Procurement Produces Platinum when Engaged Early

We all know the statistic that 80% of the cost is defined the first 20% of product design, and that engaging Procurement early can significantly attack and reduce these costs considerably. But leading organizations are learning that engaging Procurement during New Product Design (NPD) is not early enough. Real success comes from engaging procurement during the Market Needs Analysis and New Product Definition phase.

Engaging Procurement after the product specs and initial design has been more or less determined limits Procurement’s capability to add value and extract cost. Once you’ve decided on a 9.7″ tablet with 64 GB of memory and a 5.1 MP camera limits Procurement to going to market for 9.7″ casing, 64 GB of memory. and 5.1 MP cameras and boards that support processors that can stay cool in a 9.7″ tablet. You’ve already limited the universe of potential. Moreover, you haven’t really defined what the real value is from a customer point of view (specs, reliability, brand value, sizzle), why, and how Procurement could add to
it.

Procurement really needs to be involved from the inception of a new product introduction project. It needs to be both a sounding board and the voice of reason to help the organization zero in on the right mix of what will sell and keep the costs in line with market expectations (or at least market acceptance). Value to the organization is maximized when profit is maximized — which is maximized when profit per unit times number of units is maximized. This requires balancing cost with consumer values, not just optimizing cost, which is all that can be done if Procurement is not engaged until the final design / pre-manufacturing stage of the product lifecycle.

So, for real results and greater success, engage Procurement early and engage Procurement often. Sometimes the perceived market requirement isn’t worth the cost, and other times it is.

For more information on the product lifecycle, as well as some of the results Procurement can deliver not only early, but at each phase, you can check out Source One’s latest paper on Strategic Sourcing Throughout the Product Lifecycle. It’s a quick read, and if you want to go deeper, they have hundreds of projects they can draw on if you reach out to them.

Trump & Brexit Woes? Optimization is the Answer!

SI has been preaching the gospel of strategic sourcing decision optimization since day one, noting how it was the only way to not only achieve the year over year cost savings that could be identified by spend analytics but also identify additional value necessary for struggling under-staffed and under-budgeted supply management organizations to realize the value that was being demand of them. Year-over-year was key. During the noughts, thanks to the success of FreeMarkets and Ariba, everyone thought that e-Auctions were king, as the first e-Auction often returned 20%, 30%, or even 40% savings and the second a healthy 5% to 15% in a host of categories, but no one realized these savings were just a result of excess fat in supplier margins, shaved out by more aggressive, hungrier, competition looking for a chance to prove themselves and grow. Once the fat was trimmed, and inflation began to return near the end of the noughts, subsequent auctions not only failed to identify additional savings, but also resulted in cost increases.

SI knew this, as the early adopters were already beginning to experience this when SI started and multiple options for strategic sourcing decision optimization were available (CombineNet [now Jaggaer], Emptoris [now IBM], Iasta [now Determine], VerticalNet [now BravoSolution], Trade Extensions, and Algorhythm), but the auction providers had big marketing budgets (as a result of their big successes, % of savings contracts, and VC funding) and bigger mouths to spread the auction word. And by the time the blush faded from the rose, most organizations weren’t ready for what seemed to be complex solutions, so the focus turned to better RFX, should-cost models, spend analysis, and weighted evaluation models. This worked for simpler categories, and the fact-based negotiations shave the remaining fat while also identifying processes or unnecessary non-value add offerings that could be trimmed, and savings continued, but began to trail off. That’s why the leaders are slowly accepting decision optimization and why Trade Extensions has been growing aggressively year-over-year for the last five years or so.

But let’s face it … when 40% of the market still doesn’t have any Supply Management tool and only 20% of the organizations that due are leaders (which kind of explains the Hackett 8%), the adoption is still low and the usage still minimal. As long as savings can be squeaked out through other means (analytics, cost modelling, aggressive negotiation, GPOS, etc.), the average organization seems to be doing everything it can not to evolve. Cognitive Procurement is the buzzword, but cognitive dissonance is the reality.

But that could all be about to change. Why? Between Trump continually threatening new border taxes, border closings, and visa program overhauls and Brexit looming on the near-horizon, which will totally change the tax and border situation in Europe, supply chain costs are totally unknown for a large majority of global supply chains. Considering how many global organizations are headquartered (at least regionally) in the US or UK and how many more have their Procurement Centers of Excellence there (either in a distribution hub or a financial hub, of which New York and London are two of the biggest in the world), it’s looming chaos. Are your costs going up? If so, are they going up 10%, 20%, 100%? Are sources of supply going to be cut off due to trade bans? Is your best talent going to be locked out of the US or UK? It’s a nightmare waiting to happen. It’s enough to put even stock market traders into full panic mode.

So what do you do? You manage the risk? But how? Most of the traditional supply chain risk management platforms (Reslinc, Risk Methods, Achilles, etc.) are geared at supply chain visibility — attempting to identify potential disruptions [as a result of external or internal events] before they happen so that mitigation plans can be identified and put in place before they do. However, when the disruption is not an event but an unpredictable [and unaffordable] tax hike or border closing, these solutions, even those that reach level 5 on the Spend Matters scale, are pretty useless. That’s why Sourcing Innovation has recently stated that Supply Management Risk Management Needs to be Cranked to 11. (It’s important to go to 11.)

You see, the key to survival is “what if” the current supply chain becomes unsustainable due to a tax hike or border closing in the US or UK. Running a new scenario with all of the inputs except any lanes, countries of origins, and / or products where you expect to see disruptions, trade bans, or extreme import/export duties. And then running another new scenario under a different set of assumptions on lane, country, and/or product restrictions. Running scenarios at the product level and the category level. Running with current supply base, previous bidder supply base, and newly identified scenario supply base until you have a mitigation scenario that is acceptable and ready to go if something happens.

Only a good supply management decision optimization solution with what-if scenario support can do this – nothing else.

So, since we’ve all forgotten Kermit’s Lesson, this is what we’re left with. But considering how it will enhance your overall supply chain operations in these turbulent times, that’s not a bad thing.

 

Are Your Suppliers Ripping You Off?

A recent post over on the public defender‘s blog asked if suppliers [are] still ripping us off. And it’s a good question, because it’s a common, constant, fear that is never talked about. Not only is it often the biggest elephant in the room, but it’s the biggest herd of elephants as there’s typically one in every room of every buying organization.

But rather than asking an array of speakers what their thoughts are, we’re going to get right to the point and give you the answer, which, surprisingly, can be summed up in six words.

That depends, are you letting them?

While your job in Procurement is to get the best damn deal you can, keeping costs as low as possible while keeping the benefits high to maximize value, the sales person’s job who is selling to you has, as their job, to get the most amount of money for the least amount of product and service, maximizing their profit and, more importantly, their bonus (which is typically 100% tied to the order value).

If you don’t do your homework and establish the true market price or true should cost price, then its likely that they can convince you that a 3% decrease on their current price (which is 30% over should-cost) is a savings and you walk away thinking you won when you are still being ripped off big time. We have to remember why so many suppliers were, and in some case, still are, resistant to e-Auctions — because these expose fat in supplier margins faster than any other sourcing exercise when you invite new, hungry, suppliers who will lower their margins just to win business.

In certain verticals, such as electronics and office supplies in particular, most suppliers make their profit by charging you as much as possible, which they do by offering you great prices on a small set of products and markups on a large set of related products that your users are just as likely, or more likely to order. For example, an office supplies vendor will give you the best deal on the 5 park of laser cartridges but the 10 pack will be 3 times the cost of the 5-pack, and the office manager, wanting to minimize orders, will order the 10-pack not knowing the 5-pack is the preferred product. And in electronics, they’ll give you a great deal on system configurations that sound good, but are sub-optimal, and then make money on upgrades a year later. For example, a desktop with the brand new processor, lots of space, and a HD screen, but only 4 MB of RAM when they know the default usage means that the machine should really have 8 MB of RAM. But there are only 2 slots, so both chips will have to be replaced at full retail rates down the road (as no special pricing was negotiated on upgrades, only full system replacements).

But it’s not just your indirect and MRO suppliers that will pull a fast one, any sleazy salesperson who sees an opening with a buyer who didn’t do their homework will pull a fast one. So if you don’t do your homework, and negotiate fact based, your organization is probably getting ripped off. Even if the costs are close to what they should be, chances are lack of hard fact-based negotiation means you missed out on value adds.

In summary, This Song’s Just Six Words Long, and whether or not you get ripped off is entirely up to you.

Vendor Scorecards DO Work – But Only if They are Done Right!

A recent guest post over Spend Matters by Andy Kohm, founder of VendOp, provided “4 reasons why supplier scorecards don’t work”, which is a terribly inaccurate and a disservice to the procurement space because

  1. They Do Work if done right and
  2. what he was describing was internal vendor surveys, NOT scorecards.

Even worse, if he had said internal vendor surveys don’t work, SI would have totally agreed and hailed the post because, frankly, internal vendor surveys don’t work. Expecting enough people to fill out enough long surveys to get statistically reliable data when everyone is overworked, underpaid, and tired of doing everyone else’s job (because no one has time to do their own) is just ludicrous. It’s not going to happen, and when it does, the data and answers are not going to be that good or reliable because the surveys will be filled out in a rush. And all the reasons provided by Mr. Kohm will hold true.

But you see, a scorecard, at least a proper scorecard, is not a survey, or a summary of soft, qualitative feedback survey scores, but a summary of hard, quantitative metrics built up from hard data over time. A scorecard summarizes hard performance metrics, KPIs, and unarguable (undisputable) incident counts, not subjective scores on reliability.

We have to remember that just like anchoring can be a problem in negotiations, it can be a problem in subjective ranking. If the last couple of interactions with the supplier were problematic, the recipient is likely to fill out a fairly negative score even if the 20 interactions before that were great and, overall, the supplier is batting 800. Similarly, if the last few interactions were particularly good (because the supplier knows their review is coming up and making extra effort just to score enough to pass), the recipient may rank the supplier very positively even though 8 out of 10 requests are ignored on average. In short, for reliability, surveys suck.

But hard scorecards, built on on time statistics, reject rates, incident counts, billing accuracy, and so on are unbiased, anchored in fact (and not fiction), and work. They allow both parties to zero in on true issues, problems, and disagreements, and work collaboratively to fix them. They are the best supplier relation management tool the average organization has at their disposal and should not ever be discounted. Proper scorecards are the solution, not the problem.

Future Trend 34: Digital Transformation

How did SI miss this one in it’s two in-depth series on the future of procurement and it’s follow up future trends expose???

This anti-trend is as old as the internet!

But let’s back up. Recently, the procurement dynamo published a piece on the digital transformation of procurement where he asked if it was a good abuse of language. In this post he started off by noting that the digital transformation expression is an overused buzzword — which is an understatement.

Secondly, as the procurement dynamo notes, no one has a proper understanding of what it actually means. the procurement dynamo attempts to rectify this by giving a clear definition of the term with respect to the also overused digitization and digitalization terminology. According to the procurement dynamo

  • digitization is the conversion from analog to digital … atoms to bits …
  • digitalization is the process of using digital technology and the impact it has and
  • digital transformation is a digital-first approach that encompasses all aspects of business

… and, in particular, digital transformation is a digital-first approach to the extent that digital can be applied.

And this means that this is yet another anti-trend in Procurement as leading organizations have been doing this ever since the adoption of e-Auctions. The best organizations have been adopting, to the extent possible, new technologies since the e-auction hit the scene 20 years ago. RFX. True e-invoicing. Supplier Information Management. Contract Management. Decision Optimization. And so on. The leaders (which are very, very few) have pushed for, and embraced, digital transformation for the last two decades.

And, to be honest, when you get right down to it, the concept of digital transformation is, as a farmer would say, hogwash. You’re either continually adopting and using the best tools and processes available to you, or you are counting down to the days your doors close. The organizations that have survived decades have embraced multiple technological revolutions. They’ve went from carbon paper to copiers to digital transmission. Digital transformation is just the latest technological revolution, and may not be the last. (If quantum tech gets perfected, you’ll have to move to technology based on qubits … a blend of atoms and bits.)

So don’t fall for the latest fad — keep focussed on the goal. Better business building.