Category Archives: Sourcing Innovation

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?

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)!

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

There’s no single right answer or easy answer here. It’s very situational.

Some consultants will always tell you to start with Procurement because:

  • you get manpower and transactional savings immediately
  • you will get the majority of your spend properly categorized in ONE system (which will enable better spend analysis and opportunity selection later)
  • you will stop overpaying and duplicate paying invoices with 3-way matching and reduce recovery requirements
  • you will reduce cycle times and be able to take advantage of early payment discounts
  • and so on …

Some consultants will always tell you to start with Sourcing because:

  • you can invite and compare more supplier bids with modern RFI tools
  • auctions are a great way to realize a quick category price reduction
  • timeline reductions allow you to source more spend
  • portal-backed SIM makes it easy to keep track of suppliers and contacts with up to date information
  • etc.

But this doesn’t take the chicken and egg situation into account.

  • you can’t identify significant savings without a modern optimization-backed platform-backed sourcing solution that allow you to identify new opportunities, which means you need to start with a Sourcing platform if you need savings fast
  • but you can’t identify the best categories without good data, which is captured in a good e-Procurement/P2P system, which means you need e-Procurement to capture the data you need to identify the right opportunities (using spend analysis in the sourcing platform)

Or the fact that the biggest savings opportunity for your particular organization might be a best-of-breed niche SRM or CLM solution due to your biggest savings opportunities lying in supplier development or compliance.

So where do you start? Stay tuned for Part II.

For Those Who Recently Adopted Sourcing, Start Thinking About Next Generation Sourcing Now!

SI has been about next generation sourcing since the day it began. No matter how good you think you have it now, it’s not good enough. Why? Most of you are still on last decade’s sourcing platforms which, especially if you never had anything like them before, is a great start (and maybe beyond your wildest dreams if you were in e-mail and spreadsheet world), but not good enough. What you are going to find out, as SI told the Procurement leaders seven years ago today in its post on Next Generation Sourcing, all good things come to an end.

As we noted for those of you with first generation and early second generation systems,

  • Once you institute RFX, the manpower savings from automating bids can only be claimed once.
  • By the time an organization gets to the third auction, there are no more savings to be had as the fat from supplier margins has been squeezed out.
  • Once the allocation has been optimized across the supply base in a way that minimizes unit costs, transportation costs, (interim) storage costs, etc., re-running the optimization won’t lower costs further unless something changes — such as the identification of a new supplier, an alternate material (that is cheaper), additional demand (that increases the economy of scale), or a more powerful optimization model is provided.
  • Once contract management and monitoring is put in place and no invoices are paid that are not for delivered, defect-free products, at contracted rates, there is no little on-contract leakage to be stopped.
  • Once controls are put in place to stop off-contract purchases that should be on-contract (through integration of the e-Procurement system with the Contract Management system), there is no little off-contract leakage to be stopped.
  • Once spend analysis has identified all the opportunities, the savings won’t actually materialize until something is done about them. This something cannot be appropriately identified unless the appropriate information is available to the knowledge worker

And, more importantly, for those of you with later second generation systems:

  • Once a SIM with a powerful supplier portal and information / (compliance) documentation monitoring and alerting system is put in place, there is no additional time savings from information maintenance offloading.
  • Once a SPM which automatically collects organizational data and metrics is put in place, there is no additional time savings from automating supplier scorecard production.
  • Once a SRM with proper corrective action requests / corrective action monitoring and integration system is put in place, there is no additional time savings from quick-and-easy semi-automated resolutions.
  • Once an audit recovery system is put in place that not only 3-way matches invoices but identifies when rebate or discount targets are hit and automatically applies the discounts to current and future invoices, there is no more savings from high-priced audit recovery services.
  • Once integrated contract negotiation and e-Signature is implemented, there is no more process time savings from being able to track all updates by both parties and do sign-offs quickly.
  • … and so on

At some point, your year-over-year returns will start to trail off … somewhere between the three and five year mark, depending on how much spend you are able to put through managed sourcing events every year and how much you are able to use the system to support it. So don’t stand still. Start identifying your biggest weaknesses and looking for the next generation system to address them when the opportunity costs of not taking advantage of the opportunities you are missing gets too high.

So where do you start? Stay tuned.

How Do You Find Hidden Costs?

We all know that there is never a fixed arithmetic formula between the cost of producing, and transporting, the goods and services sold to us and the prices charged for them … sellers charge what they can get, and if we don’t do a good job of figuring out the true cost, which can be hard to do, chances are they are building in a hefty margin.

But the margin is only one hidden cost. There’s other hidden costs baked into the COGS by the supplier, some of which even they may not be aware of. But if you want to bring costs down, you have to find them. So where do you look?

Start by investigating each of the main production costs:

  • raw materials — what are your T1 suppliers paying to the T2 suppliers
  • energy — production always requires energy … but there isn’t always one rate
  • labour — if there is temp labour / contract labour involved, is it market rate
  • overhead costs — facilities, financing, etc. — these could be fixed, or they could not … for example, if the supplier has to borrow to fund operations until they get paid, what interest rate are they paying … and how does it compare to your rate? might be cheaper for you to pay them early in exchange for a discount that exceeds your cost of capital

That’s how you them. So what do you do next?

Come up with a plan to address any costs that look high:

  • if material costs are too high, can you buy on behalf of suppliers at a better rate? can you find alternative materials?
  • if the market is deregulated, can you help the supplier identify a better option? are energy requirements so large a supplier would do better off with its own plant? should you invest in it if there are multiple suppliers in the region paying absurdly high energy costs?
  • should you share labour negotiation and management best practices to help your supplier keep labour costs down
  • if suppliers have a high cost of capital, help them out … reduce their cost, reduce yours; maybe you can identify facility upgrades that would save them money

It’s not as easy as it sounds, but it’s not that hard either. Just takes data gathering and analysis.