer can add specific information to the online help files for supplier use and for internal use. Finally, the administrator can also run data integrity checks, performance checks, link and reference checks, and database optimization.

Whereas some vendors build separate supplier portals for suppliers, which can greatly limit the functionality available to the supplier as most of the smaller shops can only devote so many developer cycles to portal maintenance, b-pack chose to build the supplier portal within the core application. The supplier portal is essentially the same application, but with access limited only to what the supplier is allowed to see and do. When a supplier representative logs in, she sees the same task manager that a buyer sees, which shows her to-do list, in-progress tasks, most recent system access, and available applications and allows her to access her reports, search for relevant information, and define the application settings she has control over. If she accesses the purchase order module, she sees the full workflow associated with the purchase order, but she is restricted to altering information related to acceptance and delivery, attaching notes, and initiating or responding to disputes — buyer side information is locked.

In addition, the supplier (vendor) master is tightly integrated with the core platform and allows the buyer to add and deactivate suppliers as required. For each supplier, the buyer can define basic identifying information, contacts, catalogues, currency, a description of the supplier’s product and/or service offerings, and portal access. The administrator can not only grant access to one or more supplier representatives, but choose what authorizations each representative is granted (in terms of invoice management, dispute management, catalog management, packing slip generation, invoicing, etc.).

In summary, the b-pack platform, which has been under development for ten years and which is very well thought out with respect to its goal of optimizing your back office procurement, provides a comprehensive P2P e-Procurement solution that also includes some very useful capabilities above and beyond the basic procurement cycle requirements that can provide significant additional value to many buying organizations, including the invoice management, document management, and supplier management capabilities described in this post.

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