Two MUST READS on SpendMatters UK!

Today’s post is being pre-empted with a request to go and check out two great posts published yesterday over on SpendMatters UK that:

  • echo a point that SI has been screaming for years and
  • echo another point that has been pointing out for years to anyone who would ask


Post 1: The True Cost of Screwing Your Supplier

In “The True Cost of Delayed Supplier Payments” on Spend Matters UK, Nancy clearly explains just how much money you will save by extending supplier payments by 30 days on £1.2M annual spend against how much opportunity cost you will lose. An organization might think it will save a very pretty penny on the cost of capital by doing this, but the reality is that all it will save are a few copper pennies that the average CFO wouldn’t even bother to bend over and pick up if they were all dropped in front of him in a platinum-lined wicker basket.

The post works through the savings calculation in detail and the net result (with a cost of capital of 5%) is a whopping annual savings of £417! That’s right, over the course of a year you won’t even save enough to pay the consultant who forced this hare-brained scheme upon you. (Heck, you won’t even have enough to cover the executive lunches where the consultant pitched this hare-brained scheme upon you.) On the other hand, the organization loses a £60,000 benefit they could have gained from SRM (as well as any benefits they were getting as a customer-of-choice, as you’re no longer a customer-of-choice once you screw a supplier like this for no reason).


Post 2: “Made in X” – Legalized Piracy!

In ‘”Made in Nigeria” Public Procurement Policy Will Simply Lead to More Corruption’ on Spend Matters, Peter clearly explains how this new “anti-corruption” policy is just going to lead to more piracy at home (as if there isn’t enough piracy on the seas and over the internet as it is). You see, with the insistence that the government must buy local, and especially where there’s only a handful of suppliers, you’re just going to see cartels forming among the local suppliers for the purposes of colluding to double and even triple prices.

And this is the problem with any “Made in X” public procurement policy that insists that the government always buy local – for any category where the supply base is small enough, unless the product is a commodity that is sold in a local office supplies chain or store where public pricing can be easily tracked and monitored AND the government has a law that says the public sector cannot be charged more than the private sector MSRP or something similar, the public sector price is going to be significantly more than the price on the open market.

SI strongly recommends you check both of these posts out as both of these posts were, literally, between the posts.

 

Authoritative Sustentation 63: Board of Directors

As per our authoritative damnation post on the board of directors, they can be your best friend or your worst enemy, but they’ll probably be your ongoing nightmare because their dictates can drive your daily duties even more than the wacky whims of the CEO.

If all the board does is chant “savings, savings, savings”, then guess what the CFO has to chant. That’s right! “Savings, savings, savings.” But this isn’t the only craziness the board can throw your way. They can get razor-focussed on outsourcing. They can decide that the organization should have no FTE obligations and try to make as many jobs as possible contingent labour. Or they could decide the organization has to acquire or merge with someone soon and task you with supply chain analysis of the most likely candidate organizations.

So what do you do? Dance to their tune every time it changes? Well, you have to — but we’re no longer in the age of the folk, ballroom, or line dance, so you should do your best to make sure those aren’t the dances that come your way. How do you do that?

Stop waiting to follow the leader and start planning to lead the leader. What do we mean? Regardless of any lip service the executive or the board may throw towards the press about a desire to do support minority businesses, increase overall sustainability, or focus on innovation, they profit when the company profits, and profit, which they generally associate with higher revenues (which they demand of sales) and lower costs (which they demand of Procurement), is all they really care about.

So if you want to stop looking for illusive, and possibly non-existent, savings, then start focussing on how you can increase profit and come up with value-generation plans that you can sell to the board.

For example, Procurement can add value by:

  • helping Sales sell into new markets
    maybe the problem is high distribution costs, which Procurement can rectify as it’s already sourcing from the market and knows the lowest cost shippers;
  • helping Finance improve working capital
    as it’s understanding of in-depth cost modelling and (strategic sourcing) decision optimization can help it work with finance to create an optimal payment plan model that optimizes early payment discounts, invoice factoring, and supplier interest charges or late fees
  • helping Engineering improve quality and lower costs during NPD
    as a leading Procurement organization has expertise in Supplier Management

And Procurement can bring a plan to do so to the board before the board gives it a plan that would take it back to the Procurement dark ages.

Nine Hundred and Fifty Years Ago Today

Westminster Abbey opens.  While this Church of England is not the oldest building, or even the oldest church, in the United Kingdom (as St. Martin’s Church in Canterbury dates back to 597), it’s one of the most known religious buildings in the United Kingdom that is the traditional place of coronation and burial for the British monarchy.

While this structure has very little to do with Supply Chains, it goes to show how long something can last when it’s built right and maintained.

Mass Adoption of Optimization via Modern Sourcing Platforms

In a previous post, we addressed three common misconceptions about sourcing. In this post we expand upon those corrections we provided to give you six pillars of a properly designed optimization-based sourcing platform.

The three pillars of a properly designed optimization-based sourcing platform that we addressed in our last post were:

  • Useable by everyone, including the most junior of buyers
  • Affordable as any other sourcing platform
  • Efficient, decreasing event set-up time by at least a factor of 2 to 3

In addition, an optimization-based sourcing platform is also:

Powerful

Optimization is powerful. A modern optimization engine can solve sourcing problems to 99.9%+ optimality in a matter of minutes, even if they require tens of thousands of variables and hundreds of thousands of equations to describe. The platform is effectively evaluating hundreds of thousands, or millions, of different award splits in a matter of minutes.

Valuable, more so than any other sourcing platform

Simply put, optimization gets amazing results. Even if the category has been negotiated repeatedly over the last ten years, and it looks like the savings opportunities are razor thin, with the ability to analyze more suppliers, more bids, more transportation options, more value-add options, more constraints, and more supplier-specified opportunities, optimization can often identify an additional savings of 10% or more. In fact, the year-over-year average savings from optimization alone on the categories it has been applied to has been clocked at 12%, more than any other sourcing platform.

Insightful

With optimization, you can create different scenarios, with different suppliers, constraints, and goals and see how the optimal awards differ as the problem definition changes. This inspires a sourcing analyst to look at the problem in different ways.

However, the first three statements in particular are only true if the platform used by default is an optimization-backed sourcing platform . Classically, optimization solutions have been implemented as stand-alone platforms. These were powerful, and when used by the right senior resources who set up the right sourcing events, these platforms generated amazing results, but they were very difficult and time-intensive to use compared to an e-RFX or e-Auction platform. The model had to be set up. RFX data had to be imported. The data had to be validated and cleaned. The model was then run, altered, and re-run until an acceptable baseline was found. Then multiple what-if scenarios were run until a final award scenario was identified. Then the award scenario had to be exported to the sourcing platform so the suppliers could be notified and the contract(s) drafted. All of this was very time consuming. As a result, the platform was not useable across the sourcing organization, was not very affordable as it had to be supplemented by other sourcing platforms, and this process was definitely not efficient.

For mass adoption of optimization, it needs to be supported by an RFX and/or an e-Auction platform for data collection, by analysis and reporting for result presentation and exploration, and needs to be integrated with contract management and the supplier portal for negotiations and communication. In other words, optimization is the engine that powers the modern sourcing platform, it is not a stand-alone solution.

That’s why a modern optimization-based Sourcing platform, and not a standalone optimization module, is the silver lining that Procurement has been waiting for. What does this platform look like? Stay tuned!