How Low Can Strategic Sourcing Go?

In the beginning, strategic sourcing and supporting applications were for the Fortune 500 only, not only because they were the only organizations that could afford the multi-million dollar price tags, but they were the only organizations that theoretically had enough spend to see a significant ROI after the (very) significant product, process, and people costs were taken into account. (And whether or not you agreed with the viewpoint that strategic sourcing was only for the rich and famous, you couldn’t argue that unless you were among the rich and famous, you couldn’t afford the price tag.)

Then the Sourcing 2.0 providers, who said we can use the web to deliver solutions on-demand for a fraction of the cost of the on-premise behind-the-firewall model (which, in the beginning, was six figures instead of seven), hit the scene and strategic sourcing broke into the (high end of the) mid-market. It wasn’t applicable to every category, or to every project in the categories it was applicable to, but made a significant impact in those categories it was applicable when best practices and the right expertise was applied.

Then costs went down, as features increased, and (strategic) sourcing solutions slowly permeated the mid-market, starting with the companies with revenues in the high nine-figures and ending at the companies with low nine figures in revenue. At this point, most of the “leaders” had these solutions, as well as a few of the learners, and the laggards still did not give a damn one way or the other. The market started to saturate. So what was a vendor to do?

Push strategic sourcing down into the small business market. Simplify the solutions, make them true self-serve cloud-enabled multi-tenant applications, and price them so that everyone can afford them. But is this really strategic sourcing?

While you can argue that the market was starting to stagnate because it was saturated, you can also argue that the market was starting to stagnate because most of the market wasn’t benefitting from the solutions (to the extent that they adopters of the technology thought they would). And if the latter is the case, you have to ask if strategic sourcing truly exists in the mass market. After all, if the solutions aren’t working, there can only be three reasons:

  1. the solutions being sold don’t support strategic sourcing
  2. the solutions being sold do support strategic sourcing but aren’t being properly utilized
  3. strategic sourcing isn’t possible at a company below critical mass

If we assume that a critical mass isn’t required to effect strategic sourcing, then if a company isn’t getting results, it’s either because the solutions don’t support strategic sourcing or they do but aren’t being properly utilized. I think we can quickly rule out the theory that the solutions being sold don’t support strategic sourcing (when properly utilized) because the basic process has been well understood for a couple of decades now, every big consultancy has their own n-step process, and the foundational solutions have been built and rebuilt so many times that they’re almost commodity. I also think we can’t say that the solutions aren’t being properly utilized because while I’m sure some companies don’t have a clue, at this point it’s well understood what the solutions do and how to use them, especially at any company that’s investing in the right people, process, and technology to improve it’s sourcing.

This leaves one reason why the results aren’t being realized (to the extent they were expected) by the majority of the market — they companies are not at critical mass. In order for strategic sourcing to truly be effective, I would posit that the following two conditions must hold:

  • there is enough spend to warrant a strategic sourcing effort
  • there is enough knowledge to effectively execute one

At most mid-market companies, the knowledge of modern procurement is limited. Procurement is still primarily a back office function, telephone and fax is more prevalent than modern technology, and the level of education isn’t much beyond high-school. You don’t have a room full of MBAs or Engineers trained in supply chain, and most of the buyers, who have no form of certification whatsoever, don’t even belong to any purchasing organizations. And this lack of knowledge to the face that most of the solutions don’t go beyond the help necessary to guide the user through the process, and you can see that most organizations don’t have the knowledge to effectively execute a proper strategic sourcing effort.

Furthermore, even at those few mid-market organizations that have made the effort to recruit and attract the right people, and give them the right training, I would argue that strategic sourcing is a rare event because most categories don’t have enough spend to enable a true strategic sourcing effort. As Dalip Raheja (of The MPower Group) said when he declared that Strategic Sourcing is Dead, it’s not strategic if everyone else is doing it. You can’t just go through the seven steps and have a strategic event. You have to analyze the rationale behind each and every assumption and decision you make for the event to be strategic. (Why are you dual sourcing? Why are you outsourcing design? Etc.) This takes time, money, and, often, specialized consulting and/or tools in addition to your sourcing suite — and, one way or the other, this comes with a hefty price tag. A price tag that’s only worth it if the spend is significant enough to insure (the likelihood of) a high ROI!

As a result, I have to (mostly) agree with a colleague of mine who has said that there’s no such thing as strategic sourcing in the SMB market. While there will be a few categories in the higher end of the MB market where strategic sourcing can be effectively applied, and while you can push the sourcing tools down through the mid-market to the small business market, you can’t push the strategic element. The best you can do is bring true B2B commerce to the average small business. And while this is certainly a good thing, as it drives transactional efficiency and lowers cost, let’s not fool ourselves. True “strategic” sourcing is a rarity.

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Does Your CSM System Provide Multiple Product Views?

A recent white paper by Dassault Systemes on Product Lifecycle Management (PLM) hit the nail on the head when it asked, near the back of the paper, if your Component Supplier Management system supported multiple views? Specifically, the paper on “Component Supplier Management” (CSM) identified three views that your PLM / CSM system has to support if you want it to be adopted across the organization and utilized across the product lifecycle:

  • system (logical)to enable distributed and cross-organization design activities
  • physical (EBOM: engineering bill-of-materal)to enable component identification, selection, and standardization
  • financial (BOM: manufacturing bill-of-analysis)to enble supplier identification, selection, management and (strategic) sourcing activities

The reality is that PLM is a very involved process that not only touches most of the orgnization, but impacts most of the organizational functions. As a result, it needs to either support most of those functions or capture the data required by those functions and/or integrate with other organizational systems that capture the necessary data and/or accomplish the relevant functions in order to be useful, because PLM is not a function that can be siloed into any one organization. Keep this in mind when selecting your next PLM system.

Cultural Intelligence VI: India

This series is edited by Dick Locke, SI’s resident expert on International Trade, author of Global Supply Management — A Guide to International Procurement (which was the definitive guide for almost a decade), and President of the Global Procurement Group and Global Supply Training which regularly gives seminars on International Trade and working with International Cultures.

As highlighted in last year’s post on Overcoming Cultural Differences in International Trade with India, India, like China, has a long cultural history with roots that go back at least to the Indus Valley civilizations in 3,000 BC. (Recently, archaeologists have discovered abandoned and buried port cities and temples over 6,000 years old, suggesting their culture could be much older.) And while the official languages are Hindi and English, India has 5 languages in the top 20 spread across its 28 states, 6 union territories, and the National Capitol territory of New Delhi. As a result, its society is a bit fractured compared to China (where differences are primarily North/South), with mild to moderate differences in culture and behavior, but there are a number of common threads that, once unwoven, will make your dealings with India easier.

With respect to Locke’s seven key cultural differences (first outlined as six in his classic text on Global Supply Management), power distance is generally quite high as India is based on the caste system (which you must never bring up) and its values and beliefs are still strongly held (despite the movement by some of the newer consulting organizations to abolish the system within their four walls). While they may attempt to be monochronic in their dealings with the west, they are a polychronic culture that does not work by the clock. Buyers and sellers are roughly equal, and any inequalities will be due to any personal relationships that exist between the parties. They are tolerant of uncertainty and even known to take risks and experiment. Harmony underlies almost all of their religions and every aspect of their daily life, and face must always be given. Despite the caste system, and the fact that tasks are collective exercises, they are very individualistic and highly personable (as privacy is rarely indulged in or sought).

With respect to non-verbal communication, it is moderately indirect, as you should not refuse a request outright, but there is a strong history of bartering, so you are free to debate the pros and cons of any situation, as long as your “no”s are indirect and gentle and you tiptoe around delicate issues (such as caste and familial privacy). Unlike some Asian cultures, they can, and you can, get quite loud, but only if you are passionate about what you are saying.

As with any well established culture, there is a lot of non-verbal communication that occurs, and a number of actions that are taboo. For example, while limited touching is permitted (such as same-sex handshakes, and collegial backslapping between members of the same sex, as long as you never touch someone’s head), you should not stand with your hands on your hips, whistle, wink, or point your feet at a person. Hand gesticulations, which many Indians are prone to use when speaking passionately, should only be used if they speak English and you have a basic understanding of their language. You don’t have to be as reserved in your facial expressions as you would with other Asian cultures, but you need to take your cues from those around you, as the degree of expression permitted is situational. While direct eye-contact may be made, it is seen as intrusive by many, so you will again have to take your cues from those around you. Distance, due to crowding in many cities, is minimal, generally only two to two and a half feet. And it is critically important to always maintain an agreeable attitude, even if you don’t agree (as you can always indicate your disagreement indirectly (by indicating that you’ll consider the request, get back to them later, or try). Of course, if dealing with an Indian in North America who is used to your culture, all this goes out the window as they can be very adaptable and will attempt to tune their behavior into your cultural norms in their attempt to maintain harmony and an agreeable attitude.

Meetings, which often begin VERY late, will often begin with small talk and fail to follow a structure. Like other Asian cultures, they will want to get to know you professionally and personally before they get down to business. Remember that time is an expression of eternity in India. Meals are common, and the etiquette is to politely refuse the first offer of food or drink. You will be asked again and again. Just remember not to thank your hosts after a meal. A thank you is considered a form of payment and is insulting. When negotiating, be humble and polite and prepared for concessions on both sides. It is expected. (Although if you were to observe a meeting between two Indian teams, you might find that whoever has the most passion and screams the loudest wins.)

Finally, learn what Namaste is.

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Webinars This Week from the #1 Supply Chain Resource Site

The Sourcing Innovation Resource Site, always immediately accessible from the link under the “Free Resources” section of the sidebar, continues to add new content on a weekly, and often daily, basis.

The following is a short selection of webinars THIS WEEK that might interest you:

Date & Time Webcast
2010-Oct-20

 

11:00 GMT-04:00/AST/EDT

 Finding the Right CSR

Sponsor: MPI
2010-Oct-20

 

12:00 GMT-04:00/AST/EDT

 Increase your profitability through the Theory of Constraints insights

Sponsor: Jamison & Co.
2010-Oct-20

 

14:00 GMT-04:00/AST/EDT

 TPM: The Secret to Success for FMCG Firms

Sponsor: MEI
2010-Oct-21

 

16:15 GMT/WET

 A Unique Approach for Ensuring Food Safety – Manage Contamination Not Recalls

Sponsor: Hollison Technologies
2010-Oct-21

 

14:00 GMT-04:00/AST/EDT

 Extend Your ERP for Stronger Supplier Collaboration

Sponsor: Ariba
2010-Oct-22

 

13:00 GMT-04:00/AST/EDT

 Theft Prevention in the Supply Chain: How Foresight & Process Can Secure the Bottom Line

Sponsor: CargoNet

They are all readily searchable from the comprehensive Site-Search page.

Analytics II: What is Analysis?

Today’s post is by Eric Strovink of BIQ.

Ask a statistician or an applied mathematician, and she’ll probably tell you that analysis is either (1) building predictive models based on historical data, or (2) deciding whether past events are statistically significant (i.e., ascertaining whether what actually happened is sufficiently different than what might have happened by random chance).

But most of us aren’t applied mathematicians or statisticians, so we can get into trouble very easily. For example, we typically haven’t got a particular hypothesis to test (which is critical), and that means any patterns we might “find” are immediately suspect. That’s because in any dataset one can always come up with a hypothesis that generates significant results if one looks hard enough. With regard to predictions, we generally aren’t confident about the predictive power of our models, because we are neither facile with advanced predictive modeling techniques, nor do we have access (in general) to a sufficiently large sample of “known outcomes” to which to compare our predictions. Without a massive dataset like that provided by the Netflix Prize competition, there is no hope of refining a solution.

Of course, practical analysis work can be done without any advanced statistical or modeling techniques. Practical analysis boils down to “finding stuff in your data” that you either didn’t know about, or weren’t sufficiently aware of. That’s the basis of what business analysts do every day. Which salespeople are selling, and which aren’t? What products are selling where, and what aren’t? What was their profit margin, and why? What are the costs associated with running the business, and are they reasonable or unreasonable? And so on.What’s required in order to come up with these answers is well understood:

  1. Acquire data from one or more sources.
  2. Transform like data sources into a common format, and link unlike-but-related data sources together with common keys (or computed expressions that result in common keys).
  3. Create a schema for the data sources, obeying the conventions of a [selected] database system.
  4. Load the data sources into the database system.
  5. Issue queries against the database, and, when useful, format the results into reports.

Steps 1 through 4 are accomplished out-of-the-box by every ERP or accounting system, although only for a small subset of the useful data in an organization. Step 5 is also accomplished by ERP or accounting systems, on that same subset of data, but (historically) rather poorly. That’s why there has been such a large market for “Business Intelligence” or “BI” tools that put some necessary functionality back into Step 5.

However, when the data aren’t generated by the system that’s reporting on them, or aren’t resident in one of a handful of ERP systems to which a BI system can attach automatically, then we hit the essential problem with business data analysis. This problem is either ignored or deliberately misunderstood by most IT organizations, and it’s simply this: business analysts, in general, are either unwilling or unable to accomplish the following:

  • Transform data;
  • Create database schemata;
  • Load database tables;
  • Issue SQL queries.

And, even if they can accomplish those steps, exploratory analysis usually can’t be justified by management because the above process takes too long (and therefore costs too much, causing the expected value of the analysis to be negative). Which means, IT departments, that you can buy the business people all the data warehouse tools you want, and it won’t make a whisker’s bit difference with respect to their ability to analyze data. Sure, you could hire a data expert to help them, but that won’t work either (I’ll save that explanation for part III).

Previous: Analytics I: Optimization Comes of Age

Next: Analytics III: The Data Expert and His Warehouse

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