At least Twenty Two Hundred and Sixty Five Years Ago Today …

The Pharos of Alexandria was constructed. Estimated to be over 100 meters in height, and one of the Seven Wonders of the Ancient World, it was built on the island of Pharos opposite the isthmus on which Alexander the Great founded the city of Alexandria. The lighthouse was commissioned by the Ptolemy I after the death of Alexander, and due to its location, it not only guided ships by day and night but secured safe access to the city of Alexandria.

We bring this up to show the long history of lighthouses, which to this day are important in the prevention of ships hitting the rocks and wrecking off the coast (like the Stephen Whitney did One Hundred and Seventy Years ago today off the southern coast of Ireland (killing 92 of 110 on board). And while the wreck resulted in the construction of the Fastnet Rock lighthouse, an early example of an oil burning lighthouse (replacing the previous wood or coal lighthouses). And while it didn’t have the brightness of the kerosene burning lighthouse that would replace it, it was a great start.

Because the ability to see in the dark is valued, especially at sea. And this is an extremely relevant metaphor to procurement often lost in a sea of data with no ability to see where the rocks are. This is important because without sight, not only will your organization not realize the Procurement Innovation that is to come we have been discussing all week, but it won’t even realize the opportunities available it today.

Stay tuned.

Procurement Innovation The Day After Tomorrow

This week has been all about Procurement Innovation and how maybe it’s a good thing that They Terk Er Jerbs! as the only jobs that are perfectly suited for software and robotic automatons are those that we really don’t want to do. Let them match line items. Let them scan barcodes. Let them push e-paper all the live long day. No one writes folk songs about the paper drivin’ man, so they can have the damn e-paper.

But they won’t stop at automatic e-paper or transaction mapping or even invisible buying. They will go deeper. They will go broader. They will take all that can be taken with computation alone. Wherever true intelligence is not needed, they will emerge. So where else will they emerge?

Software and the machines will be everywhere, in every job, and they will be there all the time. 24 / 7 / 365. They won’t be able to do everything, but they will be everywhere. In a presentation last week, the doctor covered a dozen different areas we’ll see them today, tomorrow, the day after tomorrow, and the day after that … just in Procurement alone. And these weren’t all the examples. We won’t cover them all in this blog (and if you want to know them all, keep your eyes out for an upcoming talk), but we will cover one today.

Specifically, once invisible buying is out of the way, one area they will considerably invade the average Procurement organization is through tail spend minimization. Not only will invisible buys take a chunk out of organizational tail spend, but all of that calculation will also identify

  • other buys that fit the MRO / regular re-order pattern that should be put under contract / rate card and left to invisible buys
  • buys that are becoming significant and should be analyzed for strategic sourcing

Not everything will fit in these 3 categories, but a big chunk will … and then further enhancements will take more and more out of tail spend until it becomes a vanishingly small part of organizational spend compared to what it is today. So watch for the future, it’s coming faster than you think.

Procurement Innovation Tomorrow

In our last couple of posts, since They Terk Er Jerbs!, we have been discussing Procurement Innovation today and how automation and tactical data processing is actually a good thing for robots and software to take over, since most of it is mind-numbingly dull and hinders our creativity and productivity — and as that is about the only area we can truly best the machine (although they are making a damned good effort to take over there too), we better focus it on it now when we can.

(Even though it’s not likely we’ll see true AI in our lifetime, as processing power and parallel computing continues to improve, the prediction capability of machines will eventually get so high that some people might be tempted to say eh, good enough and let machines take over jobs and make decisions in areas they will be 95% accurate and sufficiently successful, or at least, good enough, on average. (Moreover, by the time they make one mistake so catastrophic that people die in a situation where no human would ever have made that mistake [as they can't see what they are not coded to see], it will be too late as we will be living in the world of E.M. Forster, The Machine Will Stop, and that will be it … and then, in a few dozen millennia, Earth will again be the Planet of the Apes).

But the power that comes from the machine’s ability to number crunch is going to go beyond number crunching, m-way matching, and guided buying with visual guilt. For example, one of the common innovations you are going to see tomorrow is invisible buying. And the invisible touch of the machine once it takes over some of the most boring buying tasks will be such that it will crawl under your skin, you’ll fall for it, it will take control, and if it ever gets taken away, it will take you apart. (And your only recourse will be to play Genesis.)

Just what do we mean by invisible buying? Basically stock room and MRO ordering, the bane of your buying existence, will be a thing of the past.

Who is better able to analyze purchase and inventory data and:

  • Auto-detect regularly needed items
  • Auto-compute typical usage schedules
  • Auto-predict best order quantities
  • Auto-re-order on reaching an auto-computed minimum threshold
  • Auto-adjust inventory levels using RFID, Arduino, & IoT
  • Auto-m-way match between all e-docs and auto-pay

Us? Or the software-driven machines?

That’s right, the software driven machines. Besides, what value is there wasting our time doing regular re-orders off of established contracts. None. Our time is better spent identifying the next contract to get in place to avoid cost, achieve savings, and, hopefully, provide more value to the organization. So the machines will take this over. And that’s fine. Because, at the end of the day, there is too much spend falling into the tail costing us big $$$. In most organizations, tail spend, which can be as much as 30% of the spend, is, on average, 15% to 30% over best market cost. 20% of 30% is 6%. That could be hurting your bottom line more than your top spend that is strategically sourced every three years and typically only has 2% to 3% left to shave off through smarter sourcing. Think about that.

Procurement Innovation Today

As hinted at in yesterday’s post, Procurement Innovation today mainly revolves around automation, but when that automation allows us to focus more time on analysis, strategy, and actual relationships than just pushing paper and matching numbers, that’s a very good thing.

The truth is you don’t even get savings by matching numbers because, in effect, what you are doing is preventing overpayments. Thus, all matching paper does is prevent loss. To save, you have to find a way to reduce costs below current baselines, and, to be really aggressive about the definition, reduce costs below expected baselines through the identification of an appropriate business strategy or process improvement.

Furthermore, if you really want to get analytical, you cannot claim cost avoidance as savings unless that cost avoidance is the result of a strategic or smart decision that allows volume to be reduced through actual need without the process improvement. For example, if you generally order 110 crates of ingredients, 10 spoil in the storage locker before they get sold, and you identify this and alter your order size so you are only ordering 101 crates and losing 1, that is not cost avoidance. This is loss prevention. But, if you realize that your current supplier is packing such that only 95% of the ingredients can be used (because the tomato paste sticks to the containers, the containers are too large and when customs does its random inspections, 5 times the food is wasted) and you switch to a new supplier where 98% of the ingredients can be used, (because the containers are non stick, smaller, or the spices are stronger), that is cost avoidance as you can now reduce the order size by 3% and serve the same need. Similarly, it’s not cost avoidance if you invest in printers that print double sided to reduce paper, as you are still using the same amount of ink (which costs more than blood) and the increased printer cost dwarfs the paper cost. It’s only cost avoidance if you can figure out how to reduce the total printing done by the organization (such as double monitors to prevent print outs, more online materials, etc.).

And automated m-way match is only one area where automation is helping us get more tactical. Another is automated price comparison, feature comparison, contract item identification, and what is emerging as guided buying in many of the catalog-enabled P2P solutions. If there is a contract item, it appears first (and the system can even be configured to prevent a user ordering anything but the contract item if it is in stock). If not, then items from preferred suppliers are shown. If no contract or preferred items, then either the lowest cost items that meet the need or items most ordered by the peer group are displayed. And so on. And the better solutions will even pop-up visual guilt information that shows a requisitioner how much it’s costing the organization if they don’t use a contract, preferred, or low-cost item (in hard dollar savings or missed volume/discount opportunities).

Automation, when properly used, is always a good thing. Of course, proper use is key. Automation never replaces the human element, it only enhances it. And any manager that doesn’t get that should be the first employee of an organization to be let go. Because any manager that can’t see how to use automation to make her people more valuable is not one worth having.

And for the record, I’m not saying that automation won’t displace some people – it will. Some people may not be willing or able to adapt to the new role, and will need to be replaced. And while this is unfortunate, that doesn’t mean that the organization can’t find them a different role in a different department or that they can’t go do something else more suited to them. What I am saying is that automation, properly applied, doesn’t reduce overall headcount. It just makes that overall headcount considerably more productive and value generating. And that should be the focus.

Where is the Procurement Innovation Today?

Last week, in They Terk Er Jerbs!, we noted that the age of robots (and software assistants) is here and there’s nothing we can do to prevent it now that they are roaming the floors of Walmart. We also said, especially in our follow up post on how they They Terk Er Jerbs! Good for them. that this can be a good thing since the jobs these robots are best suited for are boring, repetitive, relatively simple jobs that sometimes even suck your willingness to live.

And by doing these jobs, they can free you up to do more complex, creative, and value-generating jobs, including those jobs that couldn’t be done before.

Of course, we have the problem that most organizations only see the cost savings that result when you eliminate 20 paper pushers with automated invoice processing software that can automate 95% to 98% of the work, leaving only 2% to 3% of invoices that need manual intervention. Yes this is a savings, and yes it is significant, but it’s a one time savings. What do you the next year? Competition still increases. Costs still rise. Margins still fall. Not only is your place on the Fortune 1000, or Global 3000, threatened (or your possibility of ever getting there), but maybe even your business viability.

You get year over year savings by identifying value year over year. At the end of the day, it’s all about keeping a healthy profit, defined as Sales – Costs. You can only increase sales so much in a given market for a given product. At some point the market is saturated and your position is maximized. You can only decrease cost so much with just an RFX or Auction … all that does is take the fat out of the margin.

To find real savings, you have to figure out how to take cost out of the product — either out of the production process (lean initiatives or component substitution or design improvements), the transportation (through carefully amalgamated global shipping), the packaging (through package redesign), or even the margin through appropriate product consolidation with the right supplier (who can operate at a lower margin for higher volume). This doesn’t happen without a lot of investigation, analysis, exploration, and relationship building and management and the creative personnel to do it. Machines can’t do this. (While they can analyze the data and identify the best potential opportunities, they can’t realize them.)

The only way to truly find savings (and maybe even more value through better aligned value-added services) year after year is to have a team of people who can analyze the supply chain for them. This means that the best way for an organization to succeed is to employ invoice automation to free its people up from tactical invoice processing to, possibly after appropriate training, pursue more strategic opportunities and programs that will take identify additional value year over year without any additional overhead (since the invoice automation pays for itself and the team pays for itself).

So, the true Procurement Innovation today comes when organizations use automation not to replace headcount, but augment headcount to allow them to find more value than they would otherwise have time to find. And indirectly achieve an ROI from the software automation that is far higher than just the ROI from the automation alone.

And the great thing is that since these AI’s aren’t truly intelligent, they don’t mind doing the same mind-numbing task to infinity and beyond.
So let ‘em take our mind-numbing soul-crushing jobs. We’ll keep our soul, and fly in the clouds while they dig in the mines.