Monthly Archives: August 2010

Supplier Partnerships

Today’s post is from Robert A. Rudzki, President of Greybeard Advisors LLC, who has (co-) authored a number of acclaimed business books, including Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise, On-Demand Supply Management, and the supply management best seller Straight to the Bottom Line.

A supplier representative visits your offices and begins to talk about “the partnership” between your two firms. You hadn’t realized the relationship was that comprehensive, so you ask him to describe the exact nature of this partnership. Chances are that the answer you receive will be rather wordy and nonspecific, about what you would expect from a “glad-handing salesperson.”

“Partnership” is one of the most overused and misused terms in the world of business. When I was a CPO, we dealt with this phenomenon by taking two steps:

(1) our Procurement Council developed a written definition of what we meant by the term “supplier partnership”

(2) once we had that definition, we decided how to put it to good use to improve both our internal and our external processes

If you’ve never done the exercise of developing your own written definition of supplier partnerships, I would encourage you to do so. It has several benefits. It will help you organize your ideas about this important subject. Also, you can create a common understanding within your company regarding what the partnership term means and how it should fit into your overall supplier selection and management process. And finally, it can serve as an excellent point of discussion with your suppliers — especially those who say they want to become your partner.

We did this in my corporate career as a CPO, with real benefits. We went so far as to print our short definition of supplier partnerships on the back of our business cards. When meeting a supplier for the first time, we pointed out the definition on the back of the cards and used this as a launching point for a discussion that often proved to be very meaningful.

Share This on Linked In

Thanks, Bob!

A Hitchhiker’s Guide to e-Procurement: Reconciliation, Part I

Mostly Harmless, Part XII

Previous Post

Reconciliation is the process of comparing and matching figures from the accounting records of one system with the accounting records of another system. In e-Procurement, it generally refers to the reconciliation of the invoice and associated payments against goods receipts, purchase orders, contracts, and / or tax records.

While reconciliation should be done at each step of the process — as the purchase order should be matched against the approval and a contract, the goods receipt against the purchase order(s), and the invoice against the goods receipt(s) and the purchase order(s), there should be a separate, (semi-)manual reconciliation phase as not everything can be reconciled automatically and there will always be new situations and exceptions not accounted for in the automatic rules.

If there is an error in a SKU or other identifying attribute, it may not be possible to automatically match one or more invoice line items against the purchase order(s) they correspond to. In this situation, the e-Procurement system would flag the invoice for manual review, at which point the individual who (first) processed the invoice would do a manual match. If the amount is significant, this match should be rechecked at a later time, because if there were two similar items in the procurement system (catalogs) and the match was made to the wrong, off-contract item, the organization might end up paying a higher price.

A review should also be made of all purchases against a supplier’s account for which there are no contract prices if there are contracts in place with the supplier. For example, a contract with an electronics vendor might be such that the organization gets 10% off of list price for all items for which a contract price is not specified or that the organization gets 15% off of all purchases once it has purchased One Million Dollars worth of goods and services. These situations may not be caught by the system automatically as it might not be easy to encode which goods or services are covered, especially if items are being ordered / purchased not yet in the system.

In addition, a review should be made of all tax payments. Is the tax rate correct? Are the items being taxed subject to taxation? Is the organization exempt? Is the organization eligible to recover some of the payments (such as GST in Canada)? This is a difficult subject and a manual review will be required to ensure that the right taxes are being made at the right amount and that the organization is capturing the right information that will be required for tax reclamation, which is the subject of an upcoming post.

Next Post: Reconciliation, Part I

Share This on Linked In

While Reverse Auctions Are Not Evil, They Are Not Salvation Either!

Despite the frequent misquoting of the work of Dr. Bob Emiliani, which is regularly used to slam reverse auctions (see Spend Matters), reverse auctions are not evil, and, used on the right category at the right time, they can provide a company with double digit savings.

However, despite the claims that appear to be made in this recent ChainLink Research article on “broadening the scope of reverse auctions”, they are not salvation either. While it’s true that some companies have proven that e-auctions can generate double-digit savings year after year, this doesn’t mean that your company will see double-digit savings, and, as pointed out in a brief history of optimization, sometimes reverse auctions result in cost increases, which can be significant.

Not only does the comprehensive auction have to be conducted properly to be successful, but the following has to be true if the company is going to see meaningful savings:

  1. There must be enough serious competition in the market.There should be three or more suppliers who can meet the company’s need at an acceptable quality level and who are willing to actively (and aggressively) compete for the business.
  2. There must be true savings potential.The company must collect index and benchmark data and determine with reasonable certainty that it’s current price is significantly higher than the (expected) average market price.
  3. The company must be ready and able to commit to the winner.If not, this will damage the company’s reputation and drive away those suppliers who could (potentially) work with the company to find ways to decrease cost.

If these basic criteria are not met, you will not see (significant) savings, and the auction will likely be a waste of time at best.

Share This on Linked In

Hackett, Hast Thou Forsaken Us?

I was very disappointed after reading this recent article on “process matters too” in the CPO Agenda which discussed the recent findings of The Hackett Group with respect to P2P transactional channels as well as their recommendations for procurement organizations wanting to improve overall source-to-settle performance. If the article is to be believed, Hackett has fallen for the classification trap.

According to the article, Hackett says that a company must:

  1. Possess a unified spend category taxonomy.
  2. Define a rationalized set of transactional purchasing and payment processes that are then explicitly mapped to spend categories and/or associated suppliers.
  3. Ensure that individual P2P transactional channels balance cash, cost and stakeholder satisfaction.
  4. Integrate a channel strategy selection and implementation plan into the category management process.

In reality:

  1. A single taxonomy is not enough as each business unit will need its own in order to be effective. Moreover, taxonomy is irrelevant. The only thing that is important is that the spend is captured and available for analysis. Every department and user will want to see the data rolled up differently. This is the classification trap, and those who fall into it never advance to real data analysis, which is where true savings are discovered.
  2. While the company must define an accepted set of purchasing and payment processes, and while spend must be associated with the appropriate suppliers, the mapping should not be made to an explicit fixed category. Assignments must be able to change as needs change (spend by supplier, spend by commodity, spend by category).
  3. Channels must balance cost and stakeholder satisfaction, but the amount of cash flowing through is not relevant. If the cost of maintaining the channel is too high (relative to the value), the channel must be abandoned.
  4. This is good advice. Planning greatly increases the chance of success.

So, if you really want P2P success:

  • Come up with a channel plan.
  • Implement the appropriate channels and insure all spend goes through an approved channel.
  • Make sure all of the spend data is accessible from each channel.
  • Analyze the data in a true data analysis tool to determine which channels are performing well, which aren’t, and adjust the plan over time as necessary, and
  • allow each business unit to use their own taxonomy.

Share This on Linked In

You Say You Know How To Do A Make-vs-Buy Analysis. Are You Sure?

Should you make or should you buy? It’s a difficult question that requires a detailed analysis. Consider the example of a car engine. Do you source each major assembly — the engine, the frame, etc.; or do you source sub-assemblies — the carburetor, the fuel injector, etc; or do you source component parts — the throttle body, the choke pull-off, etc.; and so on. Do you build the final product in house from the major assemblies, or do you have a first tier supplier do it, or do you have one first tier supplier assemble the major assemblies from the sub-assemblies and send those assemblies to another first tier supplier who will assemble the car, or do you chose one of a thousand other supply chain models that can also get the job done?

The figures below hint at the complexity that needs to be considered to truly arrive at a best solution. The best, and most cost-effective, scenario will depend on the particular strengths and cost efficiencies of each supplier in the supply chain.

Engine Complexity

The only true way to find the best, and most cost-effective, scenario is by way of decision optimization with integrated make-vs-buy analysis capability that can span a multi-level Bill of Materials (BOM). While most SSDO (strategic sourcing decision optimization) platforms do not yet support this capability, it is a good bet that most of tomorrow’s will. To find out what other capabilities are forthcoming in the world of decision optimization, visit BravoSolution‘s website, fill out a short 8-field registration form, and receive your free, exclusive, copy of The Future of Optimization, a new Sourcing Innovation white-paper with groundbreaking insight on eight directions that strategic sourcing decision optimization is likely to take in the decade ahead.

Share This on Linked In