Category Archives: Procurement Innovation

The More Things Change … Outsourcing and Procurement Mastery

This week we’re revisiting posts from ten years ago to demonstrate that, to date, the more things change in Procurement, the more they have, unfortunately, stayed essentially the same.

Ten years ago we penned a post on outsourcing and procurement mastery that summarized the results of an Accenture study that found that, on 1B of controlled (normalized) spend, procurement masters achieved 30% higher savings with costs that were 50% lower.

Nothing has changed. If you have been following the Hackett group publications for the past decade, you’ll note that top performers always perform significantly better than average performers. Maybe not 30% cost reductions, but pretty close. For example, in Hackett’s most recent study, World Class Procurement organizations see 35% process cost reduction, which is quite significant. And just about every GPO publishes typical category-based cost reductions in the 10% to 30% range, which is easily achievable through advanced sourcing technologies such as spend analysis (to identify the opportunity) and decision optimization (to capture the opportunities).

The only thing that has changed is how disturbing it is that there is still so much overspend in the average organization — and how easy it is to identify it. By now the majority of organizations should own advanced sourcing and procurement technologies and be identifying the majority of these savings on a regular basis. But it’s still not the case. Over 40% of organizations don’t have a single modern sourcing or procurement solution.

We’re still way behind where we should be. In this regard, unfortunately, nothing significant has changed in a decade.

There are 4 Modes of Innovation, But Only Two Types!

A recent article over on on the 4 types of innovation and they problems they solve didn’t really discuss the types of innovation, but rather the modes. The author, who broke innovation down into the age-old 2*2 matrix, with domain definition on one axis and problem definition on the other, indicated that their was basic research — typically carried out by or with academia, breakthrough innovation — typically accomplished by skunk work projects, sustaining innovation — typically done by R&D labs, and disruptive innovation — that often comes out of VC-funded innovation labs.

As you can say, these are not really “types” but methods of innovation which can each lead to innovations that might be classified as basic, sustaining, breakthrough, or even disruptive innovations (so the names are quite confusing), and this leaves the question, what are the real types of innovation and how does innovation happen. (An academic might come up with a disruptive way to create new communications technology and the best-funded VC lab might, after years of research, just come up with a way to make a fabrication process more efficient, saving 20% of time and 10% of cost, and not discover a single revolution.)

So how is innovation accomplished? These days, it’s fundamentally accomplished in one of two ways — either using the tried and true method of good old fashioned human ingenuity or the new method of deep learning that can discover patterns, formulas, or correlations that humans can miss. But is this the kind of innovation we need? Or even want?

As per our last article where we asked if the end of the digital west was in sight, while these deep learning systems can, with enough data, make predictions that are much more accurate than the best human experts, the fact that they cannot explain their reasoning is very disturbing. Very disturbing indeed. Do we really want to trust them with a new drug formula that, while having the potential to save thousands, also has the potential to kill hundreds, with no knowledge of which individuals are at risk of instant death? the doctor hopes not!

While it’s okay to use these systems to identify the most likely directions of success, it’s not okay to use these systems to blindly choose those directions without independent verification and confirmation with rationale, deterministic explanations. In other words, while we should use every tool at our disposal, we should never replace human intelligence and ingenuity with dumb systems. Because, while there are two types of innovation in use these days, there’s only one real type of innovation — human innovation. the doctor hopes that we never forget it and return to the glory days where all innovation was human innovation.

The UX One Should Expect from Best-in-Class Spend Analysis … Part V

In this post we wrap up our deep dive into spend analysis and what is required for a great user experience. We take our vertical torpedo as far as it can go and wrap the series up with insights beyond what you’re likely to find anywhere else. We’ve described necessary capabilities that go well beyond the capabilities of many of the vendors on the market, and more will fall by the wayside today. But that’s okay. The best will get up, brush off the dirt, and keep moving forward. (And the rest will be eaten by the vultures.)

And forward momentum is absolutely necessary. One of the keys to Procurement’s survival (unless it really wants to meet it’s end in the Procurement Wasteland we described in bitter detail last week) is an ability to continually identify value in excess of 10% year-over-year. Regardless of what eventually comes to pass, the individuals who are capable of always identifying value will survive in the organizations of the future.

But if this level of value is to be identified, buyers are going to need powerful, usable, analytics — much more powerful and usable then what the average buyer has today. Much more.

As per our series to date, this requires over a dozen key useablity features, many of which are not found in your average first, and even second generation, “reporting” and “business intelligence” analytics tool. In our brief overview series to date here on SI (on The UX One Should Expect from Best-in-Class Spend Analysis … Part I, Part II, Part III, and Part IV) we’ve covered four key features:

  • real, true dynamic dashboards,
  • simultaneous support for multiple cubes,
  • real-time idiot-proof data categorization, and
  • descriptive, predictive, and prescriptive analytics

And deep details on each were provided in the linked posts. But even prescriptive analytics, which, for many vendors, is really pushing the envelope, is not enough. Great solutions really push the envelope. For example, the most advanced solutions will also offer permissive analytics. As the doctor has recently explained in his two-part series (Are We About to Enter the Age of Permissive Analytics and When Selecting Your Prescriptive, and Future, Permissive, Analytics System), a great spend analysis system goes beyond prescriptive and uses AR and a rules-engine to enable a permissive system that will not only prescribe opportunities to find value but initiate action on those opportunities.

For example, if the opportunity is a tail-spend opportunity that could best be captured by a spot-auction, approved products that meet the bill, and approved suppliers that can automatically be invited to an auction to provide them, the system will automatically set up the auction and invite the suppliers, and if the total spend is within an acceptable amount, automatically offer an award (subject to pre-defined standard terms and conditions).

And that’s just the tip of the iceberg. For more insight onto just how much a permissive analytics platform can offer, check out the doctor and the prophet‘s fifth and final instalment on What To Expect from Best-in-Class Spend Analysis Technology and User Design (Part V) over on Spend Matters Pro (membership required). It’s worth it. And maybe, just maybe, when you identify, and adopt, the right solution, you won’t end up wandering the Procurement Wasteland.

We Need BlockChain, But Not for the Reasons You Think.

The biggest use for blockchain right now is to support digital currency, namely bitcoin, and secure trade of that currency. And since it has the potential to revolutionize e-payments, everyone is talking about it. But let’s face it, your employees don’t take bitcoin, your suppliers probably don’t take bitcoin, and your customers aren’t paying in bitcoin. Most of your employees want direct debit, your contractors want checks, and your suppliers probably want ACH. Bitcoin and blockchain is the furthest thing from their minds and, thus, is the furthest thing from yours.

But there is one use for block chain, and that is, simply put, the secure transfer of IOUs. What do we mean by this? About a year ago we penned a post that asked With Currencies Crazy, Is It Time to Return to Barter. In this post we asked what if there was no exchange of currency. What if it was an exchange of a raw material or service for another raw material or service, where each raw material or service came from the organization or a partner in the same country. Since the value of a product or service, adjusted for inflation, is relatively constant over time and since the relative value of one versus another is also relatively constant over time, such a contract would not be subject to rapid changes in value differences regardless of what happened in the currency markets.

Now imagine if instead of trading raw materials, you could trade IOUs and send them up and down supply chain until all of the differences could be settled within a country. You wouldn’t need to exchange raw materials with a company you might not want to, and, more importantly you definitely wouldn’t need to deal in non-native currencies. You could just settle those IOUs with in-country in-currency bank transfers, clear out the IOUs, and all would be settled.

Up until now, there has been no way to securely trade those IOUs. You had to trade payments in banks. But now, with the advent of blockchain, you can trade those IOUs simply by creating an IOU cryptocurrency specifically for keeping track of all the barters. And, if you’re not sure how to optimize the trading of IOUs, we gave you a great idea on how to do that in our post on With Currencies Crazy, Is It Time to Return to Barter — you build a special, shared, supply chain optimization model that allows all participating entries to upload their data and opt-in to in-currency barter optimization and then trade the IOUs through the new cryptocurrency and only the final imbalances in each country need to be paid. It’s the future …

The Advanced Supply Management Phoenix Takes Flight

As indicated in our last post, Procurement needs to evolve, fast, or join the elephants in the elephants’ graveyard. But, as we also indicated, just making the natural progressing to an advanced strategic sourcing function that is based on an advanced (optimization-backed) sourcing solution is just the beginning. While this will likely extend your longevity by (at least) a decade, it’s not enough to grant you a permanent stay of execution.

The next step, as hinted at, is advanced spend analytics that can find value opportunities across categories through category re-organization, raw material identification and sourcing on behalf of a supplier, multi-level service and MRO category identification (for advanced sourcing), hidden trend identification, demand shift opportunity for category and SKU rationalization, and other value capture opportunities that out-of-the-box reports and even GPOs and consultants miss.

But don’t stop there … eventually those opportunities will be found and more and more opportunity detection algorithms will be encoded in standard analytics suites to the point where the majority of these opportunities will be detected by advanced, machine learning, cognitive analytics suites.

Move on to Supply Base Design. Don’t just source each category on its own, source each category in the context of an optimized supply base that will allow for SKU rationalization, logistics cost reduction, supplier development across a greater portion of the rationalized supply base, access to government benefits from a concentration of business activity in a region, and so on.

And do this in conjunction with design for reduce, reuse, recycle, and recovery (4Rs) so that there is no waste, especially where the corporation is responsible for taking the product, or something it contains, back under appropriate governmental regulations. And even if there are no governmental regulations, if there are valuable components that can be reused, recycled, or sold for other uses, helping the organization reclaim dollars that used to seep out the door is valuable. Plus, it shows that you can help with product design and redesign and bring value that consumer-oriented design will miss.

But don’t stop there … help your suppliers with their own supply base design and design for 4Rs to push value creation further down into the supply chain. At some point, the only value will come from enabling your suppliers to cut costs and innovate in value-generating ways that they previously could not.

And then you will survive regardless of what future exists.

If the mega-corporate world materializes, your ability to push down into the value chain will give you an edge that makes it worth keeping you around. Even if there are only three big guys for each product, going down a level there are nine big guys contributing to your product, and down another level there are twenty-seven … not only does each level of the supply chain have to be appropriately filled, but any improvement at any point of the chain will bring value.

If the project economy materializes, your ability to identify an appropriate supply base that can work with you to design for the 4Rs and minimize SKUs while maximizing stakeholder value will make you the most valuable project management candidate out there.

And if we return to the barter economy, your ability to work with suppliers to design what is needed, in the most efficient way possible, and help them identify how your products will be more valuable than your competition’s. This will be much more attractive to a potential supplier than some sales guy pushing a lower priced product that the supplier doesn’t really want.

In other word’s, if Procurement can transform to a true advanced Sourcing organization, it can survive. Otherwise, I’m sure the elephants are making room as you read this.