Category Archives: Best Practices

Ninety Five Years Ago Today …

TIME magazine was published for the first time, and, to date, has stood the test of time. It was the first weekly news magazine in the US and today has the world’s largest circulation for a weekly news magazine (with three quarters of its readers in the US).

The idea behind the magazine was brevity, with the original intent that a busy man could read it in an hour. The original slogan was Take Time — It’s Brief. Maybe that’s why it’s still around today, since it seems all the younger generation has time to read are short LinkedIn articles and Facebook Posts, and if they are on the go, you’re lucky if they get through the new, double length, tweet.

But it teaches us something … if you want to be widely read, or at least widely acknowledged, get to the point … fast. Add more in depth later when you have attention, bur brevity sells. Advertising revenue may be down (but it’s down in print across the board), but TIME is still surviving, and looks like if it does go down in the future, it will be among the last major print publications to fall. It’s a communication lesson for all of us, so let’s take time to understand it.

When Managing Supply, Don’t Forget …

… sometimes supply comes from within the four (virtual) walls of your business. This is one fact that is overlooked by many S2P suites which are setup to acquire external goods and services (and, specifically, finished goods and services that typically fall into indirect categories.

When we are talking about MRO, the goods and services you need might be in a storage room in another building. If we are talking about consumables, like what you might need for a new hire, everything you need might be one floor down, left behind by another hire who, after the probation period, didn’t work out.

Inventory and Asset Management are key to successful Supply Management, and to successful Procurement. One should NOT buy what one does not need. This is the other form of demand management — which is two parts. The curbing of need for consumables (less paper for the printer, less usb drives when there are secure network share folders, etc.), and the re-use of what you have. Laptops or cell phones less than 6 months old should never go unused or reassigned. Expensive MRO replacement parts can often be couriered from site to site for $40 — why spend $5000 ordering another 4-pack to fix the production line and have your minimum “3” on hand when another facility still has 8 in storage.

When you are upgrading your e-Pro / P2P / S2P system, keep this in mind. Either find one that includes inventory management or integrates with an inventory management system, and you’ll save a lot.

But to truly win, make sure it supports end-to-end asset management. It’s not just expensive hardware that often collects dust in storage closets, is also expensive assets. Like expensive snowblowers that are bought, put in the basement, forgot about when the business gets a new, better, facilities contractor and the internal maintenance team doesn’t have to do it anymore instead of being sold or sent to another facility. Expensive 3-D software licenses that are not transferred to another engineer, and then bought again 6 months later when a new hire needs them. Patent or other IP library that could be licensed by sales to a partner for extra revenue. Etc. This last part is key. Not only are unused assets costing the company money (because thy were bought to fulfill a need, which is not being met by them, but costing the company money if they can be licensed, rented, or, in the case their value becomes limited, sold.

So when you are upgrading your e-Pro / P2P / S2P system, keep this in mind too. Make sure it’s inventory and asset management or integrates with an inventory and asset management, and you will not only save a lot, but help the organization generate value.

Supply Market Intelligence … Harder than it Looks Part II

In yesterday’s post, we turned our attention to supply market intelligence which, as the maverick points out, is critical as much for supply risk as it is for value creation. But, as we also pointed out in yesterday’s post, despite the plethora of options, finding the intelligence you need can be difficult. All sources have strengths and weaknesses, so you need to be selective to achieve success. Where should you start?

Suppliers

      • financial statements: if the company is public, they must release a reasonably sufficient level of information for a sound financial assessment
      • customer interviews: if you really want to find out how good a supplier is at providing a product or service, ask a customer!

Internal Sources

      • performance reporting: gather all the hard metrics you can!
      • internal stakeholder interviews: any data they have is real company intelligence data

External Sources

      • price index data: and roll your own forecasting!
      • research services: which collect data relevant to your needs
      • blogs and social media: which offer unsolicited third party opinions and reviews
      • public consumption data: from government contracts and import registries which allow you to understand supply vs demand dynamics

This data will give you a mostly factual, relatively unbiased third party picture of the market and supplier performance in the market. All you need is a platform that can automatically gather, consolidate, project, and advise on it all.

Supply Market Intelligence … Harder than it Looks Part I

Building on our recent risk focus, we turn our attention to supply market intelligence which, as the maverick points out, is critical as much for supply risk as it is for value creation.

It’s critically important, but where do you find the intelligence you need? As pointed out in a Spend Matters (main site) post, there are a number of sources that might yield intelligence, including:

Suppliers

  • company websites
  • financial statements / reports
  • request for information
  • supplier interviews

Internal Sources

  • internal stakeholder interviews
  • performance reporting
  • supplier relationship management (SRM) programs

External Sources

  • news feeds and alerts
  • price index forecasts
  • blog and social media
  • peer companies
  • research services
  • advisory programs

But what’s the right source?

Consider the following downsides:

Suppliers

  • company websites display only what the supplier wants you to see
  • financial statements / reports only display high level summaries, they don’t allow you to identify high spend or high risk suppliers or categories
  • request for information only capture what you ask for, and only what the supplier shares
  • supplier interviews again only capture what you ask for, and only what the supplier representative shares

Internal Sources

  • internal stakeholder interviews capture their expertise and bias
  • performance reporting captures hard metrics, but only what you take the time to capture
  • supplier relationship management (SRM) programs vary by company and supplier

External Sources

  • news feeds and alerts – cover the angles exposed or available to journalists
  • price index forecasts – use in-house algorithms that may or may not be right
  • blog and social media – cover the angles seen by bloggers
  • peer companies – may cover the views of the peers, or may cover the perceptions they want to pass on
  • research services – tend to provide hard data, but on the areas they cover
  • advisory programs – are limited to the expertise of the advisors

So what’s right?

How Should You Define Procurement Success?

This question is encased in a nut that’s quite tough to crack. We hinted at the importance of defining it three years ago in our post that asked how do you define Procurement success which noted that if you consider the art of the Strategic Sourcing Process, the Category Management Process, or the Contract Management Lifecycle, you [not only] see that they all start about the same at a high-level but that a key requirement of each step is an acceptable definition of success.

This means that if you want to be successful, you need a good definition of success but what should it be?

If you ask the CFO, she will say it should be cost savings! Reduce the outflow!

If you ask the Chief Engineer, it should be the best quality and reliability money can buy!

If you ask the Production Chief, it should be rock solid supply availability.

If you ask the CMO, it should have the most unique gee-whiz features on the market for the biggest marketing splash.

If you ask the VP of Sales, it should be the product that comes with the most value-adds so they can command the greatest price.

And so on.

On SI, we have repeatedly said the definition of procurement success should always be the outcome that brings the most value to the organization, but this can be hard to define when there are a number of competing viewpoints on what value is.

However, we can define Value as the outcome that balances the tradeoff between the goals of the respective stakeholders for maximum return against an agreed upon value scale that normalizes a dollar of savings (for the CFO) against a reliability metric (for the Chief Engineer) against an expected availability metric (for the Production Chief) against a feature differential against the market average (for the CMO) against a value-add differential (for the VP of Sales) [etc].

Now, you might be wondering how you do that? The answer is simple: define an expected dollar value. It’s not as hard to do as you think (as long as you have the [big] data and the model and the software to calculate it)!

The CFO metric is easy, a dollar of savings is a dollar of savings.

The reliability metric is not that much harder. A failure rate of 90% vs 93% during the warranty period has an incremental cost equal to 3% of the units times replacement cost (which is base product cost + processing cost if outside of supplier warranty or processing cost + return cost if inside supplier warranty) and this cost can be amortized per unit.

The supply availability metric is involved, but still easy to define. First you have to calculate an expected chance of disruption based on it. Once you do, the cost can be approximated as follows: (% chance of disruption * % length of disruption x cost per day of disruption) amortized by units. If there is 10% chance of disruption, then you expect one every 10 years, for the estimated length of time, at the estimated cost per day, and amortize that cost over each unit purchased each year. Not perfect, but a good approximation. To find the conversion from expected availability percentage to chance of disruption, you mine your data and extrapolate the multiplier. Easy peasy (with a modern cognitive or deep analytics platform).

The CMO metric is tricky. Just how much better is that gee-whiz feature? Probably not nearly as important as the CMO claims. To figure out an approximate dollar value per unit here, you will have to mine historical data to see the incremental marketing value from the company’s “most differentiated” or “feature rich” products compared to its “least differentiated” or “feature poor” products as compared to the estimated market share each product obtained. If “feature rich” products typically command an extra 10% of market share, each unit is valued at a premium of 10%.

The value-add is easy — mine the historical data to extract the dollar value of each “value-add” available to the company.

Then, to find the optimal trade-off during a sourcing event, build a multi-objective optimization model that maximizes the overall value generated from these goals.

In other words, what used to be downright impossible is now pretty straight forward with strategic sourcing decision optimization and cognitive sourcing.