2020 is Less Than a Year Away. And we still haven’t crossed the supply chain plateau. Part I

Six years ago tomorrow we commented on a piece by the Supply Chain Shaman who believed we had reached the supply chain plateau. This was based not on a gut feeling, but on an objective analysis of balance sheets of process companies over the course of a decade. The result: the average process manufacturing company has reached a plateau in supply chain performance. As bluntly stated:

Growth has stalled. To compensate and stimulate revenue, the companies increased SG&A margin by 1%. However, the conditions were more complex; the average company, over the last ten years, experienced a decline of 1% in operating margin, and an increase in the days of inventory of 5%. While cycle times have improved, the majority of the progress has come from lengthening of days of payables and squeezing suppliers.

And while SI still believes, as it did last year, that we have not reached the plateau, SI believes that growth is still stalled. As the Shaman conjectured, complexity has increased, but many well-intentioned executives still lack the understanding of the supply chain’s potential or how to manage the supply chain as a system. So while select projects in the hand of gifted buyers, departments as a whole are not performing as well, and often being managed even worse.

The core problem has not changed — manpower capability has not kept up. While leading vendors are building assisted intelligence technologies (and a few are experimenting with augmented intelligence technologies on the way to delivering cognitive, almost AI, experiences), the average organization, if they are lucky, are running on first generation Sourcing and Procurement systems from the early 2000s. And if they aren’t, they are running on spreadsheets and thoroughly outdated ERPs (as noted by the Supply Chain Shaman in the aforementioned article).

A year ago tomorrow we conjectured, in our post where we asked will this be the year we traverse the supply chain plateau, we conjectured the manpower capability issue was a lack of education. While the average practitioner is not educated enough, it’s certainly not a lack of education opportunities, so we’re obviously still missing part of the puzzle.

So what are the missing pieces?

Category Management Savings Drying Up More? Time to Cross-Strategize!

Last year we asked you in jest if category management savings were drying up, because we knew we were. We told you that the way to prevent this was to cross-source and cross-optimize across categories that can be shipped together from the same supply base. For example, while it might be logical to separate brass, bronze, and copper parts from a category management perspective, considering that some suppliers will likely supply parts across these categories (considering brass and bronze are alloys that contain copper), from a sourcing perspective it makes sense to source all three categories simultaneously. This way you can optimize logistics and negotiate additional volume discounts based on spend levels.

And this is still a great idea, but sometimes it’s not enough to achieve savings. Volume leverage is only one half of the equation, at the best of times. The other half is the strategy. Simply bundling additional volume and shipping it out for a bid isn’t going to do the trick if demand exceeds supply. Nor is putting a large volume up for an auction going to guarantee results even if supply greatly exceeds demand. Especially if the auction is not going to the right supply base.

The key is the right strategy for the right sub-set of the category. As the doctor penned in his series on AI in Procurement (Today Part I, Part II; Tomorrow Part I, Part II, Part III; and The Day After Tomorrow), and in his upcoming series on AI in Sourcing (over on Spend Matters Pro, membership required), it’s all about the right strategy for the right sub-category at the right time.

The key is, for each category product, service, or raw material, to analyze the state of the market and determine whether the best result is going to come from a catalog buy, a (3-bids-and-a-buy) auction, or a (multi-round) (optimization-backed) RFX and then slice up the category appropriately — then piece those slices together across related categories to get the necessary volume leverage to ensure savings in auctions, (optimization-backed) RFX events, or re-negotiations with incumbents. Just like there is no one-size-fits-all approach to categorization, there is no one-size-fits-all approach to sourcing events — even if everything worked the last time around. Markets change. Supply/Demand imbalances change. Buying power changes. Everything is in flux. And sometimes the third time is the charm … for your suppliers that can achieve a windfall at your expense.

Your Procurement New Year Resolutions

To save you time, the doctor has updated his short-list of the most important.

1. I WILL NOT READ PREDICTION ARTICLES

As the doctor has stated many, many, times, most predictions are old news or remanufactured shoes, as clearly explained in our long series on The Future of Procurement, where we tackled the same predictions you hear year after year after year and explained how some are, sadly, as old as commerce itself. Thus, there is no need to waste your time on them.

2. I WILL IMPLEMENT A BoB PLATFORM (FOUNDATION)

Last year we advised you to implement at least one new BoB Module or System, because, even if your organization is in the Hackett Group top 8%, the doctor can guarantee that there is at least one major Supply Management system or Source to Pay module you are missing (or lacking critical functionality in). In order to do a great job, you need a great system.

But, in addition to a great system, you need a great platform with a centralized data store and back office capability because the best system in the world is useless unless the right people are using it and everyone is working off of the same data and results with the access appropriate for them.

And very few organizations have a shared platform for S2C or P2P activities, and even less for P2P. And while the doctor encourages using BoB platforms as they can generate spectacular results when properly applied, those results need to be realized — which can’t happen unless the right employees can access the data in the applications they need to use. This means everything needs to be connected. This requires a platform.

Moreover, a platform with an open API, an open data store, and the ability to act as a master data store for all entities and transactions in the platform. Anything less is not a platform.

3. I WILL CONTINUE TO IMPROVE AT LEAST ONE TIME CONSUMING TACTICAL PROCESS PER QUARTER

There is absolutely no value in tactical work. This is where you hand over as much as you can to the machine that can do it faster, better, and cheaper than you. You can’t do millions of calculations and comparisons a second — it can. You can’t consolidate data from 20 different sources into a 20 page report in less than a minute — it can. Plus, as per the doctor‘s series on AI in Procurement (Today Part I, Part II; Tomorrow Part I, Part II, Part III; and The Day After Tomorrow) over on Spend Matters Pro and his upcoming series on AI in Sourcing over on Spend Matters Pro [membership required], now that assisted intelligence is widely available, and augmented intelligence is coming, there’s no excuse to do unnecessary tactical work.

Plus, as we clearly indicated last year, what you need to focus on is strategic work. Analyzing the top recommendations that come out of the Cognitive Procurement system to make sure they make sense, that the system didn’t miss anything, and that it works for your organization. And then figuring out if you have the experience and expertise to ignore a system market buy recommendation to go negotiate a better deal with top (incumbent) suppliers because your 20 years of insights gives you an edge that cannot be encoded. Or if the projected results from a market auction with the top 6 suppliers is better than your team would ever do with their complete lack of category experience. Your value is your ability to use your intelligence, not your ability to push paper. Let the dumb machines do that, and do what you were hired for!

Domo Arigato, Mr. Roboto Patoron!

A decade ago, Sourcing Innovation published a piece on how Every Check Has a Cost which echoed a point made by Paul Graham that one of the big differences between big companies and startups is that big companies tend to have developed procedures to protect themselves against mistakes while a startup walks like a toddler, bashing into things and falling over all the time and, as a result, over time, gradually puts in place rules and procedures and associated checks and balances to prevent it from falling over itself, especially when the fall results in a mini-disaster (such as a contracted supplier going bankrupt).

Thus, as the company grows, it will invariably accumulate more checks, either as responses to disasters or as a result of hiring people from bigger companies who bring more checks with them for protecting against disasters which have not yet happened (and which may never happen).

But this isn’t necessarily a good thing. Unnecessary checks cost time to document,, implement, support, and maintain, especially if it’s for a situation unlikely to happen or a situation that, when it happens, will cost the company less than the cost of the check and balance it has to go through day in and day out. For example, like checking the references and solvency of an office supplies, furniture, or an off-the-shelf electronics provider. Who cares. One goes out of business, 10 more down the street.

Or mandating committee review and on-site demos for what should be a $10,000 piece of software. As described in our classic piece, the more expensive you make a sale, the more expensive that sale is going to be. If it costs a vendor $30,000 to sell you what should be a $10,000 piece of software, they’re going to charge you $50,000 — $10,000 for the software, $30,000 for the cost of sale, $5,000 for the additional support they expect, and an extra $5,000 to make up for the commissions they are losing spend all that time with you.

Similarly, it’s costly to have a manager check every purchase over $250 made by an employee just because someone decided that should be an arbitrary threshold.

Ten years ago we said review all your checks and balances and get rid of the ones that don’t make any sense or cost you more than they would save in the worst case.

But now we are saying don’t just get rid of those, get rid of ANY manual check that doesn’t add value the majority of the time — and replace it with an automated system check backed by RPA (robotic process automation) driven AI (assisted intelligence) that determines whether or not there is enough risk to warrant a manual check.

With good risk models, good training data (common situations when a “mandatory” check resulted in an approval, common situations where a “mandatory” check resulted in a denial, and exceptional situations where a “mandatory” check resulted in a request for more information by the approver), good budget/spend data, contract/catalog data (and preferred suppliers), and organizational hierarchies (with well defined roles), a system can not only easily map into (definite) yes / (definite) no / more information / forced manual review buckets and improve its knowledge of typical organizational purchase and approval patterns over time and reduce the number of manual checks to those situations that are truly risky or truly unclear. Which is, to be precise, the only time a check should be applied. (And over time, it will be able to suggest better and better check rules that help an organization understand what, and only what, it should truly be checking.)

And when you implement the right software to automate these mostly unnecessary checks (on the road to eliminating them), just like you can slowly take the foam off the table corners and the training wheels off the bike, you will grow up as a purchasing organization and, after finally finding a proper use for RPA and AI, you will say:

Domo Arigato, Mr. Roboto Patoron!

Be Wary of Marketplace Solutions for Procurement

Spend Matters is running a series on Marketplaces (Part 1 and Part II) because, sadly, they are making a comeback. Why does the doctor say sadly? Because Marketplaces were designed by (specific) point-of-sale sellers to serve end buyers. They were never designed as full-fledged solutions for Procurement Professionals.

And to understand that, we have to step back and understand what a marketplace is. Traditionally, a marketplace has been a physical area where a number of individuals with goods to sell gather together to present those goods to whatever buyers happen to wander through. And these goods can range from food items and bobbles through clothing and accessories to high end electronics and even personal transportation devices or animals and, literally, everything in between. And payment can be cash, credit, promissory notes, or other goods in trade. And it has been like this for thousands of years. All over the world. Persistent, temporary (one day a week), and transient markets still exist in every county to this day (although my American friends like to call them swap-meets and flea markets, for reasons that perplex those of us with more British and French sensibilities).

Now think about translating this to the online world. You’d essentially be putting together an e-Bay where anyone can sell anything to anyone, but in addition to having to support payment in every online currency imaginable, you’d also have to support promissory notes or offline trading of merchandise, and, of course, implement mechanisms to track that. Does any marketplace support this? No. But this is not the real problem you need to be wary of Marketplaces as a Procurement professional.

The real reason is that they are NOT designed as Procurement solutions. A Procurement solution controls the universe of what’s available, at what price, to who, and when. This is essentially an integrated managed catalog solution. Now it’s true that modern Marketplaces are beginning to support this capability and allowing Procurement organizations who license an instance of the marketplace to restrict the catalogs, items, and have approval over the items and prices before they go into the catalog, but this isn’t really a marketplace, as sellers have limited control, no ability to negotiate, and no ability to provide better offers dynamically. So while it is more of a Procurement solution, it’s not really a marketplace.

Then there’s the issue that Procurement strives to use existing inventory and buy off of contracts, not from marketplace items, so you need a solution that will not allow a non-contract item to be bought when a contract one will do. Furthermore, you also need to buy non-catalog items and services and track those too, and will the marketplace do that?

And then you probably have the issue that you need to make different catalogs and items available in different locations if you are global, and restrict them to those specific solutions — so in addition to buying rules (no off contract items when there is an on-contract one and budget enforcement), you also need multiple view restrictions (or virtual marketplaces) in that single instance.

And then there’s the fact that you don’t typically pay item by item, you typically pay in bulk or monthly, as per a contract, or pay through another system. So you need more advanced accounting and payment tracking than will be found in a typical marketplace. And so on.

So, dear Procurement, be wary of a vendor that offers you a Marketplace solution for your maverick-spend or related Spend Management woes. Most of the solutions, which were really built for B2C, are not yet where you need them to be for B2B.