Why Good Procurement Goes Bad. Part I.

Most poor-performing Procurement departments don’t start out bad. They start out with the intentions of doing a good job, at least as good as any other department in the organization (although not necessarily a better one), but somewhere along the way, they stumble, and sometimes fall. And since there are not enough best-in-class Procurement organizations, (8% is a small number), and since there are theoretically more good people out there, we have to ask: why does good Procurement go bad?

Strategic Blinders

The first thing a new(ly formed) or re-staffed Procurement organization does is try to get organized. As they have not yet acquired a Procurement tool, been given budget for a Procurement tool, or even know the right tool exists, they turn to the tool they know — the spreadsheet. Spreadsheets really limit a Procurement professional’s view of what can be done with modern technology — how efficient Procurement can be, how effective they can be in their negotiations with correct and properly weighted bid and survey data, and how complete they can be in their supplier evaluations (as they don’t have to rely on one size tis all surveys for each supplier, which easy supplies different products and services). Spreadsheets are a Technological Damnation, often result in 20 Million in the scrap-heap, and sometimes cost you billions. There’s no such thing as good spreadsheets. The strategic technology choice to get started is often the technology choice that ends it all.

Efficiency over Effectiveness

Process is good, often very good. It increases efficiency, creates operational standards, and provides a repeatable baseline for junior buyers to follow. And no organization should be without processes. But sometimes, in their haste to be the best, Procurement departments wanting to do as much as they can as fast as they can often rush to get as many processes as they can in place to be as efficient as possible. But not all processes, even best-practice processes, are right for the organization. Adopting the wrong process and running with it can hinder Procurement’s effectiveness beyond no process at all. Having a process that all spend between 20K and 200K goes to an auction, while efficient, will be very ineffective if the wrong categories are put to auction.

Another process that blinds Procurement departments trying to get spend under control is the classic 3-bids and a buy. It is better than no bids at all, but there right number of bids is not always 3. For some events it’s 30 — as many supplier who can supply satisfactory non strategic products. For some events it’s two — because the strategic nature of the custom-manufactured nature means that only a couple of suppliers are up to snuff to start producing today.

And even if the process was good in the beginning, a process that goes unchanged for years and becomes an unquestioned routine can miss new opportunities. Gathering the same old, same old intelligence from the same old, same old sources can miss new intelligence from new sources that could identify new, innovative suppliers and products that could be game changers.

These are just a few reasons good Procurement goes bad, but not the only reasons. In Part II, we will explore more.

Marketing Needs Procurement Now More than Ever!

On June 7, 2016, K2 Intelligence released “An Independent Study of Media Transparency in the U.S. Advertising Industry” on behalf of The Association of National Advertisers (ANA), and it is scary.

If you think that the antics of the Mad Men and the mis-leading management consultants in the House of Lies are bad, if only it was as bad as seen on TV. And by that the doctor means that if that was as bad as it gets, it wouldn’t be so bad. The truth is, as bad as you can imagine the situation is when it comes to agencies handling, or more accurately, mishandling your money, it is much, much worse.

Just like financial analysts, financial consultants, wealth management advisors, and other non-financiers don’t have to advise you on what’s best for them (and, in fact, usually advise you on what will add the most cash to their compensation, see this great expose by the one and only John Oliver), your agency has no legal authority to advise you on what’s best for you or spend your money in the best way possible. The most they have to do is deliver the artifacts in the contract and do so in a manner that can be reasonably justified as meeting the requirements (or at least in a manner that a lawyer can argue meets the requirements).

They don’t have to tell you that they get rebates for volume business to their suppliers that they don’t pass on, financial incentives in the form of free media or cash, and that they sometimes take on transactions as principal transactions, outsource all the work, and sell it back to you at markup. The talent they offered up might not even touch your work! Many agency principles hold equity stakes in the media suppliers they use and so profit twice off of your work. Some respondents to the survey also noted that their obligations to their respective Agency Holding Companies were in conflict with the interests of their clients (and had no problem with this). They had no duties beyond the contract. WOW!

This is a rather intensive report at 60 pages, but the summary speaks for itself. Procurement needs to take heed of what happens when agency relationships are not vetted, very well defined, carefully managed, and fully transparent — especially with respect to the cashflow.

And it needs to make sure the organization has Agency Management solution, and that both Procurement and Marketing make use of it.

To understand why, read the free report that is “An Independent Study of Media Transparency in the U.S. Advertising Industry”.

Supply Risk Management Can Not Be Siloed

In our post on Playing With Fire, we indicated that your supply chain was full of hidden risks, ready to materialize unexpectedly at a moment’s notice and bring your supply chain to a crippling halt as your bank account bleeds dry trying to deal with the damage. Risks that, in many cases, could be mitigated and prevent the organization suffering and, in some cases, losing 100 Million to fines alone.

Why? Because the average organization is not spending the time and resources required to properly manage risk, or if they are, they are not managing risk appropriately. There are a number of reasons for this, including:

  • Lack of Resources
    most organizations do not have enough people with the right expertise to effectively manage and monitor supplier sustainability efforts, and sometimes this is because there just isn’t the budget for the resources
  • Lack of Time
    most of the skilled resources in an organization barely have the time to do their jobs properly, and since risk management is hardly ever anyone’s primary job, it typically becomes a side issue
  • Lack of Immediacy
    even though there may have been hundreds of smaller incidents in the supply chain that resulted in small fines, unexpected cost increases, disruptions, and minor brand damage, if no single incident has been severe enough to get the C-Suite’s attention, something else will always be higher priority
  • Lack of Cohesion
    most risk management and sustainability efforts grow organically over time as different functions encounter risks, regulations, or sustainability objectives that need to be addressed — this results in a fragmented approach to risk management that is inefficient and ineffective

But regardless of the reason, fragmented risk management does not work. It’s the biggest reason that many organizations are losing millions, if not billions, of dollars a year due to supply chain incidents (that could have been caught or significantly reduced with effective supplier management). With every department running off in their own direction, no one knows what is, and is not, being done. And that’s a problem. But it’s one that can be addressed. How?

Check out Sourcing Innovation’s latest white-paper on Why Sustainable Supply Risk Management Cannot Be Siloed: Lessons From Leaders Who Beat the Odds, sponsored by Ecovadis, for the answer.

Your Procurement Sucks … and Here are 3 Likely Reasons Why.

Yes, SI is trying to get your attention and yes there is the vanishingly small possibility that nothing SI says in this post applies to you because you are the top 8% of the top 8%, but let us face facts. The possibility that the entirety of this post does not apply to you is significantly less than 1% and we can say with near 100% confidence this post will benefit you.

Procurement May Not Be Dead (as per our four part series on Procurement is Dead! Long Live Procurement!) but that doesn’t mean your job isn’t if you don’t eliminate the situations on this list and enter the modern age of Procurement. So take careful note of not only what is wrong with your Procurement, but the hints we give you for addressing these problems.

You’re drowning in paperwork

Invoices. RFPs. Catalogues. It’s not the 90s anymore, it’s the teens. If you don’t have a modern e-invoicing, e-RFX, and e-Catalog/e-Shopping solution there’s no hope of you ever getting your Procurement on track because you’ll never be able to process the mound of paperwork that is getting bigger and bigger every day as your organization grows and more invoices go in, more RFPs go out, more suppliers respond, and more suppliers send you their catalogues that get bigger every year.

You’ve never sourced Marketing, Legal, HR, or any spend outside of MRO and For-Sale Products

If all you are sourcing are office suppliers, MRO, and resale products, you are likely only sourcing half of the organization spend, at most. These areas, T&E, and other areas you are not sourcing are accounting for greater and greater portions of organization spend. Many studies indicate that 10% is the magic number for marketing spend. With more and more work being assigned to contingent labour, consultants, or outsource partners, this can be 20% of spend. T&E is also 10% of spend at many organizations. Then there is legal, which can be quit high, p-Card spend, event, spend, etc. If Procurement is only responsible for half of spend, why is it even needed at all? A third party can manage MRO, a GPO can manage office spend, and VMI can manage products for resale.

The only metric on your scorecard is savings.

This might have been a great metric in the noughts when inflation was essentially zero, many suppliers had inflated margins during the right-sizing craze of the eighties and the outsourcing craze of the nineties to record highs, and new suppliers were desperate to win business at any cost and double digit percentage savings were the norm in sourcing events across the board. But inflation is on the rise, hyper-inflation is around the corner, margins have been trimmed to low single digits as a result of over-use of auctions, and savings is a word that will soon only appear in the history book. We’re in the age of demand management (for consumables and internal spend), spend management (to keep cost increases in line with actual inflation), and value management (where value-added services that can increase revenue is sometimes more important than reducing spend).

If any of these situations applies to you, fix it fast, or your procurement will remain in the dark ages. Not a situation you want to be in.