Authoritative Damnation #63: Board of Directors

Do we even need to say more? The Board of Directors can be your best friend, or your worst enemy. But either way, they’ll probably be your ongoing nightmare.

Their dictates drive your daily duties even more than the wacky whims of the CEO, because their dictates drive the CEO’s and CFO’s dictates, who in turn drive your daily duties. Do you really think the cost savings chant stems from the CFO alone? A good CFO realizes there are 2 big ways to make more money. Increase revenues — which can come from sales or investments — or decrease costs. An even better CFO will realize that you only have to do so much to appease Wall Street and will want to do whatever will increase revenues in the future, because that will increase the stock value, and fatten his nest egg when he sells out and retires (from the company). But if the board chants “savings, savings, savings“, his hands are tied and he will have to do his best country boy jig.

But it doesn’t necessarily end their. We all know that if this was the extent of the damnation caused by the directors, it would barely qualify as a damnation at all. Where do you think the outsourcing craze (and craze is the proper word) came from? The lease versus buy at any cost (because ownership is maintenance and maintenance is supposedly bad) craze. The move to contingent labour (because, apparently, benefits are bad too) craze. Just about any non-sensical craze you can think of usually originates from the wacky whims of a helicopter board member.

But it doesn’t end there. The board is also responsible for forced entry into markets. Forced entry into new product categories. Forced (use-my-buddy-Bill’s-business-or-else) supplier selection. And so on.

Director damnation is it’s own kind of damnation and sweep it under the table we shall not! Especially when this is one of the few damnations on our list that makes the eighth circle!

Environmental & Sustainability Damnation 17: Greenpeace

Yes, you read that right — procurement damnation #17 is Greenpeace. While it’s important that someone provide the voice of sustainability when your average organization can’t see beyond the Wall Street proclamation that the almighty dollar must come first, and must come as soon as possible unless you want your rating downgraded and your corporate brand value wiped out, this is a case where that someone has inadvertently done as much harm as good.

While Greenpeace is not an eco-terrorist organization, there’s a reason that the (US) FBI (Federal Bureau of Investigation) coined the term eco-terrorism and a reason that the FBI once called radical environmental activists the number one domestic terror threat, and, at SI we’re very sad to say that the reason is Greenpeace. Unfortunately, a large number of radical environmentalists take Greenpeace’s message too far and use, or threaten the use of, violence and sabotage of a criminal nature in an effort to get their responsibility and sustainability messages across. (This, of course, weakens their cause, but they still do it.)

Moreover, its fight to end the use of nuclear power, coal, and oil can be so crippling to a developing economy that still depends on those technologies (and that needs time to convert over to more environmentally friendly alternatives such as solar, wind, and water power) that Greenpeace actually poses a threat to economic security and India even barred international funding for the local branch of Greenpeace (while freezing its seven bank accounts) in April of this year (and, to date, Greenpeace India has only regained access to its two main domestic bank accounts and 25% of the funds in its foreign contribution accounts).

And when it gets a company in its sight, that company loses money. For example, Greenpeace demonstrators regularly put up blockades that prevent companies from clearing land, drilling for oil or mining for minerals, or ships from leaving ports (with a recent example being the blockage of a Shell drilling vessel from leaving port). Renting, maintaining, and staffing heavy construction equipment and ships costs a lot of money and everyday the equipment sits idle can cost a company tens or hundreds of thousands of dollars. This drives up the cost of the raw materials mined or harvested, and hits all our pocket books to the point that the tax credits we get in countries where Greenpeace is seen as a charitable organization is often less than what they cost us.

And if your organization ever gets in Greenpeace’s sights, the reason why it is one of only two organizations to be included on our Procurement Damnation list will become crystal clear.

Best Practices: What Are They?

There’s a lot of talk about best practices these days, but not every site will tell you what a best practice is. Technically, a best practice is a process that consistently demonstrates superior results compared to other processes that accomplish the same task. Best practices are necessary because, without them, an organization will not advance up the hierarchy of supply (as discussed by the maverick and the doctor in their article on “availability and delivery in a hierarchy of supply”) and will always be worrying about simply insuring supply and never able to truly focus on cost reduction, demand control, or value generation.

To illustrate why best practices are needed, let’s consider one activity at each level of the hierarchy of supply: supply (chain) visibility, cost modelling, demand management, and value management.

Supply Chain visibility is not as simple as getting all of your contracts in the system, mapping the supply chain for critical products down to tier 3 (or tier 4) raw material suppliers, and then setting up automated monitoring of news sources for potential disruptions. To simply take a supply chain map, set it (in the system), and forget it until an alert comes in is a disaster waiting to happen. First of all, the supply chain is not static. New contracts with new suppliers will be cut. Disruptions will force emergency substitutions to different suppliers. And the map will quickly get out of date. Moreover, not all disruptive events will make the (English) news sources the semantic event monitoring software will be parsing. For example, maybe the mining company went bankrupt, didn’t file for bankruptcy, and didn’t tell anyone. They just stopped shipping. The first inclination won’t be until a tier 3 component supplier realizes a shipment is a couple of weeks late. They may or may not tell the tier 2 subassembly supplier, who won’t realize this until a few months later when the tier 3 supplier’s shipment doesn’t show up because the tier 3 finally ran out of inventory. But it might still be a few more months before the tier 1 supplier realizes the assembly, which was being shipped slow ocean freight, doesn’t show up.

In order to ensure that the organization actually has supply chain visibility and a realistic chance of detecting supply chain disruptions, the organization will have to create procedures and processes to make sure the supply chain map is kept up to date, that regular communication happens up and down the supply chain, and that multiple news and data sources are monitored to catch indicators of potentially disruptive events. And then it will have to implement best practices to see that this is done, and verified, on a regular basis.

Now consider should cost modelling. A should cost model is only accurate as long as each of the cost components are valid. Just because the should cost model that was done two months ago indicated the likelihood of a potential savings opportunity, this doesn’t mean that the opportunity is still there today. A spike in oil prices (due to a disaster that required the temporary, or permanent, closing/capping of a well) could have jacked energy, and, in turn, production overhead and transportation costs that negated the savings that came from a demand/supply imbalance. Alternatively, if the projected cost trend was an increase, mandating the quick lock in, shifts in the market could have flipped the cost trend, which is now downward, and the organization may want to just spot buy for the next few weeks, or months, until the optimal buy time comes around. In order to benefit from cost models, the organization needs to have processes in place to make sure cost models are verified before each sourcing event, that each data feed is verified, and that the time is still right for the sourcing event.

When it comes to demand management, it’s good to identify a demand management opportunity, such as reducing the paper required by Accounts Payable by providing them with a second monitor so they don’t have to print out scanned invoices to re-key them in the system, but that only happens if the second monitors get bought, setup, used, and the AP staff change their tree murdering ways. There needs to be a process in place to follow up on the strategy, monitor consumption, and plot usage trends on a regular basis to insure that the projections are being met and that the plan is coming together.

Finally, when it comes to value management, not a single strategy can work without good processes and even better practices. Just specifying a MDM strategy is not enough to insure that it is properly implemented and followed. Cross-Functional Collaboration is more than a C-Suite mandate. SRM is both a process and a set of practices implemented by your relationship managers. And so on.

As we can see, each level of the hierarchy requires best practices to make sure the right workflows are followed and the expected results achieved.
Best Practices are what supply management thrives on. Furthermore, there is no single definition of a best practice for any function because any function that does better than the other practices available to you is a best practice, and it is not necessarily the best practice used by your competition.

Contract Lifecycle Management VII: Do You Know What The Nice-to-Haves Are?

In Part I of this series, we argued that CLM, short for Contract Lifecycle Management, while arguably one of the most humdrum acronyms in the Supply Management space, is also one of the most important. This is because, as summarized in Part III of this series, it overlaps S2C, P2P, and, as a result, S2S/S2P as well as intersecting with risk management, performance management, change management, and supplier (relationship) management. In other words, CLM touches almost every aspect of Supply Management and is taking a central place in your Supply Management organization.

However, as noted in previous posts, up until now, CLM has not been well defined and the best definition, which could arguably be that given by Gartner (see Part I), has been, more or less useless, because you already know proper CLM is a good process supported by a great platform. What you need to know is what that platform is as vendors, analysts, peers, and even professional organizations don’t, or won’t, tell you. That’s why, in a landmark effort, Sourcing Innovation and Spend Matters, as the two leading independent authorities on Supply Management, led by the doctor, the maverick, and the prophet, have joined forces to define, publicly and openly, the core Supply Management platforms, starting with CLM.

In prior posts we elucidated the need for a core CM (Contract Management) platform because traditional Supply Management platforms aren’t enough, in Part V we outlined the must-have core capabilities of a CM platform, and in Part VI we discussed the should-have capabilities that should be mostly present in any market-leading contract management platform.

Today we are going to outline all of the nice-to-have capabilities of a contract management platform, discuss a couple of them, and then refer you to “The Extended Contract Management Platform”, part seven of the landmark ten-part series co-authored by the doctor, the maverick, and the prophet over on Spend Matters Pro [membership required], for an in-depth discussion of each nice-to-have capability.

To make sure there is no confusion, a nice-to-have capability is a capability that, while not present in most solutions, can greatly increase the power, usefulness, and even the value of a Contract Management solution to your organization.

The following capabilities are defined as nice-to-have:

  • Contract Negotiation with Complex Pricing Support
  • Budget Management
  • Asset & Resource Management Tracking
  • License Management
  • Discrepancy & Sanity Checks
  • Violation Detection
  • Full Analytics
  • Contract-Based Project Management
  • Multi-Tier Contract Management
  • Process Integration with Sourcing, SRM, & GRC Platforms

As with the set of core and should-have capabilities listed in our previous posts, most of these you probably expect, and for some of these you probably have a fairly good idea why (even if you are not sure exactly what functionality is required for a proper implementation), but one or two of these are probably unexpected, including budget management and integration to 3PM/SRM (Third-Party Management / Supplier Relationship Management) & GRC (Governance, Risk, and Compliance) platforms. We’ll discuss budget management in this post, but refer you to The Extended Contract Management Platform, part seven of the landmark ten-part series over on Spend Matters Pro [membership required] for complete details on the other capabilities.

Budget Management is important because while spending should be against, and is supposed to be measured against, budgets, budgets are typically entirely disconnected from the Sourcing and Procurement process as they are created in the Finance system and typically not captured in most Sourcing and Procurement systems. However, once a contract is created, all spending on that contract needs to be tracked against the budgets that are impacted. Performance from Finance’s view is that not only is all spending covered by the contract made on contract at contracted rates, but that the impacted budget categories are also respected. If the contract is for office supplies, computing equipment, consulting services, etc., then just because all of the orders and invoices are compliant against the contract, it does not mean that the budget is being adhered to. If a department’s budget for office supplies is $10,000 and the department orders $20,000, it doesn’t matter if the savings was 20% if the department spent 100% more than they were supposed to. And since Contract Management naturally overlaps Finance, it’s a perfect place for budget management capability.

However, every other nice-to-have capability listed above could be just as valuable to an organization, and to understand why, and what the platform has to support with respect to those nice-to-have capabilities, check out The Extended Contract Management Platform over on Spend Matters Pro [membership required], part seven of the doctor, the maverick, and the prophet‘s landmark ten-part series fully defining CLM.

How Should Your Procurement Department be Organized?

Earlier this week we talked about the importance of a Procurement Centre of Excellence (CoE) with functional excellence in key processes that can elevate the efficiency and effectiveness of the organization against its goals and objectives (as well as stating that this does not mean you form CoEs within CoEs as that’s just redundant), but this whole topic begs the question, how should the Procurement department be organized?

When it comes to a departmental organization, there are three common theories as to how a Procurement department should be organized, which included decentralized, centralized, and centre-led. These days most consultants either preach centralized or centre-led. There are advantages and disadvantages to each model, and the best model will depend on the needs of the organization and, often overlooked, the suitability of the organization to the CPO’s leadership style.

In a centralized Procurement model, all Procurement is directed through a single, central organization. This has many advantages as it allows corporate spend to be fully leveraged, sourcing processes to be standardized, team knowledge to be captured and documented, and best practices to be improved through continual execution by a central team. However, the localized expertise that was specific to a business unit is often lost, maverick buying increases when local site managers do not agree with the centrally mandated decisions (and there is no technology platform that can be used to enforce the decisions), and reaction time to localized disruptions increases.

In order to try and minimize, or negate these disadvantages, some of the more advanced Supply Management organizations moved to centre-led models to try and achieve the best of both worlds. In the centre-led model, the organization forms a a centralized procurement centre of excellence (COE) focused on corporate supply chain strategies and strategic commodities, best practices, and knowledge sharing that leaves individual buys and tactical execution of categories that are not worth sourcing centrally to the individual business units. With appropriate category balancing, the centre-led model is believed to provide the best of both worlds — all of the advantages of the centralized and classic decentralized model of Procurement with minimal disadvantages.

However, until the specific needs of the organization are analyzed and the management style of the CPO is taken into account, it is hard to say which model is better. For example, if the organization is very centralized in its operations, and the individual departments, or heads of, are all in the same geographic area, then the perceived disadvantages of centralization are not there. There are no geographically dispersed units that can easily ignore the directives from a centralized organization, no delayed reaction times as the centralized team can quickly interact with the individual departments, and the localized expertise can be involved whenever it is needed. Moreover, there’s nothing to prevent a centralized organization from having a centre of excellence. The centre of excellence (CoE) is simply part of the Procurement team that focusses on best practices, market intelligence, education, and support for the rest of the team.

So the answer is, it depends on what’s right for the organization, as long as what’s right is identified, and built, with the goal of enabling and supporting a CoE in mind.