Category Archives: Best Practices

It’s Time To Put An End to Business Spend Management!

Coupa may have built their Billion dollar business on it, but the time for Business Spend Management (BSM) is at an end!

Spend Management may have been the business strategy and philosophy that leaders practice and followers fail to understand according to THE PROPHET (who penned it two decades ago), but that was then, and this is now.

While spend management wasn’t supposed to be just cost management, but instead an incremental change that represents a new type of thinking, a way of taking integrated approaches to not just procurement, but all aspects of non-revenue generating operations and a way of thinking about your global supply chain strategy that would reduce costs, improve processes, and increase profits, that’s not what it became.

Spend Management became a fancy term for cost reduction (and, for the most part, that didn’t include cost avoidance), and even when optimization was used, the objective was always price. The majority of analytics focussed on spend, and even when process analytics were run, they were always framed in terms of cost and savings if automation was increased and/or process time decreased. Even multi-objective RFPs were primarily weighted on price, if they were weighted on anything else at all once basic supplier, product, and/or service requirements were met.

And now, in the age of AI (hype), all of the agentic / BS AI Employee offerings are focussed on offering you solutions to your Procurement problems that will reduce overall cost (base cost, human cost, processing cost, etc.). Cost, cost, cost.

But, for as long as it has existed, that’s never what Procurement was about. The goal might be to keep costs down, but the point of Procurement is the acquisition of a good or service. Supply, NOT Spend. Now, it’s true that the spend has to be less than what an individual would pay on his or her own to acquire the product or service or, as per Coase, there’s no reason for the business to exist, but if the business can’t acquire any products or service to allow them to offer a product or service for sale, the spend doesn’t matter.

That’s why BSM (where the “B” doesn’t necessarily mean “Business”) needs to end. It’s time to return to supply management, with guarantee of supply (not minimization of spend) at the forefront. This means a focus on risk minimization, production management, logistics management, trade management, and other variables that contribute to assurance of supply (and prevention of disruption). Costs can only be optimized once all of these other factors are taken care of.

This is the only way to procure in today’s volatile times, and, moreover, the only way to control cost. Real spend management is not just minimizing unit costs, transportation costs, and other purchase prices, but reducing operational costs across the board. You’re not reducing costs if the organization has to buy 30% off of contract because of delays, disruptions, and defects. And you’re definitely not reducing costs if you have to constantly expedite shipments, buy from alternate sources of supply at higher prices, or lose considerable revenue due to stock outs while paying for warehouse space / retail space.

It’s optimizing human intelligence against dumb automation to make sure processes are optimized, exceptions are quickly processed, risks mitigated to the extent possible, and disruptions detected and addressed as soon as they arise.

It’s Supply Management. (Not Spend Management.)

Old Strategies for Supply Chain Management

How things have changed in two decades. When SI started, the craze, and the right approach, was new strategies for supply chain management. But that was then, this is now. As we’ve regularly explained over the past few months now that globalization has gone, isolationism has returned, natural and man-made disruptions are on a level not seen in decades, if not a century,

That means that survival is dependent not on new strategies, but old strategies when trade was restricted, dangerous, and lengthy.

Long Term Partnerships

In a recent post we suggested it was once again time to bring back Keiretsu, which can be briefly described as a long continual business relationship, and, in one way or another, has been a significant force in the Japanese economy for over four decades and, despite its long and varied history, criticisms, the Structural Impediments Initiative, and economic downturns, is still a strong foundation for many supply chain relationships in Japan

Whether or not you adopt the Japanese philosophy, the key to success in this unstable economic environment with fragile supply chains is to form solid partnerships where both parties support each other through tough times. If you support the supplier as much as you want to support them, it is much more likely that you will be their customer of choice and when stocks are low, shipping options are few, and support is limited. That’s key — being the one that keeps going when all your competitors shut down.

Localization of Production and Near-Shoring of Inputs

Producing in country B that is halfway around the world for country C doesn’t make any sense in an age where shipping costs are rising rapidly, can triple to quintuple on every pandemic and/or seaway closing, and where raw material supplies can dry up over night. The key to success is buying, manufacturing, and selling as close to the destination country / region as possible.

It’s not twenty (20) years ago when shipping was stable and super cheap, unexpected supply chain interruptions were usually limited to natural disasters or unexpected man-made disasters (plant fires, mine collapses due to insufficient shoring, etc.), and it was much cheaper to mass produce in a single locale (i.e. China).

Now, shipping is unstable and super expensive (while crude oil from about 1985 to 2005, adjusted for inflation, ranged between $40 and $60 per barrel except for the occasional spike; for the past five years, it’s been $80 to $100, with the pandemic and Strait of Hormuz strikes bringing it to $110 to $120), interruptions are daily, and China, which is now 18% or so of global GDP thanks, primarily, to US and EU outsourcing (on the advice of the Big X consultancies, led by McKinsey), is not as cheap anymore). This means that, for North America, South American production is cheaper than China. (Why do you think Foxconn, famous for Apple product production and suicides, has at least five plants in Brazil?)

It’s true that some raw materials, like rare earths, will always have to come from China (especially if you’ve in a country sanctioning Russia), but it costs less and makes more sense to just buy the raw materials which can be shipped very compactly (and even by cargo plane if needed) than finished goods that are often 90% empty space (like appliances).

In other words, the days of centralization in manufacturing, as well as supply chains, is over!

Controlled Verticalization

These days all the techbros want to be railroad barrons and be super rich to the point that it would be impossible to spend all their money unless they started buying small countries. What they forget is that it wasn’t just monopolies, a lack of regulation, and zero worker rights (which the current US administration is doing it’s best to reinstate by rolling back human rights, regulations, and anti-trust laws as far back as they can as fast as they can in the hopes of bringing in a new Gilded Age [while forgetting what followed]), but super efficient execution from source to sink.

The barrons not only owned the most lucrative businesses (like the railroads), but also all the subsidiaries that made the parts, shipped the parts, mined the raw materials, and shipped the raw materials. With vertical integration, they could, and did, optimize every single step of the supply chain.

This means that if you want to succeed, you need to optimize your supply chain. While you may not be able to own every company in your supply chain (since some electronic products require 10,000 components), you could own, or at least own part of, key suppliers and/or your parent company could own your key suppliers and/or key transportation companies. Whatever is critical to your operations, can’t be easily replaced, and could bring down an entire product line (and even your business) if it could not be obtained, that’s what you need to own.

Abandonment of JIT

For years, when supply chains ran smooth, supply was assured, and costs were manageable, JIT was all the rage. When inventory costs were an average of 20% to 25% of the inventory value, reducing inventory made sense (to a point — we’d argue it was taken too far). But when production line shutdowns can cost millions, supply chain interruptions are coming regularly and remediation times can take weeks or months, and customer loyalty might be at an all time low thanks to rapid inflation and limited funds, lack of supply is much more costly than inventory, especially if the inventory is well managed.

With today’s multi-objective multi-scenario pareto forecasting models, demand over a reasonably sized time-window can be predicted to 98% accuracy for many categories, the chance of overstock can be minimized (while minimizing the size of stock-outs), and warehouse sizes and costs can be optimized as well. A slight increase in inventory cost prevents costly stock-outs and shut-downs, leading to lower operational costs overall.

Standardization of Technology

Right now, the average large enterprise has 1,000 or so SaaS apps on top of dozens of ERP instances across half a dozen major products. That’s not efficient — in fact, it’s the exact opposite. And it’s probably costing them at least 40% more than if they standardized on a single app for each function.

But it’s not just software you should standardize on — all forms of technology should be standardized. Production lines, equipment, and components used in your product lines should be standardized to the extent possible. Fleets should be standardized as well so you can standardize parts, training, and operations. The more you can standardize, the lower your overall costs will be.

Cost Reduction … it Starts With Cost Increase

It used to be cost reduction, which was focussed on cost cutting, started with the one-trick pony of cost cutting by any means necessary, which typically took the form of e-Auctions, RFPs to new suppliers, and GPOs that could aggregate and leverage huge volumes — all tricks that are rearing their ugly heads again with the rapidly rising costs thanks to inflation, tariffs, and global instability.

They all work just fine in the short term, but they all come back to bite you in the backside in the long term. Here’s why:

  • e-Auctions: find savings by squeezing margins, and you can only take those out once, and once inflation comes back, costs go up
  • RFPs: designed just to find the absolute lowest price attracts suppliers who cut corners, underpay their staff, and offer no service while alienating your current, more trustworthy, suppliers
  • GPOs: can aggregate volumes and lower prices, but then you are dependent on them, and paying their markup … forever

None of these is the long term answer.

When we first started discussing cost reduction two decades ago, the key methods we focussed on were:

  • strategic supplier relationships and customer of choice: so that they put the effort into being your supplier of choice and finding their own ways to keep costs down (streamlined operations, better raw material sourcing, etc.)
  • supplier investment and development: if the supplier is smaller, or not as advanced, they’ll only do so much on their own, so your efforts to invest, improve, and guide them (through early payments, low-cost new line financing, etc.) could greatly lower your costs over a multi-year engagement
  • strategic sourcing decision optimization: where you did a multi-objective optimization that took all of the cost factors (unit, transportation, warranty, service, waste etc.) into account as well as risk (that could cause “savings” to evaporate over night) and quantitative assessments of other key factors

And those are all good techniques in (semi) normal times. But these are not (semi) normal times. These are almost unprecedented times. Between natural disasters, geo-political conflicts and wars, and terrorism, we are dealing with unprecedented simultaneous reductions and closures of major maritime shipping lanes (the Panama Canal, the Red Sea, the Strait of Hormuz), unstable (and rapidly escalating) fuel costs, regular supplier and carrier failures, unpredictable crop and raw material availability, etc. all at the same time. Old friends becoming foes, or at least frenemies; friend-shoring, near-shoring, and home-shoring finally gaining ground (despite being promoted and the right answer for decades); and supply chains being swapped whenever possible.

We’re in times where these techniques, while still good, can’t always address all of the situations. Plus, if you’re constantly adapting to what’s available now, versus focussing on what you should be building, you’ll be in a constant, unstable, state of affairs, caught off guard with every flux, and constantly on the brink of ruin.

You need to stop working sourcing event to sourcing event, procurement to procurement, and disruption to disruption and start working on transforming your supply chain to a more resilient long term supply chain. This will require identifying which safe countries and regions (likely to have long term geo-political and trade stability with your home and/or destination countries) you should be doing business with, where solid supply bases could be, and how you could construct a real supply chain from the source countries to the destination countries that don’t depend on unstable source points.

Then you have to engage the carriers, find partners to help you manage the export and import requirements and take advantage of FTZs (free trade zones), build or acquire intermediate warehouses and cross-docks, and be ready for trade with the local suppliers. Those will typically include multiple suppliers you are not currently working with, and they may need to upgrade their production lines, operations, services, etc. to serve you to your level of expectation. This will incur costs that your suppliers and partners will need to incur, which will need to be passed onto you. Which means, in the short-to-mid-term, your costs will increase. But if you design the right, stable, supply chain networks that you can use for years (or decades), develop the right suppliers, and maintain volumes, as operations improve, up-front costs get amortized, and economies of scale get optimized, costs will go down, and with long-term agreements, over multiple years, your company will see previously unrealized savings while your peers see their costs go through the roof.

So if you want to save money, you better be prepared to spend.

When Was The Last Time You Did A Full Audit Of Your Supply Chain!

When a single event puts over 25T of global trade in jeopardy, or about 20% of Global GDP, you know you need a full end-to-end understanding of your critical supply chain.

The event I’m talking about is the 2026 US-Iran War that saw the Strait of Hormuz closed.

1. Global trade in goods and services is about 35% in US Dollars.
2. 80% to 90% of all traded goods move by ship through canals, straits, seas, and oceans.
3. About 8% of maritime trade by volume passes through the Strait of Hormuz.

Do the math, and it’s easy to see that the blockage / closure of the Strait puts over 25T of global trade in jeopardy, because wars in the Middle East tend to drag out for years!

The world was not ready for this. (They thought the US would never risk a war with Iran because of that … especially when the US could have continued last year’s strategy of just bombing uranium enrichment sites once per year as they neared completion and prevented Iran from ever reaching nuclear potential that way.)

Most company’s supply chains were even less ready — especially since some sectors saw way more than 20% impact, especially when it’s (one of) the largest trade route(s) for certain products like LNG (20%+/-), (crude) oil/petroleum (25%+/-), fertilizers (33%+/-), and sulfurs (50%+/-). Multi-national businesses without alternate sources or routes at their immediate disposal were put in instant financial jeopardy (and risk of bankruptcy)

As a result, you need more than supply chain visibility, you need full end-to-end supply chain awareness for all critical product lines, and that requires a full audit. You need to know where everything is coming from, what routes it’s taking to get to you, what alternatives exist (and to what extent — can you replace all, part or none), and what financial impact its disappearance would entail.

Even if you can get it at a reasonable price, supply chain insurance isn’t going to be enough anymore. As with any insurance, there will be exclusions for war, terrorism, etc. unless you pay astronomical prices, conflict zones will be excluded, and when a disaster wipes out an area and affects many clients at once, payouts won’t be quick and you can expect a massive amount of paperwork and effort will be required to get one (as the insurer won’t have enough cash on hand and will have to delay and delay until they can liquidate assets, which is difficult to do in crashing markets that result from economic disasters).

When something happens, you need to be able to react, reroute, and reorder quick. That will require not only deep visibility, but pre-defined mitigation plans when key regions, routes, or resources are impacted. The only way you will know this is if you do a full audit and associate each product to (sub-tier) suppliers, locations, countries/zones, and routes. That way, when a critical event (is likely to) happen(s), you can immediately identify the affected parties, locations, routes and associated products, and determine what you need to do in order to ensure continued supply. It might be switching plants, distribution routes and methods, or even suppliers.

If you haven’t done a supply chain audit in a few years, or ever, you should do one ASAP. You don’t want to be caught off guard when the next major disruption happens!

So, You Didn’t Succession Plan — What Do You Do Now?

Back when SI first started talking about talent in year one, we noted that the most important thing you need to do is succession plan — because even if you do everything right, acquire and keep the right talent, and thrive … it will all come to an end when the talent gets lured away, retires, or dies (and it does happen).

You see, if you succession planned, you would have done a number of things that, frankly, you should have started 20 years ago (if you were in business then), or the year you started (if you weren’t).

1. Captured their knowledge from day one

You would have acquired a KMS (Knowledge Management System) and started capturing their knowledge from day one. Even if it’s not directly tied to the systems they use, you’d at least be capturing key knowledge that your junior people don’t have.

2. Captured key artifacts from day one

Furthermore, as time went on, you’d acquire systems for all of their major tasks and ensure that all of the key steps were done online in those systems. No bypasses allowed. Sure, how they made the decisions would be in their head, at least to the extent it’s not captured in the KMS, but all the steps, and artifacts would be there for whomever comes next.

3. Identified at least one internal successor for each critical resource and have that individual mentored by the critical resource ASAP

So that, even if the potential successor isn’t ready for a senior role when the critical resource is no longer available, at least you’ll have retained some of the knowledge, some of the artifacts, and some of the capability. And if you can find a suitable replacement externally quickly, that person will be much more effective as they’ll have a capable right hand resource, artifacts, and knowledge.

But you didn’t do any of this. So what do you do?

Well, first take Wouk’s advice and get it out of your system:

When in danger or in doubt,
Run in circles, scream and shout

Second, identify and acquire a suitable successor as soon as possible, even though it could be costly. You need someone suitable who’s ready, not half ready.

Third, you need to acquire the expertise and systems to jump start the replacement.

  1. Get a KMS ASAP. Don’t make the same mistake again.
  2. Acquire systems that will be used to automate key functions, as well as capture, store, and index all the key artifacts for quick look up that are needed to execute them — no disconnected email, documents on various cloud drives and untracked laptops, or other haphazard solutions.
  3. Hire expert consultants who are former practitioners to help populate that KMS with key knowledge and execution systems with templates and as much process knowledge as those systems can hold.

You’ll still have a rough time sailing choppy seas … but you might not sink if you start on the right track now. No guarantees, but it’s likely your only chance. The Age of AI Hype has proven dumb systems and inexperienced kids can’t do the jobs of senior talent, and since you forced so much of that talent into early retirement with your AI BS, you’re in trouble if you can’t retain a few grey hairs and start training the next generations to take over now.