Category Archives: Knowledge Management

Procurement KPIs and Business Acumen – A Review, Part II

Next Level Purchasing (NLP) recently released a new four-part express course on Procurement KPIs and Business Acumen that is available to all premium Next Level Purchasing Association (NLPA) members for free (and to all free NLPA members at a one-time price of 54.99*). In SI’s opinion, this course meets it goals of delivering one of the key lessons a Procurement department needs to master to be seen as strategically contributing to the organization given the current view of Procurement’s role, does a great job of defining business acumen and relating it to a function Procurement should understand well (Sales), and does a deft job of indicating how properly defined synergistic KPIs can generate compound effects and deliver greater results than non-synergistic KPIs. But more importantly, as indicated in Part I, it develops and presents a basic, generic, framework that ties together the key synergistic KPIs for any Procurement organization that can be used by any Procurement Professional. This framework, which is beautiful in its simplicity, is the most innovative encapsulation of a core idea that I’ve seen from a purchasing organization, analyst firm, or consulting organization in years!

So what is the framework? We’ll get to that. First we have to describe the Sales funnel. In order to measure their progress, and success, most Sales organizations use a sales funnel that represents the various stages that a potential customer goes through before becoming an actual customer. The basic funnel has three tiers: leads, prospects, and customers. A business or individual that might be interested in the organization’s products or services is a “lead”. Once the organization has taken the time to investigate the needs and desires of the business or individual and determined that they have a reasonable probability of becoming a customer, the “lead” is converted to a “prospect”. Once the “prospect” commits to the purchase of a product or service, they are a “customer”. Not all leads become prospects, and not all prospects become customers. And this is to be expected. A successful organization is one that converts a large number of leads to prospects and a large number of prospects to customers.

Using this framework, Sales can successfully define synergistic KPIs that allow it to measure how well it is doing. Unlike a Key Resource Indicator (KRI), which is a number that represents the result of a business activity, or a group of business activities, such as revenue or number of support calls, that is often mistaken for a Key Performance Indicator (KPI), a KPI is a number that represents how well a person or group performs the activities that contribute the most to a key result. In this framework, the KRIs are number of prospects, number of leads, and, most importantly, number of customers. The KPIs are the conversion rates, i.e., the number of prospects that convert to leads and the number of leads that convert to customers. The higher these conversion rates are, the better the business does. And better yet, in the sales funnel, the KPIs are synergistic, in other words, they work together and improvements in one improve the other. Let’s say the organization starts with 1000 leads, identifies 600 prospects, and gets 200 customers. In this case, it has a 60% conversion rate from leads to prospects, a 33.3% conversion rate from prospects to customers, and a 33.3% * 60% = 20% conversion rate from leads to customers. The KPIs are synergistic because a 10% improvement in the conversion rate from leads to prospect (to 66%) and a 10% improvement in the conversion rate from prospects to customers (to 36.66%) results in a 21% improvement in the conversion rate from leads to customers (to 24.2%). The effects are multiplicative, not additive.

Viewed from a high level, this funnel is a framework to get from the universe of organizations of businesses and individuals to the universe of customers — which is what matters most to Sales. What matters most to Procurement is realized savings (because that, and not value generation**, is what they are typically measured on). And this savings is relative to the universe of total spend of the organization. From the 30,000 foot view, there is no reason why one cannot create a “Procurement funnel” that takes the total spend of the organization down to the the realized savings of Procurement. And that is precisely what NLP does in this course. It defines a Procurement funnel that can be used by any organization to accurately determine it’s contributions that go straight to the bottom line while defining a framework for the definition of a base set of synergistic KPIs that can be used as a starting point for any Procurement and Supply Management organization, independent of vertical or geography.

So what is the Procurement Funnel? Come back tomorrow for Part III!

* Note that premium NLPA membership is only 99.99 annually and grants you access to all nine express course series (of one or more courses) as well as the full NLPA library. SI would recommend that you consider premium membership if you are interested in multiple resources as it is much cheaper than paying by the drink.

** Shame on the backwards thinking C-suite that still has this mentality!

Procurement KPIs and Business Acumen – A Review, Part I

Next Level Purchasing (NLP) recently released a new four-part express course on “Procurement KPIs and Business Acumen” that is available to all premium Next Level Purchasing Association (NLPA) members for free (and to all free NLPA members at a one-time price of 54.99*). The express course series is designed to cover the essential lessons required for a procurement department to strategically contribute to an organization, including what business acumen is and why it is essential for procurement success and how synergistic Key Performance Indicators (KPIs) can be used to create a compound effect on business result. In SI’s opinion, it delivers one of the key lessons a Procurement department needs to master to be seen as strategically contributing to the organization given the current view of Procurement’s role, does a great job of defining business acumen and relating it to a function Procurement should understand well (Sales), and does a deft job of indicating how properly defined synergistic KPIs can generate compound effects and deliver greater results than non-synergistic KPIs.

However, what SI really liked about the course is that it introduces a new concept poorly missing from the Procurement world that should be adopted by EVERY organization on the planet. And for this reason alone I would recommend you become a premium NLPA member. It is the most innovative encapsulation of a core idea that I’ve seen from a purchasing organization, analyst firm, or consulting organization in years! And we’ll get to it before the review is over.

The course starts off by noting that it is big news when a CPO rises to the top and becomes the CEO of an organization. Why? Because it is a rare event. Why is this the case? SI believes there are a number of factors but agrees with NLP that one of the reasons is a lack of business acumen (beyond the procurement and supply management function). What is business acumen? The Financial times defines business acumen as a keenness and speed in understanding and deciding on a business situation. People with business acumen are able to obtain essential information about a situation, focus on the key objectives, recognize the relevant options available for a solution, select an appropriate course of action and set in motion an implementation plan to get the job done. And if they discover that changes are required to adapt to unforeseen circumstances, they make the adjustments as necessary and keep the activity moving forward. And, most importantly, they are more often right than wrong (at least when it really matters).

The definition also goes on to state that people with strong business acumen use an explicit or implicit business framework to ensure completeness and integration as they assess a business situation. This is a key point that cannot be overlooked. Because, as they also state, business acumen is learned and a key part of that learning is the tools, processes, and frameworks you need to make good decisions. In the “Procurement KPIs and Business Acumen”, NLP develops a basic, generic, framework that ties together the key synergistic KPIs for any Procurement organization that can be used by an Procurement Professional. What is this framework? We’ll address that in Part II.

* Note that premium NLPA membership is only 99.99 annually and grants you access to all nine express course series (of one or more courses) as well as the full NLPA library. SI would recommend that you consider premium membership if you are interested in multiple resources as it is much cheaper than paying by the drink.

We Have Supply Management Problems. Where Will We Find Solutions?

Scandinavia.

That’s right, Scandinavia! Apparently.

According to the Global Creativity Index, put out by the Martin Prosperity Institute* and published in 2011, Sweden takes first place, Finland takes third place, Denmark takes fourth place, Norway takes eighth place, and the Netherlands takes tenth. The U.S., Canada, Australia, New Zealand, and Singapore round out the top 10, creating North American and Australasian pockets of creativity, but most of it is centered in Scandinavia. (And that’s likely why Spend Matters is expanding into The Netherlands [spendmatters.nl]. They’re hoping to tap into that creativity that huge pocket of creativity.)

The report, which takes the three main classes of economic inputs — Technology, Talent, and Tolerance — attempts to go beyond simply ranking the 82 nations considered in the study and shift the classical focus on competitiveness and growth (which resulted in the pursuit of short term profits to the point where some of the world’s most advanced and affluent economies reached the brink of collapse) to creativity, prosperity, and well-being. As a result, in addition to the classical measures of economic growth and competitiveness, the research also takes into account broader measures of economic equality, human development, and subjective well being.

Classical economists, who followed in the footsteps of Adam Smith, may have believed that economic development came down to land, labour, and capital, but physical factors alone no longer determine progress in today’s modern, advanced economies, where factors like technology, innovation, knowledge, and human capital play much greater roles. And creativity underlies all of these factors. Also, as the report points out, everyone is potentially creative. But not everyone produces creativity. A lot of this depends on the tolerance of the culture in which they live. New ideas are generated most efficiently in places where different cognitive styles are tolerated — and different cognitive styles are linked to demographic diversity. It’s important to remember that, in today’s world, technology and talent are mobile and tend to flow to areas with the most tolerance.

What’s interesting to note is that leadership in any two measure is not enough to guarantee leadership across the board. Finland is first in Technology and talent, but 19th in tolerance, and thus lag Sweden by 3% in the index, putting them in third place. Canada, which is first in tolerance, is in seventh place because it’s eleventh in technology and seventeenth in talent. The United States maintains it’s second place position because it manages to maintain a ranking in each category that is top ten, giving it a narrow margin over third place Finland. Sweden is number one because it maintains the best overall balance, second in talent, fifth in technology, and seventh in tolerance (and since it maintains the best balance, people and technology are unlikely to flow out of the country).

So what does Scandinavia have to offer us? That’s a very good question. While SI knows there is a lot of innovation and creativity coming out of Europe in Supply Management, it has to admit it wasn’t expecting the creativity to be centered in Scandinavia. But it does explain why if you are seeking spherical supply solutions that you will succeed in the EU.

The Martin Prosperity Institute, directed by Richard Florida, author of Who’s Your City (referenced in SI’s series on Where Should Your Supply Management Organization Be Located), is the leading think-tank on the role of sub-national factors in global economic prosperity.

Should you “Mandarin-ize” Your Supply Chain?

After reading a recent post on the HBR Blog Network on how to unify your global company through a common language, which discussed Hiroshi Mikitani’s attempt to unify Rakuten, the third largest e-Marketplace company in the world (with a presence in the Americas, Europe, Asia, and Oceania) through a common language, this question surfaces.

In 2010, Mikitani, founder and CEO of Rakuten, decided that he was going to unify the global company through Englishnization — a commitment to make English the company’s official language. This commitment had three phases.

  1. All workers were required to take a 2-hour 200-question test (TOEIC) to assess their reading and listening comprehension of business English, and continue to take the test until they passed. (Failure to do so could result in demotion.)
  2. Outside help was brought in to coach employees on how to study and manage the process of learning English.
  3. English was made the language of meetings.

Why English? Practicality. Many of the most talented individuals in the industries important to Rakuten, such as technology and finance, already spoke English as a first or second language. Many of these individuals were educated in English-speaking institutions. Thirty percent of new hires in Rakuten are non-Japanese, with 50% of new engineer hires non-Japanese. The vast majority do not speak Japanese, but the vast majority do speak English. Their top engineers all over the world can communicate with their top engineers in Japan, who (now) speak English, with the average company TOEIC score having reached 737.3 out of a possible 990 (or 74.5%).

A common language will allow an organization to achieve a true unity of corporate purpose, because it will allow a unity of understanding. And then the organization will be able to manage and innovate as one with speed and precision and truly be global.

But should the language be English? For some multi-nationals, I am beginning to think it should be Mandarin. Despite the fact the cost of fuel keeps rising, that wages in China keep rising, and that supply chains have to adapt and respond faster and faster, outsourcing to China is still rapidly increasing. As per SourcingLine, China’s current outsourcing market is growing an estimated 30% annually, and many companies (like IBM) have relocated division or global headquarters to China to grow and strengthen their global business (and to try and get a dominant foothold in the market that consists of 1.3 Billion potential consumers).

In other words, these companies are sourcing from, managing in, and selling to China, where the dominant language is Mandarin – the language with the most native speakers in the world (that outnumber native English speakers almost 3 to 1). Plus, China is on the fast track to become the dominant economy in the world, an event that could happen in as little as three years (according to recent data from the International Monetary Fund, see the China Digital Times), and will most definitely happen in the next five to ten years if China’s economy keeps growing by leaps and bounds and America’s stays stagnant.

I will admit it will be much harder to Mandarin-ize your Supply Chain that it will be to English-ize, especially since Spanish, Portuguese, and French, which are other dominant global languages, use the same character set (A to Z) while Mandarin uses logograms known as hanzi (which are the counterparts to the Japanese kanji for those of you who speak Nihongo). Furthermore, there’s the special grammar rules for Germanic language speakers who are used to inflection, affixes that denote plurality and tense, and different rules for topic-prominence. However, if China is the heart of your Supply Chain, and thus the heart of your organization, it’s certainly worth considering!

Can We Harness the Wisdom of Crowds in Supply Chain Forecasting?

How Do We Harness the Wisdom of Crowds in Supply Chain Forecasting? A little over two years ago, I posed this question to you. I got a few responses, mostly private, who were thankful that I pointed out that you cannot just blindly follow the wisdom of just any old crowd, because expert judgements often demonstrate logically inconsistent results, but not a lot of advice on how we could successfully approach the task of integrating the wisdom that crowds could provide in our supply chain processes. The reason that we wanted to tackle this problem is because it is true that teams of forecasters often generate better results (and decisions) than individuals as long as the teams include a sufficient degree of diversity of information and perspectives.

But this is the caveat. The wisdom of crowds only holds if the crowd is large enough to contain the necessary diversity of information and perspectives in a statistically significant way. In other words, you will need a lot of people, and these people will need to be from diverse backgrounds and possess diverse skill-sets. But even this might not be enough in some situations.

As pointed out in this great blog post over on the World Future Society blogs by Thomas Frey from last August on The False Wisdom of Crowds, the decision between flying on a plane piloted by a single AI or the combined intelligence of 3,000 people is not as simple as you think. While it is true that the combined IQ and skill-set of 3,000 people is much greater than any AI on the planet, as you Next Generation Trekkies aware of the quick adaptability of the Borg will be quick to point out, it is also true that if all 3,000 of these people are farmers from the MidWest, it is likely the case that not one of them will know how to fly a plane! In contrast, the AI might be the best autopilot software in the industry, successfully used problem-free on tens of thousands of flights. The only way you’d beat that is if you had a collective of 3,000 of the best airline pilots in the industry. But the statistical likelihood of selecting that crowd from the global population is astronomical.

As Drew Curtis, founder of Fark.com, points out, “Crowds are dumb. The reality is that, while people are very good at knowing what they personally want, they are generally very bad at understanding the truths of the world around [them]. If you want proof, consider the examples given by Thomas and Drew, which include:

  • In the ’50’s, it was common knowledge that if a nuclear bomb went off in your city, you’d be safe if you simply learned to “duck and cover”.
  • Until 2007, it was a well-known fact that real-estate was a great investment where you would virtually never lose money.
  • Only once percent of Web comments have any value and the rest are just garbage.

In other words, diversity is not enough. You need expertise. And you need the right expertise. But as pointed out in SI’s post from 2010 and Thomas’ blog post, ‘social influence’ diminishes the range of opinions and tends to lead crowds in the direction chosen by the most respected and/or socially powerful individuals. So you have to gather data from a “blind crowd” that cannot see each other.

In other words, when you put it all together you need:

  • diversity, as addressed in our previous post,
  • privacy, as partially addressed in our previous post,
  • expertise, as demonstrated by Thomas’ blog, and
  • statistical significance, as not adequately addressed yet.

Taken together, these requirements pose a bit of a problem, which is made clear in Thomas’ post where he quotes a recent study by McKinsey and Company that calculated an immediate shortage in the US of almost 200,000 people with analytical expertise and 1.5 million managers and decision makers with the skills to understand and make decisions based on the analyses provided by the analytical experts. Overall, we’re starving for expertise in Supply Chain, as evidenced by the fact that less than 10% of companies truly employ advanced sourcing techniques! The average company just doesn’t have enough people to meet the diversity, expertise, and statistical significance required to guarantee that a crowd decision will be better than the decision of their “leading expert” in that area. And since most firms don’t want to share expertise, sourcing processes, or suppliers, especially where strategic or high-value categories are concerned, they’ve essentially cut-off external sources of expertise. The result: beyond non-strategic / low-value categories they would be willing to hand off to a GPO, their chances of truly harvesting the wisdom of crowds for many Supply Management processes are low, at best — and this leads us to wonder if we really can harness the wisdom of crowds in supply chain forecasting in practice.

New Thoughts? Comments? Criticisms?