Category Archives: Procurement Innovation

The Revolution of Purchasing: Part II

Yesterday, in Part I, we noted that even though Purchasing has been evolving in the leading Supply Management organizations, thanks largely in part to some great technology platforms outlined by Lisa Nyce of Source One Management Services in her guest post three years ago on The Evolution of Purchasing, it has been an evolution to more strategic purchasing on select categories, and not a widespread revolution.

And this is problematic in SI’s view because we’ll never have a true purchasing revolution until all Spend Under Management is truly Managed Spend. Right now, many Procurement organizations have the fallacy that just because the spend goes through the e-Pro/P2P/I2P system, that doesn’t mean it’s managed. It just means it’s tracked and available for analysis. And, more importantly, the spend strategy and decision has to be enforced. Negotiation a contract with Supplier X for 10% below current prices is useless if everyone keeps buying from Supplier Y. Deciding to go three bids and a buy is useless if the buy is from the highest price / lowest book value supplier just because the buyer knows they’ll deliver. Directing a user to a catalog with preferred items is not spend under management if the user can just punch-out to Amazon and buy from an overpriced third party because they want a non-standard product. And so on.

For all spend to be managed spend, at least things have to happen:

  1. All spend has to be categorized.
    Uncategorized spend is unmanaged spend. It gets shoved into the tail spend, and is left for anyone with budget authority to manage as they see fit. Catalog buy. Spot buy. Non-preferred vendor spend. Big barkup store down the street spend. Etc. If it gets into a category, and that category is a managed one, there’s a chance it will be managed.
  2. All categories have to properly purchased.

    Every category has to have an associated bucket. Strategic. Non-strategic 3-bids and a buy due to high spend volume. Catalog. Just categorizing is not good enough — categories must be mapped to preferred strategies. And bought according to those strategies.

  3. All purchasing decisions have to be enforced by a platform.

    Once a purchasing strategy is selected for a category, it must be executed. And once an award or decision has been made, it must be enforced. The platform should not permit a strategic category purchase to go through punch-out catalogs or a catalog buy for an on-contract item to be made with an off-contract supplier.

And, since there just isn’t enough manpower for a Procurement department to tackle 100% of Spend Under Management (as the average organization struggles to tackle 1/3 of strategic spend each year), the platform must support automation of tactical 3-bids and a buy, catalog buys, inventory re-orders, etc. Modern cognitive solutions, with enough rules, data, and market intelligence can buy low-dollar, non-strategic categories as good, if not better, than overworked purchasing professionals. Automate 3-bids and a buy. Automate catalog purchases with on-contract suppliers. Automate re-orders for on contract product and services when inventory gets low. Automate that where your strategic insight provides little value, and then increase the percentage of strategic spend that gets strategically sourced every year and you will have a real purchasing revolution.

The Revolution of Purchasing: Part I

Three years ago, SI published a guest post on The Evolution of Purchasing from Lisa Nyce of Source One Management Services, a provider of sourcing consultancy and category management services that has been in the game for a very long time compared to many of the niche consultancies out there.

In this post, she noted that purchasing has become more strategy-oriented, rather than transactional, but needed better tools to to their jobs. Specifically, if these Procurement pros wanted success, they needed to adopt:

  • Spend Analysis Software,
  • Cost Savings Tracking,
  • Supplier Report Cards, and
  • Stronger Legal Controls.

And they do for strategic sourcing success because:

  • you can’t wring savings from a category with no savings potential
  • savings aren’t real until they materialize
  • a supplier isn’t better until you have hard data to backup your claim
  • a lack of compliance can wipe out all of the negotiated value with one product seizure, fine, or consumer boycott

But when you think about it, while this is an evolution of the function into strategic procurement, it’s not the revolution we need for widespread success. Why?

In Procurement, most of the Spend Under Management is NOT Managed Spend.

For a decade or so, we’ve been hearing that one of the keys to Procurement success is getting more of that organizational spend under management because not only can the organization not save on spend that Procurement doesn’t manage, but Procurement can only wring so much in savings out of a limited spend bucket. And this is true. But merely dumping more spend on a Procurement organization not ready to handle it doesn’t generate savings.

There is a common fallacy that spend in the system is spend under management. It’s not. Just because the spend goes through the e-Pro/P2P/I2P system, that doesn’t mean it’s managed. It just means it’s tracked and available for analysis. That’s a great first start, but that’s all it is, a start. All spend has to be strategically allocated and appropriately sourced to really claim spend under management. And, more importantly, the spend strategy and decision has to be enforced. Negotiation a contract with Supplier X for 10% below current prices is useless if everyone keeps buying from Supplier Y. Deciding to go three bids and a buy is useless if the buy is from the highest price / lowest book value supplier just because the buyer knows they’ll deliver. Directing a user to a catalog with preferred items is not spend under management if the user can just punch-out to Amazon and buy from an overpriced third party because they want a non-standard product.

The Revolution of Purchasing will only happing when all Spend Under Management is truly Managed Spend.

Why’s it all about the platform when it should be all about the power?

As we all know, the last year has been all about the M&A frenzy as the big try to get bigger by gobbling up any player with any modules they don’t have or any player with customer bases in a region they aren’t in, and doing so in a manner that doesn’t always make sense to analysts. As the doctor indicated in his post last month on Surviving a M&A: The Customer Perspective, acquisitions should lead to synergies and do so from a customer, solution, and/or operations perspective.

Preferably, an M&A should culminate in synergies of all kinds. Why? An M&A that doesn’t synch on an operations perspective doesn’t reduce overhead costs, and that means you don’t get any economics of scale, which is something all the traditional textbooks say is the first thing you should look for. If there are no customer synergies, then there are no cross-sell or up-sell opportunities, and that’s typically the next thing the textbooks say you should look for.

And, especially in our space, if there are no solution synergies, then a lot of money is wasted, as the point of the acquisition should be to build a better, or at least, a more complete platform. Otherwise, one company is paying a lot of money for something that will just get tossed in the bit bucket because supporting non-synergistic platforms gets too expensive too fast and the non-synergistic pieces will get sunsetted faster than the sun in Alert, Nunavut in late February.

So why doesn’t the recent M&A Frenzy make a lot of sense to the doctor? Not only has a fair amount of it been lacking in obvious synergies, but a lot of it has been to simply expand platform offerings, without focussing on the power of the solutions being bought or how the acquisitions will help the platform.

The past year has seen the acquisitions of traditional catalog providers and leading spend analytics and optimization providers. In some cases, the power is limited … and in other cases the power is limitless. But in the majority of cases, to date, the integration has been pretty limited. It’s been more or less just plugging a module into a whole without an analysis of not only the power of the solution but how the solution could enhance the rest of the platform in new and innovative ways.

For example, let’s take optimization. Just plugging it into a S2P platform is pretty good, especially given the dearth of optimization solutions on the market today, but is it great? How do you take an offering to market that the market will understand is better than the other leading vendors which have optimization? After all, if it’s just the same process — construct RFI, send it out, get data, pump into model, get result, make award, push into contract management — what’s better from the perspective of an average Joe? But if you have an advanced Procurement solution, can plug it into the catalog and analyze not only the cost, but the total cost if the order can be piggy-backed on other orders from on-contract suppliers who can add it to forthcoming shipments, give you contract-level discounts, etc. that’s value. And if you are looking to assemble a standard kit for a new hire, can run all the various combinations and determine which variant is best over a given time frame, that’s value too.

And a catalog solution can enhance sourcing if it supports punch-out and integrated search and anytime a buyer is considering sending out an RFI, can be integrated to identify current market pricing and source suppliers from the data within the catalog and in punch-out sites. If the buyer compares this pricing to current pricing, this can let the buyer know if going to market will likely be good (if market pricing is significantly less than current organizational pricing) or bad (if market pricing is significantly higher and the best option is just to extend the contract with the incumbent if pricing will stay about the same).

At the end of the day, Procurement is about generating value — and if the platform addition doesn’t generate additional value, what’s the point?

When Managing Supply, Don’t Forget …

… sometimes supply comes from within the four (virtual) walls of your business. This is one fact that is overlooked by many S2P suites which are setup to acquire external goods and services (and, specifically, finished goods and services that typically fall into indirect categories.

When we are talking about MRO, the goods and services you need might be in a storage room in another building. If we are talking about consumables, like what you might need for a new hire, everything you need might be one floor down, left behind by another hire who, after the probation period, didn’t work out.

Inventory and Asset Management are key to successful Supply Management, and to successful Procurement. One should NOT buy what one does not need. This is the other form of demand management — which is two parts. The curbing of need for consumables (less paper for the printer, less usb drives when there are secure network share folders, etc.), and the re-use of what you have. Laptops or cell phones less than 6 months old should never go unused or reassigned. Expensive MRO replacement parts can often be couriered from site to site for $40 — why spend $5000 ordering another 4-pack to fix the production line and have your minimum “3” on hand when another facility still has 8 in storage.

When you are upgrading your e-Pro / P2P / S2P system, keep this in mind. Either find one that includes inventory management or integrates with an inventory management system, and you’ll save a lot.

But to truly win, make sure it supports end-to-end asset management. It’s not just expensive hardware that often collects dust in storage closets, is also expensive assets. Like expensive snowblowers that are bought, put in the basement, forgot about when the business gets a new, better, facilities contractor and the internal maintenance team doesn’t have to do it anymore instead of being sold or sent to another facility. Expensive 3-D software licenses that are not transferred to another engineer, and then bought again 6 months later when a new hire needs them. Patent or other IP library that could be licensed by sales to a partner for extra revenue. Etc. This last part is key. Not only are unused assets costing the company money (because thy were bought to fulfill a need, which is not being met by them, but costing the company money if they can be licensed, rented, or, in the case their value becomes limited, sold.

So when you are upgrading your e-Pro / P2P / S2P system, keep this in mind too. Make sure it’s inventory and asset management or integrates with an inventory and asset management, and you will not only save a lot, but help the organization generate value.

So You Need a Sourcing Platform That’s Next-Gen To You. Where Do You Start? Part II

In our last post we noted that there’s no single right answer or easy answer here. It’s very situational. We also noted that some consultants will always tell you to start with Sourcing, while others will tell you to always start with Procurement, even though it will often be a chicken and egg situation. You need to score big wins, and that requires Sourcing. But to pick the right categories, you need good data to analyze, and that requires Procurement. But that doesn’t take into account that sometimes the best starting point is SRM or CLM for an organization where the most benefit can come from supplier development (because the organization is locked into strategic suppliers) or CLM (because compliance is key to cost, and brand, control).

So where do you start?

It’s very situational dependent, but your biggest issue should drive it. So if you think your biggest issue is that:

  • you can’t do enough sourcing events

    start with e-Sourcing

  • you’re events are generating limited returns

    use decision optimization with extensive models that factor in all known direct & indirect costs and even costs of capital

  • you can’t find the right suppliers

    start with a modern SRM platform that integrates with a true supplier network for granular supplier discovery that takes a plethora of business needs into account

  • you have to (quickly) ensure compliance with a newly introduced regulation

    start with a CLM platform with embedded semantic-based / deep learning analytics that can quickly scan thousands upon thousands of contracts and determine those in compliance, those not, and those that need to be manually reviewed (due to the presence of non-standard clauses, enforcements that appear to be country specific, etc.)

  • your over-spend, and need for audit recovery, is too high

    start with an I2P solution with m-way matching (contract, PO, Goods Receipt, etc.)

  • your maverick spend is too high

    start with e-Procurement / P2P with an embedded catalog (with visual-guilt driven guided buying), flexible requisition & approval processes, and no-PO / no-Pay enforcement capability

  • you need to get your services spend under control

    start with a Sourcing platform with a VMS/CWM module or a VMS/CWM solution that can integrate with a BoB S2P solution

  • you are unsure of where your best opportunities lie

    start with a modern spend analysis solution with integrated prescriptive analytics that can go deeper than just top N

In other words, you let the issues drive the starting point. After all, we all know what happens if you try a big bang implementation and take on the entire extended S2P process at once … the project goes up in a big bang and you risk ending up as one of the top supply chain disasters of all time (especially since everything will need to talk to the ERP)!