Category Archives: Best Practices

For Lasting Results, Follow the Procurement Leaders … (Repost)

… but be sure to focus on the right characteristics first.


I posted this a year ago today, and I’m reposting because nothing has changed. This is still the right methodology, and, more importantly, the message has not sunk in yet at a large number of companies. The first three steps are absolute.

Reviewing a recent summary of A.T. Kearney’s 2011 “Assessment of Excellence in Procurement Study” over on the A.T. Kearney site on why you should “Follow the Procurement Leaders” that described seven ways to lasting results, I couldn’t help but notice that they had all the right suggestions, but in reverse order. Starting from the bottom of the list, and working our way up, we see that the suggestions will transform your organization from an average performer to best in class.

  1. Win the “War for Talent”.
    This is the first T necessary for supply chain success and the most critical one. No supply chain function can be happen without someone in place to plan, manage, and execute it — and for any function to be planned, managed, and executed in an optimal manner, you need world-class talent.
  2. Adopt Technology.
    This is the second T necessary for supply chain success and the next most critical one. Once you have found the right talent to take your supply chain to the next level, you need to enable your talent with the right technology to make them as efficient and effective as possible.
  3. Transition to Category Strategies.
    As the article notes leading procurement organizations use more advanced toolkits — systematically employing more than twice as many methods as the followers — to tailor their approaches to each situation. That’s why leading e-Sourcing / e-Procurement providers are now offering platforms with category templates / workflow management capabilities to allow platform customization to each organizational category and support the third T of supply chain success.
  4. Use Supplier Relationship Management.
    Suppliers are key to supply chain success, and leaders manage the relationship to get the most out of it. They use suppliers to improve innovation and growth, monitor compliance and risk management, and improve capabilities across the supply chain.
  5. Manage Risk Systematically.
    Leaders use risk-impact analysis, financial risk management, and disaster planning as ways to protect against, and mitigate the effects, of disruptions — unlike the risk management “followers” that constitute 80% of companies that are a single natural disaster away from a major supply disruption.
  6. Contribute to Top and Bottom Lines.
    It’s not just about cost reduction, but about value generation. Good Supply Management doesn’t just stop at cost reduction, but goes onto demand reduction, component innovation, product innovation, and even market innovation. This is done by managing risks, managing supplier relations, applying category strategies, using technology, and using all of the skills your talent possesses.
  7. Align with the Business.
    Leading supply management organizations support the business strategy. And while this is the most important goal from the viewpoint of Supply Management, as the goal is to increase the image of Supply Management in the organization, this can not be accomplished until all of the pieces of the puzzle, described in the first six steps, are in place.

Why is Supplier Relationship Management (SRM) Under-delivering?

It’s a good question, and it needs some good answers. As a result, I was drawn to Bill Young’s two-part blog (Part I and Part II) over on Procurement Leaders earlier this month as I have some ideas, but wanted to see if they matched up with the insights of others.

Most of his observations were correct, namely that:

  • There is a confusion over what SRM is.
    It’s not just software or handholding – as Mr. Young points out, it involves organizational structure; governance; supplier engagement model; joint activities; value measurement; systematic collaboration; and technology/systems.
  • Current incentives focus on short term results.
    Most organizations are laser-focussed on the mythical goal of “savings” and immediate payback, not long-term value generation.
  • Lack of clear accountability and who takes the blame when something goes wrong.
    So no one is incentivized to do anything beyond what they are minimally required to do.
  • Legacy attitudes and behaviours.
    Not only do many old-school negotiators believe that every deal is a win/lose zero-sum game, but organizations that need SRM most are broken and (still) believe that “coordination and relationship management” is not part of a well-oiled organizational machine (that should work like an automotive assembly line).
  • Suppliers’ unwillingness to challenge customers.
    They don’t want to speak up in case the extra air movement will rock the boat.

However, the observation that I believe is closest to the truth is the one pointed out by readers who noted the

  • Skills gap.
    There is a huge gap between the skills required for normal category management, and the competencies needed for complex, ongoing, internal and external relationships. (This is because, as SI has repeatedly pointed out, the average Procurement professional does not get nearly enough training.)

As far as SI concerned, the primary reason that SRM under-delivers is that it is not embedded in a category management lifecycle. Because it is misunderstood and because there is a huge skills gap in the average Procurement professional where SRM is concerned, it tends to be pigeonholed into the “procurement” part of the category lifecycle (which is phase 6 of the 9 phase strategic category management lifecycle), driven off of a balanced scorecard, and managed by a SPM (supplier performance management) solution. However, as pointed out in Part II of the strategic category management post, formal supplier management starts as soon as the contract is signed and doesn’t stop until the last unit of product is recovered or returned. And formal supplier management is only part of Supplier Relationship Management which starts with the first reach out to a potential supplier in the supplier identification phase and continues until a contract award phase where the supplier fails to win any additional business from you (and you brief the supplier as to why in an exit briefing).

In short, it’s underdelivering because it’s under-applied, undermanaged, and mis-understood.

Need a Truck? BuyTruckLoad.com!

Believe it or not, counter to every nerve in your body, you should be buying a portion of your freight business on the spot market! Take a minute, get those gasps out, and SI will explain why.

Simply put, for the vast majority of product-based companies, freight is the one category that is inefficient from a contract perspective. At first thought, this might not make sense as efficiencies and cost savings typically come from good planning, but this is precisely why you can often get significantly better rates spot-buying your freight than contracting it.

To see this, you have to look at the situation from your carrier’s viewpoint. It is most efficient, and most profitable, when it’s trucks are kept full. Your contracts keep your carrier’s trucks full at most half the time. Specifically, your contracts keep your carrier’s trucks full from point A to point B. Maybe it has a few pallets to take back to point A, but that doesn’t fill the truck, and it’s only efficient (from your point of view) if the carrier waits until the truck is full to take the pallets back. In order to maximize efficiency and profitability, the carrier needs business from point B back to point A. The chances of the carrier getting precisely this business when competing against 70,000 other carriers and only getting called to the bid on one of every 10,000 or 20,000 freight contracts being tendered are probably 40,000 to 1. Not good odds.

Plus, even if the carrier’s lucky enough to get business that geographically fills, say, 80% of the route from B back to A, chances are the timing doesn’t line up right and the truck ends up sitting idle for a few days on a regular basis, which also takes away from efficiency or profitability.

Because of this, and because of the fact that the carriers have to hedge their bets when you ask them to contract three, six, and twelve months out, you end up paying, on average 14%-15% more for contracted freight than you do freight purchased efficiently on the spot market (if you know what you are doing or use a good freight brokerage). In particular, even if you’ve done a great job on your contract, you’re probably paying, on average, over $1,400 for a load that you could get for $1,300 or less on the spot market.

That’s why Sean Devine and John Labrie, each with over a decade of transportation sourcing and optimization (at CombineNet, Emptoris, and Con-Way), built BuyTruckload.com — the first automated truckload brokerage service. This service, built on an advanced real-time truckload optimization model, takes your requirements, searches their database of over 70,000 carriers (and current spot market prices) across the United States (each with an average of 4 trucks), and gets you a quote that is, on average, $100 less than you would expect to get otherwise (buying yourself with a limited selection of carriers), and $200 less than you would if you were contracting months in advance (based on an average truckload price of $1,400+ and an average savings of 15%).

It’s quick, simple, and almost obvious — and that’s what makes it so useful. As a buyer, all you have to do is define the acceptable authority types (contract, common, broker), the acceptable / required equipment types (bus, van, flatbed, refrigerated, dry van, etc. — they allow for 16 different types), the cargo authorities (private, property, etc.), the safety alerts you will (not) accept (unsafe driving, driver fitness, etc.), the required number of power units, and where you need the trucks and the system will identify the relevant carriers. Define your shipping requirements, and it will generate binding quotes. It’s that simple, and if you use the right mix of contract and spot-buy freight, it could save you a lot of money.

Please note that the right mix is key! Even if the 15% savings are there for you, it’s probably not a good idea to put all of your freight on the spot market. You need to know you have enough reserved freight for critical products (at critical times) and carriers need to know they have enough baseline business to sustain themselves. the doctor‘s gut is that you probably want a 2 to 1 ratio between contract and spot market, on average. In some industries and/or categories, this ratio will be higher (because, let’s face it, you don’t care if you get those office supplies a day late), and in others it will be lower. But a 2 to 1 ratio is probably a good starting point.

Don’t Forget The Post Mortem in Your Strategic Category Management of Services!

A couple of weeks ago, after running our series on Strategic Category Management (Part I, Part II, Part III and Part IV), we said Don’t Forget Strategic Category Management in Your Services Categories. This was because a lot of organizations believe that strategic category management is only for direct categories or physical goods, when nothing could be further from the truth (especially when indirect spend can approach 50% in some organizations).

In this post, we outlined the nine phases of strategic category management and how they relate to services categories. Although we did not make Post Mortem a separate phase, it is still a critical part of the process. In fact, it’s one of the most critical parts – because if you do not analyze how you did, you will not improve the next time around. So why isn’t it a separate phase? Two reasons. One, it’s a required input to the first, rationalization, phase because if you don’t do a post mortem and analyze how well the last strategy worked, you can’t be sure if it was the right strategy or not. (The fact that the results were not what you expect is not sufficient to declare a strategy incorrect. Maybe the team didn’t follow though on the strategy as required in each phase.) Two, and this is the real reason, you should be doing a post mortem after each phase. Face it. If you’re procuring discovery services for the next three years, and you wait until thirty-three months in to start the post mortem, how well can you reasonably expect to assess the job you did in the supplier identification and sourcing phases three years earlier, when half of the team has changed, memories has faded, and a lot of the details of the process has been lost? Here’s what you should be doing from a post-mortem perspective at the end of each phase.

At the end of the rationalization phase, you should be documenting not only what strategy you are pursuing, but why. What are the assumptions you are making that favour this strategy? What other strategies did you rule out and why? (If it turns out an assumption was wrong, then another strategy might have been viable and you will have saved work the next time around.)

At the end of the supplier identification phase, you should document how you conducted your search and how effective you were at identifying additional suppliers. How long did it take, how many new suppliers did you uncover, what percentage were suitable to push to the sourcing phase, etc?

At the end of the sourcing and contract award phases, document the process that was followed, how long it took, what seemed to work well and what didn’t, and anything you wish you would have done (differently).

During the supplier management phase, which is ongoing from contract award until the end of recovery, conduct regular supplier assessments and thoroughly document the results against well defined metrics, any benchmarks you have, and any expectations that were included in the contract. For each issue, document the root problem, what you did to address it, and what you think you could have proactively done to prevent it.

During the procurement phase, review actuals to expected at the end of every quarter. (This will be “easy button” simple if you have a decent e-Procurement system that allows you to define budgets at the line-item level.) For all line items that are off more than 20%, do a quick manual review to identify any that aren’t easily explained (a payment slipped, you moved some work back, you ordered extra inventory as a precaution, etc.). Dig into these. If they can’t be adequately explained in five minutes, someone didn’t do a good job of budgeting or project management. This needs to be identified and documented as part of supplier management.

Then, at the end of the phase, and before you execute a new sourcing event, you need to do a more detailed analysis. At the very least you should:

  1. Run the spend reports on your complete transactional data
  2. Compare the results to your original spend analysis data (which was likely incomplete if this is the first time you are doing strategic category management)
  3. Focus on the gaps – where the data does not match, is it because you brought new spend under management or is it because there was some off contract spending
  4. Focus on the differences that are +/- 20% (adjusted for inflation or demand, as required) – for each difference that was not already detected and adequately explained, do a deep dive
  5. For each gap and each difference >= 20%, document what could be done to prevent this in the future – better forecasting, new processes to keep purchases on contract, better supplier / demand management, etc. and what changes, if any, are required to the overall strategy

This is the phase where you “close the loop” and begin to loop back to the next, hopefully better, iteration of the strategic category management cycle. If the loop is not closed, spend under management will not effectively increase and the organization will only see savings the first time. If the loop is effectively closed, then, when inflation and demand is adjusted for, the company will see savings each time through the process as efficiency, in both the buying and supplying organizations, is increased (and unnecessary fat is taken out of the margin).

During the recovery management phase, you have to document what actions you take and how well they do.

Don’t Forget Strategic Category Management in Your Services Categories!

Even though there is no inventory, nothing physical to return, and very few recovery opportunities available, even if the supplier fails to perform, you still need to manage your services categories strategically. Why? As per the Hackett Group Spend/Savings Visibility Study (in 2010), 48% of indirect expenditures (composed of T&E, Marketing Spend, Logistics Spend, and Professional Services) are primarily services-related, and an additional 35% (composed of IT/Telecom) are largely-services related.

Furthermore, when you consider that, in some organizations, indirect spend can approach 50% of spend, and that the organization is often left with nothing tangible to show for the spend when all is said and done, strategic category management becomes even more critical on these categories. And extra attention should be focussed on the seven steps that come into play.

Phase 1: Rationalization

When it comes to services, you need to not only analyze your options from multiple perspectives, but consider different strategies. While it is often beneficial to dual-source from a product perspective, to insure continuity of supply, dual-sourcing from a services perspective is often detrimental. For example, hiring two agencies for a marketing campaign is a waste of money, and if, by chance, your cell phone carrier goes out of business, there are at least six more to pick up the business the next day. You will likely need to single source, so you need to do so with care.

Phase 2: Supplier Identification

Not only is it important to open up your search, but it is important to qualify your options more completely. For example, where Marketing is concerned, if the primary need of Marketing is brand building, then the focus should be on agencies with that specific specialty. If the primary need for management consulting is to help the company with international expansion, you need to find a consulting organization with expertise in the target market – and it may not be a Big 5.

Phase 3: Sourcing

Unless you have an in-house expert, you will likely need to call in an expert if you want to get the best deal. Services, and services firms, have their quirks that you will need to understand intimately to get the best deal. For example, in advertising, bundling creative and print is not likely to save you money, as savings in print come from consolidated volumes with a single print house, and volume comes from consolidating orders across campaigns. In Logistics, the best deals are often found on the spot-market, especially if you have a little leeway in delivery schedules. In Telecom, you’ll get a great deal on the most common base package for your mobile devices, but the outliers who go over or who need the high-end packages will be laden with 100% profit margins to help the carrier make back what it gives up on the base. And so on. You need to know the gotchas, and how to avoid them.

Phase 4: Contract Award

The contract is very important, and detailed delivery and performance requirements are a must, otherwise, you’ll have no recourse if the service provider fails to deliver. In agency spend, make sure you have fixed delivery dates, penalties for late delivery, and termination clauses for repeat offences. In print spend, make sure you have contracts that state you don’t pay for their mistakes. In telecom, make sure there are no-pay clauses that state you don’t have to pay after notice of termination is given, even if they forget to deactivate the device/account for 30 days, and that you can apply rebates immediately. In professional services, make sure you have the right to withhold final payment until the final deliverable has been completed and accepted.

Phase 5: Supplier Management

Supplier management needs to be more active than it does in product-based supply chains. In a product based supply chain, once the chain has been worked out, and the first batch of products has been accepted as meeting quality standards, visibility solutions, that inform you of a potential hiccup, can often minimize the need for day-to-day interaction with the supplier until a change is required. No news is often good news. Not so with services. No news is almost always bad news. It typically means things aren’t going to plan and the supplier is trying to avoid telling you. If you aren’t managing the supplier and monitoring the situation, it’s likely that you won’t find out until it’s too late.

Phase 6: Procurement

It’s very important to send a purchase order with a clear statement of work, approved amounts, a payment schedule, and specific instructions (and account codes) for the invoice. It’s critical to capture the correct data for reconciliation, reporting, and evaluation purposes. If you can’t compare approved budget to actuals, you really don’t have a good grip on what your services are costing you.

Phase 9: Recovery Management

If deadlines are not met, overpayments are (accidentally) made, discounts aren’t applied, or other terms and conditions are not met, you will need to recover monies from the supplier. If you have cut a proper contract, appropriately managed the supplier, and procured properly, recovery will be possible (although you may have to threaten / go through with arbitration and/or legal action with suppliers unwilling to cooperate — but be sure you’re ready to sever the relationship before progressing to legal action).