Originally posted on on the e-Sourcing Forum [WayBackMachine] on May 19th, 2008

As proved time and time again, that’s what the majority of you – who still aren’t using optimization – are doing each and every time you execute an e-Sourcing project of even minimal complexity without using optimization.

At reSource, Iasta provided five case studies of recent projects that it executed in conjunction with its clients that ranged in value from 2.8M to 110M. Savings on these projects ranged from 5.5% to 40%, and even the most complex project was completed in under a week. Furthermore, 18.2%, or 20M, was saved on the largest project and 40%, or 20M, was saved on the second largest project. More importantly, each of these projects were completeable by an average buyer or analyst through the user-friendly UI provided in Iasta’s Smart Optimization. (Yes, it is more complex than an e-Auction and, yes, you do need to have a basic understanding of what you are doing, but compared to the other optimization solutions out there of equivalent power, it is very easy to use and you can be up and running on the basic decision optimization tool included with the basic e-Sourcing suite within a day if you take the time to get training or take advantage of Iasta services on your first few projects.)

I know that optimization still has the stigma of being too complex, too hard to use, or too slow, and that this is still true of some solutions on the market, but some vendors, like Iasta, who have made a significant R&D investment into optimization over the last few years now have solutions that are much more straightforward to use, usable by an average buyer (with training), and very quick. In each of the case study projects, including the two large projects where 20M was saved, the average scenario solved in under a minute. Furthermore, most of the scenarios were built by the analyst in 15 to 30 minutes (with the most complex scenario clocking in at slightly under two hours to build, as it required between 60 and 100 constraints). Running the math, this says that you can analyze an average project in one to two days, as you’ll be able to build, solve, and compare somewhere between 7 and 28 scenarios in a day, and most projects usually don’t require more than 5 to 20 scenarios to hone in on the best award for your business. (In the case studies presented, most were completed with 2 days of analyst time. The most intense project required 60 scenarios and took close to a week, but it saved 20M. Also, one of the intense projects that took almost a week used to take 6 months, as it took almost a week to build a single scenario in Excel.)

In addition, it’s a lot easier to get started with optimization than it used to be. If you’re working with the right vendor, you have the choice between getting trained and doing it all yourself, using optimization-as-a-service and having the vendor do the project for you (which can be very cost effective giving the savings and / or cost avoidance that is likely to result), or having the vendor work with you through the project (so that you’ll be ready to do it yourself next time). You can start by having the vendor do a few projects for you and explaining what they did, then do a few yourself under vendor guidance, and then, when you’re comfortable, start doing them all on your own. Considering that the average cost savings is 12% above and beyond what you’ll get with an e-Auction, and that you’re likely to save 5% even in categories where you’re efficient, I don’t see any reason why you shouldn’t be trying it – because you’re leaving millions on the table if you don’t – and with prices skyrocketing across the board, how can you not do everything you can to squeeze every penny?

Originally posted on on the e-Sourcing Forum [WayBackMachine] in 2007

At EyeForProcurement’s recent Technology for Procurement Forum held in San Francisco, Art Laszlo, Director of Strategic Sourcing for Brunswick Corporation, gave a presenation on Effective bidding, common pitfalls, and proper approaches to e-auctions. This was a good presentation, and one who’s content you know was worth it’s weight at least in silver since Brunswick Corporation was featured as one of the case studies in Aberdeen’s recent Advanced Sourcing and Negotiation Benchmark Report.

In his presentation, Art covered the benefits of auctions, strategies to avoid the pitfalls, ethics, and the benefits to suppliesr. Nothing you haven’t heard before if you’re a regular reader of eSourcing Forum or Sourcing Innovation, but it did a great job of tying everything together. In brief, here are the highlights of Art’s presentation:

Benefits to Buyers

• removes the human factor from price negotiation
  not all buyers are good negotiators, and, by definition, only
  a handful of buyers can be selected as your best negotiators
• higher average cost reduction
  especially when compared to a basic 3-bids-and-a-buy RFx process
• increased efficiency and price transparency
  what used to take months can now be done in a couple of weeks
• assists in the identification of the “best total cost” supplier
  as you can also track “bids” on delivery terms and conditions
• a foundation for supplier relationship development
  not only are they open and fair (done right and ethically), but
  they require a great deal of communication up front and post auction
  (including to losing suppliers) to get right

Avoiding the Pitfalls

• select items that exist in a naturally competitive environment
  if you only have a couple of sources, go for supplier development instead
• select an item where the contract is ending
  bidders don’t want to win business for one or two years down the road; but more importantly, make sure you have no (other) contracts in place before advertising an auction
• if you invite new suppliers, have the ability to switch
  if you have a long-term contract with an existing supplier, or the costs with switching are too high, you don’t have the right conditions for an auction
• clear, complete, and well defined specifications
  since you need to be able to award the business to the winner
• identification of relevant non-price factors
  this could disqualify some suppliers and indicate delivery terms that you need to track or have suppliers bid on
• intend to award the business!
  not only is it unethical to hold an auction unless you intend to award the business, but if you get a reputation for not following through, you’ll have no suppliers bid next time

Ethics

• clearly communicate your intentions, the process, and your
  ultimate goal
  if you just need to reduce cost, and you’re honest, suppliers will respect that
• do not use auctions for benchmarking or price discovery
  suppliers don’t want to be be used solely as a tool to beat down an incumbent
• award must be to a supplier in the auction
  it’s really unethical to award to a supplier who didn’t bid but then struck a deal after the auction closed
• set realistic starting prices
  if raw material prices haven’t dropped, asking for a starting price that’s 15% lower is not reasonable
• allow adequate time to train and support the suppliers
  especially right before the auction
• do not allow for after-the-fact negotiations
  in fact, if a supplier tries to negotiate after the fact, they should immediately be disqualified
• properly qualify all suppliers pre-auction
  you must be able to award to all winning suppliers
• contact ALL participants after the auction ends
  especially the losing ones – taking just 5 to 10 minutes to explain why they lost goes a long way – and might help them shape up to provide you better bids and service the next time they are invited to a bid

Supplier Benefits

• it’s a fair and competitive bidding environment
  everyone has an equal chance of winning
• more efficient process
  they’ll have their answer quickly, and no paper to fuss with
• increased business opportunities
  they could have more opportunities than they would otherwise
• collaborative bidding environment
  they can ask questions, and get answers
• even if they lose, they still get good information
  they can see what the market is bidding, and find out why they
  didn’t win (if you follow the ethics above)
• open processes require trust
  even if they lose, they can get the information they need to
  potentially win your business in the future

Again, even though most of this should not be new to you, it’s a great all-inclusive high-level overview on how to succeed in an e-Auction!

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Wednesday, 18 April 2007

Best-of-Breed is good, often very good, but does have its disadvantages if you carry it to the extreme. Depending on your needs, an end-to-end e-Sourcing Suite with competitive functionality, particularly if its on-demand, from one provider might be significantly more advantageous to you than a best-of-breed spend analysis tool from vendor A, e-RFx and e-Auction tool from vendor B, decision optimization tool from vendor C, and contract management tool from vendor D. And the reasons for this go well beyond the initial cost savings of not having to develop and integrate custom integration solutions between four different vendor applications in addition to their integration with your back-end ERP and accounting systems or the efficiency gains from not having to load up four different applications to review the history of an event.

The real benefits become clear when you start implementing Next Generation sourcing strategies. In particular, end-to-end platforms present significant advantages to those organizations that are adopting center-led procurement organizations, taking advantage of guided sourcing, focusing on the transaction, adhering to the mantra of “Do Less, Not More”, and implementing hybrid sourcing strategies.

In center led procurement, a procurement center of excellence (COE) focuses on corporate supply chain strategies and strategic commodities, best practices, and knowledge sharing while leaving individual buys and tactical execution to the individual business units. Furthermore, in a center-of-excellence, a sourcing professional is responsible for education and training, benchmarking, and best practices. It should be clear that it is much easier to benchmark a process that can be completed on one platform vs. one that can be completed on many, tailor a best practice implementation to a single platform, and train and support users on one platform.

With guided sourcing, the sourcing professional uses the best tools that technology has to offer, deep analytics and optimization, and dashboards and monitors her sourcing projects through a centralized dashboard that provides a deep command-and-control view into the most critical supply performance information. Generally speaking, most dashboards plug into a specific solution and the only way you’re going to get a dashboard with this capability that can cut across multiple solutions from multiple vendors is to undertake a long, costly, custom development project – which will have to be maintained and updated any time any single vendor updates their offering. Thus, the best guided sourcing has to offer is not only easier, but sometimes only possible, in an end-to-end suite from a single vendor.

An organization with a transactional focus likes to follow the transaction from beginning to end, review the transaction when it is complete, and know, at any given time, where it is. With a slew of tools, it is sometimes difficult to know the status of any given transaction without checking all of the tools. With an end-to-end suite, it’s often just a matter of checking the dashboard.

In order to Do Less, Not More, you have to do as little as possible, as efficiently as possible, and get the maximum results possible. This is obviously simpler in one platform, which can automate as much of the process as possible.

In hybrid sourcing, an organization is blending sourcing technologies with third-party supply market and sourcing intelligence and making use of third party business process outsource solutions for parts of their supply and spend management function, when appropriate. A single platform makes a single integration point and, more importantly, if the platform is on-demand both the internal team and outsourcing service provider can share the same platform, giving the organization 100% visibility into all of its sourcing, and not just the sourcing it chooses to do in house.

Of course, this all hinges on the end-to-end platform being competitive with other offerings. Although it is true that not a single component has to be as good as the best of breed alternatives, each component has to at least meet the majority of the organization’s needs. Exceptions should be rare, and not the norm.

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Wednesday, 10 January 2007

The current issue of CPO Agenda published a very provocative article entitled “Are there any limits to procurement’s role?” where they summarized the responses of a panel of leading professionals that recently debated the issue in Brussels.

The participants included Gordon Criction, Nando Galazzo, Malcolm Harrison, Craig Lardner, Silla Maizey, Tom Rae, Luc Volatier, and Peter Kelk.

The participants had a significant number of great insights to share, which I’ve summarized below.

Silla Maizey

Procurement is shifting from being relatively transactional to something that’s quite commercial. Procurement is now about how to drive the business forward commercially. The only limits you put on the role are the limits that you place on yourself.

Luc Volatier

Whereas in the past, procurement heard the news along with the rest of the world with respect to acquisitions, today procurement is often involved in the due diligence process from the beginning. Procurement also tends to be included in any innovation project. In the end, the limit to procurement’s role is the one set by the executive board.

Craig Lardner

Procurement is now included in the sales process at some companies. For example, to meet with the client’s purchasing director to overview cost structures and demonstrate cost containment. The limitations of procurement are ultimately driven by the quality of your team and what they can achieve.

Peter Kelk

Procurement is now becoming involved in professional services.

Nando Galazzo

Globalisation and consolidation have opened up tremendous opportunities for procurement development. You are ultimately constrained in what you can do by the overcommitment of your people.

Gordon Crichton

Procurement is now a real contributor to the business, especially in helping to build the brand to create sustainable shareholder value. Today there is a high-level demand for procurement that wasn’t there before. The sky’s the limit.

Tom Rae

Procurement is becoming more of a profession for generalists, rather than specialists. Also, procurement is now devoting more time and resources to strategic issues.

Malcolm Harrison

If you take sequential steps, build credibility, build the capabilities of your team, and go as fast as you are capable of, there are no limits to procurement’s role in the long term.

The article also asked what was driving this change in procurement’s role, what needs to happen for procurement to be involved in non-traditional activities, and what the constraints and challenges are when it comes to the expansion of procurement’s role. It’s a great article and I encourage you to read the article in its entirety.

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Wednesday, 16 May 2007

As you well-know, On-Demand is a favorite topic of mine and of e-Sourcing Forum, so it should be understandable that Aberdeen’s recent report on “B2B Collaboration: How On-Demand Platforms Accelerate Value and Impact TCO” caught my eye.

According to the report, “On-demand technology platforms (also called ‘software as a service’) are playing an increasingly important role in enabling electronic communication and process collaboration. Companies seeking to improve their collaboration capabilities should take a strong look at on-demand solutions. On-demand solution providers tend to have greater resources and experience in on-boarding trading partners onto the collaboration platform than a company has in-house. Many on-demand providers also come to the table with networks of pre-connected suppliers and carriers, further reducing rollout times and increasing trading partner acceptance. Considering that most on-demand supply chain solutions are operational in less than three months and have an ROI period of less than a year and that best-in-class companies are more than twice as likely to be using on-demand supply chain applications”, on-demand should be in your sights if it is not already.

The report also notes the following benefits achieved by market leaders:

• administrative cost savings
• shorter planning and execution cycles
• reduced out-of-stocks at retail locations
• increased percentage of perfect orders
• reduced inventory holding costs
• shorter cash-to-cash cycles
• increased customer satisfaction
• revenue growth

According to the report, which notes “on-demand solution providers often have much greater resources and experience in on-boarding trading partners onto the collaboration platform” and that “many on-demand providers also come to the table with networks of pre-connected suppliers and carriers” the two main process areas for collaboration are the order-to-cash process (customer collaboration) and the purchase-to-pay-process (supplier collaboration). On the P2P side, the touch-points identified for collaboration are product design, forecasting, VMI, capacity and material planning, transportation management, and order fulfillment. On the order-to-cash side, forecasting, order management, trade promotions and marketing, invoice reconciliation, inventory management, and transportation management are the main touch-points.

Fortunately, on-demand SCM solutions are well-suited to address two critical requirements of effective collaboration and synchronization:

• the need for rapid electronic partner enablement
• the requirement of process flexibility

The report also provides a value framework for assessing B2B collaboration options to help a company decide whether an on-demand solution is right for its B2B collaboration needs. The framework consists of four dimensions: TCO, business value gained, speed and project risk and is meant to look at the costs and benefits from all relevant angles.

Dimension 1: Estimating the Total Cost of Ownership

The total cost of ownership is dictated by start-up costs, recurring costs, and business partner on-boarding costs. These costs are defined as follows:

Start-up Costs

• Cost of software
• Cost of pre-requisite software
• Upfront hardware costs
• Software implementation costs
• Initial software training costs

Recurring Costs

• Software maintenance fee
• Customization costs
• Monitoring and on-going maintenance of hardware and pre-requisitie software
• Data storage and continuity
• Business continuity
• Internal training costs for users and system administrators
• Help Desk costs
• Internal IT staff maintenance and support
• Upgrading software

Business Partner On-Boarding Costs

• On-boarding business partners
• Maintaining and trouble-shooting trading partner connections
• Total costs borne by business partners

Dimension 2: Estimating Business Value

The business value is primarily determined by the corresponding reduction in operating costs, increase in revenue, supply chain metric improvements, and community benefits.

Reduction in Operating Costs

• Reduced labor costs
• FTEs avoided during business expansion
• Reduced transaction costs
• Reduced inventory costs
• Reduced logistics costs
• Reduced managed services costs

Increase in Revenue

• increase in sales due to new customer acquisition
• increase in new product sales
• decrease in sales due to old customer defections

Supply Chain Metrics Improvements

• supply chain costs as a % of revenue
• increased # of partners participating in collaboration initiatives
• demand management-specific metrics
• supply management-specific metrics
• logistics management-specific metrics
• cash-to-cash cycles

Community Benefits

• hard and soft benefits of community development

Dimension 3: Estimating Speed

Speed is estimated along the following dimensions

• Initial implementation time
• Time to on-board trading partner
• Rollout to new locations/business units
• New process deployment
• Time to reconfigure existing processes
• Upgrade speed

Dimension 4: Estimating Project Risk

Project Risk is estimated along the following dimensions

• Year 1 exit costs
• Risk of project failure
• Risk of software disuse
• Risk of implementation cost overruns
• Risk of data security
• Risk of system downtime

Once a company has completed this analysis, according to Aberdeen, they can determine if they are in the sweet-spot for on-demand / Software-as-a-Service solutions and use the framework to consider the advantages and disadvantages to using on-demand versus more traditional approaches. It’s a good framework, and I believe it nicely complements the weekend series I authored last summer on On-Demand (The Good, The Not-So-Bad, And The Coming Pretty, And the Story Continues).