Procurement 2020: We’re Off Track, But Can We Get Back on Track? Part II

In part one, which lamented our recent post that asked if we were on track for Procurement 2020 because the reality is that we are way, way, off track, we discussed business process sourcing, supply performance management (SPM) and supplier relationship management (SRM), and knowledge management, three of the six levers that need to be properly pulled to get Procurement on track for 2020, as identified by Hackett way back in 2008. In this post, we will discuss the other three levers and discuss whether or not there is still time to properly pull them.

Talent Management

While tomes can be written about this subject, of all of the fixes that are required, this is the easiest. All one has to do to get things back on track is to reinstate the training budget, give the team the time to get and take training, give Procurement the resources it needs to attract and retain top talent, and sit back while the talent takes your Procurement up a notch. That’s it. It really is easy-peasy. You don’t even need the big red button!

Next Level Strategic Sourcing

This is also an easy fix. Get a true next generation sourcing platform designed for complex tenders that can support true strategic sourcing decision optimization and next level sourcing, get training on what next level sourcing is, and just do it. For more information on what this is, check out Sourcing Innovation’s paper on Optimization: What Comes Next and its upcoming paper on Complex Sourcing, being released on October 7th.

New Product Development & Introduction

Once processes are under control, knowledge is captured and maintained, talent is where it needs to be, platforms are in place, and next level sourcing processes have been instituted, Procurement is going to get results and respect. When it is able to demonstrate to Engineering how involving it earlier in the process will save money and increase value, it will get invited to the table earlier in the process and will eventually be asked to consult and provide guidance on every NPD/NPI opportunity. It will help lead the organization into new markets, rather than just scrambling to make the best of the poor situation it is placed in. And it will be able to do this because it will already have collected the market knowledge, already have cost model baselines that it can use to create should-cost models, already know where to look for the market intelligence to predict the costs associated with different options, and so on.

In other words, we can get back on track, but only if some major changes happen.

  1. Talent needs to come first.
  2. Knowledge needs to be captured.
  3. Platforms and processes need to be in place to support purchasing and capture spend.
  4. Suppliers need to be engaged, monitored, and developed.
  5. Sourcing needs to be taken up a notch.

This is all feasible with today’s knowledge and today’s platforms, and the vision can be realized, but a serious commitment has to be made by the organization which also has to stop focusing on, and more importantly, measuring Procurement on savings and savings alone. It’s not cost reduction. It’s cost avoidance and management. It’s knowing that going too far to save a penny today will cost a pound tomorrow. It’s making the best overall decision to not lower costs now at the expense of being locked into higher costs for for years to come when the organization should be investing in suppliers and platforms that will generate additional value for the organization down the road.

Will it happen? In a few, forward thinking organizations, yes. In the average organization still dancing to the drum of Wall Street, probably not. And it’s a shame. But as global market situations worsen and short-sighted companies begin to fail, far-sighted companies, where Procurement is encouraged to take a longer term view, will gain market share and those that re-institue long term five and ten year plans will prosper the most. While the state of affairs won’t be what they should when we reach 2020, maybe 2030 will see an improvement (and Procurement optometrists will have to adjust their vision scales).

One Hundred and Ninety Years Ago Today

We entered the age of the steam locomotive when the Stockton and Darlington Railway is ceremonially opened in North East England as the world’s first public railway to use steam locomotives. One of the first uses of this railway system, and the steam locomotives that powered it, was the movement of coal to ships, and the age of steam-powered logistics began.

Soon after their introduction, steam locomotives dominated the world of railway transport until the middle of the 20th century (when they were gradually superseded by electric and diesel locomotives). However, they dominated the railways for well over 100 years (as evidence by Walter Lucas’ 1981 collector’s edition release of 100 Years of Steam Locomotives as they retained their dominance in the US until the 1950s and in the UK until the 1960s). This is not surprising considering that, near the end of their reign, they were capable of producing over 6,000 horsepower (as the Union Pacific Challenger could in 1936) and even the smaller locomotives at the time were capable of producing over 3,600 HorsePower (including the 4-8-4 Northern Class Locomotive #3101 built in 1928 by the Canadian Pacific Railway in Montreal, see this silent film).

And these steam engines changed the world. Steam power, first widely used in steam locomotives, not only transported the goods created during the industrial revolution, it drove the industrial revolution. It powered the factories, the ships, and the locomotives. And on land, nothing was more powerful, or faster, than the locomotives for transport.

Procurement 2020: We’re Off Track, But Can We Get Back on Track? Part I

As per our recent post that asked if we were on track for Procurement 2020, we’re off track. Way off track. So far off track that we can’t even see which direction the track was in.

Hackett told us way back in 2008 what we needed to do to get where we needed to be, but most Procurement organizations are still nowhere close to where they should be, even though most of it is easy-peasy.

Business Process Sourcing

This is easy to get under control, it just requires some good planning and process mapping. Specifically, an organization has to map all of its processes, define the knowledge-centric strategic aspects versus the manual-processing tactical aspects, and then figure out the benefit of each part of the process with respect to the cost.

If the benefit is low, the cost is high, and the process is tactical, it is a prime candidate for outsourcing. If the cost is low, the benefit is high, and the process is knowledge-centric, the process is a poor candidate for outsourcing. Organizations need to maintain their knowledge and strategic advantages and outsource that which brings them no benefit when performed internally.

An organization that takes the time to map its processes and understand them can find the right candidates for outsourcing and manage them appropriately.

Supply Performance Management (SPM) & Supplier Relationship Management (SRM)

While this was a major oversight in first generation Sourcing systems, this is a common module in second generation Sourcing systems and over the past few years a number of expert consultancies and solution vendors have come on the scene that can help you get your SPM and SRM processes up to snuff. They have n-step processes that can be used to help you get an understanding of where you are on the SPM and SRM maturity curves, what you can do to get better, and how you can figure out how you compare to the market average and the best-in-class.

In addition, there is a lot more information on SPM and SRM, what it is, how to do it, and the importance of it to your supply chain on the various blogs and publications then there was a decade ago. Those who seek out and make use of this information can progress well ahead of the curve. (And a couple of overviews will be made freely available to SI readers over the next month or so as part of a larger offering … stay tuned.)

Knowledge Management

A decade ago, it was unheard of to have more than half of spend under management, and if you said that one day you’d have integrated spend data, you risked being put in an asylum. However, with modern platforms that provide an organization with the ability to not only push all payments through a common platform, but all purchases through a common platform that supports integrated internal and external catalogues — whether they be cXML punch-out, EDI, flat-file, data-base driven, or custom entries — things have changed. When all requisitions and purchases can go through one platform, all spend gets in one database, and the organization has visibility into all of its spend and can plot a course to get the majority of its spend under management.

In other words, we can return the engine to the tracks, but an effort will have to be made to do so. How much of an effort? Stay tuned for Part II.

Consumer Damnation 74: Demand Planning

Each group of customers are a damnation upon themselves, and they will get the attention they deserve, but demand planning to meet customer demand is its own damnation. Why is this?

Traditional demand planning models require historical data.

To be precise, they require a fair amount of historical sales or usage data in order to be accurate. And sometimes a lot of sales data. But with new product introductions coming fast and furious every day, there are so many categories without a decent amount, if any, historical sales data that it’s hard to make good predictions. Now, one can always use the most similar product, or the product the new product is expected to replace, but this weakens the model and the confidence in the result.

Traditional demand planning models require market predictability.

To be more precise, they expect that the market will not substantially change. That the needs will stay the same. The utilization or replacement curves will stay about the same. That a competitor won’t substantially increase or decrease their market share overnight. That a revolutionary new product won’t be released that causes a huge market shift.

Traditional demand planning models require market foresight.

In addition to requiring historical data and market predictability, traditional demand planning requires market foresight. Knowledge of potential competitor product introductions that could change the market demand. Knowledge of innovations that will begin demand shifts. Knowledge of general market conditions that could delay replacements or result in reduced demand due to cash availability.

Demand Planning requires knowledge of the expected price point.

Most products are services, especially in the end consumer market, are very price dependent. People will pay more if they perceive more value, which could be better quality, more functionality, or owning an iconic brand, but if they don’t perceive more value in your product which is priced higher than a competitor’s product, don’t think for a minute, even if they bought from you last time, they won’t shift. And price prediction is difficult if it is dependent on production cost, which can be variable if transportation can involve unpredictable fuel surcharges, raw material prices can skyrocket due to insufficient supply as a result of a disaster, and labour prices are dependent on contingent labour to meet demands at peak periods.

In other words, sometimes demand prediction models fall flat, and demand projections come from a place that can only be seen by a proctologist with a flashlight, so how do you effectively plan for those as a Procurement Professional? You don’t. It’s damnation.