Category Archives: Guest Author

Spend Analysis: What Purchasing.com Got Wrong

Purchasing’s recent article on  “How to Select a Sourcing Strategy” wasn’t the only article that just didn’t make the cut in my book. “Their ABCs of Spend Analysis”  article missed the point as well. However, knowing that Eric Strovink of BIQ (acquired by Opera Solutions, rebranded ElectrifAI) would also be taken aback by this article, I invited him to shed some light on what the article missed. So, without further ado, here’s Eric’s guest post on What Purchasing.com Got Wrong.

Occasionally an article crosses my desk that seems well-written and insightful, such as
Purchasing.com’s “The ABCs of Spend Analysis” — but only if I’m willing to accept
assumptions with which I can’t agree.

“A: Acquire the data skills”

Wait, stop right there. In my view, it shouldn’t be necessary to
“acquire data skills” in order to manipulate and report on spend data.
This limits usage to a fraction of the business users who otherwise could
deeply improve their understanding of what’s going on. Any requirement to
dump data out of a spend analysis system and import it into Microsoft
Access or any other database management system is a glaring indictment
of the spend analysis system itself. It’s supposed to be a “spend analysis”
for goodness sake, so where’s the “analysis?” Similarly, a requirement
for SQL skills or other IT expertise in order to construct a report
is equally an indictment of the spend analysis system.

We should not allow tool limitations to dictate that business users
must become IT experts in order to analyze their data. That’s like saying
drivers must become mechanics before they can use the interstate highway system.

“B: Bring the data together”

One could hope that “ETL (Extract, Transform, Load)” would not be
the theme of this page, but of course it is. In fact, the only letter
that’s relevant in this tired acronym is “T” (for “Transform”). If
you can’t load data into your spend analysis system, then find one
that makes it easy. If you can’t dump data out of your ERP or accounting
system(s) in some reasonable flat file format (like .csv), you didn’t
try very hard. Every accounting system I’ve dealt with in the last
four years, old or new, has a perfectly reasonable and simple method
for dumping its data, almost always a method that requires no IT
assistance at all.

Transformation is necessary in order to coerce data from incompatible
systems into a common format. A good transformation tool should be able
to move any field from one column to any other; create new fields;
eliminate fields; and create any output field as a function (including
string, math, and logical functions like “IF”) of any number of
input fields. It should be able to save the transform and apply it
on refresh.

And the translation tool should be — you guessed it — operable by
ordinary business users, not just by IT types.

“C: Change the way you source”

Wait, should we just plow ahead and start sourcing? It turns
out that accounts payable-level spend analysis doesn’t really
show you very much, and this section of the article reinforces
the point. “We realized we were spending more with Supplier K
than we had previously thought, and this gave us more leverage
in negotiations.” OK, but do you know whether contract terms
were met? Was the supplier over-charging? What were the exact
buy points and quantities with supplier Q for commodity X? Why
didn’t a contract with supplier Y result in the savings we projected?

Problem is, an A/P level cube only peels back the first layer
of the onion. You’ve achieved a reasonable idea of what was bought,
who bought it, and who supplied it, and that’s important. However,
spend analysis is an iterative process of first identifying macro
behaviors, and then zooming in using micro analysis on a
commodity-specific basis. The high level cube gives you an
indication of what might be wrong — too many suppliers, or
too few; too high a spend rate given [number of employees] or
[size of business]; too much off-contract spend. But that’s
all it gives you. You don’t really know, for example, whether
off-contract spend (Fred down in Order Entry buying a Dimension
800 from Dell) is an inferior price point to the company’s VAR
contract for ThinkPads — or whether Fred actually got a better deal.

If the high-level cube hints at a possibility for cost reduction,
should you run right out and start running sourcing events? Maybe
not. For one thing, it’s sometimes difficult to determine
whether high spend is a demand issue or a supply issue, and
sourcing won’t touch the demand side. Sourcing events are
politically disruptive, can take many months to implement,
and can upset long-term supplier relationships unnecessarily.
It’s entirely possible that quietly confronting an incumbent
supplier with a detailed analysis of buy patterns from
invoice-level data can not only change behavior immediately,
but also return money to the bottom line from overcharges. And,
it certainly will tell you if you have a demand problem. If,
at the end of the day, sourcing is still required, fine; but in
many cases it’s not. Few incumbent vendors want to go through
a sourcing exercise and potentially lose the business; they’d
rather meet Fred’s price point.

Thanks Eric! I could not have said it better myself.

Emptoris – Setting the Record Straight Part II

Ammiel was kind enough to respond to my comment and provide more information about their overall solution offering over on SpendMatters. However, given that I copied my comments here and that this is very good information for a prospective buyer, the comment deserves to be repeated.

Regarding in-depth briefings to “affiliated” bloggers — IMHO it is also applicable to analysts and press — Each briefing is a unique instance, and we take into consideration the topic as well as the nature of work the individual is doing with competitors. I Note that in my original post the briefing exclusion was narrow, and specific to this very topic – not a broad brush statement towards you. As a CTO for hire there is a big difference between the type of work you do and what Jason and Andrew Bartels do – especially in the area of optimization. Kudos for the above board disclosure policy, as noted, we did not feel that we were deceived, etc.

My statement on the MindFlow team joining Emptoris made no mention of team size, etc. It was simply to state that we are qualified to judge the relative strengths of the two offerings (given Product Management and Engineering talent), you may have read more into this than was specifically stated.

Regarding our assessment of MindFlow capabilities, this was done from the End-User perspective, as a whole-product capabilities assessment. In the case of 5(a), 5(c), and 6(b) the MindFlow Front-end simply let down the back-end. On 5(b), we specifically meant the ability for suppliers to enter the constraints themselves – this area of our solution is very robust, and has evolved into a feature set that we’ve called Creative Negotiations in the past, and which has now matured to Supplier Decision Support.

Speaking of whole-product, that is very much the point of the Advanced Sourcing Service. It is all about running mega-events better and with much less risk (Think of $50M+ riding on a single event). It is not just an engine that we provide, we help the customer by providing e-Sourcing category experts specific to help these mega-event *optimization* problems (Transportation – Ocean, Truckload, LTL…, Packaging, Print, Fleet Acquisition, etc.). When we say infrastructure, we talk about a complete HW/SW stack along with instrumentation and surrounding services to ensure that the event will not go down, etc.

The challenge with these categories is that when companies put out $100M+ on a single event, things become very risky in several business dimensions (e.g. if the event is mis-handled logistically then supplier relationships can be burnt for years, if the event runs 3 weeks longer than expected – that’s $750K in lost opportunity cost, if the event misses a key deadline then a price lock-in may be permanently missed given rising fuel rates, etc.) The benefit of the Advanced Sourcing Service is that we and our partners invest and in a sense under-write some of the logistical risks the customer faces.

A benefit of this complete solution approach is that it helps accelerate advanced optimization’s adoption within the sourcing domain. At the end of the day it makes the core technology even more approachable to a greater number of organizations. And that is something good that I believe we can all agree upon.

I would like to thank Ammiel for responding and providing clarifications not only on Emptoris’ prior comments but on the Advanced Sourcing Solution as well.

The Top Three VI: Straight to the Bottom Line

Today I’m thrilled to bring you a guest post from Doug Smock, editorial director of Global CPO (.com) and co-author of “On-Demand Supply Management” and “Straight to the Bottom Line”.

First I’d like to thank Michael for the invitation to participate in the blogathan. I’ve spent most of the last three years since I left Purchasing magazine writing two books about what I consider to be the biggest issues in the procurement world, and have already vented my spleen about such critical issues as CEO involvement/buy-in as well as world-class metrics (since 99.9% of all procurement departments I’ve visited have terrible metrics).

For this, I’d like to touch briefly on the need in American companies for greater cross-functional collaboration between procurement and engineering. The primary goals need to be reduction of specifications’ complexity, introduction of new ideas throughout the supply base, better understanding of “could” costs, improved management of products through their entire lifecycle, and dramatically improved product quality and user-friendliness.

When I first joined the staff of Purchasing magazine in 1977, we used to run a special issue called Value Engineering in which we ran reports of how teams of purchasing and engineering professionals met to reduce costs or improve performance of existing, or even brand new, products. I once visited Buell Motorcycles in East Troy, WI, and saw how product development began with a talk by founder Erik Buell on his vision for a new sports bike: the cost target, speed, look, and feel. Engineers and purchasing professionals then broke into platform teams and met with key supplier partners to develop components. One team replaced a 21-part front section of assembled metal pieces with a sleek-looking, stronger and cheaper single made through an outsourced metal molding process. When I returned to Purchasing as Chief Editor in 2000, I couldn’t really understand why the Value Engineering issue had disappeared. It also seemed to disappear at many companies in the blitz of wonders related to dotcomism.

That’s a shame because what suppliers bring to the table is incredibly powerful in this process. I saw it recently in the newly designed Cabrio and Duet line of laundry products from Whirlpool, where suppliers proposed solutions to technical problems that internal engineering teams felt were irresolvable. I hate to kick a dog when it’s down, but this to me is the most lamentable of all of the problems with the American automobile industry. Bob Lutz, currently chairman of GM North America and former head of Chrysler, once famously commented: “I was amazed (and a bit appalled) at the lack of functional integration at the companies I worked for.”

I know the blogs focus a lot on software, but I’d like to see a little more emphasis on blocking and tackling at the company level.

Editor’s note. Bold was introduced to help draw out Doug’s key ideas. Also, our blogs do occasionally tackle more than just software, and two posts in particular I’d like to point out are Jason Busch’s “Selling the Value of Procurement to the Business”* on Spend Matters [WayBackMachine] and Tim Minahan’s “Selling Supply Management to the C-Suite: Make it Personal” on Supply Excellence [WayBackMachine]. Also, keep your eyes on the eSourcing Wiki [WayBackMachine]. More content is on its way, including a wiki on perfecting your pitch for a procurement project to pointmen.

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.

The Top Three V: Learning to Communicate

As indicated in my last post, here is Kevin Brooks contribution to the Top Three. He takes a different spin, focussed on internal communication, but it is valuable insight nonetheless.

3 Ways To Get Buy-In

As a marketing guy, you’re required to be something of a corporate voyeur in order to put your finger on the real pain facing your customers. In darkened rooms, behind one-way glass partitions, I’ve watched focus group after focus group of procurement executives complain about how they can’t get buy-in from their organizations. “We communicate all the time, but it doesn’t seem to make any difference!” I recall one harried CPO of a multi-billion dollar company telling his nodding colleagues around the table.

While I’m sure every corporate function shares this perspective from time to
time, procurement teams seem uniquely saddled with difficulties making
themselves understood to their organizations. So, in the spirit of this
blogathon, I’d like to offer three rules that can help the struggling
procurement executive communicate more effectively.

Rule #1: Listen To Your Audience

You may think you’re simply putting out information, but your audience views things differently. The best communications start with listening, and an understanding that you’re always engaged in a dialogue – not a monologue — with your audience.

There are formal and informal ways of listening to your audience. The
easiest is to simply talk with them. How do people like to receive
information? What format is best for them – email, snail mail, voicemail,
instant messaging, carrier pigeon? What makes them read or listen to
something now versus saving it for later? What kinds of messages do they
ignore completely? Why?

Do this regularly, and make adjustments to your approach based on what you hear. Basically, just give your audience the same attention you’d give an
important supplier, and the simple fact that you took the time to ask them
their opinions will cause your next email or presentation to be “heard”
louder and clearer.

Rule #2: Repeat, Repeat, Repeat

It would seem logical to put out information that builds on what you’ve said
before. If last week you talked about the new travel spend policy, there’s
no need to rehash that old news when you want to let people know about the new p-cards, right? Wrong.

It has been said that on average it takes people 6-9 times to receive
information before they “get” it. One email, or a single team presentation
won’t cut it. Repeat, repeat, repeat. Even when you’re sick to death of
telling people about the travel spend policy, grit your teeth and keep
mentioning it. It takes discipline, sure, but if you want to get a message
across, this is how you do it. There are no shortcuts.

Rule #3: Keep It Simple

This rule is tough, especially if your organization is filled with detail-oriented gurus from the Pierre Mitchell school of PowerPoint. And, to give them their due, complexity surrounds us in the business world and you would think people could deal with a few extra bullet points or paragraphs here and there.

Sorry, but they can’t. Your audience isn’t illiterate, but they are busy and
distracted professionals. If you can’t make your point efficiently, they
tune out. It is far better to get one message across clearly, than to get 10
messages across muddled.

Keep things simple by limiting your message to one idea per communication. And remember: shorter is always better.

So there you have it. Three simple rules that can improve your
communications and help you gain buy-in for procurement across the
organization:

  1. Know Your Audience
  2. Repeat, Repeat, Repeat
  3. Less Is More

Good luck!

Winning the Battle on Risk: Information and Technology

Today I’d like to welcome back Jim Lawton, VP and General Manager of Open Ratings, a D&B company, back for a follow-up on his “Five Types of Supply Risk” piece and the role of information and technology in risk mitigation.

Let’s face it – the single best way to reduce your exposure to risk introduced by suppliers is to know them. And I mean really know them. For any of the five types of risk we identified last time, it means having insight well beyond what you track today. Not only how much they cost you, but also how much they cost your competitors – and how well they perform for your competitors. It means knowing about everything from EPA and OSHA violations and changes in their leadership to their growth plans and whom else they do business with.

Some great sources of information into just how well your suppliers are doing, include things like:

  • Real estate transactions
  • Legal actions
  • ITAR filings (esp. in the case of dealing with overseas suppliers)
  • SEC filings
  • Tax returns

At its worst, it means knowing things about them that they aren’t likely to tell you. So you need to go out and find it.

Sure. Given the likely state of your procurement operations – more suppliers, not less –

in spite of rationalization; suppliers 12 time zones away operating in countries with much more lax reporting regulations and fewer resources to actually manage all of this, odds are good that right now you are asking “how much time does this guy actually think I have to spend investigating every little bit of data and figuring out if it matters to me!?!”

The good news is that you don’t have to do. Technology makes it possible. Think about it: Intelligent systems are everywhere. Your car tells you when it needs service and books an appointment at the dealer; your GPS system gives you an up-to-the-minute way to navigate out of a traffic jam; your house knows when you are home and turns the lights on just as you move into each room.

So why shouldn’t it be possible to apply smart solutions to make your life easier – and shrink the risk factor.

Today, data aggregation solutions are able to do what you would do, if you had the time: scan thousands of sources – regulatory agency sites, financial and credit reports, news releases, tax and real estate filings, competitors’ internal systems and much, much more. With a million documents on your desk, you’d pick out what matters and analyze it within the context of your own business. Using your years of experience and deep knowledge about the supplier, you’d decide to act on it if needed. You might switch suppliers or intervene to shore up a critical supplier.

Information, technology and you. Risk on the run. Life is good.