Procurement KPIs and Business Acumen – A Review, Part II

Next Level Purchasing (NLP) recently released a new four-part express course on Procurement KPIs and Business Acumen that is available to all premium Next Level Purchasing Association (NLPA) members for free (and to all free NLPA members at a one-time price of 54.99*). In SI’s opinion, this course meets it goals of delivering one of the key lessons a Procurement department needs to master to be seen as strategically contributing to the organization given the current view of Procurement’s role, does a great job of defining business acumen and relating it to a function Procurement should understand well (Sales), and does a deft job of indicating how properly defined synergistic KPIs can generate compound effects and deliver greater results than non-synergistic KPIs. But more importantly, as indicated in Part I, it develops and presents a basic, generic, framework that ties together the key synergistic KPIs for any Procurement organization that can be used by any Procurement Professional. This framework, which is beautiful in its simplicity, is the most innovative encapsulation of a core idea that I’ve seen from a purchasing organization, analyst firm, or consulting organization in years!

So what is the framework? We’ll get to that. First we have to describe the Sales funnel. In order to measure their progress, and success, most Sales organizations use a sales funnel that represents the various stages that a potential customer goes through before becoming an actual customer. The basic funnel has three tiers: leads, prospects, and customers. A business or individual that might be interested in the organization’s products or services is a “lead”. Once the organization has taken the time to investigate the needs and desires of the business or individual and determined that they have a reasonable probability of becoming a customer, the “lead” is converted to a “prospect”. Once the “prospect” commits to the purchase of a product or service, they are a “customer”. Not all leads become prospects, and not all prospects become customers. And this is to be expected. A successful organization is one that converts a large number of leads to prospects and a large number of prospects to customers.

Using this framework, Sales can successfully define synergistic KPIs that allow it to measure how well it is doing. Unlike a Key Resource Indicator (KRI), which is a number that represents the result of a business activity, or a group of business activities, such as revenue or number of support calls, that is often mistaken for a Key Performance Indicator (KPI), a KPI is a number that represents how well a person or group performs the activities that contribute the most to a key result. In this framework, the KRIs are number of prospects, number of leads, and, most importantly, number of customers. The KPIs are the conversion rates, i.e., the number of prospects that convert to leads and the number of leads that convert to customers. The higher these conversion rates are, the better the business does. And better yet, in the sales funnel, the KPIs are synergistic, in other words, they work together and improvements in one improve the other. Let’s say the organization starts with 1000 leads, identifies 600 prospects, and gets 200 customers. In this case, it has a 60% conversion rate from leads to prospects, a 33.3% conversion rate from prospects to customers, and a 33.3% * 60% = 20% conversion rate from leads to customers. The KPIs are synergistic because a 10% improvement in the conversion rate from leads to prospect (to 66%) and a 10% improvement in the conversion rate from prospects to customers (to 36.66%) results in a 21% improvement in the conversion rate from leads to customers (to 24.2%). The effects are multiplicative, not additive.

Viewed from a high level, this funnel is a framework to get from the universe of organizations of businesses and individuals to the universe of customers — which is what matters most to Sales. What matters most to Procurement is realized savings (because that, and not value generation**, is what they are typically measured on). And this savings is relative to the universe of total spend of the organization. From the 30,000 foot view, there is no reason why one cannot create a “Procurement funnel” that takes the total spend of the organization down to the the realized savings of Procurement. And that is precisely what NLP does in this course. It defines a Procurement funnel that can be used by any organization to accurately determine it’s contributions that go straight to the bottom line while defining a framework for the definition of a base set of synergistic KPIs that can be used as a starting point for any Procurement and Supply Management organization, independent of vertical or geography.

So what is the Procurement Funnel? Come back tomorrow for Part III!

* Note that premium NLPA membership is only 99.99 annually and grants you access to all nine express course series (of one or more courses) as well as the full NLPA library. SI would recommend that you consider premium membership if you are interested in multiple resources as it is much cheaper than paying by the drink.

** Shame on the backwards thinking C-suite that still has this mentality!

Procurement KPIs and Business Acumen – A Review, Part I

Next Level Purchasing (NLP) recently released a new four-part express course on “Procurement KPIs and Business Acumen” that is available to all premium Next Level Purchasing Association (NLPA) members for free (and to all free NLPA members at a one-time price of 54.99*). The express course series is designed to cover the essential lessons required for a procurement department to strategically contribute to an organization, including what business acumen is and why it is essential for procurement success and how synergistic Key Performance Indicators (KPIs) can be used to create a compound effect on business result. In SI’s opinion, it delivers one of the key lessons a Procurement department needs to master to be seen as strategically contributing to the organization given the current view of Procurement’s role, does a great job of defining business acumen and relating it to a function Procurement should understand well (Sales), and does a deft job of indicating how properly defined synergistic KPIs can generate compound effects and deliver greater results than non-synergistic KPIs.

However, what SI really liked about the course is that it introduces a new concept poorly missing from the Procurement world that should be adopted by EVERY organization on the planet. And for this reason alone I would recommend you become a premium NLPA member. It is the most innovative encapsulation of a core idea that I’ve seen from a purchasing organization, analyst firm, or consulting organization in years! And we’ll get to it before the review is over.

The course starts off by noting that it is big news when a CPO rises to the top and becomes the CEO of an organization. Why? Because it is a rare event. Why is this the case? SI believes there are a number of factors but agrees with NLP that one of the reasons is a lack of business acumen (beyond the procurement and supply management function). What is business acumen? The Financial times defines business acumen as a keenness and speed in understanding and deciding on a business situation. People with business acumen are able to obtain essential information about a situation, focus on the key objectives, recognize the relevant options available for a solution, select an appropriate course of action and set in motion an implementation plan to get the job done. And if they discover that changes are required to adapt to unforeseen circumstances, they make the adjustments as necessary and keep the activity moving forward. And, most importantly, they are more often right than wrong (at least when it really matters).

The definition also goes on to state that people with strong business acumen use an explicit or implicit business framework to ensure completeness and integration as they assess a business situation. This is a key point that cannot be overlooked. Because, as they also state, business acumen is learned and a key part of that learning is the tools, processes, and frameworks you need to make good decisions. In the “Procurement KPIs and Business Acumen”, NLP develops a basic, generic, framework that ties together the key synergistic KPIs for any Procurement organization that can be used by an Procurement Professional. What is this framework? We’ll address that in Part II.

* Note that premium NLPA membership is only 99.99 annually and grants you access to all nine express course series (of one or more courses) as well as the full NLPA library. SI would recommend that you consider premium membership if you are interested in multiple resources as it is much cheaper than paying by the drink.

Ecovadis-Powered E-TASC: A Great Solution for ICT Supply Chain Sustainability

The Global e-Sustainability Initiative (GeSI) is a 36-member strategic partnership between the Information and Communication Technology (ICT) sector and organizations committed to creating and promoting technologies and practices that foster economic, environmental and social sustainability that recognizes that sustainability is a strategic issue. As a result of this recognition, GeSI has decided to do something about the situation. In partnership with EcoVadis, it recently developed and re-launched a new and greatly improved version of the Electronic Tool for Accountable Supply Chains (E-TASC). Designed to facilitate support and drive accountability in the area of human rights and other sustainability standards throughout the supply chain, the goal is that the tool will allow for a more effective and transparent management of ICT Supply Chains and allow companies to better report to their different stakeholders.

Within a month of launching, over 20 ITC companies are already fully deployed on the platform and using EcoVadis to assess suppliers and over 1000 ICT suppliers are subscribed and registered on the platform (which can be found at etasc.ecovadis.com). The platform has all the power of the core EcoVadis platform, which has been EcoVating the Globe for many years (as described in the linked SI post) plus new capabilities in the areas of collaboration and corrective action plans, multi-tier transparency, site audits, and SEC conflict mineral tracking (which is very important if you are a supplier that wants to supply to a US ICT company). In addition to the deep supplier sustainability, business practice, and environmental assessment, there is also an in-depth labour practice and human rights assessment as well as the ability to track sustainable procurement initiatives. But the biggest improvement by far is the ability to share supplier audits and associated data between participating member companies.

If every buyer does their own audit of a supplier, it not only presents a significant drain on the supplier (which will end up costing all of the buyers in the end), but diminishes the chance that any buyer will get a thorough audit. There are two reasons for this. First of all, if you are doing individual audits on every major supplier, the cost is going to add up quickly so you are going to opt for the minimal audit from the lowest cost provider. And you’ll get what you pay for. A check-the-box minimal review of operations and records. It won’t be hard for poor working conditions at a secondary factory, off the books underage labour, etc. to slip through. Secondly, if a supplier has to deal with dozens of audits, it’s going to try and rush each auditor through each audit due to limited time and resources. In this case, it’s going to have books, materials, tours, etc. prepared, stick to them, and possibly avoid areas that could be troublesome to you. But if all of the big buyers come together and commission one audit, through a platform such as E-TASC on the EcoVadis platform, they can afford to pay for a very thorough audit at a fraction of the price that is not stressful on a supplier’s resources. Every one wins, especially when the supplier can see their assessment through the platform, what corrective actions they have to take to improve it, and other recommendations for improving their standing with the industry overall. In additional, all parties can see the results of the audit against the industry standard benchmark.

It’s a great solution for the ICT industry and one every ICT buyer should check out BEFORE regulations come into play that will mandate more sustainability and traceability in their supply chain.

If You Are In Food and Beverage, You Can Not Afford NOT to Have Supply Chain Visibility!

As per this recent article in Inbound Logistics, product recalls cost the U.S. economy $7 Billion annually, and the average product recall costs $10 Million. That’s Ten Million US Dollars that will disappear from your bank account if you are faced with a recall and are unable to quickly and effectively recall product. This is an incredible risk to your viability, and a real risk for the vast majority of companies that struggle with real-time visibility and managing inventory across a network of suppliers, distributors, and manufacturers.

Every day of recall delay results in lost revenue and lost consumer confidence, and, if you’re talking products with salmonella or e-coli poisoning, additional lost lives. The first empties your bank account, the second dries up your revenue stream, and the third can shut you down if consumers decide they do not trust your brand anymore (even if the regulators chalk it up to an accident and allow you to continue operating with additional monitoring and safety precautions).

Ten years ago, given the dearth of supply chain visibility solutions and the cost of extended enterprise ERP systems that could manage your inventory and talk to supplier systems through EDI, you might have had an excuse to not have such a system as it would have cost you 10 Million to acquire and implement such a solution and millions in annual maintenance costs to maintain it. Given that serious incidents, like supply chain disruptions, were much rarer than they are today, the cost savings just weren’t there (and by the time you extracted the relevant data and sent the message out to the affected parties, who probably had to be faxed, the damage was done, the news was on TV, and the opportunity to prevent a significant number of injuries and death wasn’t there).

But today, when you can acquire such solutions for six figures and completely map the supply chains of the suppliers who account for the majority of the goods you buy, and all critical or perishable items, there is no excuse. Properly implemented, these systems can track the complete chain of custody for any item manufactured, stored, or shipped within the supply chain and when (not if) a recall is needed, a simple query will pull up the inventory location by item, batch, and lot — anywhere, and at any time.

In addition to the quick location of an affected product, the system allows a manufacturer to focus in on contaminated or faulty batches, instead of recalling an entire product line because the affected product cannot be isolated quickly enough. So not only is the supply chain more visible, but actions can be taken on a more granular level – allowing a company to minimize the impact to the revenue and reputation with minimal effort and cost. As Nike would say, Just Do It.