Monthly Archives: August 2010

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.

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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.

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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.

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A Hitchhiker’s Guide to e-Procurement: Invoices, Part II

Mostly Harmless, Part XI

Previous Post

In the last post, the invoice was defined as well as some of the associated data requirements. This post will address the associated challenges with invoice processing, some associated best practices, and the benefits that could be expected from an appropriate e-Procurement solution that was flexible and efficient in its processing of invoices.

Common Challenges

  • Purchase Order Partitioning

    The line items on the invoice can relate to one or more purchase orders … but which items go with which purchase orders? If an invoice is for a large shipment of hundreds of line items, this can be a challenge.

  • Billing Validation

    Were all of the items ordered? Were they received in acceptable condition? Are they at contracted or otherwise agreed to rates? Do any discounts apply? Are there early payment discounts to be taken advantage of?

  • Duplicate Detection

    Is this invoice unique? Is each line item a unique billing against received goods?

Best Practices

  • Automatic Acceptance / Import

    The system should be capable of automatically receiving invoices from suppliers and automatically accepting them (conditionally) if no reason for automatic rejection is found.

  • Automatic Uniqueness Validation

    The system should automatically match each line item of the invoice against the indicated and/or outstanding purchase orders and automatically reject the invoice if it, or any part of it, is determined to be a duplicate of an already submitted, and (conditionally) accepted, invoice. This notice should automatically be sent to the supplier, along with the reason for rejection.

  • Automatic m-Way Matching

    As soon as an invoice is received, it should be matched against any and all relevant goods receipts, purchase orders, and contracts to make sure that all goods were ordered, received, and billed at contracted rates. If unacceptable errors are found, the invoice should be automatically rejected. If only minor (billing) errors are found, the invoice should be accepted with modifications. If one or more items are under dispute, the invoice should be conditionally accepted and a note made that it can not be paid automatically until the dispute is resolved and that manual intervention will be required if this resolution does not occur before the due date. If one or more line items can’t be matched, the invoice needs to be flagged for manual review.

Potential Benefits

  • Reduced Overspending

    Automatic uniqueness validation insures that duplicate payments are not made, automatic m-way matching prevents overpayments, and automatic flagging of invoices under disputes prevents payments for unacceptable merchandise.

  • Faster Payments

    Invoices that are determined to be problem free can be queued for payments according to the payment terms. Automatic payments can prevent interest charges or reduced goodwill on the part of the supplier.

  • Greater Savings

    The prevention of duplicate payments, overpayments, and payments for goods not yet accepted, the ability to take advantage of early payment discounts, and increased supplier goodwill all contribute to greater savings.

Once the invoices are accepted, it is time for final reconciliation of (conditionally) accepted invoices and invoices that are marked for manual reconciliation (due to one or more problems that are not cause for automatic rejection), which is the subject of the next post.

Next Post: Reconciliation, Part I

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If Optimization Can Clear Transit-Dependent Toronto in Two Hours …

… imagine what it could do to your supply network! While I regularly trumpet strategic sourcing decision optimization, because that’s where many of your significant savings opportunities lie, there are savings to be had throughout the supply chain. Some of those savings come from streamlined shipping. When you consider that each additional day in transit costs you one half of one percent of the value of the goods when you take into account:

  • shipping costs,
  • depreciation costs for limited life-span commodities, and
  • temporary storage costs, etc.

Every day you can take out of your shipping will save you money. By optimizing you network, your routes, your modes, your carriers, and your processes (and documentation), you can often take days off of your average shipment time! So why not optimize your network today? There are a number of providers who specialize in network and inventory optimization, including:

  • Algorhythm
  • Axxom
  • GAIN Systems
  • JDA
  • LlamaSoft
  • Optricity
  • Smart Ops
  • WAM Systems

So take some inspiration from Hossam Abdelgawad, who just won the Young Researcher Award for his work on “Managing Large-Scale Multimodal Emergency Evacuations” and make a connection. Your network will thank you for it.

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