Category Archives: Best Practices

Siloed Supply Risk Management Just Wastes Time, Money, and Resources

In our last post on why Why Supply Risk Management Cannot Be Siloed we noted that, despite the fact that an organization’s supply chain is full of risks that could not only cripple the organization’s supply chain but cost it 100 Million or more in fines, the average organization’s supply chain is overflowing with risk (despite the fact that many of these risks could be mitigated).

Why? Because the average organization is not properly managing risk. Why? As per our last post, there are a number of issues including lack of resources, lack of time, and lack of immediacy, but the biggest issue is lack of cohesion. Even organizations that have risk management and sustainability efforts in place tend to be relatively ineffective overall because most of these efforts grew organically over time as individual functions encountered risks and needed to deal with them. This results in a very fragmented approach to risk management that is very inefficient and ineffective. Why? Each department sends its own surveys and questionnaires and reviews its own data sources and this results in:

  • a duplication of effort where
  • some suppliers will be assessed on the same dimensions twice while
  • other dimensions for the same suppliers go unassessed and
  • some suppliers do not get assessed at all while the process generates
  • false positives as well as
  • false negatives.

How can this happen? And just how much time and money is wasted? And what should be done? For the answer, check out Sourcing Innovation’s latest white-paper on Why Sustainable Supply Risk Management Cannot Be Siloed: Lessons From Leaders Who Beat the Odds, sponsored by Ecovadis. And you’ll learn not only what the correct approach is, and what it involves, but what it can do for you.

Is Your Procurement Platform Cost Centric Perfect for Indirect Only?

We’re all familiar with the standard 5-Step Sourcing Process:

  • Category (Spend) Analysis
  • Category (Sourcing) Strategy
  • Supplier Identification & Invitation
  • Sourcing Strategy Execution
  • Award and Contract

(which is covered in detail in the doctor‘s e-Book on The Strategic Sourcing Lifecycle: A Brief Introduction [registration required])

and we’re all familiar with the core capabilities of e-Sourcing and e-Procurement tools for supporting this lifecycle, namely:

  • Spend Analysis
  • Supplier Network
  • RFX / e-Auction
  • Optimization
  • Award & Contract

… for Sourcing and

  • Requisition & Order Management
  • Invoice & Receipt Management
  • Payment & Tax Management

… for Procurement.

And we’re very familiar with what each of these technologies has to offer for each of the strategic sourcing (execution) lifecycle phases.

But is it enough? For the majority of your indirect (finished product, MRO supply, temp labour, etc.) categories, it is more than enough. Compared to what you had a decade ago, it’s the answer to all your dreams (and, for the religious among you, prayers).

For a commodity alarm clock radio, yes. For a bill of materials for a custom designed tablet, no. First of all, you can’t just do an RFX for all of the “standard components”. Why? For starters:

  • all of the components have to be compatible — it is often the case that components from different manufacturers, even if they are the same form factor, are not 100% compatible
  • the cost is not just the components, it’s the integration — and sometimes you want sub-assemblies, and you want to bid those against components and doing the assembly in house
  • complete composition data is key — if some products use materials that are restricted or banned in one or more target markets, they are not all equal

and when you consider a typical sourcing platform

  • there is typically no advanced strategic sourcing decision optimization or constraint satisfaction capability and no way to indicate that certain products are only compatible with certain others and, thus, it is extremely difficult to create and evaluate the cost of legal award scenarios; and even if the organization has one of the half dozen solutions with this capability, there’s typically no way to capture the data that defines compatibility or incompatibility (or help a sourceror identify potential issues)
  • not only does the average sourcing platform have no support for Bill of Materials, but there is no support for production cost models that capture overhead costs (as most procurement platforms designed for indirect focus mainly on logistics costs in addition to component costs)
  • average procurement platforms track descriptions and bids, not component and material breakdowns (and have no support for compliance and sustainability issues and regulations)

In other words, your typical procurement platform is cost-centric perfect for indirect, but when it comes to direct, the platform is sorely lacking.

So what do you need to support your direct procurement? Download Sourcing Innovation’s newest white paper on The Direct Procurement Challenge (registration required), sponsored by Pool4Tool, and find out today!

What’s Your SRM Index Score?

Supplier Relationship Management is a key component of good strategic Procurement management. Good SRM can contribute to lower costs and higher organizational value through higher quality, great reliability, value-add, and innovation that an organization might not achieve otherwise. But how does an organization know how well it’s doing?

One way is to benchmark against its peers. While this will not necessarily tell an organization how good it is doing compared to how well it could be doing, it will tell an organization how well it is doing against its peers, which provide a baseline of how good it could be doing.

So, considering most organizations keep this data private, how do you figure it out? One way is the State of Flux SRM Index. Over the last seven years, State of Flux has collected and analyzed detailed SRM data on over 1200 global companies across the six different dimensions of business drivers, stakeholder engagement, governance & process, people & skills, information & technology, and relationship development & culture.

If your organization takes the SRM Survey (closes July 1, 2016), State of Flux can automatically assess your responses against its database and compute an index score for your organization and instantly let you know if your SRM is undeveloped, developed, established, or advanced. In addition, should your organization desire (and should multiple individuals in different departments complete the survey), State of Flux will also give you a free SWOT analysis on request.

Supply Risk Management Can Not Be Siloed

In our post on Playing With Fire, we indicated that your supply chain was full of hidden risks, ready to materialize unexpectedly at a moment’s notice and bring your supply chain to a crippling halt as your bank account bleeds dry trying to deal with the damage. Risks that, in many cases, could be mitigated and prevent the organization suffering and, in some cases, losing 100 Million to fines alone.

Why? Because the average organization is not spending the time and resources required to properly manage risk, or if they are, they are not managing risk appropriately. There are a number of reasons for this, including:

  • Lack of Resources
    most organizations do not have enough people with the right expertise to effectively manage and monitor supplier sustainability efforts, and sometimes this is because there just isn’t the budget for the resources
  • Lack of Time
    most of the skilled resources in an organization barely have the time to do their jobs properly, and since risk management is hardly ever anyone’s primary job, it typically becomes a side issue
  • Lack of Immediacy
    even though there may have been hundreds of smaller incidents in the supply chain that resulted in small fines, unexpected cost increases, disruptions, and minor brand damage, if no single incident has been severe enough to get the C-Suite’s attention, something else will always be higher priority
  • Lack of Cohesion
    most risk management and sustainability efforts grow organically over time as different functions encounter risks, regulations, or sustainability objectives that need to be addressed — this results in a fragmented approach to risk management that is inefficient and ineffective

But regardless of the reason, fragmented risk management does not work. It’s the biggest reason that many organizations are losing millions, if not billions, of dollars a year due to supply chain incidents (that could have been caught or significantly reduced with effective supplier management). With every department running off in their own direction, no one knows what is, and is not, being done. And that’s a problem. But it’s one that can be addressed. How?

Check out Sourcing Innovation’s latest white-paper on Why Sustainable Supply Risk Management Cannot Be Siloed: Lessons From Leaders Who Beat the Odds, sponsored by Ecovadis, for the answer.

e-Auctions — Savings Machine or Inflation Nightmare?

When e-Auctions were first released, they were heralded as the saving grace that Procurement was waiting for because early efforts, in the early 2000s, were always a smashing success with double digit percentage savings on almost every category and endless praise and admiration for the Procurement organization, and their astuteness in the selection of an e-Auction provider to help them find more savings than the organization knew existed.

But mature organizations know that the glory days didn’t last. The next time the auction was run on the same category, double digit percentage savings became low single digit savings, which, if the organization was lucky, barely covered the cost of the pay-per-use auction platform and the services around it. Then, a few years later, when the third auction was run, costs increased, sometimes substantially in the double-digit percentage range that almost equalled the savings found the first time around. The savings machine became the inflation nightmare — run an auction, spend more money.

Auctions were dropped like a hot potato, old-school muscle was broken out of retirement, and in a few organizations, Procurement returned to the dark ages. But now, with many mid-market companies able to afford next generation sourcing suites where pay per use starts in the four digit range and can be put on a P-card and where unlimited use starts in the mid-five figure range (and not the high six figure range), auctions are making a comeback, and the cycle is starting all over again.

But this time, those of us who have been in the game for over 15 years know how the story ends, and can honestly tell you Auctions are not a saving grace. They are an out-of-control spend nightmare.

To understand this, one has to understand why auctions worked in the first place.

  1. The outsourcing and rightsizing crazes of the 80s and 90s pushed more and more spend out, while oversight remained the same, and this resulted in less and less oversight on the majority of categories. As a result, suppliers could keep inflating their margins because of “inflation”, “oil price increases”, “minimum wage increases”, etc.
  2. The lack of market knowledge resulted in most organizations not knowing the breadth of the competition or the true production costs.
  3. The lack of e-Platforms meant that most organizations could barely handle 3-bids and a buy with the usual suspects each time contract renewal went up.

It was the perfect profit storm for suppliers. But with the introduction of auctions:

  • Suppliers could self identify and the buyers knew the extent of the marketplace.
  • Hungry suppliers with efficient processes could afford to offer the product at cost + 10% whereas long-term suppliers who believed they had no competition got fat and lazy and needed 1.3 x cost + 10% to remain profitable. (Also, desperate suppliers could offer for perceived_cost in the hopes of using the award as a loss leader for future business.)
  • Running the auction on line in real time gave hungry and desperate suppliers auction fever and they often bid the majority of their margins away. So where there were 40% margins, there were 30% savings.

But here’s the thing. With respect to savings, Auctions didn’t do anything. Exposing market truths isn’t identifying savings. Reducing margins isn’t identifying savings. And hastening the process isn’t identifying savings. The same “savings” could have been identified with an RFX.

Especially when those margin reductions hurt the supplier. A supplier that is suffering has to increase margins or go out of business. And inflation is back, so if the supplier is at rock bottom pricing, and the costs are going up, what is the supplier expected to do? Bid less and go bankrupt?

Savings is identifying better products, better processes, more innovative suppliers, better delivery schedules, and fat that can be trimmed to reduce cost. Savings isn’t about reducing a supplier’s fair margin to nothing.

And this lack of ability to deliver true savings is just one of the many problems with auctions. To find out the rest, download Sourcing Innovation’s latest paper on The Dangers of e-Auctions today, sponsored by Trade Extensions, before one of the big problems brings your supply chain to a screeching halt.