Category Archives: Guest Author

Spend Analysis Meme Busting, Part I

Today’s post is courtesy of Eric Strovink of BIQ (acquired by Opera Solutions, rebranded ElectrifAI). (It is also a good summary of some of the more critical assumptions that were wrong in the book I reviewed last Friday in this post.) 

The following memes are circulating through the space.  Needless to say, they are all very false!

1. Vendor classification by spend is the secret sauce.
 For direct materials, the key is said to be automatic UNSPSC classification. For indirect materials, the key is said to be D&B-style “who owns whom” plus SIC code. This ignores the fact that who owns whom is often irrelevant (Hilton hotels, for example, are all franchise-owned), and that many large vendors sell multiple, disparate products and services, so vendor mapping by itself is often ineffective.

2. Direct linkage to existing accounting systems or e-commerce trading platforms is the “holy grail”.
 The logic is that the transactions from the e-commerce platform or ERP system should feed the spend analysis system transparently and directly. The confusion here is between “business intelligence” and “spend analysis,” a distinction that is often incorrectly blurred. To do its job properly, a spend analysis system must re-cast and re-map transactions into a useful form, often in a very different manner for each individual analysis, not just report blindly on fixed input data. A direct linkage to accounting is therefore a bad idea.

3. Spend analysis means the propagation of spend data to a large audience via a data warehouse.
 This is the idea that a shared data warehouse is a “spend analysis” system, when in fact no useful analysis can be done without alteration of the schema (something that is impossible in the data warehouse model).

4. Conventional relational reporting tools are useful on spend datasets.
In fact, reporting on spend data can’t be relational, because only OLAP queries will function reasonably on large spend data sets. And, conventional reporting isn’t useful, because useful analyses always involve modeling and data outside the scope of the spend analysis system.

5. Spend analysis is only useful within the context of an e-sourcing suite.
 This is a fallacy promoted by suite vendors. Armed with good visibility into spend, any procurement department can improve performance dramatically without a multi-million dollar commitment to an e-sourcing suite. Furthermore, the actual proportion of spend actually traveling through the suite is typically less than 20% of total spend. Thus, “integration” with a minority of the spend is a step backward, not a step forward.

6. “Point” or “best of breed” solutions should be avoided; rather, they should be part of an ERP system or e-sourcing suite. This might be true if the point solution is expensive or complex to implement. It is not true if the solution is inexpensive and easy to use. This is especially true given that suite vendors promote warehouse solutions that offer little or no analytical capability. In that case, the point solution can add significant capability that is lacking.

7. Vendor familying and spend mapping is difficult and/or requires special technology and tools.
 This is a marketing myth, used by spend analysis vendors to aggrandize their own tools and/or expertise. Procurement professionals and sourcing consultants are far better at classifying spend than the “10 guys in Bangalore” behind most vendors’ claims. The familying/mapping process can be accomplished easily and quickly in most cases, even on large datasets.

8. It’s critically important to get spend mapping “right” the first time.
 Wrong. No spend map survives first contact with a procurement professional who knows his commodities well. The best strategy is to empower that procurement professional to correct errors as he finds them, quickly, easily, and with real-time results. Nothing else will satisfy him.

In summary:

1. The “secret sauce” is being able to build the cubes you need.

2. There is no “holy grail” of integration.

3. Spend Analysis and Data Warehouse technologies are two completely different things.

4. Spend Analysis and Spend Reporting are two completely different things.

5. Spend Analysis can be done on its own and does not need to be part of a sourcing suite. 

6. Best-of-Breed solutions are just fine for spend analysis.  

7. Spend Mapping is easy.  The real secret sauce is “map the GL-codes, map the vendors, map the GL-code and vendor combinations for vendors who supply more than one GL-code”.  This gets you at least 90% and can be done by an accounts payable clerk in a day in most organizations with a proper solution that supports rules-based mapping and rule (group) priorities.

8. No one gets spend mapping “right” the first time, so there should be no assumption of such.  That’s why a real spend analysis solution where you can continue to build cubes and throw them away until you’re happy is critical. 

Expanding Procurement’s Role in a Financial Services Company

Today’s guest post comes courtesy of Per Blomquist, Katie Boord, and Bob Derocher of Archstone Consulting (acquired by The Hackett Group), a consulting firm that focuses on strategy and operations consulting in supply chain, strategic sourcing, and procurement.

With today’s uncertain economy, volatile capital markets, and ever-worsening credit crisis, it is more important than ever for companies to stay focused on spend management in order to weather the storm.

While product-based businesses tend to have fairly mature procurement organizations due to the criticality of direct materials, service-based businesses often lag behind. Without a prominent and centralized role, and without the leadership of a CPO with budgetary influence, procurement groups within these companies often struggle to make inroads into functional silos where much of the enterprise spend resides. Bringing this spend under management by a disciplined procurement organization can have a dramatic impact to the bottom line.

Recent experiences with clients in the financial services industry have illustrated the existence of decentralized procurement efforts by functional areas such as marketing, e-commerce, legal, and collections. These engagements have highlighted some critical success factors for procurement organizations looking to break down barriers to spend beyond their current scope, as well as the resulting opportunities that exist.

CRITICAL SUCCESS FACTORS

  1. Executive Sponsorship
    In the absence of a CPO, procurement organizations need to have visible senior management support in order to encourage business units to partner with them.
  2. Change Management and Communication
    Recurring and consistent communication is necessary to convey the spend management goals of the company and the value that the procurement organization can provide in order to meet those goals.
  3. Spend Analytics
    All external spend data needs to be compiled, scrubbed, categorized, and verified in order to understand what products and services are being purchased from which vendors by which areas of the enterprise.
  4. Partnership Development
    Procurement “ambassadors” need to meet with senior stakeholders across the enterprise to articulate their value proposition (see three guiding principles listed below) and explore partnership opportunities.

    • Efficiency
      Providing best-in-class tools, templates, and processes that can be deployed quickly with minimum effort from the stakeholders.
    • Flexibility
      Supporting stakeholders with any part (or all) of the procurement process.
    • Stakeholder Ownership
      Assuring the stakeholders that the procurement organization will not dictate vendor decisions.
  5. Results Tracking and Reporting
    Results (e.g., savings, improved contract terms, enhanced supplier relationships) must be tracked and reported to ensure appropriate progress and to bolster enterprise support.

OPPORTUNITIES

  1. Increased Savings
    The engagement of procurement organizations in the sourcing of categories such as Search Engine Marketing, Online Banner Advertising, Corporate Jets, Debt/Credit Protection Outsource Provider, Online Banking Website Design and Development, Online Banking Middleware Solutions, Market Research – Consumer Insights, and Consulting Services (to name a few) can result in millions of dollars in incremental savings and cost avoidances. Each “win” can strengthen existing stakeholder relationships and generate new partnership opportunities through referrals.
  2. Decreased Risk
    Employing a disciplined procurement process can reduce enterprise risk through consistent NDA execution, standardized contract terms (including security and insurance requirements), and transparent communication of vendor utilization and performance metrics.
  3. Improved Governance
    The tracking and reporting of procurement results can increase executive awareness and organizational accountability to formal savings targets. Spend analytics can support joint initiatives between procurement and finance organizations, such as the restructuring and redefining of AP account codes to enable the monitoring of category spend and policy compliance.
  4. Enhanced Process Efficiencies
    Utilizing standardized processes and templates can save time and avoid duplication of efforts. Furthermore, better procurement results are achieved when best practices are followed, and lessons learned are communicated across the enterprise and leveraged for further improvements.

The authors would welcome the opportunity to discuss your experiences on this topic. They can be reached by email.

Do You Have A (Cost Reduction) Plan?

Today’s guest post is by Bernard Gunther (bgunther <at> lexingtonanalytics <dot> com) of Lexington Analytics.

Financial Services companies buy almost all “indirect” goods and services. This is exactly the type of procurement that every company does. One might imagine that Financial Services companies would be able to leverage the large amount of work done in all these other companies to become best in class. In turns out that they don’t. Purchasing Organizations at most financial institutions do not historically have the best reputation for delivering results. If you are leading the procurement organization, you need to change this general impression. The easiest way to do this is to deliver results. To deliver results, you need to have a plan.

Your plan needs to describe to people where you plan to start, what you are going to do and how everything is going to be done. The easiest way to create this plan is by reviewing your basic spend cube information. The spend cube takes all your AP spending from one or more systems (cash out the door), groups vendors together (when they appear multiple times) and assigns a commodity code to each transaction (based on a series of rules, generally based on GL code or vendor). From this, you can get reports by commodity on the top vendors, the top organizational units and the total volume of activity.

Using the spend cube data, you can develop an accurate and meaningful plan. A way to start the plan is to take each category and assign it to an action group (below). The action could be to source a category, to do a demand review, to do an Invoice Review or any other type of savings activity your team is capable of delivering. The category could be the full spend in a category or could be a sub-segment (e.g. geography / business unit). For each category, you need to tag spending as:

  • Completed.
    This category was recently done and no further work is required at this time
  • In Process.
    There is a project underway
  • Wave I.
    What you plan to start immediately
  • Wave II.
    What you plan to do after the first wave
  • Wave III.
    Other categories that you know need to get done
  • Further research.

Now that you have a “strawman” plan, you need to see if you have the resources to get this done and if key stakeholders agree with your “strawman”. Gaining stakeholder buy-in will help you understand the true situation “in the field” and will likely get you key resources to address the spending.

Having good spend data will enhance your credibility. Without good data, your first meeting with the Retail group could be “We’re from Procurement and we’d like to help. We think there might be an opportunity to save money. Can we do something for you?”

With good data, your first meeting with this key stakeholder could be “We think there is an opportunity for sourcing PCs. You’re spending $2.3 million with 2 VARS. The rest of the bank is spending $4.5 million and using an additional VAR and buying direct from a manufacturer. Looking at your pricing on your most frequently bought laptops, the Technology group is getting 7.3% better pricing. This means you’re looking at over $150,000 in annual savings. We want your help in doing the following [insert plan here – with details on who should be involved and what it means for them].”

Without a plan, the best you can hope for is another meeting. With a plan and good data, you can get a stakeholder fully bought into your idea, they can give you authorization to proceed and many times, they will give you the support and resources you ask for.

For one bank with about $750 million in spending, we created a plan for savings. This plan targeted savings of $85 million in 3 waves across 113 initiatives. For each of the 10 major department heads, we could tell them how much spending was involved in each initiative, which vendors might be impacted and which budget centers we wanted resources from. Over the next 15 months, we conducted the initiatives and generated $94 million in annual savings on 80% of the baseline. As part of the program, we involved finance to sign off on each of the results so the savings could be measured and tracked. The results were incorporated into the spend cube to support ongoing monitoring of the spending.

Is such a plan hard or expensive to create? The short answer is “no”. New tools have made this process faster and much less expensive to do. For an organization with less than $500 million in spending, a good plan (including building the initial spend cube and conducting the initial syndication) can be put together, with a focused effort, from scratch, in 6 to 8 weeks. And some organizations that have done much of the preliminary work can get it done faster.

A good plan, with good execution can lead to significant results. In the world of procurement, the data you need is there for the taking. All you need to do is to use it.

Thanks Bernard!

Don’t Wait for the Burning Platform (Start Your Procurement Transformation Now)

Today’s guest post is from Robert A. Rudzki, a former Fortune 500 senior executive of supply management who now advises other companies through Greybeard Advisors LLC, a strategic management consulting firm. Bob has authored several business books including the critically acclaimed Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise and Straight to the Bottom Line. Bob also writes the Transformation Leadership blog for the Supply Chain Management Review. Bob can be reached at rudzki <at> greybeardadvisors <dot> com.

 

A few years ago, US financial institutions were making so much money that their procurement departments were having great difficulty. They could not get any serious time commitment from their executive staff to discuss procurement and supply management opportunities.

I know that’s true, because I heard it directly from several chief procurement officers at insurance companies and banks, who approached me after I made a presentation on the West Coast. These CPOs were, to state it mildly, very frustrated in their jobs and with their senior management. They had a sense that there was real opportunity, but couldn’t get their senior management’s attention.

Today, the executives of many of those same companies probably wished that they had started paying attention to procurement and supply management back when they did not NEED to. In fact, the best advice for senior management, including senior supply management, is this: don’t wait until you are standing on a “burning platform”. Start the procurement transformation process now.

It may be easier, in some corporate cultures, to tee up a business case for change when things are going poorly; for example, when your company is on a “burning platform”. It’s a real sign of good leadership, and forward-thinking management, however, to decide to transform when you have no immediate urgency to do so.

One of the implicit challenges in building a case for procurement transformation in financial services is the atypical cost structure. Where are the direct materials (other than people) – that typically occupy center-stage in strategic sourcing? To a manufacturing eye, the banking industry cost structure appears strange – essentially all people and the so-called indirect spend. But, as some of you may know, indirect spend offers a larger percentage cost reduction opportunity – often well above 15% – when addressed with a robust strategic sourcing and negotiations management process (“SSNM” in Greybeard Advisors’ parlance).

Several of my colleagues at Greybeard Advisors have deep experience applying strategic sourcing in the financial services industry. The benchmarks from their experiences confirm the enormous potential to impact the bottom line at financial services companies.

Similarly, we have applied strategic sourcing in numerous “non-traditional” areas of spend at manufacturing companies, including spend for financial and marketing services. There are sizeable percent cost reduction opportunities – again, if approached with a genuine SSNM process.

Opportunities abound – but they don’t just happen by putting numbers and analyses on a PowerPoint chart. It takes real leadership, and a carefully thought-out transformation roadmap.

Thanks, Bob!

 

Supply Risk – Seize the Initiative!

Today’s guest post is by Brian Daniels (brian <dot> daniels <at> cvmsolutions <dot> com), VP of Strategic Marketing at CVM Solutions (acquired by supplier.io), a sourcing and procurement content and application solution provider to mid-market and large enterprise companies, including half of the Fortune 500.

In 2007, North American companies began to wake up to the dangers of supply risk. From the bankruptcies of a number of “big name” tier one automotive companies to the scandals of lead painted toys and tainted eels – just to name a few items – hitting the North American shores from China, supply risk changed from theory to reality for many companies. But twelve months later, are they any better prepared to manage supply risk? In many cases, the answer is no. Many companies are just beginning to think about what putting a supply risk management program into action means. In my view, this requires stepping back from some of the news headlines to better understand the specific types of risk which could have the greatest impact on your particular organization.

For example, while quality and labor issues dominate the news when it comes to China-sourced products, in many cases, it is total cost risk and supplier performance risk which should be of greater concern for companies doing business in the region. Consider how the chance of a change in currency value or tax/tariff/import regulations could create significant risk in the savings models that led to a global sourcing decision in the first place. Perhaps the most common risk we see in global – and even local – sourcing initiatives comes down to on-time performance. To this end, on-time performance is not just when an item leaves a factory, but when it arrives at your loading dock. On a global basis, there’s a lot that could go wrong in the weeks this process takes. But in my view, building visibility into past supplier performance – including on-time delivery – is critical to predict and model future supply chain performance – both locally and globally.

Another risk many companies fail to fully consider is their suppliers’ overall financial and corporate stability. Checking a Paydex score or third party credit rating alone is insufficient to develop a complete perspective into whether or not a supplier will be able to stay in business to meet your organization’s continuing needs. Taken alone, these analyses represent a point-in-time snapshot based on information which may or may not be accurate (and timely). These approaches should never replace expert-driven analysis and the direct verification of financial and other information with your suppliers. In my view, it’s essential to conduct customized and expert financial risk assessments based on metrics which matter most to your organization prior to contracting with a supplier. Furthermore, risk assessments should be part of ongoing monitoring and risk forecasting.

In addition, if supply risk information is managed and analyzed within silos inside a procurement organization, it’s critical to insure that this information is available to the rest of the company – or at least to those individuals who need it the most – whether it is via a portal-based system that provides proactive alerts and insights to front-line managers, who can develop mitigation strategies and approaches, or some other mechanism. Some companies and providers might call this supply risk “dashboarding”, but the name is not important. The key is to make sure that these information sources provide the right level of information to the specific individuals who can make a difference if they’re brought into the supply risk loop in time to intervene before a preventable risk rears its ugly head.