Category Archives: Best Practices

The Entanglements of e-Auctions

Not too long ago, Procurement Leaders (PL) published a piece on “the pitfalls of procurement auctions” that did a good job of exposing some of the traps in Procurement Auctions. It is worth a read, but it missed a few entanglements that also need to be understood in order to determine when, where, and why an auction should, or should not, be used. In this post, after reviewing the traps of the PL piece, we will discuss some of those.

According to the piece, there are four main traps of Procurement Auctions:

  • lack of auction knowledge
    The author notes that many business have a pre-conceived notion of what an auction is, even though the concept is very broad and flexible and can be adapted to your business needs. Modern e-Auction platforms support upwards of ten types of auctions, many of which are described in the e-Auction WikiPaper the doctor co-authored years ago.
  • lack of an appropriate platform
    As a result of lack of knowledge, many Procurement teams will lock in with an e-Auction provider before understanding what they really need and settle on a platform that, while great, isn’t right for them.
  • lack of supplier interest
    Auctions don’t work unless you have enough suppliers who can meet your needs who are seriously interested in winning your business. This will generally only be the case only if there are multiple suppliers who can supply the good or service you need (that are not locked in non-compete agreements with your competition that would exclude you) that see your auction process as fair, transparent, and efficient.
  • lack of planning
    As noted above, there is no auction type or platform that is “one-size-fits-all” so you need to select an approach that is flexible and you need it to be repeatable when you need to run the auction on the category, or a similar category, again in the future.

These are big traps, but not the only ones. Four more traps include:

  • lack of market knowledge
    Auctions generally work well when supply exceeds demand and generally work poorly when demand exceeds supply. A buyer who runs an auction at the wrong time will generally not get good results.
  • lack of supply market knowledge
    Just because a supplier is interested in bidding doesn’t mean it should be allowed to bid. Only qualified suppliers that have been confirmed to have the necessary capabilities should be allowed to bid. Otherwise, an unqualified supplier could win the business or suppliers, seemingly separate but in league, could collude to keep prices high. (Do you really know what goes on overseas?)
  • lack of e-Sourcing expertise
    Auction’s don’t have to be stand-alone events. They can succeed RFxs and they can preceed decision optimization. They can include real-time optimization and rules for sole-source awards, split-awards, baskets, etc. The right knowledge can not only lead to the selection of the right type of auction, but an auction that complements the overall sourcing cycle.
  • lack of perceived trust
    As per this article on the potential pitfalls of e-Auctions over on the MIT Sloan Management Review, suppliers often see open-bid auctions negatively. They believe that the buyer is using an open-bid auction to unfairly force prices down through the inclusion of unqualified suppliers or fake bids.

Don’t be afraid of e-Auctions – they work great when used appropriately. Just don’t rush in until you do your planning.

8 Key Design Considerations for Optimizing Your Demand Planning Process: Part II


Today’s guest post is from Josh Peacher, a Senior Consultant in the Operations Practice of Archstone Consulting, A Hackett Group Company.

In the first installment, we focused on defining the 4 basic design considerations for optimizing your organization’s demand planning process. These considerations included:

  1. Utilization of time series forecasting and exception management to drive a base forecast
  2. Selecting the right software tool for your business
  3. Identifying a set of core metrics and KPIs that help to identify opportunities and drive accountability
  4. Effectively leveraging external information to elicit a more accurate forecast

These design considerations are foundational in nature and effectively addressing each will ensure that your organization’s demand planning process has a solid base. However, to truly move the needle towards world class performance, a set of more advanced considerations must be applied.

5. Drive Towards a Consensus Demand Plan

A formal demand planning process should conclude with an aligned set of forecast numbers that the entire organization understands and can speak to. This doesn’t necessarily mean that a “One-Number” forecast must be reached as this can be very difficult and cause a whole set of different issues. However, organizations should look to align on a set of numbers and be prepared to speak to and manage to the gaps. Key participants in the consensus demand plan conversation include Sales and Account Teams, Finance, Supply Planning, and Demand Planning. Each of these groups will bring a different perspective and set of information to the discussion resulting in a more informed final demand plan.

6. Identify the Right Level of Detail

When defining the appropriate level of detail to forecast at, leading companies strike a balance between importance to the business and complexity of the process. The diagram below defines a general set of guidelines for identifying the appropriate level of forecast detail based on the situation. As a general rule of thumb, the more important and complex the set of items is to the business, the higher the required level of detail and rigor.

Complexity vs. Importance

7. Ensure Adequate Resources

As I mentioned in the first installment, demand planning is commonly an overlooked element of supply chain planning. This often leads to an insufficient allocation of resources by the organization. Demand planning is an arduous process that requires a high level of dedication and attention. More times than not, I see organizations that have failed to realize this and leave their demand planning team without the necessary bandwidth to perform effectively. The net effect is a less accurate forecast, poor demand signals trickling through the system, and a higher turnover rate. A few simple rules of thumb to ensure that your organization is not falling into this trap include the following:

  • Install dedicated analysts for demand planning.
    This will ensure that demand planners are focusing on value-add activities and have the right information on hand to make informed decisions.
  • Make sure that your demand planners aren’t wearing too many organizational hats.
    It’s an odd phenomenon but demand planners often end up taking on responsibilities that are well outside of their job scope and not essential to their core function. The best way to decipher this is just to simply ask them where their pain points are. Trust me … they will tell you!
  • Understand which segments are the most critical and complex to the business and distribute them across your demand planner resources.
    Ideally, each of your demand planners will have a portfolio of demand responsibilities that are evenly distributed amongst the four quadrants of the above diagram.

8. Define your Organization Process Model

Too often I have seen organizations operating in an environment of chaos because they lack a defined process and cadence for their demand planning cycle. You may believe that you have a process in place, but can you articulate what it is? Can the demand planning resources in your organization define the calendar of events that make up the process? Many times what people believe to be a process is actually floating tribal knowledge and tends to vary depending on who you ask within the organization. Without a well-defined process, it’s difficult to hold others accountable and overall performance tends to suffer. An optimal process must be defined for each organization based upon it’s unique set of variables and constraints. However, the list below is a set of monthly activities that can be found in most leading company processes.

  • Prepare Data –
    Cleanse and gather all required data for the demand planning process (internal and external)
  • Generate Initial Forecast –
    Generate both the base statistical forecast and manage exception SKUs manually
  • Incorporate Market Intelligence –
    Collaborate with trade partners and external contacts to incorporate quantitative and qualitative data into the forecast (e.g., POS Data, Customer Forecast, Promotional Calendars, Pull-Forward Buys)
  • Consensus Reconciliation Meeting –
    Meet with sales and finance to reconcile the bottoms up forecast with top down financials and sales forecasts
  • Refine and Publish Final Forecast –
    Make final adjustments to forecast before transmitting to ERP
  • Monitor Performance –
    Monitor forecast for large anomalies and diagnose root cause of error

Thanks, Josh!

Good SaaS vs. Bad SaaS

A recent post over on Richard Anson’s blog on “11 Crucial Tactics for SaaS Pricing”, while written for new SaaS vendors who need to know how to price their solutions, did a great job of helping to point out some of the key elements of a good SaaS solution sales process vs. a bad SaaS solution sales process as well as some key elements of a good SaaS solution from a customer’s perspective vs. a bad SaaS solution from a customer’s perspective.

In particular, it focusses in on some of the key non-functional characteristics that should be examined in your SaaS purchase process. These non-functional characteristics can easily be summarized in a quick side-by-side comparison of good SaaS vs. bad SaaS.

 

Good SaaS Bad SaaS
Value-based Cost-based
ROI-justification Process Improvement
Business Case Justification Potential Manpower Reduction
Priced According to Company Size and Utilization One Price Fits All
Competitively Priced Priced Out of the Ballpark

 

In other words, if the SaaS solution is good, it will be competitively priced, and priced according to your company size and intended utilization, come with a business case justification, deliver a proven ROI, and clearly deliver ongoing value.

And if a SaaS solution is bad (for you), it will be priced out of the ball-park with respect to its competition (and be either too expensive to deliver value or too cheap for the company to sustain over the long term, which will lead either to the provider’s failure or substantial price increases at contract renewal time), have little in the way of a solid business case justification, or have a poor ROI over the short and/or long term. SaaS is more than features, functionality, hands-off management, and a cool web experience — it’s about delivering value to your bottom line.

For insights on how to cost out the TCO of a SaaS solution, and compare that TCO to an installed solution, see SI’s classic post on Uncovering the True Cost of On-Premise Sourcing & Procurement Software. For insights on what constitutes a good SaaS contract, see SI’s classic posts on SaaS Contractual Considerations (Part I and Part II). And remember, as per SI’s recent post on Maximizing ROI from Technology, it doesn’t matter how strategic the IT Vendor is, it only matters how strategic the solution they offer is.

Are You Losing 2% of Your Revenue to Fraud? Are You Sure?

Between two thirds and three quarters of organizations experience fraud every year and the average organization affected by fraud loses 2.0% of revenue in the UK and EU and 1.7% in the US. This means that, even if your organization is not aware of fraud, there’s still a 66%, or more, chance that it is being defrauded. And it should know for sure, one way or the other. Because if fraud isn’t detected, dealt with, and discouraged quickly, you end up with headlines like this:

  • Alibaba.com CEO And COO out because of vendor fraud
    involving over 2,000 suppliers and 100 staff members
  • Former Vodafone employee facing fraud charges
    for the fraudulent requisition of €2.3 million of services
  • The great Sainsbury’s potato fraud:
    Jail for vegetable buyer who took £5 million in bribes

Which all have one thing in common — each of these frauds involved the payment of millions of dollars to fake suppliers. Not over billings, not duplicate billings, fake billings from fake suppliers. A situation that can easily be prevented with a good supplier information management or supplier visibility system that validated the accuracy of the supplier information and the legitimacy of the supplier. If the supplier information management and visibility system cannot validate the existence and legitimacy of the supplier, then AP knows that a detailed manual investigation should be undertaken before the supplier is authorized to submit invoices, and that such authorization should require at least two sign-offs by high-level personnel. This simple process, which is yet another example of the value of supply chain visibility, would prevent fraudulent invoices from non-legitimate suppliers from ever getting in the system and greatly decrease the organization’s exposure to fraud.

And this is only one example of the many types of savings opportunities that good Supply Chain Visibility can bring your organization. For a deeper insight into the other ways in which Supply Chain Visibility can bring your organization recurring year-over-year savings, download SI’s latest white-paper on The ROI of Supply Chain Resiliency: It’s More Than You Think, sponsored by Resilinc. You might be surprised at just how much hidden value you can extract from your Supply Management operations with good visibility and resiliency.

The Value of Visibility: It’s More Than You Think

When someone mentions supply chain visibility, the first thought that probably jumps into your head is a foundation for resiliency, which it is, as we discussed in our last post on the value of visibility in your supply chain. The potential to prevent a major supply chain disruption that could cost an organization an average of 10% against potential revenue on the affected product lines for two years running and reduce that loss to 2%, or less, is huge. But it’s not the only savings enabled by good supply chain visibility.

In addition to per-event savings associated with disruption avoidance and crisis containment, there are ongoing savings associated with spend under management. Even if your organization employs advanced sourcing methodologies that include spend analysis and decision optimization, the value of multi-tier visibility goes well beyond what traditional advanced sourcing models can deliver.

For example, a 2012 FERMA4 study found that the majority of firms with advanced risk management practices, built on good end-to-end supply chain visibility, had EBITDA growth over 10% and revenue growth over 10%. The EBITDA growth came from lower costs. The lower costs resulted from better sourcing decisions enabled by better multi-tier supply chain visibility and total cost-of-ownership models. That’s a double digit savings! Up until this point, only spend analysis and decision optimization could consistently deliver that level of savings.

The observant among you might be thinking that this study is just one data point and maybe these savings aren’t obtainable by everyone because it’s statistical, but the proof doesn’t end there. In 2011, Haitao Li and Mehdi Amini undertook a comprehensive computational study on a five-tier multi-echelon supply chain for PC assembly that analyzed over 2,000 scenario variations and found that multi-tier visibility drives cost savings of 15% on average. This study, which built in the impacts of potential, and likely, supply chain disruptions at various levels of the supply chain, demonstrated that most optimal awards that only consider the first tier are highly dependent on the input assumptions and extremely susceptible to disruptions, which can increase the cost by up to 60%! Even the tiniest of perturbations was found to increase the total cost by over 5%. But when multiple tiers were considered and awards were made that were disruption resistant, the average cost savings came out to 15%! This is huge! (Especially given that, according to research conducted by IBM referenced in our last post, emergency re-sourcing efforts often increase costs by up to 30% over the optimum solution.)

This means that, even if your organization is lucky enough to be among the 14% that don’t experience a major disruption within the next year, the ROI from better sourcing decisions alone will pay for a supply chain visibility solution many times over. How much will you save? Up to 1.7% of revenue every year. (An average manufacturer will spend 59% of revenue on direct materials and services and 89% of this spend under management. Assuming that at least 1/3rd is sourced annually, and that the savings are only 10%, as per the FERMA4 study, that’s savings opportunity of 0.10 * 0.33 * 0.89 * 0.59 = 0.017 = 1.7%) So, if your organization does 1 B in revenue, it can expect a savings opportunity of up to 17 M a year from disruption-resistant awards to the supply base (which will, by their very nature, minimize the number of small disruptions the organization experiences).

And this is only one aspect of the year-over-year recurring savings that Supply Chain Visibility can bring your organization! For a deeper insight into the other ways in which Supply Chain Visibility can bring your organization recurring year-over-year savings, download SI’s latest white-paper on The ROI of Supply Chain Resiliency: It’s More Than You Think (Registration Required), sponsored by Resilinc. You might be surprised at just how much hidden value you can extract from your Supply Management operations with good visibility and resiliency.