Monthly Archives: September 2011

You Don’t Need to Fish to Identify Savings Opportunities in Indirect Procurement

A recent article in the SIG Newsletter on “How to Identify Savings Opportunities in Indirect Procurement” gave a fisherman’s perspective on how to identify savings. It wasn’t bad, and went something like this:

  • The “big catch” comes from understanding the entomology
    Just as an angler must understand the feeding opportunities created by a trout’s main source of food – bugs – a Procurement Professional must understand the current business climate and the opportunities provided that, when intersected with the right plan at the right time, will create success.
  • Match the Hatch
    Trout opportunistically feed at the time of the hatch (when fly larva emerge and float to the water’s surface to dry their wings). A skilled angler will know when a bug hatch is occurring and match the fly to the hatching bugs to increase the catch. Similarly, a skilled procurement professional will identify which business trends are hatching and what elements need to be considered to create a category “catching” opportunity. She will start by prioritizing categories by ROI, developing a change management strategy, and focussing on internal and external adoption requirements.
  • Fish With a Guide
    There’s a big difference between traditional spincasting rods and fly rods and moving from one to another can be intimidating even for an experienced angler. The best way to move from one to the other is through a guide — an expert who already made the transition, learned from past mistakes, and who can help you overcome your fears and take you forward. In Procurement, a good guide will help your company create a strong indirect program through:

    • Analysis (Opportunity Evaluation)
    • Strategy (Best Practices)
    • Implementation (Adoption)
    • Management (Sustainability)
  • Approaching Indirect Procurement Services is Just About “Getting it Done”
    Intimidation and uncertainty can create a paralytic environment. Be empowered. If fish are analogous to categories, then plan where you want to fish and what kind of fish you want to catch. Determine where the fish are and if you can access them. Then, set out with clear goals and enlist the help of a good guide. The results can be that “big catch” or a series of smaller fish that add up to a great day or quarter.

And it overviewed some of the more common reasons why companies are not taking a more aggressive approach to indirect services expenditures, which include:

  • Fragmented buyer base
  • Difficult to transactionally manage (no comprehensive systems — too many point/niche solutions)
  • No detailed, real time visibility
  • Big change management issues
  • Not properly staffed to ensure adoption & sustainability post sourcing
  • Focused on direct materials & services
  • No internal expertise
  • No executive sponsorship

And it even indicated the most common indirect categories organizations were going after.

So it wasn’t bad. But it wasn’t that good either. It didn’t dive into how to detect a business climate that was prime for “a big catch”, how to detect “hatching” trends early in the game to be ready for an opportunity that is about to become prime, how to identify the right “guide” for your business, or the best way to “Get it Done”. As we indicated in a recent post, this will require stakeholder involvement across the board — and this is where the fly fishing analogy breaks down. You fly fish alone. You need to source indirect categories in a team. Furthermore, the right “guide” might be category dependent (as IT [targeted by 76% of businesses surveyed] and Travel [targeted by 84% of business surveyed] require very different knowledge bases and skill sets), trends are often very dependent on a sector, and a “big catch” will vary depending on business spend patterns, industry, and the overall economic climate (and the supply / demand [im]balance). And while these answers may be organization specific, they need to be answered to insure success.

How Corrupt is Your Country?

Transparency.org recently released the results of its 2010 Corruptions Perception Index, that ranks countries according to perception of corruption in the public sector, on a scale from 10 (very clean) to 0 (highly corrupt). I’m pleased to say that Canada is 6th at an 8.9, outranked only by New Zealand and Singapore (tied for 1st at a 9.3) in the Commonwealth.

The ten most corrupt countries, in order, are:

  • Somalia
  • Myanmar
  • Afghanistan
  • Iraq
  • Uzbekistan
  • Turkmenistan
  • Sudan
  • Chad
  • Burundi
  • Equatorial Guinea

But more interesting is where the BRIC, and the US and UK, fall in the list. The UK and US are 20th (with a 7.6) and 22nd (with a 7.1) respectively. South Korea pegs in at 39 (with a 5.4) and Mexico at 98 (with a 3.1).

  • 069th: Brazil
  • 078th: China
  • 097th: India
  • 154th Russia

As Abdul Khadar commented on SI’s recent post on Buy India, Sell China, maybe you should also consider the level of corruption when making investment decisions. If things go bad, and you want local help, you may need a fair amount of bribe money set aside to get it.

Not All Best Practices are Created Equal

A recent article in Apparel outlined the responses from Sourcing Execs [Who] Reveal[ed] Best Practices which clearly demonstrated that not all best practices are created equal. Of the twelve (12) best practices outlined in the article, three (3) were good, six (6) were okay, and three (3) were out of left field and about as useful as < insert favorite euphemism here >.

Good:

  • Look at what is behind the costs. What influences can you have on each cost?
    Understanding what drives costs is the key to understanding what you may be able to do to reduce costs and/or increase value.
  • Innovate in product, technology, finishes.
    Innovation is not restricted to one area — products, services, and technology employed, are all valid areas where innovation can add value to you and your customer.
  • We’re trying to push a total cost of ownership.
    Always look at the big picture. A decision should not be made on one or two cost components or contributions to value.

Okay:

  • The reasons why we source in China remain valid and China will still be a huge part of our sourcing going forward.
    You should double check your decisions against your reasons and assumptions on a regular basis. Sometimes they will still be right, sometimes market conditions will have changed.
  • Vietnam and Bangladesh can be used for key items. But China will not be going away.
    Yes, these are two other sourcing destinations, but they are not the first destination for most companies for a reason. They are smaller, and there are only so many high quality products that can be sourced from these countries.
  • Use technology to mitigate risk.
    Technology can only mitigate certain types of risk. Certain political, natural, and societal risks cannot be predicted with any degree of accuracy.
  • We need to focus our human capital on the things that matter.
    Of course you have to focus on the right things, but how do you identify what those right things are?
  • The real question is who is the next best guy.
    Locale is only one component of outsourcing / best cost country sourcing. The supplier is the other component.
  • We feel strongly about Vietnam, and Colombia is of great interest. Pakistan will straighten itself out and come back.
    There is definitely a lot of interest in Columbia, Vietnam remains a strong contender in Asia, and Pakistan may be a good future option.

Out of Left Field:

  • We are also working with our suppliers in China to share the joy of sewing the company way. We are working with these suppliers to help promote the idea to their employees that sewing is cool.
    What does a job being cool have to do with sourcing?
  • Avoid interfaces and legacies.
    Legacies, yes. But interfaces? Your software needs to interface not only with what you have today, but what your suppliers and customers have today if you are to have visibility up and down the value chain. Interfaces are critical. While the software should not be restricted to interfaces to legacy technology, they must be supported — your suppliers and customers may not be as innovative as you!
  • I remain very interested in the Western Hemisphere, particularly on our intimates side.
    Uh, ok, why?

Does Outsourcing Save Jobs?

A recent article over on Global Services on “Outsourcing often Mischaracterized as Evil and Insidious” states that outsourcing costs jobs is one of the myths that turn outsourcing into an epithet.

The article states that it is a jobs fallacy that when a job disappears in a western country and turns up in India it was exported by a nefarious businessmen. The article claims that the reality is that the job was exported because the job has been uneconomic to maintain in the West, whether or not India exists. The example given in the article is that when Carly Fiorina exported 35,000 jobs, it was the right decision, because if HP did not remain competitive in fiercely competitive markets, HP would have lost 100,000 jobs. In addition, if a certain job gets too expensive to do, such as calling a patient to remind her to take her medications, then it will disappear. But if it can be outsourced at an affordable cost, it will not.

I certainly buy the second argument. But I don’t know how far I buy the first. Costs have to be kept under control to support solvency and maintain jobs, but does this mean they always have to be outsourced? Sometimes it’s just a matter of increasing productivity. While that may be hard to do in online customer support, in certain areas of manufacturing, new technology and processes might be all that is needed if the plant is put in an area where costs are low or government incentives are high. In other words, outsourcing may not always be saving as many jobs as other methods could. It’s a balance.

How To Increase Spend Compliance

A recent item over on the CPO Agenda addressed “How to Increase Spend Compliance” because, as we all know, procurement organizations still face opposition to initiatives to channel indirect spend through preferred suppliers. The article chronicled advice from Carrie Ericson, VP of Procurement and Analytic Solutions, at AT Kearney. This is what she had to say.

Treat it like an opportunity.
It might be a problem, but it’s also an opportunity to cut considerable cost. There’s a chance for procurement to deliver greater value by driving standardization to existing contracts through preferred suppliers.

Focus on the right thing.
A mature organization with quality contracts with preferred suppliers can focus on compliance, but an immature organization without quality contracts with preferred suppliers who can provided products and services that meet organizational needs cannot. This organization must first focus on vendor identification, supplier selection, strategic sourcing, and contract observation.

Procurement must be good at arbitration.
Where you have a category that a lot of different functions within the organization buy and use, you get a lot more perspectives on which is the right supplier or the right contract. It’s Procurement’s challenge to not only get them to align, but get them align in a way that meets corporate needs.

Procurement must understand that buyers think their needs are special.
Even if a user understands that a contract is good for the company, the buyer may still think they need something just a little bit different for their needs. Or they may have developed a relationship with a certain supplier over years and feel that no other vendor can provide the same level of service to them. Or they may feel that it will take too much time, and cost too much money, to transition to a new supplier because their needs are special.

Focus on thresholds, not 100% compliance.
A broad compliance initiative across all contracts and preferred suppliers is risky because it assumes that all the contracts and preferred suppliers procurement has in place actually meet the business users’ needs. If care was taken, this may be the case, but if there are a large number of diverse business units with (seemingly) diverse needs, it may not be feasible, or cost conscious, to meet all the needs with one supplier. Sometimes, it’s cheaper to let low spend business units (on that category) do their own thing. Procurement should establish a spend threshold where anyone having to spend over a certain amount needs to use the Master Contract or get Procurement involved. (And if a proper analysis is done, the Threshold can always be designed to insure that at least 80% will be on contract by default.) Then, the Procurement organization isn’t wasting dollars chasing pennies and if a unit’s needs truly are different, they can still get the right product (at the best value with the help of Procurement).

Visibility into what’s going on is a huge obstacle.
Much of the data CPOs can get their hands on is historical and the money has already been spent. (And that’s why there is no real-time spend visibility and it makes no sense to require that the central data store / spend analysis cubes get updated in real time. Even a spend cube for your fastest moving category doesn’t need to be updated more than once a week. Put the resources into analysis, not updates.) That’s why the biggest challenge for the CPO in driving benefits to the bottom line is influencing that spend before it actually occur.

And


Compliance is typically achieved through stakeholder alignment and outreach by Procurement.
This is the most important point in the article and, unfortunately, it’s buried at the bottom where you are likely to miss it. If the stakeholder’s aren’t aligned, they won’t buy in, and the only way you get buy in is to insure they are part of the process from day one. All of the key stakeholders should be part of the vendor identification, supplier selection, and strategic sourcing; every stakeholder who is affected should give a chance to provide their input up front, and before a contract is signed, the sourcing team should hold a session to explain why a supplier / contract selection is best for the company and each affected stakeholder should be given one more chance to provide their input. Stakeholders who feel they are part of the process are much more likely to accept the results than those who are ignored and have a contract forced on them. While it’s true that there are those whom you’ll never be able to make happy, this will get you to compliance faster (even though it’s more work up front) than any other effort you care to undertake. Work with your stakeholders, and they will work with you!