Category Archives: Procurement Damnation

Authoritative Sustenation 65: Solution Partners

In our post on authoritative damnation 65: solution partners, we noted that solution partners are their own breed of damnation and can be much more annoying than activist investors and boards of directors, that you might only hear from at quarterly or annual meetings (who will stomp their feet, bang their drum, but eventually settle down and go away for a while), as they could be a pain in the backside on a daily basis.

We said this was because you often depend on these solution partners to serve your customers, run (parts of) your organization, and bring you innovation that you can’t develop in-house (due to lack of time, money, or external ideas). As a result you can’t just tell them to sit-down, shut-up, and wait their turn … especially if their support is essential to keeping a million dollar client happy or a multi-million dollar category stocked and selling.

So what is an organization to do? Especially if it can’t reasonably meet all their demands, err, requests in a short time frame?

Include them in roadmap planning for products and services.

If you include them in roadmap sessions, where they can see all the requests and demands being placed upon you by the organization, customers, and other solution partners, they will understand better that you can’t do everything they want now and that will focus them onto platform, product, or support enhancements that they really need versus those that they think they really want. For example, they might want more do-it-yourself configuration options when they are supporting your software in their country or in their client bases, but if you can typically turn requests around in 2 business days and they see how new features could benefit the customer base more and possibly help them sell more (and earn more commission), they will quiet down about saving 24 hours on a new configuration or install.

Offer them your innovations in Procurement, Planning, and CRM.

Chances are your solution partners are great in manufacturing, production, solution delivery, support, etc. but pretty bad in procurement, project management, or CRM (and why even their best bid doesn’t match your should-cost model with a fair margin). Offer to help them innovate their processes and platforms in exchange for product innovation, production cost savings innovation, and service level improvements.

Help them sell to your customer base.

If it’s a product provider, offer to help them understand what your customer base values most in terms of product purchases (low cost, reliability, innovation, etc.) and what the supplier needs to do to win more of your business. If it’s a service provider, help them understand not only what you need of them to support your customers, but what common services your customers need that you don’t provide, that the provider might be able to up-sell to them (without violating the terms of agreement). This will be a big plus in their eyes and they will start treating you as a customer of choice (who is their favourite customer to work with) and the complaints will go away, with only the odd helpful suggestion here and there.

Solution Partners can be a pain in the backside, but inclusion and support can replae the thorn with the rose. It’s up to you.

Influential Sustentation 96: Consortiums

Consortiums, better known as Group Purchasing Organizations (GPOs), will be one of your biggest organizational conundrums of the decade. Regardless of whether your organization is currently using a GPO or not, with the need to save money in every category in your tail spend, the next few years will be the years that you can’t live with them, you can’t live without them.

GPOs are going to be pushed upon you by under-informed CFOs because the believe that a GPO will be able to leverage economies of scale, in the form of more volume and more efficiencies, then the organization can achieve on its own.
For example, a supplier might offer price reductions at 1,000 units, 10,000 units, and 100,000 units and offer 2%, 3%, and 6% discounts at each price level. On its own, an organization that only buys 20,000 units would only be able to obtain the 3% discount but if it banded with five other organizations that required a similar amount of units, each organization could obtain the 6% discount. In addition, if only one contract needed to be negotiated and cut, each organization could reduce the amount of negotiation and administration overhead required to negotiate the contract and save even more. Theoretically.

But all of this comes at a cost. First of all, the GPO has to be funded — so, either the organization has to pay a fixed membership cost every year or a percentage of each transaction. Secondly, the GPO has to be managed just like every business processing outsourcing (BPO) provider. This isn’t always easy because not only does the organization have to manage the relationship and insure that the GPO is working on categories that are important to the organization, but it has to make sure that the GPO is taking the organization’s needs into account. And, the double edged sword, the best deals materialize when the combined volume allows a supplier to hit peak production (which allows them to produce the product at the lowest possible cost) and offer their customers the lowest possible cost. However, getting to peak production often requires combining the needs of a dozen or so different organizations, each of which has its own viewpoints and goals for each category. In other words, while you might prefer Supplier A’s products, because your Engineering department feels that they are of superior quality, the other GPO participants might prefer Supplier X — the least favoured supplier of your organization.

So what do you do?

1. Categorize all of your unmanaged spend.

You need to understand how much spend is each category, how much savings is likely available from (better) management, how much savings you could get if you began to manage it yourself, and how that would compare, using market average GPO statistics on savings and GPO overhead, to having a third party manage it. If you could save 2%, but the overhead to save that is 30%, that’s 1.4% savings at the end of the day. If the GPO can save 3%, and the amortization of the fixed and transaction fees work out to 40% of that, that’s a 1.8% savings, and throwing it over the wall might not be worth it. But if the GPO can save 5%, and they are really efficient on that category and their fees work out to 20% of the savings, that’s a 4% savings and you strongly consider throwing it over the wall.

2. Identify the Candidate GPO spend.

Identify all categories that the GPO could save enough on to make it worthwhile, then remove any categories too strategic to the business to hand over to a third party, and then remove any categories where they are primarily being sourced from a strategic or high-volume supplier and where they could be added on to an existing or renewal contract.

3. Estimate the Realizeable Savings from the Candidate GPO Spend

How much is being spent? How much of that could be saved based on industry average statistics? What would it cost to obtain that savings in total fees and overhead? What would really be saved? What is the real ROI?

4. Determine if the ROI is worth it.

If the ROI is not at least a factor of three, by the time you factor in all the change management, learning headaches, and delayed savings, it’s probably not worth the GPO. If it is, it probably is. Make your decision, and then present the detailed calculation to defend your position, and don’t waffle. If you can save, do it, and evaluate in 3 years. If you can’t, just get the best damn tail spend management you can and do better. But you can’t be constantly evaluating, reevaluating, and bickering about it. Do it. Or don’t. No in-between.

Procurement is Still the Rodney Dangerfield of the Organization and Land of Confusion Is Its Theme Song

Why else would we need an egalitarian Procurement Revolution where we must work collectively to shape and drive change?

But in all seriousness, the numbers don’t lie. If you check out “Five Imperatives for Creating Greater Procurement Agility”, which was recently (and still may be) temporarily free from The Hackett Group, you see that the average Procurement Function Operating Budget is forecasted to increase a mere 1.1% this year. Now, that’s better than last year where it was forecasted to increase a mere 0.7%, but when you consider the average annual US inflation rate from 2000 to 2015 was 2.25% (which you can verify on a number of sites), relatively speaking, Procurement is still getting further and further behind every year!

This is despite the fact that world-class procurement (which needs to be properly funded), has an average payback that is twice that of the Procurement peer group. And, as far as the doctor is concerned, the argument that, since world-class procurement organizations have 18% lower operating costs than the peer group, Procurement doesn’t need as much money, doesn’t pass muster because “operating” costs are different from “capital” costs and might or might not include “training” costs or “travel” costs.

If the organization is doing a lot of outsourcing, then a lot of travel is needed by procurement, engineering, etc. for relationship and quality control site visits, and if all of this has to come out of the Procurement budget, as opposed to the operations budget, that’s not fair. If Procurement is not allowed to spend “capital” to acquire a new system, but must instead use a SaaS solution so it can be expensed monthly under the “operating” budget, while manufacturing and warehousing gets a budget that does not include the ERP upkeep, that’s not fair. If Procurement is subject to the across-the-board training ban, because people should know their jobs when they are hired, and are deprived of the ability to advance their skills, not only is that not fair, but that can be costing the organization millions of dollars as sometimes a better informed and prepared procurement professional can shave an extra percentage point off of a hundred million dollar buy, which makes the 10K it cost to send the person to a 3 day workshop paltry in comparison.

Plus, when sales has to increase revenue by $10 to equal the same savings that Procurement often makes by taking $1 off of the bottom line, it should, logically, make sense to throw money at Procurement instead of the marketing mad men or the house of lies consulting firm. But it doesn’t, proving that most board rooms are still cemented in the land of confusion and Procurement is still the Rodney Dangerfield that don’t get no respect with a kick-me sign on its back.

Provider Sustentation 68: Carriers

Roll on highway, Roll on along
Roll on daddy till you get back home
Roll on family, roll on crew
Roll on momma like I asked you to do
And roll on eighteen-wheeler roll on (Roll on)

If you decide against 3PL firms, which bring a disadvantage for every advantage, then your only option is to manage the carriers on your own. Without providers, the full force of their damnation is thrust upon you.

Thanks to the outsourcing outsourcing craze that began in the 80’s, no one makes their own stuff anymore which means that they are dependent on logistics carriers to get the products to the warehouses and then again to get the product to the retail stores. And these carriers know that, to use a common expression, they got you by the balls.

Now it’s true capacity isn’t always full capacity, especially in off season, and at these times there is some negotiation room, despite what the carriers will initially tell you, but at peak season when the holiday rush is closing in and half (or more) of your annual sales are at stake, and the carriers really are at, or close to, peak capacity, the carriers are in control and they know it. Fuel surcharges pile up. Overtime charges pile up more. And you’ll pay because if you don’t, your product won’t arrive on time, putting your sales, and profits, at risk. But this isn’t the biggest problem. If the driver shortage continues to worsen, their might come a day when you are willing to gladly pay those surcharges and overcharges but still won’t get your products delivered.

So what do you do?

1. Understand your overall shipping needs.

Map your entire supply chain, associated annual volume levels, associated revenue, and associated criticality. Understand that going out to tender category by category or region by region is not always the best way to do things.

2. Do a national, if not global, supply chain tender.

Do a large supply chain tender across regional, national, and global carriers across all volume where the goal is to award all strategic volume and all high revenue volume to a handful of carriers which will guarantee year round capacity and customer of choice status to your organization in return for long term, guaranteed shipments and income. The bigger the number, the hungrier the carrier.

3. Give a little more to get a little more.

Use optimization to balance cost versus delivery times and service level guarantees. Select carriers that can easily handle the load, are financially stable, and willing to give your deliveries priority in exchange for large volumes, timely payment, and relationship building (and lean transformation help) over penny pinching.

4. Don’t sweat the small stuff.

Some lanes will have to go local, and some smaller carriers won’t give you the best rates, but you can still use competitive bidding and not lose much by making sure the majority of volume is under sound management. You can’t completely escape the damnation, so just settle for getting as much as you can under control.

Geopolitical Sustentation 25: Government Actions

Upon review of our damnation series, we know that governments can be a major source of damnation. From their meddling in the employment rate (economic damnation 3), currency strength (economic damnation 5), and their sheltering of the 1% (economic damnation 7); their lack of support for postal services (infrastructure damnation 11), ports (infrastructure damnation 13), and roads (infrastructure damnation 14); their (mis)management of customs acts (geopolitical damnation 28), trade embargoes (geopolitical damnation 29), and the TPP poison pills (geopolitical damnation 30); their taxation (regulatory damnation 33), tariffs (regulatory damnation 34), and health and safety (regulatory damnation 35); and their poor urbanization plans (societal damnation 43), utter lack of support for education (societal damnation 44), and their handling of workers’ rights legislation (societal damnation 48), their damning meddling is everywhere. (It’s more ubiquitous than the meddling of those meddling kids.)

But this is just the tip of the iceberg. In our damnation post we listed a few of the more focussed damnations that will cause you a never ending nightmare.

  • Budget Freeze
  • State of Emergency
  • New Legislation Outlawing your Product or Service
  • Criminal Charges against your Organization or Executives

1. Don’t Sell Governments More Than You Can Afford to Maintain in the Receivables Indefinitely.

There’s no guarantee of quick payment, or even late payment in the timeframe you are led to believe it will materialize in. Government might be good money, long term contracts, and guaranteed references, but they aren’t always the best customers if you need money now. Make sure you have a core business selling to the private sector that can sustain you through the dry times.

2. Don’t be slack in receivables recognition and collection

Insure all deliverables are received, acknowledged, and accepted on a timely basis. Make sure the invoice gets in the approved payment queue ASAP, and follow up the minute a payment date is missed. You don’t want multiple invoices in a queue during a budget freeze or budget shortfall. You want as few as possible, and you want them front of the queue as soon as the freeze is lifted.

3. Keep abreast of any proposed legislation that could impact your product

You want plenty of time to engage lobbyists if you can afford it, and if the product line is that profitable, or identify reformulations (or replacements) if the product is important, but not worth enough to engage lobbyists to try and alter the legislation appropriately (which may not be successful).

4. Make sure you have well documented policies and procedures in place … and all follow them.

Have a policy that failure to follow policies and procedures, especially those that are designed to protect the organization and stay on the right side of the law, will result in immediate discipline and possible dismissal. Also implement monitoring systems and processes to do your best to ensure that all individuals follow critical policies and procedures. The goal is that if someone breaks the law, it’s doing so in a way not supported or condoned by the company.

5. Make sure the board oversees the executive and reviews key financial reports and deals on a regular basis.

If one of your executives is engaging in shady business practices, you want to discover it and take action first. It’s often the difference between a slap on the wrist and a public hanging. (And don’t say you have nothing to worry about. It’s well known that the job that attracts the most psychopaths is that of the CEO, with the job that attracts the second most psychopaths being that of the lawyer who defends him.)