That’s Right, You Do NOT need AI for Automation!

In our last article, we stated that our space was full of Overpriced “AI” you don’t need in source-to-pay, and one of our three examples was “Sourcing Automation” in Sourcing. To be clear, we’re not saying you don’t need automation — the whole point of software has always been efficiency through automation — we’re saying you don’t need “AI” automation.

The reason we’re doubling down into this topic is that we know there are a number of vendors pushing AI Automation and while automation is very good, AI is just not needed. But we know you’re going to get pushback if you echo the doctor‘s viewpoint here, so we’re going to double down into the details and explain why no AI is needed for great automation.

In our last post, we noted that, at its simplest, it’s the ability to auto-source a (set of) product(s) or service(s) once the need has been identified or the request approved. It’s useful, but you don’t need AI to accomplish this, just good-old rule-based (workflow) automation. After all, it’s just

  1. instantiating a new RFP (which can be done if you have a template tied to the product/service types)
  2. distributing it to known, approved suppliers (which is easily done if you have supplier management that tracks approval status and associated products/services)
  3. collecting the bids (automated submission management through a portal or provided spreadsheet for upload)
  4. selecting the lowest bids and marking it as an approved award (simple analytics)
  5. assembling the contracts (with templates, it’s just sucking in the supplier details, product details, and bids using tag-based search and replace)
  6. push it into the e-Signature portal (via the API)
  7. alert the buyer when the contract is ready for signature (via alerting)

1 You just need templates, and good providers have had those for a long time. And “AI” is not going to invent one you can trust.*1 It’s not too hard to tag your (provider’s) existing templates to all of the products and services you buy, and you only have to do it once.

2 When you onboard a supplier, you should tag it as approved, associate it with the products and services it is approved for, look up its risk and environmental scores, and track its performance over time. If it’s performance drops, it can automatically be suspended from consideration for new projects using old-fashioned business rules that will prevent it from being included in events it shouldn’t be. Thus, approved supplier management isn’t that hard to do and simple saved searches find all the suppliers that should be automatically invited to an event.

3 RFP and e-Auction software has been around for 25 years, so don’t let anyone ever tell you that you need AI.

4 If you’re trying to administer an award subject to constraints or goals, that’s good old fashioned strategic sourcing decision optimization. That’s not AI. MILP using classic tableau and interior point algorithms works just fine in predefined scenarios that suck in the organizational constraints … that leading SSDO (Strategic Sourcing Decision Optimization) providers were building over two decades ago.

5 Contract templates should be prescribed by Legal Counsel, not by software flipping random bits using layered statistical algorithms in combinations no one truly understands. The vendor will provide you with templates, but you should be the one reviewing them to make sure they are too your liking. This includes the standard clauses and variation by geography, industry, or risk you want to address.

6 Software integration happened for decades before AI.

7 Alerts have been standard software capability for decades, no AI needed.

If the right data is captured, and the right rules are written, standard workflow-driven software systems can be fully automated without any AI. The only thing preventing them from going from one step to the next is the human verification checkbox being completed. You can turn that off and they will work just fine. So, again, don’t be fooled that you need AI for Sourcing Automation, because you don’t. And with rules-based systems, you’re guaranteed you won’t get the odd, unpredictable result, every 10th sourcing project (because AI is only statistically effective, which means, eventually, it will always fail).

*1 Sure “Generative AI” can generate one. But there’s no guarantee it won’t be hot garbage.

How Many Employees Should You Have in Procurement

Those of you who have been around for awhile will know that AQPC, Hackett, and, going way back AMR, and Aberdeen, among others, have been benchmarking and telling us for years how many employees your Procurement Organization should have based on organizational revenue.

Furthermore, those of you who have been paying attention will know that they’ve been telling you for years that the better you are, the less employees you should have.

And you probably believe them. But, THEY ARE WRONG!

Why?

All of these employee count recommendations were based on two fundamental assumptions.

1) You can automate your way to baseline, as every improvement in automation will allow you to shed employees.

2) Baseline is sufficient to maximize Procurement value.

The first assumption is true. As you automate the thunking, more and more tactical processing that requires no actual thinking is offloaded entirely onto the machines, and those resources are no longer needed for those tasks. At this point, you can redeploy them, or you can follow the crowd and reduce the headcount (while remembering that the true wisdom of crowds is that none of us is as dumb as all of us). (We’re not saying that you shouldn’t let the employees go. It all comes down to whether or not they have the skills to be redeployed in a value generating role. But more on that later. We are saying that you should think twice before reducing the headcount target. More on this later.)

The second assumption is false. Baseline is considered to be enough for an average organization to source the top 80% of their spend over the average contract window and sufficiently manage the critical suppliers.

But simply having enough headcount to do baseline sourcing events and manage a few suppliers is not necessarily enough to guarantee value. And that’s what it comes down to. Value.

If the buyers barely have enough time to setup and run the events, but don’t have any time to discover or qualify new suppliers, negotiate beyond initial bids, or work with existing suppliers to identify additional opportunities for cost saving (such as minor design/spec changes) or value creation (such as new value added services), then are they really providing any value (beyond simply adopting a bleeding edge sourcing platform that can automate an entire sourcing event and reducing headcount even further)? No, they aren’t.

Now that inflation is back with a vengeance, in any managed category, savings is out the window. The absolute best case scenario is you keep costs flat, but most of the time the best you will be able to do is reign in increases less than the market average increase (and less than your peers). So if you want, or need, savings, you need to redefine the category, the product, the service, the delivery, the network, etc. That takes a lot of expertise, creativity, focus, and time from true Sourcing professionals … focus and time they won’t have if they have to launch a new sourcing event every week because you are measuring Procurement success based on how low the headcount can go and not how much value Procurement can generate.

Similarly, if all buyers have time to do on the supplier management side is deal with critical issues and the fires that arise because of them, you’ll never get real value out of the relationship, never build the relationship to the point where you co-innovate and jointly take cost out of the supply chain, become a true customer of choice (and not a fake one based on standard contract rhetoric which only guarantees they won’t screw you in pricing more than any other customer), and never discover capabilities in your supply base that you never new existed (… capabilities that may allow you to offer new products and services with a greater profit margin).

Plus, if you’re only tackling the top 70% to 80% of spend and the top 10% to 20% of suppliers, what opportunities for significant spend reduction, or at least control, are you missing. There’s often more overlooked opportunity in the tail than the middle categories. And you’ll never know the true extent of the potential in your supply base if you only ever talk to 1 in 10 suppliers.

The right amount of headcount is the number of professionals that add value and an ROI 3X to 5X their fully burdened FTE cost. the doctor would hazard a guess that the right number is probably 2X what AQPC, Hackett, and others would have you believe. Look to these reports to understand what percentage of tactical headcount can be redeployed with the right automation, not for the right number of strategic headcount to retain. (Based on the current numbers, you should be able to redeploy 80% of your tactical head-count as you go from the bottom to best in class, but you only start redeploying headcount out of Procurement when adding more strategic resources doesn’t increase value at a 3X to 5X ROI.)

Overpriced “AI” You Don’t Need in Source-to-Pay (S2P)

Everyone and their dog is trying to sell you an “AI” solution. Most of which, as we continually lament is “Automated Idiocy” at best (and “Applied Indirection” at worst, see our article on the April Fools joke vendors are playing on you year round that relaunched SI full time). Some vendors, for select capabilities, actually have the first stage of AI, Assisted Intelligence and a few, for very select capabilities, actually have the second stage of AI, “Augmented Intelligence”, but, and this is what they won’t tell you, especially if you’re a mid-market (MM), you probably don’t need it.

In fact, if you don’t yet have complete S2P, we’d wager that you absolutely don’t need it and likely won’t get an ROI from it, at least not with respect to the price tag they try to charge. (Just like spending more than 120K a year on S2P as a MM generally decreases your Return On Investment [ROI].)

While what is and is not effective and valuable can be situation dependent (just like certain high-priced capabilities can be highly valuable in 10M+ categories but detrimental in 1M categories), there are some capabilities that are almost never valuable, and in this post we will give you some examples, and the reasons therefore, so that you will be able to both analyze whether or not a solution actually has AI AND whether that AI will provide any value.

While there are dozens of capabilities being marketed as AI (which, if implemented using advanced techniques could fall under Level 1 AI), we’ll pick one from three (3) areas as our goal is exposition and not an all-inclusive treatise (that’s a novella, not an article).

Sourcing: Sourcing Automation

What is this? At its simplest, it’s the ability to auto-source a (set of) product(s) or service(s) once the need has been identified or the request approved. It’s useful, but you don’t need AI to accomplish this, just good-old rule-based (workflow) automation. After all, it’s just

  • instantiating a new RFP (which can be done if you have a template tied to the product/service types)
  • distributing it to known, approved suppliers (which is easily done if you have supplier management that tracks approval status and associated products/services)
  • collecting the bids (automated submission management through a portal or provided spreadsheet for upload)
  • selecting the lowest bids and marking it as an approved award (simple analytics)
  • assembling the contracts (with templates, it’s just sucking in the supplier details, product details, and bids using tag-based search and replace)
  • push it into the e-Signature portal (via the API)
  • alert the buyer when the contract is ready for signature (via alerting)

And while very useful for non-strategic and/or low-value categories, no AI is needed. Now, the vendor will counter with multi-round, but guess what, you just implement ceiling, best X, or mandatory response rules before allowing a supplier to progress to the next round and close round one and open round 2 on pre-set dates.

Low bid prediction? i.e. when should the RFX be ended? Guess what, if the platform has anonymized community intelligence, integrates with market data feeds, or supports should-cost modelling (and knows industry average margins), it’s pretty easy to calculate what the low-bid should be (and any bidder that bids lower has likely made an unsustainable bid that should be ignored), and end bidding when you hit that. No AI needed for any of this.

Contract Management: Contract Generation

The ability to auto-assemble a contract is cool, but leading platforms have had it for almost 15 years. How?

  1. A contract template for the category that specifies the clauses that are required, the data that needs to be included, and the meta-data that is needed to assemble the contract correctly.
  2. Default clause templates for each clause, with variants for each geography or industry of interest

That’s it. Then, the system just uses rules to select the template and the clauses and fill in the required supplier, product, and price data from the RFP.

Invoice-to-Pay: Automated Invoice Parsing

Yes, it’s great if you can reduce the number of invoices you need to review from an average of 15% with issues to 1.5%, but let’s face it, you can reduce it to 5% or less with just a little bit of automation, no AI needed.

Almost all invoices are coming in electronic these days, and suppliers that invoice regularly and want to be paid fast will use EDI, XML, or PO-flip through the portal, which means the invoices will come in electronic in an easily parseble format. Missing data / errors will be easily detectable in address, PO field, line items, amounts, etc. when there is an empty field or a mis-match between expected and received data (based on the PO, etc.), etc. and the invoice can be flipped back with notifications of issues for the supplier to correct. Most of the time it will be an honest mistake or oversight and the supplier will happily make the correction to get paid.

The remaining problems will fall into two categories.
1) Those few suppliers that don’t have a solution and have to send PDFs (or images) through e-mail, but those aren’t the suppliers doing massive business (as we’re talking about one time suppliers or consultants for the most part)
2) Those suppliers who don’t accept the requested corrections and have a dispute that needs manual intervention.

With respect to these two categories.
1) An “AI” parsing solution with 80% accuracy is just going to create more manual work, since you will have to correct all the errors anyway (which will be just as much work as entering the data in the first place). (And if the invoice automatically flows through, then it flows through with errors, and that touchless system leads to overspend. Better to touch an extra 3% of invoices and get it right than trust AI that, instead of saving you money, overpays suppliers or sends money to non-existent fraudulent suppliers.)
2) No AI will resolve a dispute. In fact, it will just annoy the h3ck out of the supplier representative and make the dispute worse.

So don’t fall for “AI” in the sales-pitch, even if it isn’t automated idiocy. The vast majority of it you don’t need as good rules-based workflow, configuration, and human ingenuity in the solution still gets the job done (and as the vendors get smarter, the software gets better, and that manually driven best-of-breed software optimized for the process doesn’t make company ending mistakes).

Yes Mid-Markets, 120K is More Than Enough for Source-to-Pay!

the doctor is sure that by now you have certain (mega-)suite vendors whispering in your ear that you really need their full 1 Million+ (annual subscription) S2P solution to maximize efficiency and savings (and that the doctor was crazy*0 when he told you that you should be able to get a sufficient Source-to-Pay solution for 120K a year), which, while possibly true stated that way, you don’t need to spend nearly that much to maximize your ROI.

But how do you maximize ROI without necessarily maximizing savings and/or efficiency? Simple! The same way you optimize profit by optimizing COGS vs. increasing volume. Just like every $1 of savings goes straight to the bottom line vs only $0.10 of revenue, every dollar you don’t spend on a technology solution goes straight to the bottom line vs. only squeezing out an extra 1% on savings.*1

But the best way to see this is to, gasp, do some math! Let’s take three mid-markets at 250M, 500M, and 750M. We’ll use industry averages for COGS (with 33% salaries & contractors; 2% utilities; 5% rental; and 20% amortization/depreciation) and assume 40% external spend. Depending on the industry, external costs can go to 50% or more, but not much in the Mid-Market (MM). We’ll assume an average 5% savings potential and 80% spend addressability over 3 years (as some existing contracts will be long term and not addressable in the short term, and some tail spend will just be too small / one time to ever bother with). We’ll assume that a base solution can achieve 80% of that savings potential, or 4% over three years (if there is sufficient manpower to address all the relevant categories [semi]-strategically).

 

Size 250M 500M 750M
Addressability (80% of 40%) 80M 160M 240M
Savings Potential @ 4% 3.2M 6.4M 9.6M
3 Year Cost 360K 360K 360K
ROI 8.8 17.6 26.4
Savings Potential @ 5% 4M 8M 12M
3 Year Cost 3M 3M 3M
ROI 1.4 2.7 4.0

 

Now, what type of ROI would you like to see if you are a 250M MM? A 1.4X ROI or a 8.8X ROI? the doctor knows what type of ROI he’d like to see! Also, if the mega-suite provider cuts the price in half, it only doubles the ROI to 3.2X. Barely acceptable, and you need the manpower to identify the full savings potential and everything to go perfectly to realize it. (What’s the probability that this will hold true continuously for three [3] years? Zero Percent. 0%)

Unless you have a (very) large category over 10M (where the savings potential on that category is 500K), the reality is that the 80% solution you will get by an average across-the-board solution / self-assembled platform-powered BoB suite will provide you an ROI that far outshines what the oversized, overpriced solutions will do for you as a mid-sized business. (Those suites are only needed for 1B+ enterprises where there are 50M to 100M+ categories where an extra 1% makes a huge difference.)

the doctor loves sourcing optimization, but it typically won’t find that much savings beyond what you can find with good spend analysis on RFP data in a category < 5M. (It might take a few hours of spend analysis, but you will get 80% of the savings with intelligence. If the vendor includes an affordable optimization module (2K/month; likely with model size caps), then you should use it on every category, if just to get a baseline, as you will get a good ROI from the module with continuous use, but if they want 10K/month and you are a 250M business, you likely won’t get enough of a return, especially since most of your categories aren’t that large or complex. Note that if you are a 1B+ multi-national enterprise, the story is the exact opposite. You absolutely need it and in your well managed categories, you won’t identify enough savings without it.)

For most categories, all you need to do in sourcing is 3-5 bids, side by side unit cost and total landed cost (TLC) comparisons, supplier award selection with RFP (spend) analysis, contract cutting to capture the price, configured POs in the eProcurement system to capture the contracted price, and line-item match on the invoice to the PO to make sure you’re paying what you should be. This is two-decade old tech now, but more than sufficient, when properly implemented and enforced, to capture 80% of the “savings” (or cost avoidance) in a category. Procurement savings come more from the proper implementation of a process than from technology that enables that process. What technology does is make it easy to do the process efficiently and effectively because it can guide you through the process, prevent you from missing steps or making mistakes, provide you the insight you need to make the best decisions, and even train you on best practices you aren’t familiar with. And allow you to repeat the process many more times on many more categories in a much shorter timeframe than if you were trying to do it all by hand.

Plus, the technology will allow you to do more with less, so you can minimize the need to expand the Procurement team as the company grows. Remember, good people cost $$$. In fact, a fully burdened high-end resource will cost as much as you pay for the tech, if you are paying the right price. This means that the tech will not only provide you an ROI on measurable cost reductions, but a measurable cost avoidance as you grow as you will not need to add as many people to a Procurement department that will become more efficient over time (as more and more tactical tasks get automated, freeing up the team to focus on value-add tasks). (Remember, tech never replaces the people you need, it just makes them many times more efficient so that you only need one or two high performing individuals for a function vs ten for one that is poorly managed; allowing you to add those ten resources elsewhere to produce more product or grow the business further. However, remember that Procurement does more than one function, so you may still need those 10 people for contract management, supplier development, additional strategic sourcing events, etc. but you won’t need them processing paperwork.)

So don’t overpay for S2P tech. You absolutely need S2P tech, but overpriced tech won’t get you the ROI!

*0 they may be right, I may be crazy … but it just may be a lunatic you’re looking for …

*1 An extra savings of 10% on a maximum savings of 10% leads to a maximum additional savings of 1% overall on a single category. In inflationary times, which we are now back to, you’ll never find more than 10% slack in the TCO of any category. In fact, you’ll do good to find 5%, which means going from average capability to advanced capability will only shave an extra 0.5% off of the total category spend on average.

Don’t think that these inflationary times are going away anytime soon. Supply chains are at their shakiest thanks to both the pandemic and the repercussions thereof, the rapid increase in climate change which has led to a rapid increase in natural disasters, the increased geopolitical destabilization around the globe, and the rebelling workforce, many of whom have gone from living barely above the actual poverty line (relative to where they live) to below it. Now add that to the flat and recessionary economic conditions in most major GDP players, and we won’t be seeing good times ahead for quite a while.

How Do You Reconfigure the Global Supply Chain? That’s Easy!

Ever since the pandemic, there’s been quite a few articles about this despite the fact we’ve known the answer for well over a decade. (Or at least SI was giving away the answer, for free, over a decade ago, even though it seems no one was listening.) Or at least some of use have known the answer for well over a decade. So why was no one listening? Why is the answer still not well known? Is it not clear? Is the new generation not looking on their own and wanting the answer spoon fed to them? Are the articles with the solution either too generic, too politically correct, too vague or not actionable?

It’s hard to say, but to make sure this article is not too generic, not too politically correct, not too vague, and not inapplicable, we’re going to be very, very specific, as politically incorrect as possible, as to the point as possible, and actionable in our messaging. And we’re going to keep it as short and sweet as possible so that the message will be clearly understood.

 

Unless you are selling the product to China (/Asia), when sourcing,
FUCK CHINA.

It’s that simple.

 

Risk Mitigation 101 for Buyers is to have two sources of supply because risk mitigation 101 in systems design is no single point of failure. But over the last three decades, we have built a global supply chain where all roads simultaneously end in China and start in China. When there isn’t a single product you buy where a component or raw material doesn’t get produced or processed in China, it doesn’t matter that you use two different distributors or manufacturers for the product as the choke point is still China. Thus, if the factories or ports shut down because of China’s ridiculous “zero tolerance” policy to an unstoppable epidemic (which is not even as lethal as the bird flu if a large majority of your population that can be safely vaccinated is vaccinated); if the shipping industry gets overloaded due to a lack of ships, workforce (see yesterday’s article on how strikes are going to be your biggest source of supply chain disruptions for the next decade), or containers (which happens, especially since there are way more ships carrying goods from China than carrying goods to China, semi full ships will not load containers to take back until completely empty, and this results in many ships sailing back mostly empty); or critical commodities or utilities expected locally become temporarily unavailable to the factory, you, and everyone else in the world relying on that product, are shut down.

There’s a reason that North America used to primarily source products not made in the USA from Mexico or South America. If there was a disruption, you found out sooner. If a factory had a fire, you could fly in, assess the damage, and send in your engineers to help fix it — quickly. If not, you weren’t far from alternate suppliers you could fly down to assess, and if suitable, negotiate with. If there was a transportation backup, it was easier to clean up — you weren’t waiting for ships, you just sent down more trucks or ordered more rail cars.

And the answer should now be obvious:

  • Home-source anything that can be grown / mined / produced at reasonable economy of scale in multiple geographically separated locations in your home “region” (i.e. multiple states in the US; multiple connected countries in the EU)
  • Near-source anything that can grown / mined / produced at reasonable economy of scale in a relatively near-by country or region connected by land where the product can be shipped by rail and truck (Mexico / Central America / Northern parts of South America for the US)
  • Far-(Over-Sea)-Source only what can’t be home-sourced or near-sourced, which should just be raw materials or small components (i.e. there’s no excuse to be manufacturing and importing washing machines, refrigerators, and cars which are super bulky and weighty when there are only a few core components that need extreme specialization [where it would be hard to find another / build a new factory] or materials that need to be processed pre-transport

Which means that if you are sourcing for the Americas, the amount of sourcing that you should be doing from China is likely about 10% of what you’re actually doing, which, at the end of the day, gave you short term savings in exchange for long term debt including, but not limited to:

  • customer churn and angst
    (happy customers seeing value fork over $$$ a lot faster and in greater amounts than those that aren’t, and they aren’t happy when they don’t get their products on time)
  • constantly increasing transportation costs …
    containers went from < 5K to > 30K during the height of COVID, and while they have come back down, they’re still 30% to 50% more on average, and since most ocean going vessels still use HFO (the dirtiest oil there is, FYI), and the global port strikes are resulting in significant wage increase (partially due to significant inflation in many countries), they’re going to keep going up, especially once you factor in those
  • high carbon taxes
    (everything you make in China is dirty and the shipping is even dirtier)
  • high IP theft …
    even if most of the products don’t make it out of China, everything you produce in China is copied … everything … and some of the copies are now so good, even high end stores in the US are getting fooled!
  • limited options …
    many of your best options went out of business over the last two decades as you believed the overpriced consultants with their false promises that the savings would last forever (but nothing lasts forever …)
  • increased disruptions
    due to the soon to be three-fold increase in natural disasters annually since the China craze began in the late eighties/early nineties (which is projected to be five fold within a decade or so)

On the flip-side, many of the factories you used to use are still where they were. The workforce is still there. The potential is still there. All you have to do is invest in it. It may mean a partial return to the vertically integrated company where you own (part) of your supplier, as you may have to re-enter into co-opetition through conglomerates where you and a group of your peers each minority invest in a new entity to bring that factory back online (or build a new one), but nothing is stopping you. And it might take a year or two (or three) to bring it back, but you can do it, and greatly reduce your supply chain risk in the long term. And, to make it a bit more personal, when you do this, just like Justin, you will have brought SexyBack

In short:

Unnecessary Outsourcing, especially Unnecessary Overseas Outsourcing, broke the supply chain. If you want to fix it, JUST STOP!

To be fair, we should point out that this article is aimed at the primary readership of this blog, which is North America / (Western) Europe as well as the continents of Australia, South America, and Africa. This article is NOT aimed at Asia, because China is part of Asia, which means if you are buying to support an Asian market, in this situation you should be buying from China (and Fuck the Americas), as per our qualifying assertion near the beginning of this article.