Monthly Archives: August 2010

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

Mostly Harmless, Part XVIII

Previous Post

In the last post, the analysis process was discussed and some of the basic questions were defined. This post will address the some of the associated challenges of the analysis process, some associated best practices, and the benefits that could be expected from an appropriate e-Procurement solution.

Common Challenges

The literature will claim that there are many challenges with regards to spend analysis, and that these challenges will revolve around data cleansing, data classification, and data enrichment, but the reality is that there are generally only two real challenges: access and analysis.

  • Data Access

    In order to do data analysis, an analyst needs access to the majority of the relevant organizational data that represents at least 90% of the spend in the categories that the buyer wishes to analyze. Without a centralized e-Procurement system, this can be difficult as some spend will be in the ERP/MRP, some in the accounting systems, some in the P-Card system, and some in various departmental systems.

  • Insightful Analysis

    Top N reports are not analysis. Spending trends are not analysis. Automated reports are not analysis. Analysis is the ability to slice and dice the data eight ways from Sunday to allow for the identification of unusual spending patterns that represent true savings opportunity.

Best Practices

  • Force Every Purchase Through the e-Procurement System

    Forcing every purchase through the system not only significantly reduces maverick spend, but it provides a centralized repository of all transactions which provides a solid foundation for spend analysis.

  • Force Every Payment Through the e-Procurement System

    If the e-Procurement system does not support e-Payments, insure that it supports a record of payment against each invoice and that all payments are loaded into the system and cross-referenced with associated invoices, goods receipts, and purchase orders. This is necessary to take spend analysis to the next level. While many vendors will claim that only AP data is needed for spend analysis, the reality is that AP, invoice, and purchase order data is needed for spend analysis. Without the m-way analysis, it is impossible to tell if overpayments, which could be recovered, were made. Without the m-way analysis, it is impossible to identify all maverick spend, which is the first step in reducing future maverick spend. Etc.

  • Do Ad-Hoc Analysis Whenever There is a Possibility for Savings

    Traditionally, data analysis was avoided because the cost of analysis was high relative to the savings potential. However, with the right tool, the cost of an ad-hoc analysis is no longer the five or six figures it used to cost, it’s now three or four figures — which makes even a maximum five figure savings opportunity worth analyzing, especially if a preliminary analysis can be done in an hour or two! Even if only one in ten hunches pays off, if it only costs $1,000 of an analysts time to do an analysis, and the one pay off is $100,000, that’s a 10X ROI.

Potential Benefits

  • Savings

    Real analysis will identify overpayments that will lead to immediate savings. Real analysis will identify maverick spending, which will lead to more savings when it is prevented. Real analysis will uncover new savings opportunities, which will lead to more savings. Real analysis is savings.

  • Better Procurement

    Finding and eliminating maverick spend through better processes leads to better procurement. Understanding spending patterns leads to better procurement. Saving money leads to better procurement.

Once the analysis is complete, it is time to review and update the catalogs and contracts, which is the subject of the next post.

Next Post: Catalogs & Contracts, Part I

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What Will The New Brazilian Consumer Mean to Your Supply Chain?

In supply chain, we are continually talking about how the BRIC: Brazil, Russia, India, and China, are going to revolutionize our supply chain by substantially decreasing our costs and, thus, increasing the overall value the supply chain organization brings to the business. For the most part, it hasn’t happened yet (as management costs, tariffs, delays, and expedited shipping costs usually serve to eat up most of the projected savings), although many companies, who took their time and did it right, did see enough savings and enough improvements to make it worthwhile. The real opportunities are going to come when the middle class in these countries reaches a point where the market is just as lucrative, if not more lucrative, then our home markets. Just like Japan, with its focus on electronics, achieved a rapid transformation over the last few decades to become the second largest consumer economy in the world until it was overtaken by China this month, the BRIC is on track to create a new middle class larger than the current global middle class in the next 15 – 25 years.

And while much has been written about the China and India Opportunity (as the 2.5 Billion people the countries contain are expected to contribute another 500 Million to 750 Million people to the global middle class), I haven’t seen much written about Brazil, which is still very respectable in size with it’s 8.5 Million square kilometers and 192 Million people. Plus, it’s current middle class, which is approximately 25% of the population, already earn between $1,000 and $3,250 US, which is on par with what the average middle class income in India (which is as low as $3,000 to $5,000 US by some estimates) and most of China.

Brazil, like any other country, poses a distinct market. As per The Brazilian Consumer: Opportunities and Challenges, Brazilians favour quality over low price, status over indifference, and interaction vs. seclusion in their way of life. The companies that have successfully reached the emerging middle class to date have focussed on quality, distinction, small stores (in lieu of hyper-centers), and exclusive distribution networks — all of which will have an impact on your Brazilian supply chains. But will the emerging Brazilian consumer have any impact on your supply chains for those of you sourcing from, but not selling to, Brazil? Probably not. But if anyone has any differing opinions, I’d love to hear them!

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Has Coupa Settled on a Coupe? Part II

In our last post we discussed how, when Davie ran The Coupa Factory, their strategy was innovation focussed and they were constantly charging ahead in their efforts to bring Procurement Independence to the masses. However, lately, it seems that Coupa‘s strategy has shifted from “build a better platform and they will come” to “get the customer and then build them a better platform”. While not much of a change, it’s a change nonetheless and it appears to have affected their rate of innovation. Furthermore, it has been accompanied by a shift from groundbreaking new features to even flashier UIs, iPhone apps, and streamlined ERP integration. [Either that, or they’ve been celebrating all those new customer wins with The Coupa Drinking Song. ] While these features are important to the tactical buyer, they don’t add value to the strategic parts of the procurement process.

This isn’t to say that Coupa has stopped developing, or that some of their new features aren’t impressive, especially where the average buyer is concerned, but that their rate of innovation for the last year and a half just doesn’t compare to the Coupa of old. And while it is to be expected that the rate of innovation will drop as a company matures, if the rate drops too fast, the company risks going stagnant, and that would be troubling. However, what is really troublesome is that Coupa hit upon two areas in real need of innovation in their latest release, but appear to have completely missed the point on how to bring that desperately needed innovation to the masses (unless it’s still a work in progress, but why not go for the big win before anyone else beats you to the finish line?). However, that’s the subject of our next post.

For now, let’s review what they have accomplished in their latest release, as a few of the features are quite useful and still unique to the space.

Drag-and-Drop Expense Management

One of the developments Coupa seems quite proud of is the ability to snap a photo of a receipt with your iPhone, e-mail it to your Coupa account, log in to the system, bring up expense reporting, and then drag it to an expense category in an expense report. The receipt is immediately associated with the report and removed from your unprocessed receipt bucket.

Transaction Metadata for OLAP reporting

Coupa has added transaction metadata to each transaction that provides supervisors and CPOs the ability to roll up reports by chart of accounts, reporting hierarchy, and category. They’ve also added more fine grained security to insure that a user can only see spend within her visibility. (Note that they were calling this “data striping“, which, of course has nothing to do with OLAP reporting but data storage on physical mediums as it is the technique, used in RAID, of segmenting logically sequential data across different devices. So if you were confused, this is what they meant.)

Real-time Budget-Based Alerts

Not only does the application allow a user to keep on top of her budget, by way of it’s budget dashboard on the home screen (which is actually useful as most buyers don’t have a clue how much they are spending), but if a requisition puts a user over a certain percentage of her budget too early in the year, the application will alert the user, and the approver before it is approved. It will also let the approver know if the requisition would put the category or department budget over a dangerous (administrator configurable) threshold too early in the year.

iRequest

iRequest is a bookmarklet (bookmark app) that allows the user to add a bookmark to their browser that will bring up a pop-up window that will let them request whatever item is on the page of the external site she is browsing. Not only does it make requesting an item on Amazon.com a breeze, but it eliminates the excuse for out-of-system requisitioning as every item can now be easily requested through the system.

Opt-in Benchmarking

With opt-in benchmarking, a customer can opt-in to sharing benchmarking data anonymously and see how it is performing on a standardized set of benchmarks relative to all of the other customers on the Coupa system. It’s interesting, and could be a powerful tool, but right now, it’s not very useful. More on this in our next post.

Supplier Ratings

With this feature, they’ve essentially added the ratings feature of Amazon.com which allows a buyer to rate the supplier with respect to each purchase, but since the ratings are optional, and since they’re not made against meaningful performance categories, the usefulness of this feature is rather limited.

All-in-all, some useful functionality that I’m sure will go far in convincing the average office manager to accept Coupa with open arms and joy in her heart, but not what Coupa could have delivered to totally knock your Procurement socks off. More on this in our next post.

To be concluded.

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Undervalued Currencies, Part I

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

The value of the Chinese currency, the renminbi is getting a lot of attention. The renminbi is commonly called the yuan, and I’ll use that term here. Economists, lobbyists, legislators and others are all saying the yuan is undervalued. I agree with them.

But undervalued compared to what? Often the answer is “compared to what it should be”. That’s really vague and circular. There is one common point of comparison, though. That’s the “Purchasing Power Parity” (PPP) exchange rate. It’s not perfect reference point though. In this two-part post I’ll be covering:

  • Background of the PPP rate
  • How to determine the PPP rate for different countries
  • How to calculate over- and under- valuation
  • Countries with big differences between the PPP rate and the actual rate

Background PPP rates

The concept of the PPP rate came largely from the World Bank. They were trying to give a realistic picture of the relative standard of living between different countries by looking at per capita Gross Domestic Product (GDP). Each country measures GDP in its own currency, and that figure has to be converted to a common currency to compare countries. The common currency the World Bank uses is the U.S. dollar. They found that converting GDPs at the real exchange rate gave an unrealistically low view of the standard of living in developing and poor countries. For example, in 2009 the annual per capita GDP in China using real exchange rates was only about $3,300 per person. But a person can live much better in China on that level of income than they would in the U.S., so the World Bank developed a PPP exchange rate that shows the per capita income to be $6,600, using a PPP rate to convert from yuan to dollars.

So how is a PPP rate determined? It’s based on a market basket of consumer-oriented goods and services. It’s the exchange rate at which that basket would cost the same in both countries. What exactly is in that market basket? I haven’t been able to find that information. I do know that it’s heavy on food, clothing, housing and education costs. It may not have much relevance to industrial purchasers.

Here are two quick examples of one-item market baskets. I live in Mexico most of the time. I can see a first-run movie in a modern theater that’s equivalent to the best in the U.S. for 45 pesos. In the U.S., it would cost $10. The PPP rate for movies in Mexico is therefore 4.5 pesos per dollar (45/10). That’s the exchange rate at which costs would be identical. However, if I were to buy a laptop computer in Mexico, an $800 laptop in the U.S. would probably cost 13,000 pesos. That implies a PPP rate for computers of 16.25. (The real exchange rate is about 12.5 pesos per dollar)

More well-known, the Economist magazine periodically publishes a one-item “Big Mac” Index of PPPs by comparing the prices of Big Macs around the world. You can see some recent results by following the link.

In the next post, we’ll cover the determination of PPP rates, the calculations necessary to determine value against the US dollar, and list some countries with large differences between the PPP rate and the actual rate.

Thanks, Dick!

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

Mostly Harmless, Part XVII

Previous Post

Analysis is often defined as the process of inspecting, cleaning, transforming, and modelling data with the goal of highlighting useful information, suggesting conclusions, and supporting decision making. However, this misses the point — analysis is all about looking into data to get insight. Nothing more, nothing less. Everything else is a pre-cursor, post-decision, or just not relevant. It’s the Analysis, Stupid.

In e-Procurement, it’s all about what did the organization do, what did the organization not do, and what should the organization have done. Of course, this is a much harder question than it may seem to be on the surface. At a basic level, did the organizational buyers follow the processes? Were the purchases on contract? Did AP pay the correct amounts? Were taxes computed properly? Were owed moneys reclaimed?

However, these questions are just the starting point, not the end report. For on-contract purchases, were prices consistent? This is very important in office electronics purchases where rates are a percentage off of “best-price”. Considering electronics tend to depreciate about 2% to 3% month-over-month, over a year, prices should decrease. However, when many organizations plot pricing for a standardized computer purchase over the course of a year, they will find that prices stay relatively flat. For off-contract purchases, were prices reasonable compared to market index? How much did maverick spend cost the organization? Was any of the maverick spend justified? Did AP pay the approved (adjusted) amounts?

But the questions shouldn’t stop there. Were the spending patterns consistent? If spend on a particular category abruptly rises in a department where it was consistent year-over-year for the last three years, something is amiss. If claims for a particular employee are the same month over month when they usually follow a sinusoidal curve, something is wrong. If off-contract spend increases rapidly, something is very wrong.

Thus, directly or indirectly, a good e-Procurement system will support in-depth analysis of the process, spend, and results. This means that if the platform does not contain a true data analysis tool, it should support full export of all relevant data in a standard format that can be imported by such a tool for analysis. This is because, when all is said and done, the biggest savings will come from improving the procurement process itself. This requires insight, or lessons will never be learned.

Next Post: Analysis, Part I

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