How Do You Define Procurement Success?

Cost Savings? Cost Avoidance? Value Generation? Just getting through the damned day? (It is the year of Procurement Damnation, after all.)

It’s an important question. Why? Your success depends on your answer, because it is this answer, given or implied, that guides every sourcing, category management, and procurement project that you do.

If you consider the art of the Strategic Sourcing Process, the Category Management Process, or the Contract Management Lifecycle, you see that they all start about the same at a high-level:

  • Need Identification
  • Business Case
  • Stakeholder On-boarding & Management Approval
  • Strategy Formation
  • Risk Assessment & Contingency Planning
  • Detailed Specifications and Requirements
  • . . .

And if you dive in to each of these steps, you find that a key requirement of each step is an acceptable definition of success.

  • Need Identification
    There is a reason for the need, and that reason is that it is required to achieve organizational success.
  • Business Case
    A key requirement is the results that will be achieved, which should define success.
  • Stakeholder On-boarding & Management Approval
    What will they get out of it? They are more likely to come on-board if they see a result that will enable their success.
  • Strategy Formation
    What strategy will lead to success?
  • Risk Assessment & Contingency Planning
    What are the risks to success and what the contingency plans to ensure success?
  • Detailed Specifications and Requirements
    What are the steps to get to success, and what measurements will keep the team on track?

And, more importantly, if you do not define success before you go to bid, you can not expect that any response to your tender from any supplier will deliver that success.

In other words, this unwritten rule should probably get its own step in your sourcing / category management / contract management process, which should probably start like this:

  • Need Identification
  • Success Definition
  • Business Case
  • . . .

For more details on how to achieve RFP success, see SI’s series on best practice vendor selection:

And check out Thomas Kase’s recent series on “Improving RFP-Driven Technology Sourcing Outcomes” over on Spend Matters Pro if you have access.

Source-to-Settle – The Sourcing and Procurement Kettle

Source-to-Settle is the end-to-end integration of sourcing and procurement, starting with spend analysis and ending at spend analysis. It is the integrated workflow that starts with sourcing event identification, proceeds through e-Negotiation and Award, and ends with the creation of a purchase order, the receipt of goods and an invoice, and the e-payment for goods received and includes everything in between.

There’s a lot involved in the source-to-settle process, and often a lot more than can be found in most sourcing and procurement modules and stand-alone best-of-breed suites. As indicated in our last post, there is the need for accuracy — to insure that savings are not lost and the right categories are identified. There is also the need for compliance — with insurance and regulatory requirements, with contracts and pricing, and, most importantly with SOX. And results only come from efficiency and performance — which requires integrated, streamlined processes, supplier performance management, and collaboration.

It’s a tall order, but an organization that doesn’t keep PACE never realizes the value that results when there’s one integrated workflow, one complete spend repository for spend analysis, and one, 100% accurate, view of the truth.

For deeper insight into how an end-to-end integrated Source-to-Settle solution can allow your organization to keep PACE and deliver value beyond what you may have thought possible, download Sourcing Innovation’s latest white-paper on how An Integrated Source-to-Settle Platform Brings Unparalleled Benefits to Supply Management and register for Ivalua’s upcoming webinar on how to Help Build Your Business Case Today on January 28 @ 11 PST / 14 EST / 19 GMT!

Technological Damnation #77 e-Currency

We started out our series with the Economic Damnation of Currency Strength, which, thanks to the recent unexpected fluctuations in certain global currencies, probably has you shaking in your boots. But if you think trying to manage real currency exchange is bad, just wait until you have to start using non-country based e-Currency, like Bitcoin.

Bitcoin, a peer-to-peer payment system released as open source software in 2009, allows users to transact without using an intermediary using a decentralized virtual currency (or crypto currency) which has a value defined by the global market based on the fact that it’s limited and once all of it has been “mined”, there are no more units. Because of its structure, new units cannot be issued on a whim (whereas a country can print as much money as it wants, at the risk of hyperinflation), and, as a result, it’s value can, and has, skyrocket(ed) over night.

For example, up until late 2013, Bitcoin’s value was negligible, at which point it skyrocketed to a value of over one hundred. It stayed there for almost a year until early 2014 when it skyrocketed up to a value of almost 1200, before, over the last year, crashing back down to about 200 (in US dollars). On January 18, 2013 it’s value was 15.70. On April 9, 2013 it was $230. On April 16, 2013 it was 68.36. On May 4, 2013 it stabilized around 112.90. It stayed there until around October 15 when it began to skyrocket to 1,147.25 on December 4, 2013 then it crashed back to 522.23 on December 18, 2013 returned to 940.10 on January 5, 2014 and since then has been on a downward fall until January 18, 2015 when it was 199.56.

As virtual / crypto currency is still in its infancy, shocks like this can be expected and can be much more devastating than the recent drop in the Ruble. And, even worse, now that many vendors are starting to accept crypto currency as payment from global consumers that trust the currency, they will be expecting to pay with the currency as well. And your organization will have to hedge against new crypto currencies, which might also include Litecoin and Darkcoin (as well as a dozen others), as well as existing currencies. The fun is just beginning.

Authoritative Damnation #64 Major Activist Investors

An activist investor is technically defined as an individual or group that purchases a large number of a company’s shares and/or tries to obtain seats on the company’s board with the intent of effecting a major change in the company. A (public) company can become a target for an activist investor if it is mismanaged, has an excess cost structure, or is not capitalizing on its value.

And while one might be tempted to think that an activist investor is only bad news for Procurement if the company has excessive costs, that’s not the case. An activist investor is always bad news. It might be the C-Suite that is overspending (on private jets and tropical locales for “strategy meeting” getaways), it might be Sales and Marketing doing a lousy job, and it might be R&D failing to focus on the right products, but the first thing the activist investor will want is a balancing of the books — and that always, always, always starts with a focus on cost reduction across the board. Procurement could be in the top tier of spend management in its vertical or industry group, with an average spend that is 5% less than the industry average benchmark, but the activist investor will still demand that the organization pursue an across the board cost reduction at least in the 5% to 15% range — a reduction that will not be possible in many of the categories currently under management.

Plus, additional opportunities will likely only be available if Procurement is able to get more categories under management — which could be difficult even with Board Support as many departments, fearful of cuts that almost always occur when activist investors sway the Board, will not want to give up budget, authority, or supplier relationships for fear of becoming unnecessary. This will make it very hard for Procurement to deliver against unreasonable demands and increase the chances that they end up under-performing on the activist investor’s scorecard and end up looking bad when they are actually the top performing department in the organization.

(And we haven’t even mentioned the expectations that will be levied if Procurement is expected to play a key role in a merger or acquisition that an activist investor, investing in multiple organizations, is trying to engineer between it’s investments — because that’s a damnation in its own right that will be discussed at a later time.)

So what can you do? Baseline, Benchmark, Model, and Expose. Specifically:

  • Baseline
    Baseline actual costs for commodity groups and categories under management.
  • Benchmark
    Benchmark against publicly available rates and obtainable GPO rates to prove that performance is good and that any additional cost comes with a value add (in the form of quality, marketing, service, additional functionality, etc.)
  • Model
    Build should cost models that justify the validity of the baselines and/or benchmarks under current market conditions.
  • Expose
    Expose the overspending in categories not under Procurement’s control using baselines, benchmarks, and should-cost models and divert the attention of the activist investor elsewhere.

Organizational Damnation #58 Logistics

Logistics should be Procurement’s best friend, but if Logistics is a separate organization, Logistics can be one of Procurement’s worst enemies. This is because while Procurement believes that it’s job is to negotiate the best overall deal, including transportation, Logistics believes transportation is it’s business, and Procurement should just stick to unit price or landed cost from overseas suppliers and let Logistics use it’s relationships to get the best deal.

And while this sounds like a reasonable division of labour, there are a few issues with this arrangement.

  1. The best deal is not always on a purchase level.
  2. The best deal can not always be negotiated by Logistics that have long-term relationships with incumbent carriers.
  3. The best deal can often be improved by atypical routes.

What do we mean by this?

1. If Logistics is in charge, they will obtain “best rates” from current carriers for Procurement for regular routes. But these will be based on current contracts, not new contracts — and if the contracts were not obtained competitively, it won’t be the best rate.

2. if Logistics is in charge, they will look at preferred suppliers for “best rates”, and not go out to bid until it is time to renew the global standing offer contracts, bid sheets which will often be sent only to “preferred” suppliers only — sometimes new suppliers, especially in restricted geographies, will have the best rates.

3. If Logistics is in charge, they will typically look at a fixed set of typical routes — not atypical routes from nearby airpots, nearby ports, or nearby dockyards. It may require a few more miles on a truck, but if the airport fees from a secondary airport are half that of the major airport, it might be worth it.

Plus, the best deals are often negotiated when Procurement can put out a tender that groups nearby lanes on unrelated bids, they can often get better rate sheets for Logistics than Logistics can, especially since Procurement is often impartial and not managing the relationships day-to-day.

But if Procurement tries to use its ability to get Logistics a better deal, Logistics will feel that it’s rights are being trampled on and might do everything it can to get in the way. It will try to prevent tenders, feed backdoor information to preferred carriers, and spread rumours that your actions will damage relationships and increase prices.

What can you do? There are only two options.

Either Procurement manages to convince Logistics to use its processes and best practices to source transportation bids and get the best rates or it manages to convince the C-Suite that Logistics should be under its purview and that the two departments should be merged into one under the CPO.