Don’t Underestimate The Importance of Workflow …

One of the big reasons that, even four years after the doctor told you about the Procurement Damnation of Project Management most vendors haven’t done anything as per my post last week (read here), is that they have little or no workflow management, a capability that we told you is vital to the modern platform in our post three weeks ago where we were Digging into the S2P Tech Foundations.

Workflow is more than just a platform’s ability to guide a buyer through the application to complete a specific task, workflow is the ability of the platform to be adapted, and adapt, to the processes an organization needs to support, and the ability of the platform to support management of those processes and the projects that create them.

This is something a large majority of software application developers don’t get, and, as a result, something a large majority of applications don’t have. And it’s something that needs to be baked in at the foundations of an application, or the application will never have good workflow capability.

Why is there so little? Because classic application design philosophy, inspired by the waterfall model of software development, has been:

  • identify a problem
  • define the problem
  • translate into requirements
  • detail into functional specifications
  • build a software solution that implements the functional specifications
  • iteratively test and debug until stable enough for release

And the agile philosophy didn’t change much. The only difference is that instead of attacking the full extent of the problem and translating the full problem into requirements, you focused on a core piece of the problem, translated it into requirements, fleshed out, built, and then went back and extended the core, extracted the new requirements, fleshed those out, built new pieces and integrated into the existing solution, and so on.

No thought was given as to how to create a set of self contained units that could be strung together in a workflow to solve bigger problems, which is key to providing a platform that would allow the workflow to be extended and altered and allow the organization to change over time.

And if you’ve invested five to ten years in a platform that has been profitable, do you really want to go back to square one and build it up from foundations the proper way? Especially if you think you can still make money on what you have? Probably not.

And looking to the bigger picture, that’s the state of Procurement 2.0 and why we need new, evolutionary, platforms if we are every going to realize the extent of Procurement 3.0. But that’s another post.

AI Will Make Your Talent More Efficient and Effective!

… but, as per our post last week, AI won’t solve your talent problem, so let’s get that out of the way right now!

AI, regardless of whether it’s being sold as assisted intelligence, augmented intelligence, or amplified intelligence, is valuable It’s powerful, and in some domains, essential to the modern day enterprise. In fact, without it, some enterprises won’t survive because the efficiency improvements and related cost reductions it can bring are so significant that competitors who invest will be able to reduce prices and leave their breathren in the dust.

And while it won’t ever replace a workforce, as it will not only allow that workforce to be 2, 3, or 10 times as effective, it will allow you to control the size of your workforce and associated costs where it can be properly applied, leaving more money to hire workers in areas of the business where AI can’t be employed and you are understaffed and/or not operating at full efficiency.

A great example we’re all familiar with is automated invoice matching and processing. A lot of vendors have automated 3-way match and kick out an invoice for manual review when something is off. This allows the department to focus on the 10% to 15% of invoices that have errors instead of spot checking 10% to 15% of invoices they have time to manually review, allowing all errors to be caught and dealt with if the manpower is efficient (and all invoice-based overspend to be prevented, which prevents costly recovery efforts down the road).

But the reality is that only 10% of these invoices have errors that need to be manually addressed. In many cases its missing PO numbers, missing bill to or ship to addresses, unrecognized line items due to OCR errors, etc. which can easily be corrected by an assisted intelligence system which can search the PO database and find out that there’s only one PO for that supplier which is for the same item (quantity, and price) shipped, one address in the vendor master, or a 95% fuzzy match due to a simple OCR error of reading an “O” as a “0” or dropping a character. Why should a human waste time on that? Good AI can handle this, and handle bouncing back an invoice to a vendor when a price is wrong (and allow the vendor to correct or open a dispute), when there are no associated shipping notices or receipts (and tell the vendor the invoice is rejected until such time as one or the other are received), etc. At the end, all the procurement professional or AP clerk is left with are invoices where there are no corresponding contracts, POs, or work orders; invoices from unknown suppliers; invoices with unapproved payment terms (or unknown accounts), and other situations that need to be manually handled. About 1% to 1.5% of invoices, on average for a large organization. For an organization with 1M invoices a year, this is 1,000 – and can be fully dealt with by 2-3 staff members, in comparison to an average organization which would have 20 who couldn’t properly review 20% of the invoices.

There are similar situations where AI can greatly speed up Sourcing Events. For example, new supplier discovery efforts often take 40 to 60 hours of manpower, and a supplier discovery platform like Tealbook can sometimes reduce that to as little as 4 hours and achieve the same result.

There are other examples in sourcing and procurement, but the point is proper AI technology is worth its weight in gold. (But relying on AI to entirely replace part of your workforce will yield an investment less valuable than lumps of coal, which at least you can burn for heat when your business goes bankrupt due to one bad decision on the part of an AI without a complete world-view or real intelligence to process it.)

Your Tail Spend Should be Vanishingly Small …

Not the 30% to 40% of spend that it probably is (as this is the amount of tail spend in the average organization)!

The reason it’s so large is that, in most companies, there is strategically sourced spend and tail spend when, in fact, there should be (at least) three categories of spend: strategic, managed, and tail — and, if the managed spend is large enough, you can break out a 4th category of tactically procured spend. Each of these categories is defined as follows:

Strategically Sourced
This is the spend that is high volume, high dollar, or strategic to your organization. While there will usually be a dollar minimum relative to your total spend (i.e. 5M to 50M depending on organizational size), if the part is critical to production of a primary product or service, if it can only be sourced from one supplier (hopefully split across multiple locations), and if its absence would bring an entire multi-million production line to a halt, then it would be include, even if it was only 1M annual spend).

More generally speaking, a product or service fits in this category if the return expected from a strategic sourcing exercise (which costs manpower and technology) will be considerable relative to the cost. (I.E. an ROI of 3X to 5X.)

Managed
This is where you put the categories or buckets of spend that are not quite big enough to undergo a strategic sourcing event (as the expected return is low relative to the effort of a manual strategic sourcing event) but where not managing the spend leads to a considerable loss when you look at an average of 15% or more overspend in tail spend.

For example, in a big multi-national, 1M is not large when there are 100M categories, but 15% overspend on 1M is 150K, that’s enough to pay the salary and overhead of another junior buyer.

This is where you do mini-events and/or take steps to make sure Procurement is efficient and cost-effective throughout the category.

Good examples are

  • low-value non-electronic office supplies and MOR, where you can integrate the punch-outs of two or three leading, generally cost-efficient vendors, into a federated search catalog which forces the organizational buyers to procure the lowest cost item in stock that meets the requirement without supervisor oversight (and keeps costs close to market, vs. 15% above)
  • recurring tech-support services, where you can integrate master rate cards from local vendors and just have the users select a vendor with an approved rate card to perform the service (and push all spend through the system)
  • one-time event spend, where you bundle up as much of the spend as possible and push out a standardized RFI to an event organization firm who makes money by aggregating event-related spend across their clients, negotiating sizeable discounts from venues and services providers, and passing those savings on to their clients in exchange for management fees … while you won’t see the full 20% they negotiate once you deduct the management fee, you might still see 10% of it, and that’s savings to you

Tactically Procured
If a category of spend is large enough that an auction or (multi-round) RFI will save money, but not so large that the savings are enough to waste a buyer’s time on a strategic sourcing event or tactical procurement event, then you can push that spend to a platform with modern automation and assisted intelligence that can automate the RFI or auction for standardized goods and services.

If the goods and services are market standard, or you have fully defined specifications that have been vetted and manufactured multiple times without issue, if you have a set of pre-approved suppliers, if you have price history and market data, why not just automate the entire process with bounds and checks?

New providers like Keelvar, Levadata, and Xeeva are realizing this and this is a great way to manage what was tail spend and keep costs down.

True Tail
These are true small, one-off, purchases that can’t be combined into a managed (or tactically procured) category and are truly not big enough to waste the valuable time of even a junior buyer on.

This should be less than 10% of your spend at most, and, in reality, with the low-cost, low-effort of automated tactical procurement in newer platforms, as well as the guided buying features of modern federated catalog platforms, should be less than 5% of your spend. A modern organization should not be overspending by more than 0.5% of its total spend (which is an acceptable margin of spend error), not the 4.5% to 6% or more it is typically overspending on the tail when 30% to 40% of the organizational spend is unmanaged.

YOUR SI (Repost)

To the tune of “UHF”
by Weird Al Yankovic, who completed the soundtrack to the cult classic UHF 30 years ago today.

Put down your old-school textbook
Throw out your online Guide
Put away your jacket
There’s no need to go outside

Don’t you know that we control the horizontal
We control the vertical, too
We gonna make a sourcing leader out of you
That’s what we gonna do now

Make it your home-page
Don’t touch that dial
We got it all on Your SI!

Kick off your sneakers
Stick around for a while
We got it all on Your SI!

Don’t worry ’bout ISM
Forget about the glitz
Just resize the window
And kill your favorites
We got it all, we got it all,
we got it all on Your SI!

Disconnect the landline and leave the iPhone in the drawer
You better put away your paper
Prime time ain’t no time to weave
Time to go and make yourself a TV dinner
Press your face right up against the screen
We gonna tell you things you’ll wanna believe
If you know what I mean, now

Make it your home-page
Don’t touch that dial
We got it all on Your SI!

Kick off your sneakers
Stick around for a while
We got it all on Your SI!

Don’t worry ’bout ISM
Forget about the glitz
Just resize the window
And kill your favorites
We got it all, we got it all,
we got it all on Your SI!

UHF should be your Procurement cult classic.  It was the first movie to teach us what happens if we try to drink from the firehose, attend an expert class as a beginner, or don’t keep track of what is in the supplies closet. 😉

AI Won’t Solve Your Talent Problem!

Talent is Still the Biggest Issue Facing Procurement Today … so what are you doing about it? (Besides still cutting the training budget as soon as cashflow gets tight and delaying necessary system purchases because you can’t take a long term view.)

As SI has repeatedly said, Procurement Pros need to be jacks of all trades and (almost masters of all but in reality) masters of one (Procurement) (Trend #17), and that’s no easy feat when the skills and knowledge a Procurement pro needs to do her job effectively increases every year.

And new AI / Cognitive technology doesn’t decrease the skill sets and knowledge required, despite what one may think. In fact, it only increases it Why? First of all, do you have assisted intelligence, augmented intelligence, or a cognitive system that is as close to true AI (artificial intelligence) as one can get with today’s technology? And, more importantly, does your Procurement Pro understand what you have, what the differences are, and what the respective limitations are.

If the solution is just assisted intelligence, then it’s an automation solution (RPA) with some expert knowledge encoded to handle typical situations with certain assumptions. If the assumptions are invalid, will the software detect them? If the situation goes beyond the realm of typical, will the software detect it? And even if the software does, will it be able to do anything without expect guidance? An example of assisted intelligence is an automated auction where the platform automates the sourcing of an item or service designated for auction among pre-approved bidders and goes from demand specification to final award without human input. But will it detect if the bids are complete? Within expectations? That bidders are bidding on the right product or service? Maybe the buyer assumes shipping included, but the bidders aren’t including shipping, and since the system only has a ceiling, it doesn’t know that the bids are way too low, and awards to the lowest bidder, that is actually the highest as the bidder is the furthest away and has the highest transportation cost.

Same goes for augmented intelligence. However, with augmented intelligence, the software goes beyond simple RPA with fixed expert rules — it is able to analyze a lot of parameters and pick the closest matching scenario and associated workflow. For example, an opportunity analyzer that takes into account current market pricing, supply availability, bidder responsiveness, current market trends (upward and downward), projected demand, etc. and advises the buyer on the type and timing of the sourcing event as well as the best workflow. But what if the market pricing is a week out of date and the market price just jumped up 20% (due to a fire in a major supplier’s plant) and reversed the trend? That changes everything, but the solution may not detect it and instead advise the worse sourcing event.

Cognitive platforms that continually monitor the situation are better, and if they learn from the actions the expert users take over time, better still, but they still can’t cope with an exception al situation they haven’t been coded for, or trained for. For instance, even if they detected that last minute spike in pricing that reversed the pricing trend and, thus, changed the optimal sourcing strategy, will they understand why the spike happened and the best alternate strategy? Or will they default back to the recommending the default strategy in a situation where costs are increasing … e.g. switching from auction to multi-stage RFI with optimization-backed analysis? Neither is right in this situation. In this situation, its extend the current contracts with your non-affected suppliers, increase the number of units, and lock in supply early, even if cost is higher.

In all these situations, only a knowledgeable, experienced, and sometimes expert Procurement Pro is going to be able to make the right decisions … and a novice relying on the systems is going to make the worst, and most costly, decision imaginable.

There’s no true AI, no all knowing software, and no replacement for a real expert.

The reality is that, at the end of the day, these systems make your experts more efficient — and multiply their productivity — they don’t replace their expertise.