Category Archives: Sourcing Innovation

Supply Management Priorities are Hard to Define

As per yesterday’s post, figuring out your priority can be particularly painstaking because the maximum benefit is only realized when certain supporting systems are in the mix.

If we reverse our last post, you might well think that you need the following core modules to benefit from the indicated modules, and you might well be right.

Spend Analysis –> Product Management, Category Management
e-Negotiation –> Spend Analysis, SSDO, Guided Buying
SSDO –> Spend Analysis
Contract Management –> Spend Analysis, Requirements Definition, Product Management
Catalog Management –> Supplier Management, e-Negotiation, Guided Buying
Purchase Order / Invoice Management –> SSDO, Guided Buying, Catalog Management, Supplier Management
Supplier Management –> Opportunity Analysis, e-Negotiation
Risk management –> Opportunity Analysis, Contract Management
Product Management –> Contract Management, Guided Buying

But something interesting falls out of this. You don’t really need anything to get started on supplier management, and the only thing you need to benefit from e-Negotiation is a way to make use of the data (be it spend analysis, optimization, category-management based guided buying, etc.). And when you start on your supplier management journey, it’s supplier information management (followed by data-backed supplier performance management).

What does this tell us? The starting point is a (set of) solution(s) that helps you get your supply management master data under control. After that, the primary buying categories, the market, the internal situation, and a host of other factors will need to be balanced to select your next (set of) priority(ies), but without data, you’re not going anywhere.

What’s Your Supply Management Priority?

Supply Management Mastery is an elusive goal. As SI has been documenting for years, in order to master supply management, you have to manage a slew of Source to Pay processes as well as related Operational, Finance, and Risk processes.

But this is not easy when you consider the many steps involved in even source to pay. Spend Analysis. Opportunity Analysis. Requirements Definition. e-Negotiation. Strategic Sourcing Decision Optimization. Contract Negotiation Management. Catalog Creation. Guided Buying. Purchase Order Management. Invoice Management. Supplier Management. Risk Management. Product Management. And so on.

You have to master all of them, but you can’t work on them all at once. You have to make priorities, and eliminate all but the top three (3). And even then, you might not be able to tackle all three if each would require a separate system.

So what’s your priority?

Spend Analysis gives you insights, but you have to be able to act on them. That requires e-Negotiation, SSDO, contract management, etc.

Opportunity Analysis goes beyond just spend to determine if your opportunities are spend related, supply base related, process related, or otherwise.

Requirements Definition helps crystalize organizational needs and helps the buyer zero in on what really matters. But then it has to create good contracts and statements of work.

e-Negotiation helps capture all of the back-and-forth between both parties so that the organization can build supplier profiles and take advantage of that. Provided the organization has deep supplier master data management.

SSDO can find the optimal cost allocation across suppliers, products, and carriers and delivers an average savings year over year that exceeds 10%. But it requires deep models and lots of data. And where does that data come from? Typically from e-Negotiation.

Contract negotiation management is great for creating great contracts. But you need product details, SOWs, risk management and liability clauses, and other data.

Catalog management software is great, as long as you have a supplier management portal to manage the supplier the catalog comes from.

Guided buying is even better, but only if you have the solutions to guide the buyer to that captures the majority of organizational spend. Guided buying that only works in an incomplete catalog is more of a frustration than a solution.

Purchase Order Management can eliminate a lot of paper, provided there are catalog, sourcing, etc. systems to integrate with to auto-generate those POs on buyer actions.

Invoice Management systems are great, as long as you have POs, contracts, goods receipts, and other documents to m-way match against! Otherwise, they just collect e-paper that still has to be manually reviewed. (And in the average organization, that still typically results in them being printed.)

Supplier Management is great for managing information, relationships, and performance, provided their are networks and portals to collect the data from, and internal systems to create and manage scorecards to define performance improvements on.

Product Management is key to understanding the product and category dynamics, but then you need category management strategies to map to.

And, these days, instantiations and realizations of risk can wipe out the savings from 10 sourcing projects, so risk management is paramount, but detecting and monitoring for risks requires a slew of systems internal and external and lots of data.

In other words, every system is great, but generally only if you have one or more systems to collect the data it runs on or supplement key functionality.

Which again begs the question, what are your priorities? Otherwise, you’ll never know where to start.

IS TCO a No Go Without Optimization?

At this point in time, very few people are still in the stone ages of Supply Management and buy on price per unit (PPU) alone, the first level of sourcing value. However, there are still a number of buyers in a number of organizations that still buy on landed cost or total cost of acquisition (TCA) and buy solely on the sum of price per unit, transportation, duty, tariff, temporary storage, and other costs that are incurred from the time an order is placed until the time the product is received. These organizations are still in the dark ages of Supply Management and need to find the light very, very quickly (especially with Trump Nation and Brexit on the way). And while most modern Supply Management organizations attempt to buy on total cost of ownership (TCO), the third level of sourcing value, not all succeed.

TCO is the most commonly used metric today by analysts, consultants, vendors, and (I’m sorry to say) bloggers alike. It is designed to be a comparative cost metric that quantifies the overall cost of each acquired unit from a direct, indirect, and quantifiable market perspective that takes a broader look at the cost of a product from an acquisition, utilization, and delivery perspective. In addition to the landed costs, it typically also considers indirect utilization, supplier switching, and transaction costs as well as cost adjustments for quality, waste, and brand power (if your supplier has a brand that increases the selling price of the product you create with the component).

TCO is designed to capture the ‘true cost’ of a product (or service) from a supplier and does a much better job of helping you to compare apples-to-apples when determining the best buy for your organization. And even though it’s not the ultimate metric, as that’s total value management (TVM), the next level (and pinnacle) of sourcing value measurement, you cannot apply TVM until you have mastered TCO (which is a big component of TVM just like total cost of acquisition is a big component of TCO), and you can’t master TCO until you can model it.

But most sourcing solutions don’t let you model TCO. And the few that do don’t let you optimize it. That’s why it’s important when selecting a strategic sourcing solution you get an optimization-backed solution with support for deep cost models and, preferably, bills of material. They might still be few and far between, but a few more hit the market in the past year, and we expect more will be coming due to the power, and utility, of such solutions.

So is TCO a no-go without optimization? Not necessarily, but it sure is a lot harder to do without optimization.

One Vendor Won’t Rule Them All … And One Ring Won’t Bind Them!

A common question (from buying organizations and investors alike) these days is which vendor is going to win out in the end? Who will still be around in 5, 10, and 20 years and which horse should take all the bets?

The answer is no single vendor is going to win. And the reason for that is many-fold. One, different types of companies need different types of vendors. That’s why SpendMatters SolutionMaps (where 3.5 of the 4 SPT maps were developed by the doctor) classifies vendors according to six different buying personas. While six personas doesn’t quite cover all the buyers out there, it covers the majority and shows that most vendors don’t do everything well.

Two, different locales around the world have different regulatory and compliance requirements, as well as (culturally) different ways of doing business, and one vendor is not always going to be the right fit, if they are even a fit at all.

Three, different organizations are at different stages on their e-Sourcing journey and need a different amount of complexity — and if they are just beginning, there’s no way they will be able to start with, and adapt to, a complex 42-step sourcing platform designed as a one process fits all. (Yes, those still exist, and they are the reason some organizations are abandoning major players with solutions they’ve invested millions in for mid-market solutions that cost a tenth of the price with a tenth of the functionality.)

As a result, different organizations value different things depending on where they are on their journey. Companies just starting their e-Sourcing journey just want a simple, configurable, workflow that can be configured to minimal requirements. Companies a bit further along want to easily centralize and manage their supplier information. Companies further along want to be able to centralize all their spend and do advanced analytics. (Or vice versa, depending on who whispered in their ear first.) Companies quite advanced on their journey want advanced modelling and optimization capabilities.

In other words, the sourcing platform with the best workflow management solution will be a winner among the newbies. The sourcing platform with the best supplier lifecycle management platform will be a winner among those that need good supply base management. The sourcing platform with the best analytics will be a winner among those that need a good understanding of their spend. And the sourcing platform with the best optimization capability will be a winner among those that need to extensively model and optimize their supply chain.

Just like there are a multitude of winners in real estate who can make money focussing on low rental, suburban housing, condos, high-end mansions, low-end commercial, and high-end commercial, there will be a multitude of winners in the sourcing space. The best in each category — and each persona — will win.

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?