Procurement is the action of procuring …
To procure is to obtain with care …
Just doing a random search on your favourite web store and clicking “buy” on the first product that might fit your needs does not involve the application of care.
That’s why you need a process … and preferably a platform to back it up.
Simple enough explanation?
Ten years ago we posted timeless principles to steer you through negotiations and, looking back, they truly were timeless. Each is as true today as it was then as they were a decade before we summarized them.
Negotiating is not about dividing up a limited pie in ways that are divisive. It is about making a bigger and better pie.
If each side sees the pie as small, then each side is going to want a bigger piece of that pie. But if the pie is large, both sides will be happy with a piece that is about half.
Conflict is at the heart of negotiation but only a positive view of conflict will result in a successful outcome.
Both sides must believe that a resolution will occur that both sides will be happy with.
There is a time to speak and a time to shut up in negotiations. When you do more listening than speaking, you actually increase your power.
If you don’t understand what the other side wants, really, really wants, then how do you know what you really need to give up and what you don’t? After all, you must
Recognize that you will only reach agreement by understanding the deeply-held needs of the other side.
Both sides make a lot of demands, but at the end of the day, only a few of the demands will generally be non-negotiable.
In power negotiations, when the stakes are high, let the other side believe what you or they want them to believe. But don’t lie or be dishonest.
If you can distract them away from what the biggest value is to you, it might help.
You can only succeed in negotiations with a win-win attitude.
As per our first point, you have to be focussed on enlarging the pie so you can divide it up in a way that both sides see a win.
Negotiating is an essentially human way of interacting.
That’s why you will get to keep your job when Procurement bot takes over inventory, re-ordering, spot-buying, and the vast majority of your job.
This week we’re revisiting posts from ten years ago to demonstrate that, to date, the more things change in Procurement, the more they have, unfortunately, stayed essentially the same.
Ten years ago we penned a post on outsourcing and procurement mastery that summarized the results of an Accenture study that found that, on 1B of controlled (normalized) spend, procurement masters achieved 30% higher savings with costs that were 50% lower.
Nothing has changed. If you have been following the Hackett group publications for the past decade, you’ll note that top performers always perform significantly better than average performers. Maybe not 30% cost reductions, but pretty close. For example, in Hackett’s most recent study, World Class Procurement organizations see 35% process cost reduction, which is quite significant. And just about every GPO publishes typical category-based cost reductions in the 10% to 30% range, which is easily achievable through advanced sourcing technologies such as spend analysis (to identify the opportunity) and decision optimization (to capture the opportunities).
The only thing that has changed is how disturbing it is that there is still so much overspend in the average organization — and how easy it is to identify it. By now the majority of organizations should own advanced sourcing and procurement technologies and be identifying the majority of these savings on a regular basis. But it’s still not the case. Over 40% of organizations don’t have a single modern sourcing or procurement solution.
We’re still way behind where we should be. In this regard, unfortunately, nothing significant has changed in a decade.
This week we’re going to revisit posts from ten years ago and demonstrate that, to date, the more things change in Procurement, the more they have, unfortunately, stayed essentially the same.
We’re starting with a piece we published a decade ago on the benefits and risks of global product development. In this piece we noted that while the risks of global product development are many, so are the benefits as outsourcing can often open the organization to talent pools it wouldn’t have otherwise.
However, as we pointed out, the benefits won’t materialize if the risks aren’t mitigated, as any risk can destroy an entire sourcing and new product development plan. And the strategies for mitigating risk, as identified in the original article, are as relevant today as they were then.
NPD (New Product Development) still requires product road-mapping and portfolio management, iterative design and validation, product architecture and system design across the value chain, knowledge management so nothing gets lost, IP management, talent management, and, most importantly the right Product Lifecycle Management platform.
Without an integrated platform to track what is coming from where in the supply chain, who is doing what, what events are occurring, which of those impacts could cause a disruption, and what the potential (cost) impact could be, the organization is literally flying blind.
However, we still don’t have one platform for NPD that also manages end-to-end supply chain risk. And this is risky business. We have great platforms for NPD and product costing (including, but not limited to, Apriori, I-Cubed, and Supply Dynamics) and great platforms for risk identification and management (Achilles, Resilinc, and Risk Methods) — but not an integrated risk-centric new product design platform.
The missing strategy is still missing. Will it finally materialize ten years from now?
… because you don’t have your costs under control. While there is no such thing as true savings, because finding savings just means that you weren’t spending optimally to begin with, the reality is that you are not spending optimally. Not even in your most strategic categories where you are putting the most of your effort. This is because you are not applying both leading strategic sourcing decision optimization and leading spend analysis to this category across multiple levels on a global category scale. (Even if you own both technologies, chances are you don’t own best of breed in both, and even if you are that one in a thousand company, the doctor has seen the most complex optimization models that are being built by the average company, and they are still elementary compared to what models could, and should, be built.)
So, even if you are given an unrealistic savings target, if it’s 10% or less, it is easy to meet because, until you have applied these two advanced sourcing technologies to every single category, and done so in a three-year time span (as costs always creep back in to a category over time, and that’s why GPOs and niche consultancies find you savings on the same category again and again if sourced three to five years apart), there is overspending everywhere. So, if you can just get your CFO to write the cheque, acquire these technologies, and apply them appropriately, you’re going to find significant savings on the 60% to 80% of your non-tail spend, which hides even higher levels of savings (as we have discussed here on SI in the past).
And then, since the secret to cost control is to source everything, make sure you are buying everything that costs 5 figures or more through an RFX or Auction, and, in many cases, preferably one that is automatically configured and run for you by the platform with little buyer involvement beyond keeping the approved supplier database up to date and verifying the award before the contract or PO is sent to the winning supplier. And if you actually manage to find the majority of savings across your leading spend and tail spend, limiting potential year-over-year cost reductions to 3% in the following year, you’ve still only scratched the surface.
Just because your organization has optimized it’s spend, that doesn’t mean that your strategic / high volume supply base has optimized their spend. This is where supplier development and supplier (relationship) management comes into play. If you help your top x suppliers, where this X constitutes 80% of your strategic spend, and over 50% of your spend, save 10% by optimizing their procurement, you lower your costs on this half of your spend by 10%, and there’s another 5% without doing anything but process improvement. But we always know that savings don’t stop at process improvement, they continue with product improvements that enhance quality, reduce manufacturing costs, and reduce reliance on rare earth metals or non-renewable materials — all of which can be identified with the right innovation.
So, in CFO speak, savings are everywhere, and you should have no problem finding significant savings as long as you acquire, and apply, the right tools for the job. This means if you don’t have appropriate advanced sourcing technologies, you have to go get them. They are worth it.