Category Archives: Procurement Innovation

Category Management Savings Drying Up More? Time to Cross-Strategize!

Last year we asked you in jest if category management savings were drying up, because we knew we were. We told you that the way to prevent this was to cross-source and cross-optimize across categories that can be shipped together from the same supply base. For example, while it might be logical to separate brass, bronze, and copper parts from a category management perspective, considering that some suppliers will likely supply parts across these categories (considering brass and bronze are alloys that contain copper), from a sourcing perspective it makes sense to source all three categories simultaneously. This way you can optimize logistics and negotiate additional volume discounts based on spend levels.

And this is still a great idea, but sometimes it’s not enough to achieve savings. Volume leverage is only one half of the equation, at the best of times. The other half is the strategy. Simply bundling additional volume and shipping it out for a bid isn’t going to do the trick if demand exceeds supply. Nor is putting a large volume up for an auction going to guarantee results even if supply greatly exceeds demand. Especially if the auction is not going to the right supply base.

The key is the right strategy for the right sub-set of the category. As the doctor penned in his series on AI in Procurement (Today Part I, Part II; Tomorrow Part I, Part II, Part III; and The Day After Tomorrow), and in his upcoming series on AI in Sourcing (over on Spend Matters Pro, membership required), it’s all about the right strategy for the right sub-category at the right time.

The key is, for each category product, service, or raw material, to analyze the state of the market and determine whether the best result is going to come from a catalog buy, a (3-bids-and-a-buy) auction, or a (multi-round) (optimization-backed) RFX and then slice up the category appropriately — then piece those slices together across related categories to get the necessary volume leverage to ensure savings in auctions, (optimization-backed) RFX events, or re-negotiations with incumbents. Just like there is no one-size-fits-all approach to categorization, there is no one-size-fits-all approach to sourcing events — even if everything worked the last time around. Markets change. Supply/Demand imbalances change. Buying power changes. Everything is in flux. And sometimes the third time is the charm … for your suppliers that can achieve a windfall at your expense.

Domo Arigato, Mr. Roboto Patoron!

A decade ago, Sourcing Innovation published a piece on how Every Check Has a Cost which echoed a point made by Paul Graham that one of the big differences between big companies and startups is that big companies tend to have developed procedures to protect themselves against mistakes while a startup walks like a toddler, bashing into things and falling over all the time and, as a result, over time, gradually puts in place rules and procedures and associated checks and balances to prevent it from falling over itself, especially when the fall results in a mini-disaster (such as a contracted supplier going bankrupt).

Thus, as the company grows, it will invariably accumulate more checks, either as responses to disasters or as a result of hiring people from bigger companies who bring more checks with them for protecting against disasters which have not yet happened (and which may never happen).

But this isn’t necessarily a good thing. Unnecessary checks cost time to document,, implement, support, and maintain, especially if it’s for a situation unlikely to happen or a situation that, when it happens, will cost the company less than the cost of the check and balance it has to go through day in and day out. For example, like checking the references and solvency of an office supplies, furniture, or an off-the-shelf electronics provider. Who cares. One goes out of business, 10 more down the street.

Or mandating committee review and on-site demos for what should be a $10,000 piece of software. As described in our classic piece, the more expensive you make a sale, the more expensive that sale is going to be. If it costs a vendor $30,000 to sell you what should be a $10,000 piece of software, they’re going to charge you $50,000 — $10,000 for the software, $30,000 for the cost of sale, $5,000 for the additional support they expect, and an extra $5,000 to make up for the commissions they are losing spend all that time with you.

Similarly, it’s costly to have a manager check every purchase over $250 made by an employee just because someone decided that should be an arbitrary threshold.

Ten years ago we said review all your checks and balances and get rid of the ones that don’t make any sense or cost you more than they would save in the worst case.

But now we are saying don’t just get rid of those, get rid of ANY manual check that doesn’t add value the majority of the time — and replace it with an automated system check backed by RPA (robotic process automation) driven AI (assisted intelligence) that determines whether or not there is enough risk to warrant a manual check.

With good risk models, good training data (common situations when a “mandatory” check resulted in an approval, common situations where a “mandatory” check resulted in a denial, and exceptional situations where a “mandatory” check resulted in a request for more information by the approver), good budget/spend data, contract/catalog data (and preferred suppliers), and organizational hierarchies (with well defined roles), a system can not only easily map into (definite) yes / (definite) no / more information / forced manual review buckets and improve its knowledge of typical organizational purchase and approval patterns over time and reduce the number of manual checks to those situations that are truly risky or truly unclear. Which is, to be precise, the only time a check should be applied. (And over time, it will be able to suggest better and better check rules that help an organization understand what, and only what, it should truly be checking.)

And when you implement the right software to automate these mostly unnecessary checks (on the road to eliminating them), just like you can slowly take the foam off the table corners and the training wheels off the bike, you will grow up as a purchasing organization and, after finally finding a proper use for RPA and AI, you will say:

Domo Arigato, Mr. Roboto Patoron!

Finding Wealth in the Year of the Pig

In yesterday’s post we noted that next year is the year of the pig, and that it could bring greed and obnoxiousness to Procurement, as per the western stigma, or it could bring wealth and good fortune, as per the eastern stigma, but that your fortunes all depend on whether or not you make the effort to acquire a next-generation best-of-breed system. If you acquire a next-generation best of breed system that uses analytics, optimization, advanced modelling, machine learning and/or AI, you can realize value and wealth. If you don’t, well …

So what should you look for? As per our upcoming series on AI in Procurement Tomorrow on Spend Matters Pro [membership required], there are a number of advanced functionalities coming your way that will add value. These include [but are not necessarily limited to]:

  • Overspend Prevention
  • Invisible Buying (of all types of MRO products and services)
  • Automatic Buying (including basic sourcing)
  • Automatic Opportunity Identification
  • Automatic Category Analysis and Emergent Category Identification
  • Procurement Method Identification

To convince you of the need for advanced (AI-based) applications to find the wealth you need to make Procurement profitable again, and the importance of reading the doctor‘s in-depth thought leadership pieces (if you have Spend Matters Pro membership), we’re going to give you a preview of the power of a platform with invisible buying capability.

While current systems can automatically re-order MRO and stock room items when minimum inventory levels and EOQs are defined, the reality is that MRO and stock room items change over time as old products are retired, new products are selected, and organizational needs change. And it can be a lot of work to maintain these items accurately over time.

But why should you have to? After all, the system can infer when a product is retired … as orders stopped being placed. The system can infer what product replaced it, as it’s not only in the same sub-category but ordered when the previously item would have been ordered by the same department and stocked at the same location in a similar quantity (under an appropriate metric). And so on.

But a modern Procurement platform, with augmented intelligence technology, can:

  • Auto-detect regularly needed items through repeated orders
  • Auto-compute usage schedules by tracking inventory levels and computing trends
  • Auto-predict best order quantities based on projected trends, re-order times, shipping costs, and inventory costs
  • Add the items to the MRO repository with minimum stock thresholds and projected EOQs
  • Use the embedded assisted intelligence to re-order the MRO items on schedule
  • And re-calculate the inventory levels and EOQs on a monthly basis using actual usage data to update the trends

And you don’t have to do tactical inventory review and re-ordering when that time can be better spent on value-generating strategic sourcing events.

So keep your eyes open for the doctor‘s upcoming series on AI in Procurement Tomorrow over on Spend Matters Pro [membership required] and, if you haven’t already, read the doctor‘s series on AI in Procurement Today (Part I and Part II) if you haven’t already.

The Year of the Pig

While us westerners tend to give pigs a bad stigma — they are lazy, filthy, obnoxious, greedy, and ugly — and even use their name in vain — calling those we feel are lazy, filthy, greedy, obnoxious, and even (sexually) predatorial pigs, in eastern mythology (and Chinese culture), they are the symbols of wealth, and those born in the year of the pig are supposed to have a beautiful personality and be blessed with good fortune in life.

So what is 2019, the year of the pig, going to bring us in Procurement? Is it going to bring wealth and good fortune from the East or greed and obnoxiousness from the West?

The sad reality is that it’s going to bring both, but unless you’re one of the lucky ones, you won’t see the wealth … or at least not enough to make the greed and obnoxiousness worthwhile.

Why?

Because we’re still in the age of iZombie-enabling platforms that cost too much, and often return too little. But that doesn’t mean you have to be free of return. You live through the pain (of Procurement systems that haven’t kept up), you should get the gain.

So how can you do that?

Acquire point-based best-of-breed solutions that can augment your existing platforms and make use of advanced modelling, analytics, market intelligence, machine learning, and even optimization to find ways to save more than you spend on the platforms you have and more than you lose on the manpower time it takes to do all the tactical processing the systems force on you.

This blog has covered a lot on analytics, optimization, and advanced modelling over the years, and for more insights on what machine learning / AI will do for you, keep your eyes peeled for the doctor‘s upcoming series on AI in Procurement tomorrow over on Spend Matters Pro which will help you identify next generation systems that can take your Procurement up a notch. (While no system will have all the capabilities we describe for a while, there are a few systems with fledgling capabilities that will give you value today and take you into tomorrow.)

AI in Procurement Today

As per yesterday’s post, there is no true AI in procurement, at least with respect to the traditional definition of AI as artificial intelligence, but there is AI out there if you interpret AI as assisted intelligence, and some of it is pretty good.

What is there? If you check the doctor‘s 2-part in-depth piece over on Spend Matters on AI in Procurement Today (Part I and Part II) [membership required], you’ll see there are six areas where at least on one or two providers add a lot of value. They are:

  • True Automation
  • Smart Auto-Reorder of MRO / retail stock
  • Enhanced Mobile Support
  • Guided (and sometimes Guilted) Buying
  • M-Way Match And Error Prevention
  • Smart (Automatic) Approvals

And, in some cases, a system will integrate its automation, m-way match, and smart approvals to determine when an invoice with a small fluctuation can be automatically paid and when it can’t. For example, when an invoice comes in for services at a rate 10% higher than the last invoice, most m-way match systems would block it and bubble it up to the lead buyer / requisitioner. But a smarter system with integrated checks, behavioural analysis, and a history of override decisions might do the following:

  • check the PO and see it referenced a master contract with an evergreen clause where the original term had expired and the supplier had the right to increase rates up to 15%
  • check the user’s past overrides and see that they generally approve rate increases of 10% or less
  • check the user’s approval authority and see that they have the ability to make that approval
  • calculate the probability of automatic approval by the buyer and if it’s 90% or greater, queue the invoice for automatic payment, with a notification to the user that they may want to explicitly renegotiate the contract as the next invoice from the supplier might be at a 15% increase

Now, this is not going to help you in all cases, but every time you waste time investigating an overage you can’t do anything about, it’s a waste of time and, thus, any assisted intelligence solution that can prevent a waste of your time is valuable.

For more details on what the best systems can do today, if you have a Pro membership, the doctor strongly encourages you to check out AI in Procurement Today (Part I and Part II) and find out what your Procurement system should be doing for you.