Monthly Archives: July 2010

A Hitchhiker’s Guide to e-Procurement: An Introduction

Mostly Harmless, Part I

e-Procurement, while commonly used, is often misunderstood and confused with e-Purchasing, EIPP (Electronic Invoice Presentation and Payment), P2P (Procure-to-Pay), and even e-Sourcing. Thus, this brief guide will define what e-Procurement is, isn’t, and how it relates, or fails to relate, to e-Purchasing, EIPP, P2P, and e-Sourcing.

This guide will start with a definition of e-Procurement and then go on to cover the basic cycle. Along the way, it will discuss some benefits, challenges, and best practices while differentiating between the procurement of goods and services in the public and private sector when required. Finally, it will end with some advice on how to accurately cost a solution and determine the potential value such a solution offers.

Simply put, as per the e-Procurement Primer, eProcurement is the counterpart to eSourcing, starting where eSourcing ends and ending where eSourcing begins. It is the “e” implementation of the procurement cycle which is concerned with the requisitioning, receiving, and reconciliation of the received goods and services as opposed to the analysis, auction, and award that takes place in the (e-)sourcing cycle. It is essentially the automation of the non-strategic and transactional activities that consume the majority of a buyer’s time (that should be spent on more strategic value-generating activities), but one that comes with increased enterprise level visibility of all purchases.

The e-Procurement cycle, which can consist of up to nine steps (as defined in the doctor wants to remind you it’s sourcing and procurement), starts where there sourcing cycle ends and ends where the sourcing cycle begins. At a bare minimum, it will generally consist of an order, an invoice, and a payment. However, the process can also include authorization, goods receipt generation, reconciliation, tax reclamation, and analysis. Depending on the purchase in question, the (e-)Procurement cycle will generally contain three or more of the following nine steps:

  1. Requisition (& SOW)
  2. Approval
  3. Purchase Order
  4. Goods Receipt
  5. Invoice
  6. Reconciliation
  7. Payment
  8. Tax Reclamation
  9. Analysis

In addition, the e-Procurement process may also involve some regular catalog or contract management to keep catalogs and pricing schedules up to date between sourcing cycles.

The next set of posts in this series will explore each stage of the procurement cycle and the requirements that are placed upon any solution that claims to be e-Procurement.

Next Post: Requisitions, Part I

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The Enterprise 2.0 Emperor Has Nice Looking Threads …

… but they might not keep you dry and warm if a storm blows in!

Allow me to explain. Intelligent Enterprise recently asked if “the enterprise 2.0 emperor has no clothes” because, when it comes to collaboration:

  1. it’s already going on in enterprises, just as it always has and
  2. it’s not that interesting if it doesn’t impact the core business processes of the intended users.

The new tools may look great, and may streamline the processes with their aerodynamic properties, but the fundamental fact remains that if the users aren’t using them regularly with the intent to collaborate, then the tools won’t help when it comes to identifying small problems that can quickly escalate into full blown supply disruptions, or when it comes to working together to make sure the disruptions never happen. Just like a stylish polyester jumpsuit isn’t much help when a cold, heavy, rainstorm blows your way.

So before you go buying an Enterprise 2.0 solution (like those offered by Hiperos, Rollstream, etc.), make sure you have your processes and culture in order. Otherwise, you’ll never realize the benefits that these systems have to offer (which, if you’ve read the SI reviews, can be numerous) and are better off sticking with your tin-can communication system as modern technology is useless if you aren’t ready for it and won’t use it properly.

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Why Aren’t Reverse Auctions More Commonly Used?

A recent blog post over on Procurement Excellence asked “why aren’t reverse auctions used more by procurement people”? According to the article, it’s usually because:

  • procurement people sometimes lack the confidence to run them
  • procurement people are often scared of running auctions because they might expose how badly they are currently buying

Fair enough. They do require confidence and if you’re really doing poorly, they’ll expose that. But these aren’t the only reasons, and, I’d bet, not even the most common reasons. What about:

  • procurement people are scared suppliers won’t participate

Suppliers can be as scared of, or more scared, of an auction as a buyer. And for many reasons. They might be the incumbent with a history of overcharging. They might be a first-time invitee and have the perception it is only being run to drive down incumbent pricing. They might feel that it won’t capture the full value of their offering. And so on.

And these reasons only really apply to procurement people who probably haven’t run reverse auctions (or at least those who haven’t run a reverse auction successfully). There’s also:

  • experienced procurement people know that sometimes a reverse auction can increase prices and
  • smart procurement people know that it’s not always the right option

For a reverse auction to be successful, a number of conditions have to be right. There have to be enough suppliers willing to participate who want the business. The current pricing has to be above market average. The buyer has to be willing to award to the bidder with the lowest (weighted) bid and the suppliers have to perceive that. Either the majority of the cost has to be landed cost or the true cost needs to be easily defined as a weighted multiple of a (supplier’s) bid. If these conditions aren’t met, not only could costs not decrease, but they could increase. For example, if there were only three suppliers, in collusion, in a supplier’s market where demand exceeded supply and the current market price exceeded the price the buyer was currently paying, costs might increase substantially!

Furthermore, a truly smart buyer knows that reverse auctions aren’t always the answer, especially for strategic materials, components, or services. Not only are there some things that you can’t auction, but there are some things you shouldn’t auction, especially if your spend is high enough where you have leverage with your preferred suppliers. If you do a spend analysis and find out you’re spending 50M with your preferred temp labor supplier, it’s pretty easy to get at least 10%, if not 20%, savings if you show them the numbers and threaten to take your business elsewhere. Who’s going to give up 30M to 40M worth of business in a down economy? And if you’re primarily contracting security guards, janitorial services, and seasonal warehouse packers, should there really be a salary bell curve? In these situations, someone making above the mean is not going to be more effective than someone making below the mean.

Finally, a good procurement pro knows that there are only two technologies in the tool-kit that consistently give double digit returns on average, regardless of the economy — and those tools are spend analysis (which can enable leveraged negotiations) and decision optimization. While it’s true that a reverse auction can generate double digit savings in the right situation, that situation is not nearly as common as some vendors will have you believe. And that’s why more procurement pros aren’t running reverse auctions. They’re not always the right choice.

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By The Time You Detect Financial Risk …

… it’s too late. As per this article on “the quality and performance connection” of supply risk, indicators of financial risk are usually preceded by a slow decline in quality or performance that is difficult to detect from delivery to delivery as suppliers, looking to survive, begin to cut corners that they hope will go unnoticed but which often compound the farther up the supply chain you go.

As the author, Jim Lawton of D&B notes, you need to consider supplier performance metrics to be the best leading indicator of overall supplier financial viability. This means that you need to define a process to monitor quality and performance from a risk perspective. Do this by:

  • identifying which areas of supply where quality, performance, and/or financial risk factors are likely to be most pronounced;
  • defining a way to track and measure performance using delivery, performance, and other system data;
  • aggregating the data regularly for analysis;
  • creating corrective action plans to be implemented as soon as elevated risk is development; and
  • creating a closed-loop process that continually monitors and assesses risk information to insure that risks are detected early enough to permit the corrective action plans to be undertaken successfully.

And maybe you won’t be the one that finds out about an impending supplier bankruptcy after it’s too late!

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How to Build a Bat House (Repost)

Once upon a time, there was a beautiful old wooden hotel in the North Country. The owner had coaxed an award-winning chef with a new family away from the hurry-scurry of the big city, so the food was fabulous. The staff were locals imbued with the history of the region and an encyclopedic knowledge of hiking trails, scenic vistas, off-the-beaten-track cross-country trails, and so on. The cleaning staff took pride in ensuring that floors and woodwork were polished, the rooms were well-equipped, and bathrooms were spotless. The fixtures and furniture were old but functional, and the atmosphere was charming, down to the homemade quilts on the beds, each one individually selected.

Eventually the owner, beset with health problems, sold the business to a bright young entrepreneur. Several years later, there was an economic downturn, and revenues fell off. The new owner seized the opportunity to cut costs. He replaced the chef with the sous-chef, at a much lower salary. He revised the menu to remove the most costly items. He instituted a retirement buy-out for the original staff, replacing them with rent-a-clerks and teenagers. He replaced the maids with a commercial cleaning service, and traded the difficult-to-clean quilts for store-bought linens and coverlets. He was able to decrease the room rates by 25%.

To the new owner’s dismay, revenues continued to fall. Former customers were turning up at the local Best Western and Holiday Inn franchises, whose newer buildings and minimalist rooms consistently undercut his prices, no matter how much he lowered them. He was forced to close one wing of the old hotel, then another, and more of the staff were let go. Finally, he had to shut the business entirely. After a while, windows blew out and bats moved in, hence the title of this story.

About six months later, the young man met the old owner for dinner. “I’m sorry about what happened to the old place,” he said. “The economy tanked, and no matter what I did to cut costs and lower prices, we just couldn’t recover.” The former owner stared into his wine glass for a while. Then he shrugged, looked up, and asked, “What reason did people have to stay in your hotel? The food was mediocre; the rooms had lost their charm; you fired everyone who cared about the guests, or who could help them enjoy their visit; and poorly-paid commercial cleaners will do the bare minimum, if that.” The young man asked, “What should I have done?” The old man shook his head. “Who knows,” he said. “But people always need vacations, and when times are tough they want an extra-special place to stay. I’d have made it more special, not less special; and I might even have increased my rates and my advertising. Heck, if someone is paying $200 a night for a room, $220 isn’t much of a sacrifice.”

The young man smiled tolerantly. “Yes, but this downturn is different. Everyone’s in trouble. Businesses are failing left and right.” The old man refilled his glass. “I’m sure you’re right,” he said. “Who can say whether my strategy would have worked?” The two men began applying themselves to their meals. Between forkfuls, the young man asked, “So, what are you doing with yourself these days?” “Oh, ” said the old man, “nothing special. The doctors eventually figured out what was wrong with me and fixed it, so I got restless and bought an old ski lodge about a year ago. We renovated the rooms, brought in a French chef, put in an outdoor 4-season pool, and recruited a bunch of savvy locals to run the place.”

“How are you doing?”

“We’re booked solid.”

Editor’s Note: This post, contibuted by Anonymous, originally ran on March 31, 2009. It is being reposted because too many businesses are still building bat houses. If this trend continues, it’s likely that there will be no avoiding a double dip recession that everyone is so fearful of. Just like Marketing is NOT optional, neither is forward advancement. There is no holding pattern in business. There is victory or death. Choose one.

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