Category Archives: Procurement Innovation

Why Your ProcureTech Initiative Will Fail … Part 1

We’ve written many series on best practice tech identification, tech selection, and tech implementation in the hopes of inverting the odds from an 80%+ chance of failure to an 80%+ chance of success, but given that failures are literally still happening on a daily basis, it seems that most people can’t be bothered to read best practice advice so today we’re going to flip the script and tell you all the reasons you’re going to fail and then you hope you go back and read the best practice advice we’ve freely given you (in series such as Successful Vendor Selection – The Series).

1. You Don’t Understand Your True Needs

You’ve never done a full end-to-end process analysis on your organization, you don’t understand how inefficient your processes are, what processes you actually need, why you need them, and how much better you could be doing. You just know that the KPI metrics you are tracking are not on par with industry averages based on what your overpriced consultants are telling you, that your balance sheet isn’t as good as best in class, and that you need to do something … and that something is get a shiny new tech toy that the overpriced consultants will help you select by telling you who to invite to your RFP. (And you should know all the problems with this — they’ll only recommend the partners they have sycophant partnerships with, get referral and implementation fees from, and who will ensure that they remain your overpriced consultancy of choice.)

2. You Don’t Understand What You Already Have

Once you understand what the correct processes are, why, and where the automation points are, you need to revisit the systems you have to see where they can solve the problems. Chances are you have a number of suites, supply chain platforms, and ERPs with easy to implement plug-in modules that solve a lot of the problems you have without buying any new systems. And even if new systems might do it better, chances are the improvement won’t be worth the extra money, downtime, and change management — which will all cost you dearly. The reality is that if you can get an 80% solution today, with tools your people are already using, that’s much better than a potential 95% years in the future.

3. You Don’t Understand What Your Capabilities Actually Are

By this we don’t mean your process capabilities or technological capabilities, we mean your actual functional capabilities. Your domain knowledge, your ability to execute on that domain knowledge, and your natural efficiency. It’s pointless improving processes to apply more advanced techniques or employing modern technology to speed up processes when you’re not capable of managing those advanced processes or technology. If you employ processes and systems you’re not ready for, they won’t deliver any results while costing you millions of dollars in the system selection and implementation processes.

4. You Don’t Understand How Long It Will Take to Upgrade Your Capabilities

Even if you figure out you need to upgrade your skills and those of your team’s, even if you posses a fair degree of human intelligence, you don’t know how long it will take. It’s not just buying a knowledge dump from a consultancy or giving your team a 5-day crash course, because knowledge that is not applied is not retained. There’s a reason College and University courses give assignments and projects as well as exams — the more you apply, the more you retain. If the imparted knowledge is not applied, it will not be retained. Until your team can start applying, repetitively, the new knowledge in improved processes, they won’t retain it and they won’t advance. The best training will be a day or two a month over months, not a week. And that’s for stage 1. It will take years to get your team from average to mastery. We’ve known for decades that major transformation projects take 5 to 10 years, and that the average journey to best in class for the committed is 8 years. Technology doesn’t change that. The longer you choose to ignore this fact, the longer you will fail.

To be continued in Part 2.

Cost Reduction … it Starts With Cost Increase

It used to be cost reduction, which was focussed on cost cutting, started with the one-trick pony of cost cutting by any means necessary, which typically took the form of e-Auctions, RFPs to new suppliers, and GPOs that could aggregate and leverage huge volumes — all tricks that are rearing their ugly heads again with the rapidly rising costs thanks to inflation, tariffs, and global instability.

They all work just fine in the short term, but they all come back to bite you in the backside in the long term. Here’s why:

  • e-Auctions: find savings by squeezing margins, and you can only take those out once, and once inflation comes back, costs go up
  • RFPs: designed just to find the absolute lowest price attracts suppliers who cut corners, underpay their staff, and offer no service while alienating your current, more trustworthy, suppliers
  • GPOs: can aggregate volumes and lower prices, but then you are dependent on them, and paying their markup … forever

None of these is the long term answer.

When we first started discussing cost reduction two decades ago, the key methods we focussed on were:

  • strategic supplier relationships and customer of choice: so that they put the effort into being your supplier of choice and finding their own ways to keep costs down (streamlined operations, better raw material sourcing, etc.)
  • supplier investment and development: if the supplier is smaller, or not as advanced, they’ll only do so much on their own, so your efforts to invest, improve, and guide them (through early payments, low-cost new line financing, etc.) could greatly lower your costs over a multi-year engagement
  • strategic sourcing decision optimization: where you did a multi-objective optimization that took all of the cost factors (unit, transportation, warranty, service, waste etc.) into account as well as risk (that could cause “savings” to evaporate over night) and quantitative assessments of other key factors

And those are all good techniques in (semi) normal times. But these are not (semi) normal times. These are almost unprecedented times. Between natural disasters, geo-political conflicts and wars, and terrorism, we are dealing with unprecedented simultaneous reductions and closures of major maritime shipping lanes (the Panama Canal, the Red Sea, the Strait of Hormuz), unstable (and rapidly escalating) fuel costs, regular supplier and carrier failures, unpredictable crop and raw material availability, etc. all at the same time. Old friends becoming foes, or at least frenemies; friend-shoring, near-shoring, and home-shoring finally gaining ground (despite being promoted and the right answer for decades); and supply chains being swapped whenever possible.

We’re in times where these techniques, while still good, can’t always address all of the situations. Plus, if you’re constantly adapting to what’s available now, versus focussing on what you should be building, you’ll be in a constant, unstable, state of affairs, caught off guard with every flux, and constantly on the brink of ruin.

You need to stop working sourcing event to sourcing event, procurement to procurement, and disruption to disruption and start working on transforming your supply chain to a more resilient long term supply chain. This will require identifying which safe countries and regions (likely to have long term geo-political and trade stability with your home and/or destination countries) you should be doing business with, where solid supply bases could be, and how you could construct a real supply chain from the source countries to the destination countries that don’t depend on unstable source points.

Then you have to engage the carriers, find partners to help you manage the export and import requirements and take advantage of FTZs (free trade zones), build or acquire intermediate warehouses and cross-docks, and be ready for trade with the local suppliers. Those will typically include multiple suppliers you are not currently working with, and they may need to upgrade their production lines, operations, services, etc. to serve you to your level of expectation. This will incur costs that your suppliers and partners will need to incur, which will need to be passed onto you. Which means, in the short-to-mid-term, your costs will increase. But if you design the right, stable, supply chain networks that you can use for years (or decades), develop the right suppliers, and maintain volumes, as operations improve, up-front costs get amortized, and economies of scale get optimized, costs will go down, and with long-term agreements, over multiple years, your company will see previously unrealized savings while your peers see their costs go through the roof.

So if you want to save money, you better be prepared to spend.

What Data Do You Need For Successful Procurement?

In a comment to a recent post over on Linked in, Mr. Buckingham asked Do you think that data driven decisions are clearly the correct thing to do, but that they tend to maintain the status quo and can be restrictive to innovation?

I couldn’t leave this one alone and responded that:

“They only maintain the status quo IF the data collected and constraints created are limited to those that support the status quo … which, sadly, they usually are …

As the Sourcing Optimization Grand Master Paul Martyn recently pointed out — the real context never gets mentioned, stakeholders just add “necessary” constraints, costs, and weightings that they know will heavily favour the incumbent

And as the Sourcing Simplifier Garry Mansell regularly points out, organizations fail because they only include the best lagging indicators in board presentations to ensure they can keep doing the same old, same old

But if you instead collect [only] external data on the market, and not internal data that supports the status quo, the tendency will be to focus heavily on innovation and change.

Data is the way to go, but it has to be evenly distributed across internal and external so you can get the full picture.”

Seemed like this is something that should be elaborated on.

For example, let’s say Procurement is trying to gauge the effectiveness of their category sourcing in a key category. They could demonstrate this through internal or external metrics. Internally they could show the average price per unit decreased year-over-year by a significant percentage. Externally, they could retrieve the average market price for the primary products and show they are paying less. If they only ever use one of these metrics, and it stays good, as Mr. Buckingham notes, it maintains the status quo, even if it shouldn’t. In order to truly gauge effectiveness it has to, at the very least, measure both. Just reducing costs doesn’t mean you are getting the best price, and just beating the market doesn’t either. In some categories, market quotes / GPO rates / etc. are never the best price, which is dependent on what you actually need, who, and where, you are getting it from.

Digging deeper, if the specs are over engineered, you restrict to a suppliers in a certain geography, or only deal with incumbents, you’re not getting the best price. So you not only need to take internal and external measures and benchmarks, but ensure you are taking the right internal and external measures and benchmarks.

And then, if there are hidden costs (from increased risk, revised shipping / order lead times, quality reductions, etc.), take this into account as well. (Which is why you need strategic sourcing decision optimization with what-if scenarios, as we’ve been telling you for the past 20 years.)

Only when you identify the right data and collect the right data can you make the right decision, which might reinforce the status quo, might tell you do do something completely different, or tell you to split your bets and do both!

The reality is, you should always make data-driven decisions, but you can only do so if you are collecting the right data for your needs.

For a Successful Procurement, you need Lagging, Lasting, and Leading Indicators!

A recent post by Garry Mansell on why some businesses fail while the numbers still look fine really makes the case on why you need all three types of indicators to be successful.

According to Garry, it happens more often than people admit. The revenue doesn’t collapse first. The reputation wobbles first. And once reputation wobbles, revenue follows on a delay. You can usually see it early, but it appears as weak signals. A different tone from customers. Partners becoming slower to commit. Hiring taking longer. Senior candidates asking slightly sharper questions. Suppliers quietly tightening terms. Teams becoming cautious about promising anything externally. It’s never announced. It’s felt.

The reason boards get surprised by this is that most board packs are built around lagging indicators. By the time the numbers reflect the problem, the organization has already lost something harder to regain … belief.

Revenue numbers are lagging indicators, but those are key indicators in the board pack. What are needed are lasting — sales cycle time — and leading — sales cycle time trend changes — indicators. If the revenue cycle time is increasing, and has been for the last two or three quarters, that’s a really bad sign, even if revenue is more-or-less staying constant because a flat organization can only support so many sales cycles, and revenue will start falling if they drag out much longer.

The same problems appear in Procurement presentations, which typically have the opposite problem, especially when trying to sell new processes or technologies just implemented. They will quote leading indicators like identified savings, and ignore the lasting, average cost per unit reduction adjusted for inflation, or lagging, actual savings vs. projected savings 12, 24, and even 36 years ago (for three year contracts). After all, as far as the CFO and CEO are (rightly) concerned, it’s not savings if it doesn’t hit the P&L!

So make sure to include all three indicators. In Procurement:

  • leading indicators define what should be possible
  • lasting indicators define what path the organization is on
  • lagging indicators define what the Procurement organization has actually achieved

Just like, in Sales:

  • lagging indicators define what happened in the past
  • lasting indicators define what is happening now
  • leading indicators define what is going to happen … and how good, or bad, it’s likely to be

To remain successful, revenue must, at least remain on track, if not increase in an organization just like Procurement success must also remain on track, if not increase.

Another Reason You Can’t Wait Too Long for the CPO!

In our last post, we reviewed a post by the Great Garry Mansell on the rule of two where he outlined when an organization needs to hire a COO in order to continue to grow. We noted that you can use the same same logic to determine when you should hire the CPO, which should happen earlier than most organizations believe.

In a follow up post on the hidden tax, Garry gave us another great reason to hire a CPO early.

Basically, as organizations grow, they spend money to feel professional. It’s a hidden tax that grows over time that not only (greatly) reduces their EBITDA and profit, but also decreases their resiliency.

As Garry points out, as companies grow, they spend money to feel professional. They add tools because someone recommended them. They add layers because it feels grown-up. They add process because it looks like control. They add roles because it feels safer than making a hard choice about what to stop. And then they end up with three to ten times as many tools as they should (just look at the average number of SaaS tools in an organization), and spend two to three times as much as they should be. And the processes they add are not the right processes because they don’t have the expertise to define best-in-class sales, marketing, procurement, etc. processes because they don’t have a seasoned CRO, CMO, or CPO to define them. They hire people they don’t need to get stuff done that should be automated or simplified by better processes (that could only be defined by the right senior people who should be hired at the right time, and funds saved until they can be).

This is another reason why you need a CPO early. A CPO will vet not only the reason, but the ROI, of every proposed product/platform and prevent unnecessary purchases and, if something is required, find the best product/platform. They will prevent processes that don’t add value. And they can even help determine when hires are really needed or when better platforms and processes can delay the need.

Procurement will focus their spend on the things that improve outcomes. And they will happily cut the things that improve optics because optics don’t carry you through volatility. Cash and speed do. And Procurement will help you conserve cash and act as fast as it is prudent to.

As Garry states A “good company” that has protected margin and kept agility will outlast a “professional company” that has simply become expensive. And a good company is one that puts Procurement front and center. After all, as Coase clarified, Procurement is the reason a company exists!