Category Archives: Procurement Innovation

The Amazon Effect Is Aptly Named

CPO Agenda recently ran an interesting article in their Winter edition called “The Amazon Effect” which, although it asked a good question, did not, in my opinion, give a full answer. The article made a great point when it noted that many users find traditional e-Procurement systems frustrating when compared with consumer websites. This is one of the main reasons why CAPS Research in 2006 found that only 36% of total spend goes through an e-Procurement system in most organizations, as quoted by the article. The reality is that systems like SAP are so complicated, that even experts have problems.

But let’s get one thing straight – even though, as Aberdeen pointed out when it noted that efficient e-Procurement initiatives increase the spend under management by 35% in an average organization while reducing maverick spending by 41%, implementing a user-friendly e-Procurement system will go a LONG way towards increasing organizational use (and maybe even lead to a 433% improvement in spend under management in extreme cases), it won’t solve all your problems. Let’s face it – not everything you buy is office supplies or other products that neatly fit with the “shopping cart” system that so many vendors these days are trying to reduce their e-Procurement systems to. Can you put a “temp labour worker” in a cart? (In the US? Legally?) Can you put “customized machining services” in a cart? Can you put a non-catalogue one-time buy in a cart? Depending on the flexibility of the cart application, the answer could be a resounding no.

The strength of an e-Procurement system lies not in its look and feel, but in how much organizational spend it can capture – since that’s where the true value of an e-Procurement system is. Usability is important – but if the system can’t capture non-traditional spend, and can’t do so in a straight-forward and efficient manner, users will continue to bypass the system regardless of how slick it’s cart interface is. It’s time to wake up and smell the coffee – enterprises aren’t consumers. They don’t go down to the local office supplies store and buy a ream of paper, a pack of pens, and a can of coffee for the home office. They buy office supplies by the palette, custom products by the thousands, or millions, and temp labor services on the fly. If you can’t handle that – then nothing else matters.

So, the Amazon Effect is merely that – an effect. It’s not a solution.

The 12 Days of X-emplification: Day 12 – e-Payment

Sooner or later you have to pay the piper, and that’s why I saved this topic for last. Although e-Payment falls under the e-Procurement umbrella, that we covered back on Day 5, most e-Procurement solutions don’t handle e-Payments, and most e-Payment solutions are actually stand alone solutions. Thus, it’s important that this topic be covered on its own.

Since the underlying concept of e-Payment is relatively simple, like the post on e-Procurement, this post is going to be a little shorter than the other posts in the series, although it actually has twice as many questions. e-Payment, in principle, is not that complex and it just boils down to whether or not the system does what you need it to do (without costing you a king’s ransom).

1. Does it integrate with your ERP and/or e-Procurement Platform?

If it doesn’t integrate, there should be an easy, well-defined methodology for getting invoice data out of your ERP and/or e-Procurement platform and the e-Payment data back in. Furthermore, if it doesn’t integrate directly, make sure to ask for a demo of the integration capability, with a test system that mimics your systems (and preferably a test system that you control), before signing on the dotted line. Remember, e-Payment, like e-Procurement is supposed to make things easier – if you have to re-key data, then it’s likely not any easier than whatever process you are using today.

2. Does it integrate with your AP system?

Your accounts payable system not only needs to track what needs to be paid, but when it was paid, how, and whether or not it was paid in full. Again, since you don’t want to re-key data, you want a clear, easy integration path. In this case, batch export and batch import using XML files is sufficient, since AP doesn’t necessarily need real time status, but you need a mechanism that is as seamless and easy as the mechanism that integrates the system with the ERP and/or e-Procurement system used by procurement on a day-to-day basis.

3. What level of volume can the system support?

If you make a lot of transactions over the course of a day, you don’t want a system that craps out if you try to put more than one transaction through a second. In particular, since you will have peaks and troughs, and since your goal is to grow your business, you want a system that can reasonably support five to ten times your peak activity today. Ask for benchmark results conducted or certified by a third party – you want to know the system is up to snuff.

4. Does it detect duplicates?

You don’t want to be paying the same invoice twice – because if it’s a less-than-reputable supplier, you might have trouble getting the payment back or getting a credit towards future purchases – and this is assuming you can even identify the duplicate payment at all! If it’s less than a certain percentage of spend, your accountants might think it less costly to write it off as a loss than try to hunt the error down. Since this will negatively affect your implemented savings metrics, you want to be sure this doesn’t happen.

5. What is the true cost of the system?

Since many e-Payment systems are priced per transaction, either a fixed rate for each transaction or a percentage of each transaction, you want to be sure you have a good handle on what a system is going to cost you before making a decision. Ask them for complete purchase, installation, operation, and maintenance quotes and a sample calculation based upon your expected throughput. Then do your own calculations.

6. How are rejected transactions managed?

Not paying the piper is generally not an option, especially since you never know what rats he might lead your way if you don’t, so you want to make sure that all rejected transactions are appropriately caught, flagged, and managed. If it was a system error, it should be retried after a small period of time has elapsed. If it was an account error, it needs to be flagged and brought to the attention of a human being to correct the information. If it was a lack of funds error, all payments in the queue need to be put on hold until the issue is resolved.

7. What types of payment are supported?

Electronic check / ACH, wire, P-card, credit card? If you’re locked into only one or two methods, and the methods aren’t right for you, it doesn’t matter how good the system is technically – it’s not the system for you.

The 12 Days of X-emplification: Day 5 – e-Procurement

e-Procurement is simply the automation of the basic procurement cycle using information technology and the internet. This cycle starts with a requisition, may or may not require an authorization, and centers around the creation, transmission, and fulfillment of a purchase order. Thus, it also involves goods receipts, reconciliation, payment, tax reclamation, and analysis.

Since e-Procurement is, or at least should be, very straight forward, and since the e-Procurement Wiki [WayBackMachine] spends a lot of time defining the procurement cycle, necessary core capabilities, and important features, we’re just going to talk about the functionality that differentiates a true e-Procurement solution from a set of tools that don’t really provide you the value that e-Procurement is supposed to promise you. Thus, compared to many of the posts in this series, this post will be short and sweet.

1. Does it support requisitions, orders, goods receipts, invoices, and m-way matching in an integrated fashion?

You don’t just want two way matching, or even 3-way matching – you want m-way matching that gives you the ability to match all of the data in the system that relates to a given purchase order. Before the purchase order is issued, you want to make sure it matches the requisition that was authorized. Before an invoice is paid, you want to make sure that it is for the items in the purchase order, that were received and annotated in the goods receipt, at the rates agreed to in the contract, and at the rates in the current price list if the contract rate is defined as a discount off of a catalogue or market price. Thus, even 3-way invoice to purchase order, goods receipt, and contract might not even be enough functionality for every buy! And anything less definitely will not cut it!

2. Does it integrate with a modern supply network offering that lets you and your suppliers manage your catalogue and pricing as appropriate?

Let’s face it – the whole point of e-Procurement is that it’s supposed to make the process of buying easy! If you have to use a separate application to find what you need, and then manually enter that information into your e-Procurement application, that’s not easy. Moreover, the “compliance” and “decreased maverick spend” many vendors promise will never materialize, because you can’t even be sure the purchase order is correct since human error can creep in at the requisition stage. (The buyer can get the product identifier wrong, the product wrong, or even the price wrong. And if a vendor gets a purchase order with an approved purchase price that is higher than what’s in the contract, do you really think they are going to point that out?)

3. Does it integrate with your payment system and allow payments to be correlated to invoices?

A lot of the e-Procurement solutions out there don’t do e-Payment, and that’s fine, as long as they recognize that it’s not an e-Procurement solution if it doesn’t recognize payments! Simply noting that an invoice is paid is not only not very useful (especially if the supplier disputes the fact), but probably not in compliance with good accounting practice or Sarbanes Oxley. At least one system has to track complete payment information and correlate that to invoices in your enterprise, and I don’t know about you, but I thought that was procurement, and, hence, that the capability belongs in an e-Procurement application!

Vinimaya: The Next Wave in Product Catalogue Management (PCM)

A little over a week ago, in Networks are ok. Catalogs are Good. Punch-outs are Better. But Agents are King!, I introduced you to Vinimaya [rebranded Aquiire, acquired by Coupa] – a little known company from Shelton, Connecticut (apparently, it’s not a total wasteland) that may be the only company in the space with a real answer to the Supply Network 2.0 Challenge.

Billing themselves as a Supplier Enablement Solution for e-Procurement with their Catalog Integration System based on distributed search technology, their product truly does allow an e-Procurement system to access supplier web-sites, online catalogs, and internally managed catalogs concurrently from a single user interface.

Unlike today’s supplier networks which only support hosted catalogs and punch-out enabled sites, constitute a large expense for the buyer and the supplier, have a long enablement cycle, and provide the buyer with almost no control over access, Vinimaya’s new Product Catalogue Management (PCM) solution, which they sometimes call a Virtual Punch-out or Virtual Supplier Network (the VSN), supports ANY site (be it a punch-out, catalog, market-place, or plain old web-site), does not cost the supplier anything (as any solution that charges the supplier only adds to the buyer’s cost as the supplier has to raise their prices to compensate for the cost), can be enabled in a day, and gives the buyer total control over access, view, and pricing with their local pricing and audit engine capabilities.

Furthermore, they can easily enable standard and custom terms and pricing to each buyer. Since most suppliers plugged into a supplier network accomplish this through a separate, protected, landing page that contains pricing customized for a particular buyer, all Vinimaya has to do is program that link (and the login) into the agent instances used by that buyer, and, presto, the buyer gets standard terms and conditions and – more importantly – gets those terms and conditions in the standard view which allows them to compare the terms and conditions across all products from all suppliers that meet the identified need. Alternatively, if the supplier cannot do this, the buyer can create discount rules or override SKU prices on a supplier (by supplier) basis in the local pricing and audit engine. No need to have a third party involved, as all the third party does is take a cut of the transaction and significantly raise the transaction cost by performing a service that the buyer can easily do on her own.

And the system works. They already have over 12M skus from over 150 leading suppliers in a single instance (with over 200 suppliers enabled for general use), and the interactive distributed search works in a couple of seconds for a new query, and under a second for a query that is similar to, or a repeat of, a previous query (as the system caches relevant results). It’s also very scalable – in their five largest implementations, they support over 30K users and hundreds of suppliers. (And, as indicated in my last post, they can quickly enable new suppliers by extending and customizing existing agents in their database. On average, they can enable a new supplier in a couple of hours, and have found that over 75% of US suppliers fall into this “quick enable” category. Furthermore, when they encounter a supplier that uses a non-standard web-site design or custom protocol, do to the distributed nature of the technology, they find that, on average they can still enable the supplier in about a day.)

The things to remember are that we don’t need a separate “network”, we have one already, it’s called the internet; we already have all the content we need on supplier websites (the supplier doesn’t have a web-site you say?* that’s okay, the supplier network 1.0 options are still available); and web-services allow a lot more functionality than some of the big dogs (who haven’t innovated in ages) would have you believe.

I applaud Vinimaya for cutting through the noise and offering the direct-connect solution that probably should have been designed in the first place. The reality is that today’s supplier networks are nothing more than bad implementations of what is fundamentally a really good idea. The technology has to use what’s there, bring it all together, and do it quickly in a seamless fashion. Otherwise, your procurement department will be spending too much time on the tactical when they need to be focussing on the strategic.

* If the supplier isn’t on the web, then all of the supplier network 1.0 options are still available: the supplier can upload the catalogue using excel or use an e-form. If the supplier doesn’t have web access, then either Vinimaya or the buyer can load the catalog on behalf of the supplier. (But if the supplier doesn’t even have web access, then I think you have to ask if you’re sure that you’re using the right supplier.)

Does Procurement Need to Be Saved From Itself?

Last month, Strategy+Business ran an article on Saving Procurement from Itself that started off by saying that it’s time for chief procurement officers (CPOs) to stop relying solely on functional depth and start increasing functional breadth.

According to the article, the emergence of strategic sourcing was a defining moment for procurement, with the potential to transform it from a primary administrative function to a powerful new force for competitive advantage, but that, as of today, the reinvention has stalled in many businesses. The article claims that CPOs today are increasingly focussed inward, implementing sophisticated ways of improving procurement itself but neglecting coordination with the wider organization. This focus on cost reduction fails to address the significant potential for creating value generated when procurement engages the rest of the business and its suppliers.

The article continues by stating that more complex business models requiring more sophisticated skills from procurement leaders are required to generate revenue and eliminate costs and that procurement, uniquely positioned to reach out across the organization, needs to step up. CPOs need to start the process by developing a close working relationship with finance, managing cross-functional trade-offs, collaborating on the joint supplier-customer value chain, gaining preferential access to innovation, and designing-in network resilience. This will make sure that they get invited to the table before major decisions have been made.

I have to agree that procurement needs to take a broader role as time goes on – it’s something I’ve been preaching for a while – but I’m not sure that procurement needs to be saved from itself or that depth can be ignored. In the more progressive organizations, the leaders of tomorrow already recognize that they need to do more and they are taking steps to do that. They may need a little help, but the point is that they make the first step along the journey of transformation. Furthermore, just how do you expect to develop and maintain a closer working relationship across the supply chain without solid collaborative technology? How do you gain preferential access to innovation without demonstrating a commitment to innovation yourself? And how do you design-in proper network resilience without best-in-class network modeling, simulation, and optimization tools?

It’s true that procurement needs to go broad, but this breadth cannot be achieved in any way that also sacrifices depth in key areas. Success lies in the proper balance between breadth and depth. It’s true that your average organization probably needs help achieving this balance, but I don’t think procurement needs to be saved from itself. I’d like to see faster progress, but the fact that you’re reading this means that you’re trying to improve yourself and your operation, and that tells me there’s some forward thinking going on. And that’s what it’s all about.

Now that the question’s out of the way, let’s focus on the tips the article had to offer that were pretty good.

  • Procurement needs the ability to report on performance in a manner that reflects the CFO’s definition of profitability. This will require the ability to provide timely and accurate spend data.
  • Procurement needs to facilitate sharing data up and down the chain to allow for the generation of better forecasts at each link.
  • Procurement needs to be the party that brings the economic insights required to build a picture of the joint value chain that all parties can agree, and work together, on.

Winning over the CFO is key to becoming a critical player on the senior management team, an in-sync chain is less costly and more profitable than an out-of-sync supply chain, and only procurement is capable of seeing the full picture. Good advice.