Monthly Archives: October 2013

The Evolution of Procurement, and Where It Is Headed

Today’s guest post is from Joe Payne, Vice President of Professional Services at Source One Management Services, LLC and co-author of “Managing Indirect Spend: Enhancing Profitability Through Strategic Sourcing”.

While strategic sourcing and procurement groups around the globe continue to make headway into new departments and address categories previously off the table, their popularity with business owners and stakeholders has never been lower. Headlines and titles like “Everybody Hates Procurement: Here’s How To Fix It” and “The End of Procurement, Forever!” and “The Problem with Procurement: Misalignment” seem to pop up every day.

I attribute these headlines to the growing pains strategic sourcing and procurement will naturally experience as the role of this group continues to expand and evolve. And evolve it has! In the 11 or so years I have been at Source One, I have seen Strategic Sourcing transition from rarity, to necessity, to commonplace, to part of a larger spend management strategy. In its current form, and as it heads into the future, it looks to me that modern procurement has developed to be just as much about negotiating with an organization’s leadership as it is negotiating with a supplier base. In fact, I tell most college grads entering this industry to be prepared to challenge those within their organization, learn how to market their group, and sharpen their debate skills. Getting savings is the easy part, getting your organization to act in their own self-interest is the challenge. This is not a job for the weak-willed or thin-skinned! To explain what I mean, here is a quick rundown of the change I have witnessed.

The Reactive Buying Era

When I first started at Source One, most of the purchasing groups in the companies we worked with dealt exclusively with raw materials. If the personnel had “sourcing” in their title, it was rare, and many of our customers did not have any sort of sourcing initiative for their indirect spend items. Stakeholders and the department heads responsible for budgeting conducted the purchasing for their needs.

In those days, we did a lot of explaining to potential customers just on what Strategic Sourcing was. It wasn’t a commonplace concept even within Procurement, so those outside of it — Finance and IT, for example — had very little knowledge of it. Especially in the mid-market, any group with spend management tactics that were more advanced than three bid purchasing or preferred supplier relationships were the exception, not the rule.

The Sourcing Era

Slowly, Strategic Sourcing became more and more familiar until it ultimately blossomed. Strategic Sourcing practices were first used by a limited number of organizations as they purchased their raw materials. Seeing the successes in that category, organizations then asked these “sourcing” teams to look into areas like packaging and shipping. Strategic Sourcing’s applicability continued to grow as success after success was reported. Subsequently, most departments were soon asked to start implementing strategic sourcing practices, and procurement departments began to be more directly involved in buying decisions.

The Category Management Error

In its latest form, Strategic Sourcing is now tied into category management, meaning companies are hiring or developing sourcing experts for their individual spend categories — telecom, media buys, office equipment — or departments — Capital Projects, Marketing, IT — and restructuring their departments with the goal of achieving near 100% spend under management. With dedicated sourcing experts managing each category and an intense focus on supplier relationships, those sourcing departments effective in category management are not only able to take advantage of market conditions today, but are better able to predict future market conditions and opportunities within the managed categories.

Even utilizing these strategies, a common problem remains. These sourcing teams lack the institutional clout within their organization to be effective in managing spend. SOPs are reluctantly followed, if they are followed at all, by the end users, and the majority of the end users and stakeholders do their best to avoid involving the sourcing team. Additionally, sourcing initiatives are often dead on arrival, killed in the name of deadlines or supplier relationships

The Change Management Era

So, that’s a short history of Strategic Sourcing’s development. So where is the industry going from here?

From what I have seen in the work we perform for the clients of Source One, category managers must now become “change managers”. “Change managers” are those leaders who can navigate their organization’s structures and barriers to be effective, and transition their department’s role from that of a reactive-tactical resource to one that is proactive and strategic.

“Navigate” here means “maneuvering around” objections or otherwise getting things done, and there are a few ways that I have seen different sourcing groups approach this. At the last conference I attended, I heard some sourcing teams discussing their use of a “bell cow” — a single resource within their group that is skilled in working with department heads and generating acceptance from end users for their group’s sourcing activities. In other cases, I have witnessed sourcing departments working through an executive sponsor, often times a CFO, to help push their group’s agenda items. A third, slower method I’ve seen used to promote sourcing initiatives is the granular approach, meaning the sourcing group is using any quick-and-easy method available to build credibility and support, end user by end user and department by department. Not surprisingly, this third method is high resource-low return, and often causes some areas ripe for sourcing to go untouched. Of these, the proper solution is the one that works best within a particular organization.

When sourcing groups improve their internal relationships, the stakeholders are better encouraged to participate and end users are better encouraged to comply with sourcing activities, increasing their chances of success. These project successes give Procurement something tangible to market internally and use as leverage in drumming up support for future initiatives, and also exposes their unique skills to the organization as a whole. Through continued project success and internal relationship-strengthening, Procurement will slowly be seen as an integral and centric resource to the company; its unique skillset prized not only for its ability to identify cost savings for the organization but for its ability to generate value for the organization as a whole.

Summary

As the need for more strategic spend management practices increases, procurement departments are evolving to meet these newfound challenges. But rest assured; the industry’s progress is not slowing or stopping. Adapting to the industry’s modern changes and challenges is only setting the stage for the next evolutionary step, which will be to become a revenue center for the organization. The better equipped a procurement team is now at handling the challenges of the current market, the better prepared it will be to predict and stay ahead of future trends

Thanks, Joe.

Intengo – Mastering the e-Procurement Tango in Turkey

When we last covered Intengo back in 2010, they were doing the e-Sourcing Tango in Turkey. At that time, they provided an on-demand e-Negotiation platform built around (multi-round) e-RFX and e-Auction with a sprinkling of Supplier Information Management (SIM) and early stage catalog management thrown in. A project-oriented system, it was a breeze to set up a new RFX or e-Auction event in the system and get a new sourcing event going. One of the unique features of the platform was the calendar view, which integrated with Microsoft Outlook and hot-linked to all of the relevant screens in the relevant projects, and which allowed a buyer to get a quick summary of where they were and what they needed to do at any given time. Other cool features were item-level currency support, smart unit support, and bulk-updates on (filtered) lots or items.

Since then they have been dancing up a storm and they are now the leading e-Sourcing and e-Procurement provider in Turkey, with over 100 clients, including a few notable international clients with operations throughout Europe and Asia. That’s right, they have migrated from a basic e-Sourcing application to an end-to-end e-Procurement solution in an effort to serve their clients better. Since 2010, they have added requisition and purchase order support, price lists and full catalog support, delivery notification and tracking, and integration with the big ERPs (Oracle and SAP) for master data management, invoice management, and e-Payment / Accounts Payable integration. In addition, they have also integrated budget management into the e-Procurement process.

A user can begin a requisition from a catalog or from a free-form request. The request can be sent straight to a (preferred) supplier if it is within the user’s spending limit (as defined by the budget), turned into a Purchase Order (after being approved, if necessary), or turned into an RFX or e-Auction. If the request is turned into an RFX or e-Auction sourcing event, the RFX or Auction is pre-populated with pricing from the most recent supplier price list (at the volume level) or catalog if pricing is available. If the request is sent straight to the supplier, the supplier can accept the request and provide delivery information, reject the request, or decline due to incorrect or insufficient information. In the last case, the buyer is notified and corrections can be made. In the case of an RFX, after the event has been configured, the request is sent to the selected suppliers who can bid on the whole or part, decline to bid on the whole or part, or decline to bid because of incorrect or incomplete specifications on one or more line items. In the last case, the buyer is notified, and if the buyer agrees, he can suspend the RFX or e-Auction until corrections are made, and all suppliers are immediately notified of the event suspension. A supplier who accepts a purchase order, who is awarded an RFX, or who wins an auction is able to immediately enter delivery information into the system (which can generate e-invoice data for submission to the organization’s ERP) and when the product is received, a buyer can mark the product as received in the mini delivery module.

The catalog functionality is pretty much what you would expect and is comparable to most other e-Procurement platforms out there and the budget capability can be used to define budgets by user, project, and department and track them against requisitions and awards project-to-date and year-to-date. The built-in reporting is good, and Intengo even has canned reports by brands (which are great for retailers). Furthermore, Intengo can create and customize any report on any platform data that you want, but note that the platform is still missing a custom report builder. However, realizing this weakness, Intengo gives you the ability to export any and all data to Excel or to your ERP (so you can build your own reports using reporting tools you already have). So if you do full ERP integration (and use it for your Master Data), and you already have a best-of-breed reporting product sitting on top of that (and chances are you do), you can use that to build custom reports on your sourcing and procurement projects.

They have also made enhancements to their e-Sourcing platform. One of the most significant enhancements is their formulaic auction capability. This weighted auction capability allows a user to define an arbitrary weighting, composed of one or more factors, to every bid, on a lot and line-item level, that is used in determining the rankings. The user can define one-or-more weighting factors based upon quality, warranty, shipping, associated duties, etc. The categories can be (optionally) displayed to the suppliers who can choose the ones relevant to their bids (such as shipping, warranty included, etc.) and the weighting factors can then be applied behind the scene. In addition, during an auction, suppliers can also suggest substitutions for each line-item and lot, which a buyer can accept. (And, if necessary, the buyer can pause the auction, define appropriate formulae, and provide additional information to other suppliers who might also be capable of offering substitutions on different terms.)

Intengo is definitely an up-and-coming contender on the end-to-end Procurement scene in the European mid-market and another European e-Procurement provider to watch, especially since, like other European players, they have been internationalized and multi-language since day one on their integrated, single-solution, SaaS platform that allows them to create new instances virtually on-demand. While SI doesn’t expect them to cross the Atlantic for another couple of years, it does expect that the North America companies competing across the pond are going to be seeing a lot more of them on mainland Europe in the coming years.

Building and Ground Maintenance Outsourcing: A Maturing Cost Reduction Trend That Requires a Disciplined Approach


Today’s post is from Howard Gutman, a Manager in the Hackett Group’s Strategy and Operations Practice who consults to Fortune 1000 clients in operations improvement, sourcing and procurement, supply chain, and cost optimization. He was previously associated with MMG, KPMG, and PWC PRTM.

Many companies currently have their building and ground maintenance function (e.g. security, janitorial, and HVAC) managed by their own employees and/or a set of local suppliers for individual offices/ manufacturing sites. However, the success of companies such as AT&T and BMW, who have outsourced their building and ground maintenance function to integrated facilities management firms such as Jones Lang LaSalle and ABM, has caused many companies to question whether they should change their approach to the building and ground maintenance (BGM) function. Based on our recent client work, the outsourcing of BGM is an increasingly maturing trend across several industries but it requires a disciplined approach to develop an understanding of a company’s current demand and specifications in order to maximize the overall savings opportunity.

Before a company can consider outsourcing this function, a company should utilize a disciplined approach to understand demand for BGM by collecting the following information:

  1. Number of building sites;
  2. Basic information about each site (e.g., address information, total square footage, building population, number of bathrooms, outdoor square footage);
  3. Total spend for each major building and ground maintenance category by site (e.g. janitorial, HVAC, and environmental services).

Once this basic understanding of a company’s demand is established, a company must work with their operational leads to gather detailed specifications for each of their BGM services (e.g., frequency and requirement for HVAC maintenance at each site). After the development of the demand set and specifications, a company can pursue a strategy of outsourcing this function as the information mentioned above is essential for any RFP process involving integrated facilities management companies.

Two recent clients utilized the above approach to outsource their BGM function but each had initial concerns about outsourcing this function due to business culture and regulatory reasons.

Our first client, a Fortune 500 telecommunications company, liked the operational benefits of moving to a single integrated building provider, which includes centralized reporting and 24-7 support. However, they had concerns about regulatory issues such as maintaining continuous 911 service at rural locations. Through the RFP process, our client discovered that all of its major competitors had moved to an outsourced BGM solution, particularly at their rural locations.

Our second client, in the manufacturing space, had concerns about moving control of building management from their plant managers to an outside building and ground maintenance provider. Through the RFP process, it discovered that many of its competitors had moved to integrated facilities management companies who were deeply experienced in the manufacturing space.

The results of these two projects are projected to result in cost savings of 10% to 12.5% over the next two years along with increased maintenance standards and visibility into building issues through 24/7 online reporting. However, the main benefit for these organizations was that they could better focus on their core business functions, while delivering continuous savings through a disciplined approach for outsourcing BGM that has already been implemented by their peers.

Thanks, Howard for some insight into this often overlooked spend category!

Insufficient Sleep is a Public Health Epidemic – Don’t Let Your Supply Chain Give You Insomnia!

As per this feature on the Centers for Disease Control and Prevention website, insufficient sleep is a public health epidemic, which shouldn’t be surprising given that over one third of the US adult population gets less than 7 hours of sleep a night, when the average adult needs 7 to 9 hours a night. (Source: National Sleep Foundation)

Why? There’s a plethora of reasons. Overwork. Stress. Late Night Talk Show Addictions. Facebook and Twitter Addictions. And Insomnia. However, Supply Chain Insomnia should not be a reason.

According to this ridiculous article (on causes of supply chain insomnia identified) over on Supply Chain Digital, the following 10 issues are keeping supply chain leaders up at night and giving them insomnia:

  1. Collaboration
  2. Inventory Management and Planning
  3. Demand Management and Forecasting
  4. Supply Chain Network Optimization
  5. Supply Chain Risk Management
  6. Training and Development
  7. Sales and Operations Planning
  8. Material Purchase Price Reductions
  9. Performance improvements in warehouses and RDC’s
  10. Supply Chain Segmentation

There’s no excuse for any of these issues to be keeping you up at night. There have existed great Best-of-Breed technology solutions that have enabled an organization to solve the following issues for years, many of which have been profiled on this blog:

  • Collaboration
  • Inventory Management and Planning
  • Demand Management and Forecasting
  • Supply Chain Network Optimization
  • Sales and Operations Planning

The following can be appropriately addressed with the right mix of talent, process transition, and technology:

  • Supply Chain Risk Management
  • Performance improvements in warehouses and RDC’s
  • Supply Chain Segmentation

And the following is easily solved by actually putting money back into the training budget and letting your people go on courses, instead of taking money out of the training budget to increase CXO pay while working your talent half to death:

  • Training and Development

Which leaves only one issue to worry about:

  • Material purchase price reductions

But when you get right down to it, we’re in inflationary times and everyone knows it. Prices are going to go up and people are going to grudgingly pay reasonable, minimal, price increases. So the issue is not price reductions, but cost containment, and this is easily accomplished with

  • market intelligence and an understanding of what the real price currently is,
  • process improvement that takes price out of raw material acquisition, product production, and logistics, and
  • creative re-design that reduces the need for costly raw materials and production processes.

And all of this can be accomplished if you have the right talent with the right training. So invest in your talent*, give them the right technological tools, and let them transition your processes to where they need to be. Then you won’t have to worry about any of these problems.

*It’s not like the 95% investment in the top 1% has done any good! (Source: UC Berkeley Study)

Why Aren’t We Dealing With Extra-Planetary Supply Management on a Daily Basis? Part II

Why not? Lack of funding and focus.

It’s going to be expensive, but we have the money. Even if it costs ten times as much to put a man on Mars as it did to put a man on the moon, that’s only 4 Trillion. The annual GDP of the US is close to 16 Trillion. If the goal was to reach Mars in 10 years, that’s 160 Trillion, and only 2.5% of GDP would be required annually. The US definitely can afford this. Right now, the US is pouring its money into its military at a rate that is unfathomable given that it has not been attacked in a declared act of war on its own soil since Pearl Harbour. The US is spending close to 18% of its budget on military efforts, compared to China which is spending less than 2% of its budget on military efforts and which still has the second largest military expenditure in the world. the doctor will concede that the US has other problems to fix, and the military budget should probably be reduced by more than 2.5% so that those problems can be fixed as well, but there’s no reason that 2.5% couldn’t be redirected to this effort, especially considering it could still be considered military expenditure and employ just as many (if not more) people. This could still be a win for the US that likes it’s military, and appears to like deploying its military given the number of wars its been involved in since WWII. Furthermore, when you consider the dangerous nature of going first, the US probably wouldn’t want to send anyone but its best and brightest. And if we’re not alone, and we advance our technology to the point where inter-stellar travel becomes possible, we might attract the attention of an aggressive alien race and need the ability to defend ourselves. (Which would give the US an excuse to try and democratize space!) It would be a win for the US any way you want to look at it.

But the US isn’t the only country to blame. China, the world’s oldest culture, wants to regain its glory as the dominant empire (even though it’s been centuries since it could make that claim). As the world’s second largest economy, with a GDP exceeding 8 Trillion, and the fifth country to launch a satellite back in 1970, it should be making more efforts to establish itself as a dominant player in space, and focussing more on Mars. A target of 2040 – 2060 for a crewed mission to Mars is just too far off. If China dedicated itself to this goal, it could spark a new space race (as the US would want to be in the lead), which is just what we need to advance not only our space exploration ability, but mankind as a whole.

In addition, if one considers these big, mostly non-political, problems facing the US right now:

  • High Unemployment, partially due to a
  • Continual Decline in Manufacturing Jobs and Expertise, another impending
  • Housing Crisis,
  • Privacy Issues, the never-ending
  • Drug War and,
  • Unfunded Liabilities, partially due to the
  • Collapsing Dollar.

And if one considers these big, mostly non-political, problems facing China right now:

  • the need to maintain an appearance of success and save face,
  • 1.3 Billion citizens to keep happy and 930 Million to keep employed,
  • population growth that can’t be adequately managed by the one-child policy,
  • factories that need to run and products that need to be consumed, and
  • corruption and the age-old tradition of bribery.

And if one goes on to examine the root causes of these problems, one will find that many of them could likely be significantly addressed, if not solved, by a space race to Mars. How so? Come back next Sunday for Part III!