Category Archives: Procurement Innovation

Davie and the Coupa Factory

When I was in in the valley, I checked in on Coupa. I’m happy to report that the Coupa Oompa-Loompa‘s are hard at work developing the new version of their open-source e-Procurement product, which should be ready in the near future. (Rumors are the next enterprise version will be ready in a month or so.) I wish I had details to share, but everything is hush-hush and I was warned by the Grunka Lunkas not to ask about the secret new features (and since I didn’t have an evil alcohol chugging robot or one-eyed mutant to back me up, I decided to heed their warnings). However, if you listen hard, you just might be able to hear the Oompa-Loompa’s song floating on the breeze.  (At least when they’re not watching TV.)

Oompa Loompa Doom-pa-dee-do
I’m building a great product for you!
Oompa Loompa Doom-pa-dah-dee
If you are wise download it for free.

What do you get when you go open source?
Straying away from the Oracle course
Where you are going terribly flat
What do you think will come of that?

I don’t like the look of it

Oompa Loompa Doom-pa-dee-dar
If you are willing, you will go far
You will live in happiness too
Like the Oompa Loompa Doom-pa-dee-do

Oompa Loompa Doom-pa-dee-do
I have a great product for you
Oompa Loompa Doom-pa-dee-dee
If you are wise you’ll take a look-see

Oracle’s fine when you have lots of cash
It stores all your data and caches it fast
But when you’re cash-strapped, you’re hung out to dry
To watch the vultures circ’ling high

Up in the dark’ning skies

Oompa Loompa doom-pa-dee-dar
But now there’s Coupa, you can go far
You will buy in happiness too
Like the Oompa-Loompa doom-pa-dee-do

Oompa Loompa Doom-pa-dee-do
I have a great product for you
Oompa Loompa Doom-pa-dee-derd
If you are wise, you will spread the word

Ask who they’ll blame when your spend is off track?
Deep in the red and there’s no turning back
Contracts alone will never be enough
If your software’s not up to snuff

And doesn’t track your stuff

Oompa Loompa doom-pa-dee-dar
But now there’s Coupa, you can go far
You will buy in happiness too
Like the Oompa-Loompa doom-pa-dee-do

Oompa Loompa Doom-pa-dee-do
I have a great product for you
Oompa Loompa Doom-pa-dee-dise
If you are wise, you’ll buy enterprise

Recquisitions with a click of the mouse
No more mistakes for accounting to delouse
One click receipts when the order arrives
Invoice matching that always jives

You’ll have no … you’ll have no … you’ll have no regrets

Oompa Loompa doom-pa-dee-dar
But now there’s Coupa, you can go far
You will buy in happiness too
Like the Oompa-Loompa doom-pa-dee-do

And yes, this is to the tune of the Oompa Loompa chant, as first heard in Willy Wonka & the Chocolate Factory.

Don’t be a Victim of the Performance Gap (Procurement Best Practices)

According to the Hackett 2006 Enterprise Book of Numbers, there is a growing performance gap in sales, general and administrative operations between world class and average companies with top performers generating significant savings while delivering improved effectiveness and reduced risk. Don’t have a copy? No worries – the IACCM ran a great summary article last month.

Hackett’s research found that by achieving world-class performance in four core operational areas – information technology (IT), finance, human resources (HR), and procurement – companies can reduce annual SG&A costs by $60M per B in revenue. At the same time, these world class performers show superior effectiveness, deliver higher quality services, and benefit from increased economic returns and reduced risk.

In addition, Hackett found that world-class performers demonstrate strength in five best practice categories: strategic alignment of business goals and operating procedures, complexity reduction, technology enablement, business processing sourcing; and cross-functional partnering. Furthermore, the strategic use of technology plays a key role in achieving world-class performance.

The article also quotes Pierre Mitchell (who needs no introduction) who states that “The best companies may differ in their size, industry or regulatory environment, but what they share is their ability to use back-office functions, traditionally viewed as cost centers, to generate competitive advantage. They do this, regardless of function, by relying on specific management approaches in the five areas we’ve identified.” World class organizations support continuous improvement within individual functions, cross-functionally and in end-to-end processes. “It’s critical to recognize that each year these world-class performers do a little better, pulling further away from the pack. The growing gap has a multiplier effect that will make it more difficult for the lagging typical companies to compete over time, a process that may soon be irreversible for many of today’s leading corporations.”

The Hackett group key findings across various SG&A functions were as follows:

Strategic Alignment
World class organizations use “flatter” management structures that are more effective. Furthermore, the senior IT executive is almost 50% more likely to be on the company’s primary management team.
Complexity Reduction
World class organizations achieve tangible benefits by abolishing unnecessary complexity in business processes. World class procurement organizations reduce complexity through strategic sourcing, consolidating their purchases among 78% fewer suppliers than typical companies, and centralization. (Hackett found a typical company with 1B in annual spend can save 8M in process cost alone by increasing the percentage of contracts negotiated centrally from 20% to 80%.)
Technology Enablement
Companies with world-class IT organizations spend 7% more per end user than their peers and their use of technology results in improved performance across other SG&A areas. Appropriately applied technology streamlines and automates operations and world-class organizations spend 45% less than typical companies on finance operations.
Business Process Sourcing
World class companies leverage business process sourcing options at the process level and do not hesitate to change sourcing solutions if they fail to meet the desired results.
Cross-Functional Partnering
World class organizations seek synergies across business functions through cross-functional cooperation to achieve common goals. Procurement staff work alongside their functional peers to understand business need, plan spending and supplier selection, and take into account current and future needs.

So don’t get stuck in the procurement gap – take Hackett’s advice to heart and join the world-class organizations who are saving an additional 6% per year on their procurement efforts. Don’t know where to start? Since technology is key, start by adopting state-of-the-art on-demand strategic-sourcing solutions, such as those offered by Iasta (acquired by Selectica, merged with b-Pack, rebranded Determine, acquired by Corcentric) and Procuri (acquired by Ariba, acquired by SAP).

aPriori

Last week, in his Spend Management Goes Upstream series, Jason presented the basics of the “aPriori Philosophy”* on Spend Matters [WayBackMachine]. About the same time, I was lucky enough to meet with them in their Concord, MA headquarters when I was in the Boston area.

I must say that I am very impressed with aPriori‘s solution and definitely convinced that their solution is unique. The reality is that if you’re a best-in-class company that has already implemented technology to support the full strategic sourcing cycle, including spend analysis, decision optimization, and compliance (in addition to the old standards of e-RFX and e-Auction), then your only chance for significant cost savings is to attack the design phase – where the majority of your costs are baked in!

This is precisely where the aPriori solution comes into play. If you’re buying direct materials from a contract manufacturer, now you have a solution for understanding precisely what you should be paying based upon precisely computable geometric (physical) cost drivers and related non-geometric (part-related) costs. The reality is that current market value for a part is not always anywhere close to what you should be paying. For example, a sales representative from a new supplier is not incentivized to give you the best deal, he’s incentivized to get the best deal he can for his company. A supplier that’s always made a certain part a certain way might not realize that new technology or materials would allow them to make that part significantly cheaper if they used a different process. In this case, this is primarily due to a lack of insight.

This lack of insight is precisely what aPriori’s tool was designed to address. The application instantly and directly interfaces with your CAD program and interrogates the solid model to construct the geometric cost drivers that aPriori uses to automatically determine all the process routings that can be used to make the part, compute the costs associated with each step based upon standard machine, material, and labor costs, and compute the total cost of each part on a per unit basis by factoring non-geometric cost-drivers such as production volumes, the selected supplier or internal factory selected, and the exact routing and machines used.

This application allows design and manufacturing engineers to understand the cost of a part before they finalize a specification, evaluate different options, and make the best price-performance decision. But this is not the coolest feature. The coolest feature is that the application is based on factories built on mechanistic process models that allow you to configure the application to understand any physical part or factory/supplier you want to analyze and produce an accurate costing model. Once you produce the mechanistic process model, the solution then applies its built in computational geometric algorithms to determine the most cost-effective construction methodology guaranteed to produce the exact part you need.

The aPriori solution is truly a significant advancement in cost-based design technology. As such, not only will I be blogging about it again in the future, but I’ve also invited aPriori to submit a few guest posts detailing some of the advancements in their platform, complementing their forthcoming posts on Spend Matters, and how these advancements will help your organization save a significant amount of money without sacrificing quality or unnecessarily stressing your supplier relations.

Innovation Tips

Recently, Professor Rosabeth Moss Kanter published an article entitled Innovation: The Classic Traps in the Harvard Business Review (subscription or purchase only). A good executive summary can be found on the IACCM site. Since innovation is one of my favorite topics, I’m going to summarize the salient points and expound on their importance.

Existing corporate structures, controls, and incentives work against out-of-the-box thinking.

Innovation springs from creativity, not from stifled mindsets.

The search for new ideas must go broad and deep throughout the organization.
As I’ve indicated in my Purchasing Innovation series over on e-Sourcing Forum [WayBackMachine] and in my Sourcing Innovation series here on Sourcing Innovation, new ideas can come from anywhere, especially from where you least expect. The key is that you open your mind to the possibilities.

Innovators must be kept connected to the mainstream business.

Otherwise, they will be no more effective than their counterparts in the ivory tower. Although all innovation is good, the reality is that you need innovations that you can profit off of on a regular basis to sustain your business and sustain crucial R&D. Moreover, the best research is that which has a visualizable application (even if it will take time to apply).

You should look for small innovations as well as blockbusters.

A consistent stream of small innovations can often be as profitable as a single blockbuster, and when you consider that blockbusters don’t come along everyday …

Make sure you have Processes and Controls.

Although free thinking needs to be encouraged and supported to get the innovation ball rolling, at the appropriate point in time, each idea needs to be evaluated and a go/no go decision made from a business and ROI perspective.

Select the right leadership.

Your leadership needs to inspire your team to new heights, not drive them to the competition. If you don’t know what I mean, then you need to read more Dilbert.

Defeating Uncertainty (in Demand Planning)

As part of my recent innovation week, I posted Measuring Innovation which provided you some metrics that you could use to measure your innovative progress – since you can’t manage what you can’t measure is as true with innovation as it is with any other business activity. But the importance of measurement goes deeper than you may recognize, as pointed out by recent articles in the Supply Chain Management Review and Knowledge @ Wharton.

According to Wharton, supply chain measurement is a mission critical element but many companies lag when it comes to measuring how well they are doing when implementing new supply chain initiatives. Considering that procurement and supply chain departments are under continual pressure to get better results without increased resources, it’s vital that you use metrics that identify how the strategic needs of the company are being met.

Wharton recommends using the “efficient frontier” to gage capability where you plot points along a trade-off curve between multiple the performance metrics and look for a position that protects your interests and those of your customers simultaneously. For you technical folks, you’re finding the optimal point on a multi-objective pareto curve based upon the relative weightings of the metrics you are using.

However, as the SCMR points out, there are many challenges in supply chain measurement that you have to solve to effectively manage your supply chain and find the optimal point on that multi-objective pareto curve. Old data, too many metrics, constantly changing metrics, and endless debate over metric definition are just some of the difficulties you need to overcome.

The key is to know what to measure, decide on some industry standard metrics to measure it, and have a program in place to measure it that focuses on quality and not quantity. This program should be based on best practices and avoid the common pitfalls of excellence addiction (constant improvement is good, but you need to take it one step at a time), missing data (the right stuff isn’t enough), ingrained inertia (resistance to change), and analysis paralysis (don’t overanalyze or fail to act on the results).

The metric definition best practices outlined in the article are great:

  • design different metric portfolios for different goals
  • keep it small (avoid the “mushroom effect”) as each portfolio must be of a manageable size
  • address the basics: balanced, cross functional, and practical (with respect to cost, quality, time, & effectiveness)
  • align execution and strategy
  • understand the interdependencies
  • balance the need for standards versus customization (every chain should measure demand-forecast accuracy, perfect order, total chain costs, and cash-to-cash cycle time)

Finally, remember to set targets, work hard to achieve them, and retain them once you have reached them.