Managing Indirect Spend: An In-Depth Review, Part I.3

In Parts I.1 and I.2 we began our review of Managing Indirect Spend, a new book by Joe Payne and William (Bill) Dorn of Source One that is the culmination of everything they have learned while doing nothing but Strategic Sourcing, primarily on Indirect Spend, since 1992 — before it was cool. And as SI noted in its last two posts, clocking in at 422 pages, this book is an incredible handbook for anyone who wants to get a handle on indirect spend, which has increased in organizations across the board since outsourcing and right-sizing rose to fame in the 1990s. (And if you think otherwise, download SI’s free eBook white-paper on Spend Visibility: An Implementation Guide, dive into your spend, and see just how much of it is indirect.)

Today we’re going to conclude our review of Part One — The Process, as well as review the last chapter in Part Two, on building stakeholder engagement (which, in the doctor‘s view, is as much process as tool), and discuss implementation, stakeholder engagement, continuous improvement, and, finally, what not to do if the organization wishes to conduct a successful sourcing event.

As Bill and Joe correctly point out, the vast majority of savings opportunities are squandered because there is

  • no implementation plan and
  • no supplier management strategy.

And the implementation is often the biggest challenge. It must be monitored continuously because the historical volumes that analysis and award are often based on do not predict future purchases. Users may start buying new items, more items, or a combination of items that provide new savings opportunities and, more importantly, especially in categories like office supplies or electronics, vendors may substitute other items when the items that were contracted are unavailable (or discontinued) and not give the organization the agreed upon, or even market, rates. So, not only can maverick buyers endanger organizational savings opportunities (when they buy off contract), so can suppliers.

However, monitoring is a challenge because it will require the end users that are the ones using the category to do most of the monitoring — and any appeals about organizational benefits may fall on deaf ears unless a message that resonates with the end users is given. For example, instead of talking savings numbers, which no one believes (because they were never historically achieved), talk jobs. How many jobs might the initiative save? Could it save their job(s)?

And, the organization will have to break down the traditional customer / supplier relationship view that still pervades the organization. Since most innovation will often come from outside the organization, the supplier must be viewed as a collaborator, and not an antagonist only out to get the most money from the organization for the least service possible. Treated with respect, most suppliers will rise to the challenge. Suppliers often have great ideas to reduce energy consumption, downtime, freight costs, and process slowdowns if asked. Plus, they are constantly monitoring the market to identify ways to outperform their competition. Tap into that. It’s a great way to start a continuous improvement initiative.

Of course, all of this will require stakeholder engagement. A stakeholder can be defined as any person, group or department that has influence in a spend category or is influenced directly or indirectly by that spend category. Stakeholders aren’t just end users or category owners. Depending on the project, they are also finance departments, management, shareholders, customers, and even marketing teams. Not only do stakeholders have to buy in for implementation success, but they are a key source of information. They are the often the best source of information on the current supplier, alternate suppliers on the market, the range of spend in the category, similar categories that may be leveraged with the supplier(s), and future requirements. Plus, stakeholders can provide the following value:

  • raw data
  • identification of organizational pain points and a project focus
  • research support and research enhancement
  • detailed business requirements
  • go-to-market support in negotiation and implementation management

Finally, once there is supplier and stakeholder engagement, make sure the organization doesn’t screw up and do any of the following:

  • allow misinformation to spread unchecked
    misinformation can spread like wildfire through an organization and kill a project before it starts (if a rumour that only one supplier can serve organizational needs ot that the goal is to improve efficiency so jobs can be eliminated takes hold, for example, it’s game over)
  • create overly complex or long RFxs
    this will eliminate small suppliers without the resources to complete them or the best suppliers who won’t find the business opportunity worth it when other (potential) customers are more reasonable
  • target the wrong audience / spam suppliers
    make sure the suppliers are pre-qualified as capable of likely meeting organizational needs, otherwise, needs won’t be met and suppliers will be alienated
  • ignore suppliers during the RFx process
    make sure reach-outs are performed before and after the first RFx is sent out to ensure a response
  • let the supplier write the RFx
    this is a great way to ensure no other supplier comes across as capable of meeting organizational needs as the supplier will fill the spec with useless features and functions that only they have
  • over-rely on technology
    nothing can replace the competent, creative guidance of humans
  • take an entitled attitude
    the organization is not entitled to the supplier’s offerings
  • expect a blind bid
    suppliers know that “blind bids are for suckers”; if there is no relationship before the bid, there will be no relationship after
  • forget to train
    if the suppliers can’t use the platform, they won’t bid; if the buyers don’t understand the process, they won’t follow it
  • ask the supplier to put skin in the game
    only desperate suppliers will pay to participate in an RFx, and all the organization will get are higher prices as a result. It’s the one of the stupidest things the doctor ever heard and whoever the moron is who came up with the idea should be ashamed of himself.
  • do everything on your own
    recognize when you need help — and get it!

All in all, Part One of Managing Indirect Spend contains some great advice that every indirect category manager should heed. Our next post will tackle Part II – The Tools. Continue to stay tuned.

Five Steps to Long-Term Growth – Huh?

Even though I was browsing the HBR Bogs, I was still a little surprised to see a post titled “Five Steps to Long Term Growth” because, to be honest, thanks to Wall Street, I didn’t think anyone knew what Long-Term Growth meant anymore. And I’m being serious here. The focus on quarterly earnings calls has gotten so intense that it’s almost obscene — the nosedive a stock takes in the market after a bad earnings call is typically so severe that one would think the world is going to end.

Not only did this intense focus on short-term profit cause the end of the famed research labs in the 1990s (like Bell Labs, Xerox Parc, Texas Instruments — and yes, I know that Bell, PARC, and TI still exist, but what we have today is not what we had then), two major market busts in the naughts (as everyone tried to IPO at unsustainable valuations), and the loss of hundreds of thousands of jobs (because people cost money and it’s more profitable to operate at skeleton crew levels and make everyone, in fear for their jobs, work unpaid overtime than actually be responsible and use the obscene amounts of profit the corporation is making to actually hire the headcount the organization should have), but it pretty much spelled the end of any thought to growth plans beyond the next year in the corporate boardroom – at least as far as I can see.

Of course, it is this lack of focus on the long term that captures everything that is wrong with the marketplace today. Once long term growth and sustainability take centre stage, short term profit becomes unimportant, Wall Street is told to go <expletive> themselves, people become as important as product, and the market changes — for the better. If you would like the market to change for the better, and become successful beyond your wildest dreams when it does, you can start by taking Vijay Govindarajan’s advice and take the following “Five Steps to Long Term Growth”.

1. Decide What You Are Playing For

Are you playing for the fat <expletive>s on Wall Street? Or are you playing for yourself and your stakeholders. If the latter, then you have to take a stand and do something about it. No one is going to do it for you.

2. Get Everyone Speaking the Same Language

Once you decide you’re playing for the long term, the next thing you have to do is something different. Growth means fostering transformational or breakthrough innovation. This will require identifying value propositions that will expand your business into new markets with new advantages.

3. Imagine Your Future

If you want sustainable growth, you must have a sense of what the future will be, what it will require, and how you will win. Then you apply your breakthrough or transformational innovation to achieving that vision.

4. Align Your Actions With Your Intentions

As Def Leppard said in a fit of Pyromania, it’s Action, Not Words. You have to remember that your people are used to hearing a lot of big talk about great new initiatives that never come to pass and without some action behind them, they will assume that your words are just another corporate fad that will be forgotten as time passes. If you say you are going to eliminate all traces of phosphate from your products, assemble teams to do it. If you say you are going to create 50 jobs with a new initiative, start hiring!

5. Do It!

Growth is hard work requiring strategy, judgment, and leadership. It involves risk. It involves you. You will have to keep doing it. Day in. Day out. Day over. Day under. Day torn asunder. And back to day in.

Managing Indirect Spend: An In-Depth Review, Part I.2

In Part I.1 we began our review of Managing Indirect Spend, a new book by Joe Payne and William (Bill) Dorn of Source One that is the culmination of everything they have learned while doing nothing but Strategic Sourcing, primarily on Indirect Spend, since 1992 — before it was cool. And as SI noted in its last post, clocking in at 422 pages, this book is an incredible handbook for anyone who wants to get a handle on indirect spend, which has increased in organizations across the board since outsourcing and right-sizing rose to fame in the 1990s. (And if you think otherwise, download SI’s free eBook white-paper on Spend Visibility: An Implementation Guide, dive into your spend, and see just how much of it is indirect.)

Today we’re going to continue our review of Part One — The Process, and dive into the last three parts of Bill and Joe’s excellent adventure into the strategic sourcing process and discuss:

  • Scorecarding
  • Negotiations
  • Contracting

A Balanced Scorecard is a strategic performance management tool that tracks supplier performance against a set of metrics in order to provide a well-rounded picture of the supplier that can be used to monitor and control performance. While most organizations introduce balanced scorecards after a supplier has been selected, scorecards should also be used when determining which suppliers to invite to the table, and everything — pricing, capabilities, past performance, market intelligence, supplier responsiveness, and employee perception — should be built into the scorecard to help insure the most appropriate supplier is selected.

The chapter also makes some great points that are often overlooked:

  • Scorecarding can be a teambuilding activity
    The entire cross-functional team can contribute to the process.
  • Scorecarding fosters buy-in to the awarded supplier.
    As everyone knows that the supplier was selected only after all data and all viewpoints were carefully considered and organizational needs fully balanced.
  • Scorecarding can deliver market insights not otherwise obtainable.
    Especially when supplier references are checked as part of the process.
  • Insights only come when a full history of the relationship is obtained
    Suppliers only give you references they believe will be glowing and cast them in the best light. Thus, it is vital to ask the references what supplier interactions were like from day one, what issues were encountered, and how (effectively) they were resolved. How long before the customer reached its current level of satisfaction?
  • A lot of questions will need to be asked!
    The authors provide a starting list of sixteen on page ninety-seven, and depending on the category and its nature, this might just be the ice-breakers.

Eventually, every process results in negotiations, which are covered extensively in Chapter 6. The authors also make some great points in this chapter that cannot be forgotten:

  • Suppliers have the advantage — ALWAYS!
    Whereas a sourcing team spends 5% of its time, or less, sourcing a specific product or service, especially in an indirect spend category, the [lead] supplier negotiator is 100% focussed on selling that category of products or services every single day. They know everything about it, and the market waters around it, while the sourcing team is struggling just to tread water in the unfamiliar territory.
  • A proper negotiation strategy minimizes the chance a supplier will add extra margin in a first round bid.
    If the negotiation strategy pervades the entire process, and presents a business case to the supplier that your business is something they can’t afford to lose because they will profit immensely by gaining it, the supplier will be much more aggressive with its bidding up-front.
  • It’s Not Getting to Yes, It’s Getting to No!
    If the supplier never says no, then the sourcing team never came close to getting the supplier’s best offer.

The chapter also had some great techniques a buying team can use to improve pricing, as well as some very important things that a sourcing team should never do, which include:

  • no negotiating after a reverse auction
  • no negotiating in contracting
  • no setting artificial targets

and if it’s not clear why, then you should definitely read this chapter.

The last, and final part, of the basic process is contracting — getting it in writing. A contract should balance the need for legal protection with common sense. It should be concise and only address the relevant risks and identified resolutions. It should not be a generic — one size fits all — boilerplate MSA that is 100 pages in length where only 10 pages are really relevant. All that does is add time (for unnecessary review), cost (of the overpriced lawyers), and loss (while savings opportunities go unclaimed) to the process. With the exception of a few basic definitions, the only clauses that should be there besides negotiated terms and resolutions are a balanced force majeure clause, a right to audit clause, and, possibly, a right to first refusal clause. While the supplier should have the right to be late without penalty if an act of nature prevents it from business as usual, the buyer should have the right to seek alternate sources of supplier or terminate the contract if the supplier cannot recover in a certain amount of time and, especially in the case of software (maintenance) contracts, should NOT be required to make payments when the supplier is unable to perform. The right to audit should be for the life of the contract, the audit should be allowed to go all the way back to the start of the contract (even if four and a half years into a five year contract), and the buyer should have the right to recover all monies owed from overcharges, even if they were made four years ago.

The chapter also did a great job of explaining why:

  • legal should be brought in even before the RFP/Q to prevent issues from arising later on,
  • most favoured nations clauses, which symbolize much of what is wrong with government agencies, do nothing but bite you, and everyone else, in the @ss, and
  • continuous innovation clauses all but guarantee that there will be no innovation for the lifetime of the contract.

There’s some great advice in these pages — and more to come in Part I.3 which will discuss how to truly achieve continuous innovation, how to get stakeholder buy-in, and what not to do if the goal is success. Continue to stay tuned!

Do You Have a Chain of Custody in Your Global Logistics Operations?

If you have a significant global logistics operation, chances are that, by now, you have sophisticated tracking capabilities and can tell at any given time at least where your cargo was at one point during the last 24 hours. And this is good. But if you want to go beyond minimum import/export requirements that have emerged, and are continuing to emerge, in the US and EU, then you need more than continuous tracking and monitoring — you need chain of custody.

Chances are that, right now, you’re thinking this is nuts because “chain of custody”, thanks to CSI-like forensic cop dramas, is associated in your mind as a “police” or “forensics” requirement when a crime is being investigated and has nothing to do with your supply chain, but it’s a wrong association. And when one remembers that many of these laws were put in place to prevent terrorism and illegal goods (such as drugs), which regulators are expecting to occur in, or through, import/export operations, it starts to make sense. And it makes even more sense when one realizes that it’s (becoming) a requirement for C-TPAT, which is crucial for efficient import/export operations given the slowdowns that have resulted by all of the additional paperwork and inspections that have been added to the import/export process over the last decade.

So what is a chain of custody? It is a process that asserts:

  • the cargo is what it purports to be and in the quantity stated,
  • the cargo was in the continuous possession or control by the carrier who took charge of the cargo from the time it was loaded in the container at origin until the time it is delivered at final destination, and
  • there is evidence of the identify of each person or entity who had access to it during its movement and that the cargo remained in the same condition from the moment it was sealed in the container for transfer to the carrier who controlled possession until the moment that carrier released the cargo into the receipted custody of another.

This, in turn requires that the cargo is secured from the time it is packed, verified, and sealed at origin, as confirmed by an authorized agent, until the time it arrives at its final destination and is verified to have been secured the entire way. In addition, all information relating to the cargo, its container, its movement, the person(s) verifying and sealing the cargo, and the persons transporting it must be maintained securely in the container security control system.

This may require more work, and more certifications, but there are benefits to the shipper, consignee, carrier, and CBP, as discussed in this great article on Tracking and Chain of Custody: The Difference over on Maritime Executive Magazine. Select Benefits include the following

  • for the shipper
    • World-wide tracking and location of container for security and asset management
    • Lower insurance costs
    • Expedited entry of cargo by CBP and faster through-port time
  • for the consignee
    • Enhanced knowledge of shipper and carrier performance
    • Third-party verification of all supply chain data elements and reports
    • Increased or enhanced knowledge needed for 10+2 Program Importer Security Filings
  • for the carrier
    • Protection against claims by shippers that unauthorized contents were the results of carrier action
    • Automatic transmission to CBP of container data
    • Compliance with and protection within the new Rotterdam Rules impacting vessel carriers
  • for CBP
    • Knowledge of which containers need no inspection improving man-power efficiency
    • Elimination of third-party reporting of trade data
    • Evidentiary data for potential legal action

#9 e-Auction

Yesterday saw the release of SI’s new sponsored white-paper on the “Top 10 Technologies for Supply Management Savings Today”. Sponsored by BravoSolution, this new whitepaper introduces the top 10 technologies that can help a company realize the goldmine of untapped savings opportunities it is sitting on. Properly employed, these technologies could help an organization tap cost reduction and savings opportunities that could collectively add up to 30%, or more, of spend across major direct and indirect categories.

e-Auction technology, which stands for electronic reverse auction technology, is typically the second entry point for a company moving from a paper-based sourcing process to a modern technology-enabled supply management solution and an organization’s second stop to supply management savings.

The savings from e-Auction technology are essentially the same direct savings, from goods and services cost reductions, and indirect savings, from process efficiency and value generated from supply base expansion, found in RFX technology, with the major difference being the speed at which the event can be conducted.

With electronic auctions, once the sourcing manager creates the specifications and sets up the auction, including the weighting and award rules, the process drives itself. The suppliers sign on at the appropriate time and place their bids. When a time-limit or bid floor is reached, the auction ends and the award is made.


The major advantages of e-Auctions are the ability to define precise lot requirements and acceptable bid ranges, which can ensure cost reductions meet a minimal threshold; the ability to define different auction types, which can drive more competitive behaviour in the supply base if properly selected; and the extreme efficiency that can allow a large number of non-strategic or low-value categories to be brought under management.

Properly applied on the right categories at the right time, e-Auctions have been generating savings for over a decade. Back in 2003, in one of the first significant studies on e-Auctions, CAPS Research found that direct cost reductions usually averaged between 10% and 20%, that cycle time reductions could be as much as 40%, and that there could be a “power shift” from strong suppliers to weaker buyers not previously attainable. One company realized 165 Million of savings on 912 Million of spend, a major service provider estimated average savings of 20% on 30 Billion of reverse auctions, and a recent report from the IBM Centre is estimating that the Federal Government could save 8.9 Billion annually through reverse auctions alone.

And this technology is only #9 on the list of the Top 10 Technologies for Supply Management Savings Today. Imagine what could be saved with the top technology, or even the third best technology. Or better yet, instead of imagining, download Top 10 Technologies for Supply Management Savings Today and find out! (Registration is required for this one but the doctor believes it’s worth it!)