Category Archives: Procurement Innovation

For a Successful Procurement, you need Lagging, Lasting, and Leading Indicators!

A recent post by Garry Mansell on why some businesses fail while the numbers still look fine really makes the case on why you need all three types of indicators to be successful.

According to Garry, it happens more often than people admit. The revenue doesn’t collapse first. The reputation wobbles first. And once reputation wobbles, revenue follows on a delay. You can usually see it early, but it appears as weak signals. A different tone from customers. Partners becoming slower to commit. Hiring taking longer. Senior candidates asking slightly sharper questions. Suppliers quietly tightening terms. Teams becoming cautious about promising anything externally. It’s never announced. It’s felt.

The reason boards get surprised by this is that most board packs are built around lagging indicators. By the time the numbers reflect the problem, the organization has already lost something harder to regain … belief.

Revenue numbers are lagging indicators, but those are key indicators in the board pack. What are needed are lasting — sales cycle time — and leading — sales cycle time trend changes — indicators. If the revenue cycle time is increasing, and has been for the last two or three quarters, that’s a really bad sign, even if revenue is more-or-less staying constant because a flat organization can only support so many sales cycles, and revenue will start falling if they drag out much longer.

The same problems appear in Procurement presentations, which typically have the opposite problem, especially when trying to sell new processes or technologies just implemented. They will quote leading indicators like identified savings, and ignore the lasting, average cost per unit reduction adjusted for inflation, or lagging, actual savings vs. projected savings 12, 24, and even 36 years ago (for three year contracts). After all, as far as the CFO and CEO are (rightly) concerned, it’s not savings if it doesn’t hit the P&L!

So make sure to include all three indicators. In Procurement:

  • leading indicators define what should be possible
  • lasting indicators define what path the organization is on
  • lagging indicators define what the Procurement organization has actually achieved

Just like, in Sales:

  • lagging indicators define what happened in the past
  • lasting indicators define what is happening now
  • leading indicators define what is going to happen … and how good, or bad, it’s likely to be

To remain successful, revenue must, at least remain on track, if not increase in an organization just like Procurement success must also remain on track, if not increase.

Another Reason You Can’t Wait Too Long for the CPO!

In our last post, we reviewed a post by the Great Garry Mansell on the rule of two where he outlined when an organization needs to hire a COO in order to continue to grow. We noted that you can use the same same logic to determine when you should hire the CPO, which should happen earlier than most organizations believe.

In a follow up post on the hidden tax, Garry gave us another great reason to hire a CPO early.

Basically, as organizations grow, they spend money to feel professional. It’s a hidden tax that grows over time that not only (greatly) reduces their EBITDA and profit, but also decreases their resiliency.

As Garry points out, as companies grow, they spend money to feel professional. They add tools because someone recommended them. They add layers because it feels grown-up. They add process because it looks like control. They add roles because it feels safer than making a hard choice about what to stop. And then they end up with three to ten times as many tools as they should (just look at the average number of SaaS tools in an organization), and spend two to three times as much as they should be. And the processes they add are not the right processes because they don’t have the expertise to define best-in-class sales, marketing, procurement, etc. processes because they don’t have a seasoned CRO, CMO, or CPO to define them. They hire people they don’t need to get stuff done that should be automated or simplified by better processes (that could only be defined by the right senior people who should be hired at the right time, and funds saved until they can be).

This is another reason why you need a CPO early. A CPO will vet not only the reason, but the ROI, of every proposed product/platform and prevent unnecessary purchases and, if something is required, find the best product/platform. They will prevent processes that don’t add value. And they can even help determine when hires are really needed or when better platforms and processes can delay the need.

Procurement will focus their spend on the things that improve outcomes. And they will happily cut the things that improve optics because optics don’t carry you through volatility. Cash and speed do. And Procurement will help you conserve cash and act as fast as it is prudent to.

As Garry states A “good company” that has protected margin and kept agility will outlast a “professional company” that has simply become expensive. And a good company is one that puts Procurement front and center. After all, as Coase clarified, Procurement is the reason a company exists!

Don’t Wait too Long for a True #2: The CPO

Garry Mansell recently wrote a great post on the a rule of two that dictates when the founder of a growing start-up needs to hire a COO to help manage the day-to-day to keep the start-up on the growth track. Garry labels the position the second-in-command — a true strong number two! But he should call it number one, because the role of this CEO’s right hand is to create pace without drama … absorb ambiguity and turn it into clarity … make the founder less central … and allow the organization to scale without burnout.

As Garry points out, when it hits the wall where the company struggles to scale, the company is in a state where it looks like the founder being busy, but not effective. It looks like things moving, but not compounding. It looks like decisions being made, but not sticking. It looks like the organization waiting for the founder to be present to progress. As a result founders often try to solve this with many more heads. Another manager. Another lead. Another layer. It can help in the short term … until the founder becomes the bottleneck for alignment across those layers. They don’t admit that the hardest part is not finding talent. It’s letting go of the belief that ‘only I can do it properly’. They don’t realize it becomes the thing that limits growth.

But when the organization has a good COO, she doesn’t just take tasks. She takes load. She takes ownership of outcomes … and they make the founder better by refusing to let everything sit in the founder’s head. And Garry’s right on all accounts.

The same logic more-or-less dictates when the organization needs to hire a CPO. Even if the CPO is the entire team. Once an organization is big enough for the founder to hire a COO, a true #1, one of the hats the COO inherits is the CPO hat — and takes over the Plague of Purchasing. But as the organization continues to grow, more and more divisions/teams need to buy more and more products and services of all shapes and sizes, which requires more and more decisions and analysis, more policy, and more decisions … which get made, not properly codified, forgotten in the heat of the moment, and made again. Just like when the organization reached the point it needed a CEO, we again have the situation where it looks like the COO being busy getting Procurement done, but not effective. It looks like things moving, but not compounding. It looks like decisions being made, but not sticking. It looks like the organization waiting for the COO to be present for Procurement to progress.

Even though the organization might only be spending a few million, and the savings might only be a few hundred K, which would barely cover the cost of a CPO, making it look like it’s too early to hire the CPO, but it’s the right time. Hiring early allows the CPO to define proper processes and procedures, define platform and automation needs, determine the right time to pull the trigger on platforms and applications, identify when category managers / senior buyers are needed and the team needs to expand, and because processes and platforms were built into the organization as it grew, the CPO will be able to delay hires longer than peers because Procurement will be efficient from the get-go.

Product Design Must Align With Procurement And Supply Chain As Well!

Port strikes, border closings, tariffs, wars, strait and canal closings, factory fires, droughts, wild fires, volcanic eruptions, earthquakes, tsunamis, mine collapses, etc. There are now an innumerable number of natural and man-made ways your supply chains can come to a screeching halt and cut off your primary (or sole) supply of critical components, parts, and materials that you need to make the product(s) in your key product line(s).

When that happens, you need to so something. If you’re lucky, you have already identified an alternate supply and can switch to it or ramp it up. If you’re not, you have two choices: identify an alternate source quick or re-design to use less/none of the component/part/material in question.

The same way Japanese snack giant Calbee switched to black and white packaging when it could no longer get the coloured ink it needed because of the situation with the Strait of Hormuz, or the same way Tesla rewrote it’s software and firmware to use different chips during a semiconductor shortage, or IKEA reimagined the metal heavy lamp to use 60 precision cut birch veneer pieces to create a spherical lampshade.

But product design can only do this if they know they can get the alternative components or materials quickly and cost effectively. They need to be able to search supplier and product databases, logistics capabilities, and build realistic cost models to see if a an alternative design is worth pursuing before digging in deep, asking a supplier to provide a customized offering, and then having Procurement saying it will cost too much, sales saying the new price point will make the product unsaleable, supply chain say it can’t fulfill the product now because of a man-made or natural (disaster) supply chain issue, etc.

Plus, once it believes it has a workable, cost friendly, alternative it can immediately involve Procurement and Supply Chain, share the data, have its thesis validated, and prepare to update production lines with confidence.

One has to remember that there are two reasons the railroad barons became so rich. The first was their exploitation of workers (before unions and worker protection laws). The second was that they were built by engineers who built vertically integrated organizations that optimized every step and ensured every interaction that was required was executed to keep costs down and profitability high. Remember that vacuums are empty, and thus devoid of profit. So don’t create them between departments if you want to be successful.

Procurement Must Align With Supply Chains

Especially in direct, as Bob and I explained in detail in our Standard Sourcing Solutions Don’t Work for Direct.

While simplistic, almost obvious, and not prescriptive, it was nice to see a recent article over on India Shipping News that echoed some of the reasons why procurement must align with fulfillment in modern supply chains.

It noted that in today’s supply chain environment, for the ecosystem to function in a seamless manner, there needs to be perfect alignment between the procurement and the fulfillment networks.

One must remember that the outcomes of fulfillment are directly impacted by the Procurement decisions. These mainly include delivery, order accuracy, and inventory availability. The procurement strategies must also be informed by the fulfillment insights, which include delivery performance and demand patterns. The operations have now transformed from being independent to following a more collaborative approach.

And we still haven’t mentioned inventory levels. In retail, 8% stock-out is the traditional average. That’s a lot of lost revenue, and in low margin industries, quite a lot of lost profit. Without alignment, organizations’ unnecessarily lose money customers would be happy to give them while losing money in stale inventory that has to be fire-sold or discarded because the organization has too much of some products and materials and too little of others.

Now, the organization’s don’t have to merge, but they have to align … and the way that happens is through shared data, shared requirements, shared goals, and shared alignment. Fortunately, with today’s systems, data can be shared across the organization in real-time. With on-line collaboration, there’s no excuse for people not to come together and outline all of their requirements and ultimate goals. And there’s no excuse for the organizations to not get together and align on what’s the most critical, and for them not to go to their common boss (the CFO) and bless the rankings on the alignment (that will be used as weightings in optimization). Once you have the goals, the rankings, and the weightings, both sides can use optimization to make the right decisions that takes the needs of the other party in mind. (In fact, there’s no excuse for all of Procurement, Logistics, Supply Chain, and Inventory Management not to be 100% aligned at all times with the tried-and-true proven tools available today.)

In other words, not only must Procurement align, it can align, and there’s no reason it shouldn’t be aligned.