Category Archives: Spend Analysis

How To Increase Spend Compliance

A recent item over on the CPO Agenda addressed “How to Increase Spend Compliance” because, as we all know, procurement organizations still face opposition to initiatives to channel indirect spend through preferred suppliers. The article chronicled advice from Carrie Ericson, VP of Procurement and Analytic Solutions, at AT Kearney. This is what she had to say.

Treat it like an opportunity.
It might be a problem, but it’s also an opportunity to cut considerable cost. There’s a chance for procurement to deliver greater value by driving standardization to existing contracts through preferred suppliers.

Focus on the right thing.
A mature organization with quality contracts with preferred suppliers can focus on compliance, but an immature organization without quality contracts with preferred suppliers who can provided products and services that meet organizational needs cannot. This organization must first focus on vendor identification, supplier selection, strategic sourcing, and contract observation.

Procurement must be good at arbitration.
Where you have a category that a lot of different functions within the organization buy and use, you get a lot more perspectives on which is the right supplier or the right contract. It’s Procurement’s challenge to not only get them to align, but get them align in a way that meets corporate needs.

Procurement must understand that buyers think their needs are special.
Even if a user understands that a contract is good for the company, the buyer may still think they need something just a little bit different for their needs. Or they may have developed a relationship with a certain supplier over years and feel that no other vendor can provide the same level of service to them. Or they may feel that it will take too much time, and cost too much money, to transition to a new supplier because their needs are special.

Focus on thresholds, not 100% compliance.
A broad compliance initiative across all contracts and preferred suppliers is risky because it assumes that all the contracts and preferred suppliers procurement has in place actually meet the business users’ needs. If care was taken, this may be the case, but if there are a large number of diverse business units with (seemingly) diverse needs, it may not be feasible, or cost conscious, to meet all the needs with one supplier. Sometimes, it’s cheaper to let low spend business units (on that category) do their own thing. Procurement should establish a spend threshold where anyone having to spend over a certain amount needs to use the Master Contract or get Procurement involved. (And if a proper analysis is done, the Threshold can always be designed to insure that at least 80% will be on contract by default.) Then, the Procurement organization isn’t wasting dollars chasing pennies and if a unit’s needs truly are different, they can still get the right product (at the best value with the help of Procurement).

Visibility into what’s going on is a huge obstacle.
Much of the data CPOs can get their hands on is historical and the money has already been spent. (And that’s why there is no real-time spend visibility and it makes no sense to require that the central data store / spend analysis cubes get updated in real time. Even a spend cube for your fastest moving category doesn’t need to be updated more than once a week. Put the resources into analysis, not updates.) That’s why the biggest challenge for the CPO in driving benefits to the bottom line is influencing that spend before it actually occur.

And


Compliance is typically achieved through stakeholder alignment and outreach by Procurement.
This is the most important point in the article and, unfortunately, it’s buried at the bottom where you are likely to miss it. If the stakeholder’s aren’t aligned, they won’t buy in, and the only way you get buy in is to insure they are part of the process from day one. All of the key stakeholders should be part of the vendor identification, supplier selection, and strategic sourcing; every stakeholder who is affected should give a chance to provide their input up front, and before a contract is signed, the sourcing team should hold a session to explain why a supplier / contract selection is best for the company and each affected stakeholder should be given one more chance to provide their input. Stakeholders who feel they are part of the process are much more likely to accept the results than those who are ignored and have a contract forced on them. While it’s true that there are those whom you’ll never be able to make happy, this will get you to compliance faster (even though it’s more work up front) than any other effort you care to undertake. Work with your stakeholders, and they will work with you!

Six Secrets of Successful Freight Tenders

A recent article over on Canadian Transportation and Logistics on “the five secrets of successful freight tenders” had some really great tips for getting the best bang for your buck that makes the article a must read. However, it missed one very important tip, which is probably why it claims that Freight RFPs are analytically challenging. (This used to be true, but it’s not anymore. If it’s still true in your organization, then your organization is stuck in the middle ages and it’s time to at least step up to the industrial age.)

Before we get to the tip it missed, let’s start with the tips it provided because at least one of these is overlooked on many a project.

  • Sell your freight.
    Provide as much information as possible about your freight requirements. For each product, include transport, storage, volume, and frequency requirements. The more accurate and complete the RFx, the better quote the carrier can give you. Without detailed information, carriers will build in a “risk premium” so they don’t end up with “bad freight” and both parties lose.
  • Provide enough time.
    Without enough time to analyze your requirements and consider the fit, you’ll get a rough bid that won’t be the carrier’s best proposal. Remember that, depending on the time of year, it will likely sit on someone’s desk for a week, then in pricing for another week, before someone gets to it in the third week. If detailed analysis is required by the “number cruncher”, it could take a month to get the best bid.
  • Standardize the accessorial program.
    Variety and complexity of programs can make the analysis of bid responses unnecessarily complex, as you will be trying to compare apples to oranges to potatoes. And while maybe you can force fit compare the first two, the third poses quite a challenge. Create one program with one uniform set of charges that applies to all carriers.
  • Fully analyze rate proposals across the board.
    Typically carriers will give you aggressive discounts on major lanes to lure your business, but keep discounts to minor lanes minimal, or non-existent. As a result, you may pay more for freight overall if you end up shipping more on secondary lanes.
  • Benchmark results
    Freight patterns can change, and the net result is that a new freight schedule expected to save you money costs you more in the end. “Shadow rate” your current shipments using at least your last rates (if not your last two rates) to get a feel for what freight profiles give you the best deal overall.

But most importantly:

  • Use a sourcing package that can handle freight optimization and multi-level freight bids.
    A good strategic sourcing decision optimization platform (as provided by Algorhythm, BravoSolution, CombineNet, Emptoris, Iasta, or Trade Extensions) will not only allow for full analysis of the entire freight bid, but allow for the easy import of multi-level freight bids from excel spreadsheets. More specifically, these modern packages allow a carrier to define (inter)national rates by weight, volume, or distance, and then override these by region, and then by lane. This will allow a carrier to quickly define standard bids for low-volume lanes or lanes that they are not interested in and focus in on the lanes that fit their network and that they want to aggressively bid on. A carrier can bid on a 10,000 lane global sourcing project in a couple of hours. This decreases response time and increases bid quality.

Innovation in Sourcing

Today’s guest post is from Chetan Raniga, who is General Manager, Americas at Trade Extensions.

As someone who’s been in the strategic sourcing field for over ten years as a consultant and product manager, it’s been interesting to see the rapid evolution of sourcing solutions over the past few years. Leading solution companies now realize that users need solutions that feel familiar; that’s why Excel integration is common among leaders in the supply management arena. It’s the same reason Coupa has screens that almost mirror Amazon.com — providing an interface and workflow that’s both familiar and intuitive. Another example is the use of dashboards — the charts and alerts in Trade Extensions remind users of Mint.com, a popular personal finance site, though they show vastly different types of data!

Here are some other changes for the better:

Collaboration and Workflow:
The sourcing solutions of the past were extremely tactical (e.g., automating the process of running an RFQ or auction for a specific category), and therefore, didn’t give buyers the ability to share ideas, exchange documents, and view the real-time status of their sourcing initiatives. Now, platforms provide robust project management capabilities with Gantt charting, custom workflows (e.g., only have new suppliers go through the qualification step), document sharing, and Skype-like chat features. A buyer can see exactly which suppliers, team members, and stakeholders are online, and instantly communicate with them. Audit trail and logging capabilities have also gotten stronger, which is important for the confidence of both buyers and suppliers in using these platforms. Multiple teams are now using these platforms to share data. For example, a Direct Materials sourcing group can incorporate freight pricing from a tender conducted by the Logistics team. The group can use the platform to determine which items will use the suppliers’ freight (delivered pricing) and which will use the 3rd party carriers’ freight (FOB plus freight).

Flexibility:
Systems of the past didn’t provide the flexibility that we have today in collecting inputs. Labels such as ‘Price per Unit’ would be hard-coded or the cost formula would only support a limited number of operators and functions. Data entry was also cumbersome and error-prone since it involved either manually entering or copying-and-pasting vast amounts of data. Today’s solutions integrate with Excel, so that existing data and formulas can be easily leveraged. For example, item, demand, and cost component data stored on separate Excel spreadsheets can be uploaded with one click. Even better, some solutions allow users the ability to customize the supplier’s bid form. This is critical to change management since companies can continue to use their existing bid forms in the bid gathering phase but obtain the decision support and reporting benefits in the analysis phase. These improvements have led to even shorter RFQ/P creation times.

It’s also now possible to run auctions with optimization (a step forward in utility from the original concept of reverse auctions), and to run RFQ/Ps with feedback — blurring the line between RFQs and auctions but also going further by providing custom feedback (e.g., a custom message of “Not Competitive” is shown when the bid is x% greater than the median price).

Usability in the Analysis Stage:
The one sourcing area that has lagged in adoption has been the use of optimization (which the doctor has defined as the application of one or more rigorous analytical techniques to a well-defined model to generate the absolute best decision from a multitude of possible alternatives in a rigorous, repeatable, and provable fashion). It sounds complicated, and in the past it really was. For example, if a customer wanted to see what the result would be if all the business went to incumbents at their current proportions, then she’d have to create a rule limiting allocation for each item and affected supplier. That’s painstaking when you have a couple of hundred items — but most projects had thousands of items! Nowadays, in a modern optimization solution (which include the solutions by Trade Extensions and BravoSolution), the buyer just selects one rule, written in plain English (as shown below).


Even better, new platforms allow buyers the ability to create rules in Excel and then upload them. In the example below, the buyer is setting limits by plant and supplier simply by completing a table.


Reporting:
The solutions of the past didn’t offer much in terms of reporting. Most had a couple of pre-defined reports that exported to Excel. Buyers had to spend additional time modifying the reports — even changing labels and creating pivot tables — before they could present the results to their peers and managers.

Solutions today have made major strides in this area. Leading spend analysis tools (which include BIQ as well as Trade Extensions) allow users to create custom reports that can be saved as templates and re-used. The ability to choose specific dimensions (rows), columns (facts), and other information means that users no longer have to go outside the system for further manipulation. Some tools even allow the ability to drill-down/up on data (e.g., view allocation data by country first, then by region, then by state, and finally by city/plant).

We have heard buyers comment that their analysis time is shortened by three-and-a-half (3.5) weeks on average by using the new decision support and reporting capabilities mentioned above.

Thanks, Chetan!

Better Data On Its Own Will Not Ensure Success

A recent post over on the HBR Blogs by Daryl Morey that stated that “Success Comes From Better Data” is on the right track, but not quite right. Better data is a necessary condition for success, but not a sufficient condition. In order to make good decisions, you need:

  1. Better Data
  2. Better Tools
  3. Smarter Analysts

When Daryl says that you need raw numbers, not the people and programs that attempt to make sense of them, he’s missing the point that raw numbers need to be distilled into information through the use of good tools that can be distilled into knowledge through smarter analysts. Without the right knowledge, a business leader will not be able to make the decisions that lead to success. While it is true that real advantage comes from unique data that no one else has, this data must be transformed into knowledge. It’s a Knowledge Economy, not a Data Economy.

Organizational Data is Organizational Data — NOT Department Data

While reading “Cuts from the Center”, which records a recent CPO Agenda Executive debate held during this past winter, I couldn’t help but notice Nikki Bell’s comment on how she gets frustrated when we make excuses about how we can’t have the right data, or about people protecting data. I have to agree. This is what kills Supply Management initiatives that could save the organization Millions (and in some cases, Billions) of dollars.

And it’s ridiculous. Everyone in the organization needs to know that organizational data IS organizational data and that anyone who has access to organizational data has access to ALL organizational data. And Senior Executives, starting with the CEO, have to mandate this. No exceptions. If information is sensitive, then it should be “scrubbed”, “sanitized”, or “anonymized”, and the data then made available for analysis and mining. Without complete data, you cannot do a proper spend analysis project, and without a proper spend analysis, you will not find the true savings opportunities. And if you want to recover overpayments and avoid unnecessary spending, you need to do a proper spend analysis and uncover the true savings opportunities.

Your data is your data. So mandate it’s use. Remember, if you want performance, you have to make it so.