The UX One Should Expect from Best-In-Class Optimization … Part I

In our last four posts, we dove deep, really deep, into the basic requirements for any modern e-Negotiation platform (which we defined as e-RFX and/or e-Auction) and then dove deeper into the additional requirements for any e-Auction platform that claims to be a modern, best-in-class, e-Auction platform in the year 2017 (not 2007, where some seem to be stuck — but we won’t talk about them). [See Best-in-Class e-Sourcing Part I, Best-in-Class e-Sourcing Part II, Best-in-Class e-Auctions Part I, and Best-in-Class e-Auctions Part II.] But we excluded optimization for a reason, because the requirements for optimization go beyond — way beyond — the requirements for even the most intense set of requirements for the most advanced e-Auction platform (which can support bills of materials and constraints).

Last Thursday, over on Spend Matters Pro [membership required], the doctor and the prophet posted the first article in our four part series on “What to Expect from Best-in-Class Sourcing Optimization Technology and User Design (Part 1)” (that’s right, 4-part series), where we begin our deep dive into what best-in-class sourcing optimization looks like and how form follows function from a design perspective.

First of all, optimization is important — and about to become even more important as savings go up in smoke due to inflation, protectionist policies, and insufficient supply of raw materials. Why do you think Coupa spent a healthy chunk of its IPO proceeds to purchase Trade Extensions. (They might not understand what they bought, or how to use it, but they saw the future and wanted to get in the game early enough to have some time to, hopefully, figure it out before their competition.)

Secondly, it’s the only advanced sourcing solution that has been demonstrated, when properly applied, to generate year-over-year returns over 10% (and an average of 12% according to two of the first back-to-back studies conducted by Aberdeen last decade). Plus, unlike spend analysis, which only identifies the high-level savings opportunities (which can only be captured if appropriate events are undertaken, possibly based on optimization), optimization produces the exact award scenario required to generate the savings.

Third, and most important, optimization identifies opportunities for both savings and value generation that no other platform can. Opportunities and supply chain designs no human, even with thousands of spreadsheets, will ever identify. It’s the foundation for a new sourcing age, but one that will only happen if optimization gets adopted, which will only happen if it provides a great user experience (as that’s the only thing that will overcome the math-based fear that surrounds it).

So what does such a platform need? Many, many things (as we dive into in What To Expect from Best-in-Class Sourcing Optimization Technology and User Design (Part 1) [membership required], but one thing it requires is powerful cost modelling.

You see, true calculation, and optimization, of the cost of goods sold requires complex breakdowns and formulas because, in practice, with even the most “vanilla” or simplest of products, there are fixed costs and variable costs and that these change at different production levels. For example, there are fixed costs to set up and start a production line, and then variable costs for each production level depending on raw resources, energy and manpower required to produce the product. And that’s just the beginning. You also have to worry about import / export tariffs, taxes, logistics costs, utilization costs, warranty, return, and disposal costs and a host of other category specific costs. If the costs aren’t modelled accurately, they can’t be optimized accurately. A great optimization platform thus supports flexible and powerful user defined cost models that break down costs as needed and to levels where individual elements can be optimized when possible.

And this is just the beginning.

Stay tuned for Part II in our series.

Once Upon a Time, Not So Long Ago …

Investors used to look for the long term. Even Wall Street promoted companies that looked to the long term. Companies would form, and invest in, R&D labs that wouldn’t realize products for five years and returns for ten. Because they knew that, with the right investment, over the right amount of time, the payoff would be enormous. Maybe even gigantic. 10X would happen, and more. Maybe 20X or even 30X. Not over night, but over time. They didn’t expect 10X returns in 3 years. They were willing to wait a decade or more.

Who wouldn’t be willing to wait a decade for a 10X return. Especially when 10X your money every ten years means that in 30 years you’ve increased your money by 1,000. That means that 1,000 today nets you 1,000,000 in 30 years. Given an average rate of inflation of 1.35% per year, in 30 years, you’re 1,000, uninvested, would have depreciated by a third. And the thing is, if you invest in a relatively safe bet, your odds of getting that 10X return in ten years are quite high. Considerably more than the odds of investing in a random startup. Whereas the odds of investing in a new startup with barely an MVP, no track records, and essentially no real, paying customers might be 1 in 10, the odds of a company or product that is solid, growing organically, and currently experiencing year over year growth at a rate of 30% to 50% continuing to grow at that rate is likely at least 50% with the right investment. A growth rate of 30% over ten years increases your money by a factor of 13.79 and a growth rate of 50% over ten years increases your money by a factor of 57.67. If you started with 3,000 and only every third bet paid off, you’re still getting that 1,000,000. In fact, you’re probably getting 2,000,000 to 3,000,000. So why wouldn’t you play it safe and wait?

If you’re not a total idiot, you would. So, taking the same logic, in Procurement, why do you push for savings today over value tomorrow? Even though real savings go straight to the bottom line, fake savings don’t. And when you get taken in by a large near-term potential savings opportunity, chances are it won’t materialize whereas a long-term value-generation plan, that comes by way of supplier development that will lead to guaranteed savings through lean process improvement, elimination of a dependency on a rare earth metal or other raw material in limited supply, reduction in energy usage requirements, and so on.

So what do we mean by fake savings? Fake savings is the projected savings opportunity that comes from an award allocation that requires shifting a large part of supply to an unproven supplier, or an untested product, typically in a low cost country, that looks great during an auction, but will never materialize because the buying organization didn’t do a detailed cost analysis and doesn’t realize the extra costs with offshoring or switching.

For example, maybe the supplier doesn’t speak, or read, English as well as they claim and stated they could fulfill a requirement with their current manufacturing line, but couldn’t, and needs to make additional investment and production line upgrades, which will take the plant offline for a few weeks. This could result in a significant delay which would, in return, result in lost sales and possibly even lost customers. This is costly. Or maybe the supplier can’t produce products of the same quality, and the defect rate is not 1%, but 5%. Not only will this increase costs by almost 6% off the top as you will have to order 6% more product, but then there is the return processing and warranty costs and costs associated with dissatisfied, or defecting customers. Or maybe the supplier hid the true costs associated with the product by claiming their product fell under one H(T)S category, but actually falls under another, at double the tariff rate. Or maybe they gave you their office address and you modelled logistics costs based on that, but their factory is 200 miles away in the middle of freakin’ nowhere and your logistics costs are 30% higher. And so on.

The reality is that mega-savings don’t exist in big, strategic, established categories where experts have been digging for savings year over year. Generally speaking, you’re not going to find more than 10% to 12% in an established category, and you’re only going to find that level of savings once every five years on average, and only using strategic sourcing decision optimization which looks at the global category and all the viable options that go beyond what a buyer can consider or an auction can capture.

And once those big savings are found in the category, the next round of savings will only come from supplier development (and that’s why you have to cycle through all your categories over a three to five year period with optimization as the next round of deep 10%+ savings won’t come until new innovations materialize that more progressive suppliers adopt that can allow for the next level of savings in the category). And that’s why it’s often better to invest in long term value generation than short term savings. Big savings rarely materialize in the short term but investments in long term value, like investments in solid companies and products, almost always pay dividends year over year over year.

So, with the greedy Wall Street mindset running corporate America these days, will we ever return to “Once Upon a Time …”?

How do you explain the importance of Procurement to a CFO or CEO?

O’er on Spend Matters UK, the public defender does a great job of figuring out how we would explain Procurement to a (hyper-intelligent) alien race who has no concept of what it is or why it is needed in his post on “back to procurement basics – explaining to an alien”, which is a must read, but I don’t think that would ever be a problem.

Any alien race smart enough to build and pilot spaceships that can exceed the speed of light and traverse vast distances to get from where they are to where we are in a lifespan would obviously be smart enough to understand why beings of lesser intellect have to specialize to do well, and that these beings of lesser intellect would have to work together, and come up with a system (the corporate world) to allow that, as flawed as it may be. They’d get it.

Our real problem is explaining the importance of Procurement to an old-school CEO who still thinks success is all about sales (and marketing to pave the way) and a CFO who thinks success is all about cost control, especially internal, and trying to pay peanuts rather than wages and rates that would incentivize someone to success.

I challenge the public defender to come up with an explanation that an average old-school CEO who only ever studied operations and came up through (Sales or Marketing) Management or traditional Finance would not only understand, but understand to the point that he (let’s face reality, these narrow-minded CEOs are usually male) would embrace Procurement and the value-based vision we run off of.

Bonus points if it changes the viewpoint of someone who graduated Trump University.

When Selecting Your Next Supply Management Solution Remember …

All opinions are not equal. Some are a very great deal more robust, sophisticated and well supported in logic and argument than others.
Douglas Adams

This is something that should always be kept in mind when soliciting opinions on a perspective solution for Supply Management. Consider who you are going to ask:

  • Your co-workers.
  • Your peers on a user group.
  • Vendor references.
  • Vendor representatives.
  • Analysts.
  • Bloggers.

Consider their average perspectives.

  • Co-workers: probably didn’t look under the UI covers of potential solutions because, like you, they are too busy …
  • Peers: stuck in a single world view provided to them by their vendor … and they are gonna love it or hate it …
  • Vendor References: peers who absolutely love the solution (or they wouldn’t be given to you) …
  • Vendor Reps: there to sell their solutions, so they will give you the best of theirs and the worst of their peers …
  • Analysts … will give you a reasonably fair comparative analysis of the vendors they know … which are typically the ones that made their quadrant … which are typically the biggest companies and/or their biggest customers …
  • Bloggers … who will tell you everything they know … but unless you pick the blogger who specializes in that area … it won’t be everything you need … but, with the exception of analysts, far better than the rest because they do their research on each vendor they cover …

In other words, when trying to select a solution and soliciting opinions from your internal survey, not all responses should be weighted equal. Insight from those who have done their homework should be weighted more heavily than from those who quickly assessed a UI and decided they like the Amazon-one best (even though a B2C interface may be totally unsuited for the task at hand) or from those with restricted world views (which make them experts on one vendor in the final three but not the other two).

Keep this in mind if you want to truly select the best solution.

Why Advanced Sourcing Is Not Progressing …

“Protect me from knowing what I don’t need to know. Protect me from even knowing that there are things to know that I don’t know. Protect me from knowing that I decided not to know about the things that I decided not to know about. Amen.” That’s it. It’s what you pray silently inside yourself anyway, so you may as well have it out in the open.
Douglas Adams, Mostly Harmless, Chapter 10

Regular readers will know that there are a couple of scary statistics in this space. First of all, almost 40% of Sourcing / Procurement organizations don’t have any modern, Sourcing / Procurement specific, applications tailored for their jobs and are still making do with e-mail and spreadsheets and Microsoft products. Ack!

Secondly, the number of organizations with advanced sourcing solutions, such as modern spend analysis (with predictive and prescriptive analytics), decision optimization, and contract analytics is much, much less. For the former category, we might hit 50% of organizations this year (as spend analysis is all the rage) but for the latter (which is what identifies the real missed opportunities and captures them), maybe 20% of organizations with solutions. Maybe. Ack! Ack!

All this despite the fact that SI has literally spent over a decade trying to convince organizations to buy these solutions, even though the first (and even second generation) were clunky and sometimes difficult to use. (Unlike e-Procurement, which has to be easy to generate value, if a solution can save you 10% on a 100 Million category, you can put up with a bit of pain to save 10 Million. Heck, you can put up with a lot of pain.) However, we’re at generation three now and they are almost as easy to use as search, click, buy e-Procurement systems. They have smart templates, smart workflows, and dozens of validity checks and while you still have to know what you are doing and what the solution does, what used to be days of setup can be accomplished in hours and processing that used to take days sometimes finishes in minutes. They should be ubiquitous, but they’re not.

Why? Because even though the solutions have improved considerably over the past decades, the staff of these Procurement departments have not. They still use old tools and they still believe the solutions now are just more colourful and fanciful versions of the solutions then. And thanks to an utter lack of training (due to budgets being cut year after year after year during crunch times despite all the lip service to the value of talent and training), they don’t know better. And like poor Arthur Dent, they just can’t fathom how the old man walks from pole to pole and crosses space like it’s just not there. (Because that’s what these solutions do. They literally cross hyper-dimensional solution spaces you can’t see like they aren’t there.)

And, like Arthur, they say their daily isolationist prayer because they can’t handle it any other way. But it’s not their fault. It’s management’s fault for cutting the training budget year after year and leaving their team in the Supply Management dark ages. And now we’re all suffering.