Category Archives: Procurement Damnation

Economic Damnation 08: Outdated Financial Models

Or, more accurately, outdated financial assumptions. Finance lives and dies by metrics that go by three (and four) letter acronyms such as CAPM, CFC, COGS, DSO, EPS, etc. If these don’t “add up”, Procurement can forget about ever getting any additional funding (and might even get rewarded with a budget cut by a CFO who thought that Procurement simply wasted his time with their last request), even though having these metrics “add up” isn’t always the right thing for the business.

Most CFOs are intensely focussed on CAPEX, COGS, DSO, DPO, ROI, and EPS. These have to look good because CAPEX and COGS take up most of the operating cash flow not swallowed up by salaries, DSO and DPO define how much cash flow there is to work with, ROI defines the return on using limited cash flow on an endeavour, and at the end of the day, all of this better add up to an acceptable EPS or the CFO can find himself in the unemployment line with the CEO if the shareholders get angry.

Now, the CFO is right to sweat these metrics because the organizational health depends on it, and it’s pretty much impossible to keep Procurement healthy in a sick organization, but if the metrics are misinterpreted or misused, and Procurement denied the budget it needs for talent, platforms, and services that will enable Procurement to deliver (significantly) more value (and bang for the buck), then in an effort to keep the organization healthy, the CFO will actually be making it sick by starving Procurement of the resources it needs to stay healthy.

Why would it do this? Because of outdated models and invalid assumptions. You see, most Finance organizations believe:

  • Unless your business is leasing, CAPEX should be minimal because all assets should be as liquid as possible.
  • COGS should be as low as possible, because minimizing COGS maximizes profit.
  • DSO should be as short as possible because the more cash on hand, the better.
  • DPO should be as long as possible because the more cash on hand, the better.
  • Only the projects with the highest, short-term, ROI should be funded.
  • At the end of the day, EPS has to increase quarter over quarter, year over year, because that’s what keeps the shareholders happy.

But not all of this is true. Do you know where the fallacies are?
We’ll give you a minute to think about it. And remind you to


Have you figured out where the fallacies lie? We’ll make it easy for you. Every single assumption is wrong. Why?

It’s not liquidity of the asset, it’s liquidity of the business. Sometimes it’s better to buy a valuable asset, and if cash is tight, use it as collateral against a low interest business loan than to lease at a rate that essentially doubles the cost of ownership over a 5 year period.

It’s not COGS, it’s POGS (no, not those annoying circular discs that plagued us during the mid-90’s) Profit On Goods Sold. If a few changes to the distribution and marketing strategy doubles sales, then it doesn’t matter that the COGS is increased 3% from 82% to 85%. 15% profit on twice as many units is much better than 18% profit on a base amount of units any day of the week.

It’s not DSO, it’s TSM – Total Sales Made. If increasing DSO allows a customer to buy more, well, if the organization has the war chest, or the credit rating to survive on a very low interest line of credit (compared to a weaker supplier or customer that might borrow at 12% to the organization’s 4%), then DSO should be increased for the right group of customers.

It’s not DPO, it’s TCO. If extending payment forces a supplier to take unreasonable loans or factor invoices at ridiculous discounts, that’s increasing their overhead operating costs considerably and, guess what, at contract renewal time, your rates are going up, up, up. Your short term gain translates into a long term loss.

It’s not always ROI, and the direct and indirect savings generated, sometimes it’s about the brand (image), such as switching to renewable energy or renewable materials which incurs a short term penalty due to the need to build new energy plants or switch to new processes, or about the knowledge gained, which would result from training, new systems, and the implementation of new processes. Organizations that stand still fall behind. Sometimes an organization has to take calculated risks and try a few high-risk investments to help it identify the best investments.

And while EPS is still the gold standard in the Wall-street led financial world, EPS cannot increase perpetually without investment, otherwise, at some point, the entire company will come crashing down. Remember, to continually increase EPS, one has to continually increase profit. To continually increase profit, that requires either continuously increasing revenue or continually decreasing costs, or both. Costs have a baseline that cannot be passed. And increasing sales almost always requires additional investment in marketing, which, at some point, will hit a point of diminishing return due to market size and consumable disposable income. And the faster one tries to grow, the faster the ceiling is hit, and the faster the rug is torn from beneath one’s feat when the dream comes crashing down. Just like leading Procurement organizations realized it’s not TCO but TVM, it’s not EPS, but VPS.

However, as long as Finance works on antiquated metrics based on antiquated assumptions, Procurement will be denied of the technologies, processes, services, training, and talent it needs to get the job done better. It’s damnation at it’s finest.

Consumer Damnation 73: Individual Consumers

Of course individual consumers are a consumer damnation (and you were just reminded of that while trying to keep the shelves stocked this holiday season). They are the consumer damnation. Corporations are bad. Governments are worse. But individual consumers take the cake, especially considering most of them bring their views to corporate and government purchases. And you are left trying to deal with the inanity and the insanity. When dealing with consumers, damnations are plenty.

Consumers are fickle.

Their tastes can change overnight. Today they want red. Tomorrow they want black. Then they don’t want the product at all because the competitor’s product glows radioactive green.

Consumers are demanding.

They want the newest operating system, the biggest screen, the fastest processor, the most spacious hard drive, the longest battery life, and the absolute lowest price for that new smartphone, even though all of these requirements might be mutually exclusive with today’s technology. And the minute you don’t deliver, they abandon your product to wait for the product from your competitor who is promising more than your current offering.

Consumers are impatient.

If you promise 72 hour service, you better deliver in 48 hours or they will be calling every hour asking where that service professional is. And if you can’t repair the product, you better have a replacement on hand or they will be demanding a refund for the service plan they purchased.

Some consumers are vindictive.

Your product didn’t perform. It broke a day after the warranty. The store wouldn’t take it back. Complaints are filed with every better business bureau and consumer protection agency the consumer can find, and that’s a best-case scenario. If the consumer discovers that there was a banned or dangerous chemical in the composition of the product, they rally a few friends, get a lawyer hungry for some media sensation, and launch a very public class action lawsuit. And if they get hurt opening the hard shell or sick licking the lead paint, that’s a multi-million lawsuit coming your way.

And of course Procurement will be on the hook for not getting the product on the shelves before the consumer tastes change, not getting the price point low enough to appease the consumers enough to buy the company’s product when it is missing a new feature just included in a competitor’s product, when the company contracted for service doesn’t deliver fast enough, or when the supplier ships a defective unit and a consumer gets hurt and sues in a very public way that is very damaging to the brand.

Consumers might be the reason the company, and Sales and Marketing, exist, but they are a perpetual damnation to Procurement who will have to deliver on every insane and inane promise made by Marketing or Sales (which are, as we know, their own damnations).

Provider Damnation 67: Tier 2

Suppliers. You can’t always deal with them, but you cannot survive without them. The same goes for your Tier 1 suppliers. They can’t always deal with their suppliers, but they cannot survive without them. Your suppliers don’t have a magic replicator that your products just materialize out of. They have to manufacture these products from components and raw materials that come from their suppliers. And their suppliers are their problem, right? Wrong.

If Tier 2 Suppliers are late with shipments to your Tier 1 suppliers, you don’t get your product on time.

And, most importantly, while you might get some insight from your tier 1 supplier that a shipment they were expecting is late (and your shipment is going to be late) if you have a great, and very well managed, supplier relationship, you’re never going to get insight from a tier 2 supplier that a shipment is (going to be) late (because there was a delay in their raw material shipment or a production line broke down).

If your Tier 2 Suppliers ship sub-standard materials, your Tier 1 supplier ships sub-standard products.

And there’s no guarantee that your tier 1 suppliers are going to notice that the grade 5 bolts for the transport vehicles were only grade 4, that the dysprosium foil supposed to be 99.99% pure is only 99%, or that the milk powder isn’t tainted by melamine powder to bulk up the weight.

If your Tier 2 Suppliers use forced labour, you get brought up on criminal charges under the emerging anti-trafficking acts and modern slavery acts (California, UK, etc.)

Don’t think that just because you visited the primary factory locations of your supplier and your supplier’s supplier and did an audit that all is clear. Your supplier’s supplier might have five different locations, and while the main location is clean, safe, not overcrowded, and complete with paperwork on all workers demonstrating minimum age and fair wage, the additional locations might be dirty, full of safety hazards, over crowded, and use hordes of undocumented workers, including underage, underpaid, and even forced workers brought in by the local “contractor” to make sure the line runs 24/7 to get those orders out and more currency in. But your supplier’s supplier, operating in a relatively lawless zone compared to the zone your headquarters is in, does this with impunity as it knows that, with the right bribe here and there, the most it will get is a slap on the wrist for its transgressions while your officers could be facing criminal charges.

Damnation exists throughout the supply chain, not just with the immediate supplier and the immediate customer.

Damnation, you left a happy job
Damnation, and now your head throbs
Damnation, now you’re in too deep
It’s a Procurement Damnation
and it makes you wanna weep

Authoritative Damnation 62: Shareholders

You saw this one coming too, didn’t you. Authoritative Damnation 63 was the Board of Directors, your best friend on a rare day and your worst enemy most of the time. But the Board is not some random group of people, they are a specific group of people that are elected by, you guessed it, Shareholders.

Shareholders are a damnation because they, collectively, control the company. Yes the company answers to the CEO and yes the CEO answers to the Board but the Board answers to the shareholders because if they don’t do what the majority of shareholders feel is in the best interest of the company, the Board won’t be around after the next annual general meeting.

Most shareholders are minority shareholders and most are not very active when it comes to day to day affairs, most not even following day to day affairs because, if the company doesn’t perform, they’ll just withdraw their small investment and put it elsewhere or wait for the overall portfolio to balance out. But some are active, very active, to the point of being activist and if they also have a percentage of the company, and the ear of other shareholders that have a percentage of the company (and not a fraction of a percent), they can be trouble. Big trouble. So much trouble that Big Trouble in Little China* looks like a minor inconvenience.

Why? If they decide that your organization is off track, possibly because they perceive that the organization is failing to be as sustainable or responsible as it should be, and they decide they are going to do something about it, they might go all out and bring the wrath of PETA or Greenpeace down upon you.

Or, if a small group of activist shareholders believe that the strategy of only using recycled content and only focussing on buying from EcoCertified suppliers is costing the company too much in terms of increased expenses and decreased marketshare (as it is, in their view, only attractive to yuppies), they might decide to force an AGM and replace the entire Board with those sympathetic to their ear, a Board that will do a 180 on company strategy, which might work, and might not. But either way, Procurement will have to do a 180 as well — find new suppliers, try to get out of iron-clad contracts with current suppliers, and support a new strategy — overnight.

Or, they might elect themselves to the Board and become the latest Board Members from Hell. Are you ready? Probably not … but they are coming for you anyway!

*Why dredge up this blast from the past? Because The Rock is bringing it back.

Societal Damnation 51: Talent

In our last post, we addressed the perpetual damnation of talent tightness in Supply Management, exacerbated by pinchpenny’s who will pay a dime-a-dozen salesperson an executive salary but won’t pay a Procurement superstar a warehouse wage; deep-pocket competitors who will double every offer you make; and IT departments that would rather spend big money on new gadgets than on systems Procurement talent needs to do their job.

But that’s just one side of the coin. The other side of the coin is the talent themselves. If you’re lucky enough to get your hands on true talent, then the true damnation beings.

Every Generation Wants Something Different.

As per damnation 4 on Gen X, Gen Y, and Gen Z, at the tip of the iceberg, Generation X wants stability, Generation Y wants unique opportunities, and Generation Z wants to be jacked in. (Not jacked up, jacked in.) Trying to satisfy all of their different desires is like trying to satisfy all of the different requests that will be received on a transatlantic cruise. No easy feat.

Just because they joined, that doesn’t mean they’ll stay.

The average worker today stays at his or her job for 4.4 years, and that number is decreasing all the time. And in some professions, that’s twice as long as the average. If your job isn’t their bees knees, as soon as a competitor comes along with a sweeter offer, your top talent could be out the door.

If they do stay, they’ll want support. And lots of it.

If you promised them training, they’ll expect it. If you promised they could select the new Source to Pay platform, that project better start ASAP and be delivered in a few months. If it was a senior buyer and you promised them a top notch data analyst to give them all the ammunition they needed in negotiation, you better deliver.

And the more support you give, the more they’ll want.

Top talent wants to excel. No matter how good they do, they’ll always want to do better. (That’s why you want them.) But every tool has its limits, and as soon as the limits is reached, they’ll want a better tool. Every technique has a limit to its usefulness, and when that is reached, they’ll want to learn a better technique. And so on. If you deliver, they will deliver, but you have to deliver. And with the CFO, CIO, COO, and maybe even CEO putting policies in place that drag you down every step of the way …

You get the picture. Talent tightness, and an inability to acquire talent, is a damnation, but so is the talent themselves if you manage to get your hands on them. It’s a can’t live with ’em, can’t live without ’em scenario.