Category Archives: Best Practices

True Savings Can Only Be Identified through Multi-Factor Optimization

A recent guest post from a vendor-employed guest contributor over on Spend Matters said to “Calculate Your True Savings Using Predictive Analytics”. While the doctor agrees predictive analytics can often give you a good data point as to projected savings, the reality is that it’s not always as accurate as you would like to believe and typically does not capture your best savings opportunities.

Why? Before we discuss the guest post, which did have some good points, we have to note that most predictive analytics algorithms work on trending and statistics on historical or market data, and while this can be highly accurate (95%+) the majority of the time (95%+), because market data is only historical and typically does not include data points on new (not yet introduced or announced innovations), detailed cost breakdowns on consumer / market prices, or operational insights into hidden inefficiencies whose correction can do more than shaving a few points off the top.

Going back to the post, the author states that if you use a Savings Regression Analysis (SRA) model based on multivariate regression of past-realized savings for a given subcategory to compute the savings potential under current market conditions, the target computed will be realistic, achievable, and likely mirror what you will do (despite the savings targets you set).

And this statistically based model will work if it is the same buyer (group) employing the same strategy on the same market base under similar conditions, but what could happen if a new buyer comes in that totally redefines the demand and the market strategy, or the market conditions have suddenly changed from supply shortage to supply surplus, or new production technologies could revolutionize production and trim overhead 20%? In this situation, this type of model will be significantly off.

Now, anything you can do to better predict savings is a positive, because, as the author points out, this allows for

  • better cash flow management (as you will better know your costs)
  • time to market optimization (as you will know the best time to source if you have leeway)
  • goal setting (as you won’t be trying to achieve the impossible)
  • performance management (as you can track against a realistic goal)

But while predictive analytics give a good data point, the best data point is when you use your market intelligence to build good should cost models, use optimization to minimize transportation and incidental storage and sales (and even taxation) costs (when sourcing globally), and use six sigma analysis to see if there is any opportunity to take cost out of a supplier’s overhead production cost. Going into this level of detail may indicate that while the product cost is likely to increase 1% this year (and explains why the predictive software says only 2% savings should be expected after heavy negotiations), an extensive analysis could show that a transportation network redesign could shave 3% and lean process improvements at your supplier could shave 2%, meaning that a cost reduction of up to 7% could be achieved with the right footwork (which is something the predictive model will never tell you). So use the predictive algorithms to establish a baseline, but never, ever stop there.

7 Secrets to Creating Supply Risk Management Leverage – and 3 More You Might Need

A recent pro-piece on “7 Secrets to Creating Supply Management Leverage” over on Spend Matters Pro [membership required] by the prophet and the maverick highlighted 7 strategies that an organization can be successful in risk management in the light of recent events that include, but are not limited to: the Hanjin Shipping bankruptcy, the Zika Virus, and the East Coast Oil disruptions.

The first three are a must.

1) You must aggregate your data.

No performance improvement, in or out of risk management, can happen without data and the process and performance visibility it brings. For more insight, and tips, into this, see the pro piece.

2) You must standardize your processes through collaborative means.

You can’t take a mish-mash random approach to risk identification and management — it must be coherent, cohesive, and collaborative. Otherwise, for every risk you prevent, two will slip past undetected.

3) Tuning — and minimizing — false positives and false negatives.

False positives are common, and the real risk is the false negatives, right? Wrong. False negatives pose a big risk, but for many companies, false negatives pose a bigger risk because, in order to minimize the possibility of false negatives, the organization will tune the system to let as many weak possibilities slip through in order to make sure no significant risks escape. However, in doing so, what will inevitably happen is that the number of false positives will increase significantly. You might be thinking, so what? Quick review eliminates them. Well, it does, but, over time, the risk reviewers become numb to, and tired of, the false positives and slowly, but surely, turn up the thresholds. Eventually they are raised so high that the false negatives increase and big risks slip in.

The next 4 are important, and most organizations will need to do at least 2 of them, and you can read the prophet and the maverick‘s piece on 7 Secrets to Creating Supply Management Leverage for more details, but here are a few you might also need.

8) Payment and Receipt Monitoring

Supply disruption in critical parts and goods is one of the worst supply chain disasters an organization can experience because an inability to sell the primary product line will result in a significant drop in revenue. Supply disruptions happen for a number of reasons, some of which are preventable (like not ordering from a supplier about to go bankrupt), some of which are not (like a natural disaster).

The best way to detect an issue is in delivery and invoicing monitoring. A supplier that is on hard financial times will submit invoices extremely promptly, follow-up quickly, re-submit on or before the deadline, and often take less than desireable early payment discounts. If they are at the point where they can’t even afford to get the credit to buy the goods and labour they need to make and ship your products, shipments will start to be late. Or maybe quality levels will drop and reject rates will rise. All of this can be detected early on with good internal data monitoring.

9) Impact Event Definition and Real-Time News Monitoring

Once your data is aggregated, and your supply chain mapped, you not only know your sole source suppliers (that need to be duplicated), but you also know your choke-points (where any number of events could impact your supply chain) and primary supply regions. (Just because you’re buying American doesn’t mean 80% of the raw materials aren’t coming from China!) You can easily define these regions, and the most likely supply chain impacts (port strikes, natural disasters, etc.) and then set up news and event monitoring to alert you to any event that could potentially impact your supply (including events that would impact two levels down the supply chain, which would cause a ripple event up). Now, its true that these are only so accurate and you might get a lot of false positives, but its better to quickly eliminate a few dozen false positives and get real time visibility into a critical component supply shortage in three months then find out there is no available supply left when a delivery date is missed.

X) Supplier Development

Let’s face it, the 7 steps in the prophet and the maverick‘s pro piece and the 2 steps above are good, but the best risk management you can do is instill the same commitment to risk monitoring, management, and prevention into your supply base (who will also do their best to push it down). A+ risk management can only do so much if your suppliers are C+ students at best.

Avetta – Vetting Your Suppliers So You Can Have Confidence

Avetta, formerly known as PICS Auditing, is a solution for companies that need to do formalized vendor pre-qualification on their mid-size, small, and micro-contractor and service providers to ensure that those contractors conform to health, safety, environmental, and other relevant legislation that these organizational (service) providers need to adhere to in order to maintain a safe environment, minimize risk, and minimize organizational liability. (A single fatality, especially one that could have been easily prevented with the proper training and certification, can cost a large organization five million or more in a settlement. Not only does the organization potentially lose a valuable contractor, but they lose a big chunk of change they can’t afford to lose and hope to remain viable.)

Despite being relatively unknown in the Procurement world (but then again, how many of you know of providers like Browz, VendorMate, or even Achilles), it is a well-known big name in industries that rely on heavily on contractors (think energy companies, cable companies, wireless companies, and other utilities) that has seen year-over-year growth in the 30% range since its humble beginnings 15 years ago.

While the solution is essentially an enhanced supplier information management (SIM) platform customized for credentialing, certification, and contractor capability tracking with respect to health and safety, sustainability, and other specific needs, unlike traditional SIM platforms, the solution allows the questions and profiles to be configured for each supplier based upon service(s) provided, risk profile, and/or industry.

One of its main strengths is the supplier-centric data view — the supplier owns their data and chooses whom they show it with. This means that every buyer can benefit from the economy of scale as Avetta grows as suppliers that have been qualified to a sufficient level by a competitor will be suitable for the organization. It’s a platform where you benefit from every competitor using it. After all, in a large, dense, city, there are going to be thousands of choices, and having a pre-qualified pool of dozens, or hundreds, can be very helpful. Similarly, in a small town or isolated region, there’s only going to be one or two contractors, and they are not going to have the time or interest to go through an audit for every company that wants to use their services twice a year.

Avetta‘s definitely a platform to check into if your organization uses a lot of contractors and you don’t have a good, holistic, vetting and certification process, and one that you can find out a lot more about by checking out the Spend Matters Pro (membership required) pieces co-authored by the doctor and the prophet.

While most organizations don’t think they need a credentialing solution, they don’t realize just how much effort it is to do a proper job manually, or how many suppliers don’t get closely vetted just because they present an insurance form or a certification from 3 years ago (that is still valid but expires in a month). Insurance just means the supplier can afford it and a certification just means that at one point in time someone knew enough to get it. It doesn’t mean they have good processes, or that they can do everything they say they can do with the same level of competence that they got the certification for (which they may lead you to believe). For example, just because their employees passed a safety course in equipment handling, doesn’t mean the employee ever passed one for working on poles or the outside of high-rises. And what is more likely to injure them? A piece of electrical equipment that shorts out and gives them a mild shock, or falling 30 feet onto pavement. Think about that.

Waste Not. Want Not.

Corporate Social Responsibility (CSR) and sustainability is all the rage with Generation Y and, in many countries, is essentially the law (where environmental protection is a key concern of citizens and law makers alike) — but are you doing everything you should (even if it is not yet legislated)?

Basically, if you procure it, and it is not used, you wasted it — and if you are not careful, it will go to a landfill, and that should be unacceptable.

However, in many companies, the focus on CSR and Sustainability is on the supply chain, and the Tier 1 (and Tier 2) suppliers as it is expected the company will comply with all laws and adhere to its own Sustainability and CSR policies, but this over-focus on the supply chain often results in drips of waste throughout the organization that, when added up, create a small pond, if not a large lake.

What do we mean by this?

Due to a lack of initiative or control by Procurement, the following happens in most organizations:

  • paper, paper everywhere especially in the back office (as AP needs to print invoices that fail OCR to re-enter them, legal has to print contracts to review them, managers need their reports on paper, etc.)
  • obsolete MRO inventory piles up in the stock room as excess parts for equipment replaced years ago doesn’t go with the equipment
  • low-cost defective products pile up in the back of the warehouse as it’s not worth the perceived return costs for minimal cost products or low volumes
  • non-recyclable packaging goes to the trash and the local landfills (and dumping costs) pile up
  • broken pallets litter the corner of the yard and are left to rot

But Procurement could prevent most of this.

  • demand management reduces paper especially if Procurement ensures AR, Legal, Managers, and anyone else who generally uses a lot of paper has dual monitor systems. A couple of hundred on a good extra monitor can reduce paper usage by 80% and only has to be replaced every 4 to 5 years.
  • MRO management (software) either in house or third party can instantly detect when inventory is obsolete and sell it to someone who needs it before all it is useful for is scrap metal
  • up-front return process definition and management ensures that defective products get promptly returned, or recycled, to make sure scrap yards don’t increase
  • insistence on reusable or recyclable packaging and making it mandatory in contracts can prevent packaging waste
  • better pallet acquisition can increase lifespan and a recycling/disposal policy can make sure the wood goes to good use

In other words, unless Procurement makes an effort to define its wants as waste free as possible, it will get its wasteful wants. Another point to ponder.

If you want to stand out, don’t answer the top 10 procurement questions! Part II!

As per yesterday’s post, if you Google “top procurement question”, you get a bunch of links to articles about top procurement interview questions and how to answer them, including this Slideshare that has some decent questions and answers, but not questions the doctor would actually ask other than to see how sharp you were (at detecting hidden intent), and definitely not answers that showcase the true range of your Procurement capabilities — which is what the doctor would want to know (as he’d only interview for a senior position and only if a company wanted a true leader, which most companies, despite the talk, still don’t want — but that’s another book). In our last post, we took the first five one by one. In this post, we’ll take the last five one by one.

Question: What Do You Know About Us?

Suggested Answer What Googling that Sh*t told you.

Problem: Of course it’s important to know what the company does, what it’s (stated) values are, etc. — and any good candidate is going to know that. So how do you expect to stand out?

Real Answer: I know that you do … and that you are committed to … but I also know that this presents a number of challenges for a Procurement organization, including … What ones are you experiencing now, how are you addressing them, and what ones will this position get to tackle? With respect to … I feel I could be a big help because of my experience with …


Question: Why Do You Want To Work With Us?

Suggested Answer Honest answer that addresses the organization’s values and vision.

Problem: Every candidate and their aloof disinterested cats can bullsh!t a 100% acceptable response to this question and it often plays little into day to day responsibilities where the rubber meets the road.

Real Answer: I love your value and vision and the products you make, but most importantly I love the work that I expect I will be doing on a daily basis. I can’t wait to apply my skills in X, learn more about Y, and tackle new territory in Z. There’s just so much to do that I feel this is just a starter role and I can have a career at your company, and maybe even your job someday when you are promoted to COO or CEO (as all good CPOs should be).


Question: Why Should We Hire You?

Suggested Answer An answer that links your skills, experience, education, and personality to the job itself.

Problem: Again, every candidate and their aloof disinterested cats can bullsh!t a 100% acceptable response to this question and it often plays little into day to day responsibilities.

Real Answer: An answer that links your skills, experience, education, and personality to the job AND showcases the innovation you can bring.


Question: What Kind of Salary Do You Need?

Suggested Answer Turn it Around, because she who plays chicken first loses the negotiation.

Problem: Salary is only one aspect of the picture.

Real Answer: It depends on the overall benefits package. I’m looking to stick around, so what do you have for health/disability benefits, retirement savings matching, continuing education, work-life balance, etc. Don’t just turn it around, say you expect your worth, but you’ll consider the full picture.


Question: What Questions Do You Have For Us?

Suggested Answer Any question that will allow you to demonstrate how you might make an impact.

Problem: Actually, this is the only question the doctor does not have a problem with, if you take the right approach, and the question is broad enough for you to do that! Just be sure to use all the tips and tricks outlined in the last nine points to emphasize you want to understand better how you can help and prepare yourself to hit the ground running, tomorrow even.