Monthly Archives: August 2010

Procurement Has a Long Way To Go if Being a Doorstop is a Measure of Success

A few months ago, the CPO Agenda published the transcript for its roundtable in London in May 2010 on “budgeting for a wider influence”. While this post is not going to summarize the transcript as it really doesn’t say anything that this blog hasn’t been telling you for years, buried within the transcript is a very interesting quote by David Noble, the Chief Executive of CIPS.

If we do not have the ability to get in there and hold the door, we will lose it and be back to where we were 10 years ago.

In other words, a current measure of success is your ability to hold a door, i.e. your ability to act as a doorstop!

It’s sad, but at many companies, it’s still true. Just like there are at least five companies that haven’t tried e-Sourcing or e-Procurement for every one that has, for every best-in-class company where Supply Management has influence and/or control over the majority of the organizational spend, there are five companies where Supply Management doesn’t have influence or control over the majority of organizational spend.

So how do you get more spend under your control and move up from door-stop to door-person? You kick-ass on some major projects and get more and more support from the C-Suite. So how do you get those big projects? You start by speaking the language of finance, because once you get the CFO on your side, the CEO will follow and then you’ll have the credibility you’ll need. Start with Bob’s great posts on Speaking Like a CFO (Part I and Part II). Then review the quick introduction to finance posts (Part I, Part II, and Part III). Make sure you understand what the Z-Score really is. Then bookmark Investopedia. It will be your best friend. Its dictionary on finance more than rivals Wikipedia’s.

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Why ERP Is Not Enough for Project Based Manufacturing

A recent article over on Industry Week on “5 Critical Issues for ERP in Project-based Manufacturing” outlined why ERP systems alone are not enough for project based manufacturing (and manufacturing in general).

The issues outlined in the article were:

  1. Bidding and Quoting
  2. Project Visibility
  3. Managing Change
  4. Financial Performance Tracking
  5. Rapid Time to Value

A carefully evaluation of many of the ERP tools on the market will reveal that:

  1. They don’t truly support modern e-Negotiation, and the company will also need a modern e-Sourcing tool (which may have to be integrated).
  2. As far as these systems are concerned, user-defined push alerts, flexible automatic notifications, and real-time reporting is still a pipe dream. A real time data analysis tool will be required.
  3. Flexibility is limited. At a a minimum, good processes will be required. A change management add-on may be required as well.
  4. Lots of data is tracked and stored, but financial analysis capabilities are limited. A real time data analysis tool will be required here as well.
  5. Implementation is rarely quick, and payback typically longer than expected. That’s why supplementary Sourcing and Procurement systems are generally required.

In other words, a good ERP system can provide a great foundation, but it will rarely meet all of an organization’s need.

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A Hitchhiker’s Guide to e-Procurement: Costing a Solution

Mostly Harmless, Part XXI

Previous Post

Every solution costs more than the sticker price. But how much more? In this post, we’ll outline how to cost the various solutions as well as a methodology for calculating the expected value.

First of all there’s the cost of the license, which can be significant. If the system is enterprise, and especially if it’s an installed solution, this can be a very significant up-front cost in the six figure range. Then there’s the maintenance, which is required for support and mandatory for some solutions, and built into the price of on-demand/SaaS solutions. This can be as high as 22% a year for some solutions. Then there’s the installation and integration costs. Even a SaaS solution will require some setup, and the e-Procurement system will need to be integrated with accounting systems, sourcing systems, payment systems, and other enterprise (resource planning) systems in order for the organization to extract maximum value for the system.

Then there’s training costs. Even though a good system will be extremely easy to use and self-explanatory where basic functions are concerned, some training will still be required. This is especially true for the administrators, who have to maintain the system, and analysts, who have to analyze processes, performance, and spending. In addition to training costs, there will be support costs. Administrators will have to be employed to continually maintain the system (data) and train new users. If the system is installed, they will also have to do patches and upgrades in addition to maintaining system data and (business) processes.

If the organization is looking for an installed or hosted ASP solution, there will also be hardware costs, database costs, application server costs, and middleware costs. These costs can easily dwarf the system costs if the organization doesn’t already have any of these solutions. And even if the organization has some of these solutions in place, there will likely be additional license fees. Finally, there will likely be additional IT (support) costs to maintain the hardware, which will have to be upgraded on a regular basis, and the supporting software.

When all is said in done, the cost of a solution can end up being 10 times the sticker price, so it’s important to understand the total cost of ownership before choosing a solution. This is not to say that a solution with a seven figure total cost of ownership is expensive. It might be, it might not. It all depends upon how much it costs relative to other solutions being evaluated, how many users will use the system, how much it will increase organizational efficiency, and what ROI the organization expects to see.

Fortunately, the calculation of expected value is quite straightforward once the TCO is known. It’s simply a matter of computing the ROI according to the following formula:

(savings expected from increased efficiency +savings expected from maverick spend reductions +savings expected from newly identified opportunities) /total expected cost

While some of these numbers may appear hard to calculate, they are easy to estimate and what is really important is order of magnitude. For example:

  • if the organization expects to increase efficiency 200%, that’s a 65% workforce reduction against current workload; if the organization currently requires 20 people to handle tactical procurement tasks, at an average salary of 62K, that’s a reduction of 13 people or about 800K per year
  • if the organization currently has a maverick spend rate of 30% and expects, using third party benchmarks, to reduce that by 66%, that’s an 20% reduction in maverick spend; if maverick spend, on average, costs the organization 5% of spend on average, if the organization spends 100M annually, that’s a projected savings of 1% (20% of 5%), or 1 M in one-time savings
  • if the organization expects that an e-Procurement system will identify additional savings opportunities on 20% of spend annually and that the average savings that will be obtained will be 10%, then the organization would expect to save 2% of spend, or 2M annually

All told, if the organization expects to use the system for five years, it would expect to save 15M over five years (5*800K + 1M + 5*2M). If the total cost of ownership of the system was determined to be 3M for five years, then the organization would expect to see an ROI of 5X, which should be a buy decision. Of course, if the calculations worked out that the organization only expected to save 5 M, and the ROI was only 1.6, the decision should be to find a more cost effective solution.

For more details on cost calculations, and a starting spreadsheet, see Sourcing Innovation’s post on Uncovering the True Cost of On-Premise Sourcing & Procurement Software in the archives.

Next Post: Procurement Models

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The Board Room CPO

In addition to offering insights into planning horizons, supply chain strategy drivers, and keys to supply chain success, the recent report on “Supply Chain Strategy in the Board Room” by the Cranfield School of Management and Solving Efeso also discussed what it all meant for supply chain leaders of tomorrow. It’s conclusion was that the CPO of tomorrow needs to fit the following profile:

  • Strong Communicator: gravitas within Leadership teamin many companies, the sourcing / procurement / supply chain leader still doesn’t have a seat at the table, and even when she does, she often reports to the COO, CFO, or another CXO that’s not the CEO
  • Multi-Disciplinary: able to understand corporate & customer service strategywithout this insight, the CPO will never develop a supply chain strategy that complements and enforces the corporate strategy
  • Collaborative: works as a team player, does “external sensing”in modern terms, the CPO must have a high EQ IQ
  • Vision-Led: but practical and pragmaticthe CPO must be able to think long term, but able to adapt to short-term circumstances and fluctuations
  • Fact-Based: but able to deal with “ambiguity and ambition”the CPO must have a solid grasp of true analysis, and apply those skills whenever data are available, but also be able to fill in the gaps with wisdom and experience when data is sparse
  • Culturally-Intelligent: able to deal with a mix of global, regional, and local culture/leadership stylesmodern supply chains are global and they are going to stay that way

In other words, nothing that Sourcing Innovation and other top blogs haven’t been telling you for years, but it’s nice to see more support for the profile.

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The Sourcing Emperor Has No Clothes!

Today’s guest post is from Dalip Raheja, President and CEO of The Mpower Group (TMG) and a contributor to the News U Can Use TMG blog.

As we pointed out in our last post (where we killed off the old sourcing process), Strategic Sourcing has always been fundamentally flawed. It clearly did not deliver the promised results years ago and it isn’t delivering the right results today. Furthermore, I would argue that the results that Strategic Sourcing is delivering may not be totally accurate because the unintended consequences that the function creates (more on this later) may actually destroy value. The current process is penny wise and pound foolish. That’s never a strategy for long term success. What we need is a new way of looking at this function. We need a set of next practices to elevate us beyond what current best practices recommend.

Now, there are many “defenders of the faith” who have argued, quite vehemently, that the TRUE process is not flawed; it was just never executed right. Semantics. What’s interesting is that not a single one of them has argued with our fundamental premise, that Strategic Sourcing has failed to deliver promised results and that it may have actually destroyed value along the way. I guess there’s no point in trying to change their minds as long as they agree, and they wholeheartedly do, that the traditional Strategic Sourcing process must be changed. Are you at least intrigued? Enough to at least join in the debate, regardless of which side you take?

As we alluded to in our last post, sourcing has always been focused on cost. And while cost cannot be ignored, a process that is rooted in cost cutting simply cannot be considered a strategic process for any sourcing organization. Cost has never been a long term strategy for most corporations. I’ll put it another way. Long term growth was never achieved on the foundation of cost cutting. And while we are not trying to use scare tactics generated by recent headlines outlining the major hiccups for some of the world’s largest and most admired corporations (like Toyota, Apple, BP etc.), a significant portion of the conversation around those blunders is focused on how squeezing costs out of either the supply chain (the entire system) or just the supply base (and there is a difference) was at the root of the problems.

Cost cutting is not viewed strategically (or favorably) by the rest of the Supply Chain either. If you think otherwise, then tell me, have you asked them? This might help explain the absolutely horrendous change management issues that we have all faced as practitioners. Cost reduction is not very high on the goal sheet of any of our major internal stakeholders, other than the CFO. And if it is, it’s either there temporarily or was imposed by someone else. What your stakeholders and their stakeholders will say is that they want Exceptional Business Results (EBR) that drive long term competitive advantage. Since the focus on cost or Total Cost of Ownership (TCO) ignores many of the other elements that contribute to EBR, it may actually be sub-optimizing the entire system. While I do understand that we have moved from the traditional three-bids-and-a-buy to using TCO calculations, risk analysis, supplier management, decision optimizing, and all of the other best practices out there that you can buy in cubes, magic boxes, checker boards and benchmarking quartiles, it’s still not enough! Since the initial goal of the process is cutting costs, it will always be like rolling a large boulder up the devil’s staircase. We lose the argument with the entire system before we even start the conversation because they see the goal of cutting costs as a threat to the rest of those elements in their system that are contributing value towards EBR. In most cases, they are right. Most of the time, Sourcing doesn’t even know what those elements are — forget about knowing what their impact is on the EBR. This also explains why Strategic Sourcing has never been fully integrated into the Supply Chain and why many still continue to think of those two functions as separate from each other.

In addition, the argument that we proposed almost ten (10) years ago, that the sourcing process cannot be strategic and competitive differentiator if everyone else is also doing it, still holds. Think about it. We are all using basically the same process, going to the same supply base and trying to extract the same leverage using the same techniques. What we have just described is a “commoditized” process. Beating down the same suppliers that all your competitors are beating down for the same 3-5% savings just isn’t strategic. Call it something else, but it isn’t strategic!

We can continue to differentiate ourselves on the basis of improving this “commoditized” process using best practices OR we can fundamentally alter the game by using a set of next practices. We can either compete against others or we can move our organizations to competition free zones. We can either benchmark ourselves against others who are all in the “commodity” world or we can re-define the measurement system so there is no benchmark for a while. We can either move up and down the traditional TCO curve or create and relocate to a totally different value curve. We can either defend our position in existing markets or create new markets. How great would it be to get the best terms for a contract without ever needing to negotiate? That’s what I’m proposing.

There are intended consequences and unintended consequences to all Strategic Sourcing decisions. Some of these consequences have a positive impact on the overall value while others have a negative impact. Some of these are known consequences while many are unknown consequences. Since the Strategic Sourcing process is based on TCO, it often only takes into account some of the variables needed to create Exceptional Business Results. As it stands, the Strategic Sourcing process is constrained from ever incorporating all of the variables mentioned above (intended consequences, unintended consequences, positive and negative, etc.). The result, many times, is a decision that clearly optimizes at the TCO level but sub-optimizes at the system level. (Exceptional Business Results Sourcing optimizes at a systems level). Tweaking the current process with best practices will certainly give you some benefits but it will clearly not lead to any type of sustainable transformation or EBR. For that you need next practices. And over the last year, we’ve created a suite of services to help our clients capture increasing value through each step-change of the Strategic Transformation. That is the summation of our argument.

While some organizations have clearly made very good progress in elevating the role and strategic importance of the sourcing / supply chain function, I think it is safe to say that we are nowhere close to being where we all thought we were going to be by now. Wouldn’t you agree? We will also be discussing this and similar topics on our own blog, News U Can Use. Come by and weigh in on the discussion!

Thanks, Dalip!

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