Category Archives: Procurement Innovation

If Your Quest for Purchasing Fire Involves a Fight …

You better make sure you’ve picked a good one! Not only can your Quest for Purchasing Fire require a lot of work, but it can also require that you fight a number of battles with people who don’t want to change, don’t want to spend money, or just don’t want to admit that there might be a better way. As a result, if you want the odds to be on your side, you need to make sure that the fight you pick is a good one. To this end, a recent article in the Harvard Business Review on “how to pick a good fight”, which should be based on the kind of conflict that can spark creativity and innovation, can help you figure out if your fight is the right one.

Remembering that conflict is healthful only when people’s energies are pointed in the right direction and when carried out in a productive way, a good fight is material, focussed on the future, and noble in nature. More specifically:

  • The Fight Has Value.As per the article, the initiative you want to undertake should save 15% or more of your resources and time a year, allow you to charge at least 10% or more for your services than you do now, or grow your sales or market share faster than your competitors. If the initiative doesn’t have this level of significance, find another one.
  • The Fight Focusses on Future Possibility.The quest should not be about sorting out what happened in the past or figuring out who is accountable for the current state of affairs. That just won’t fly. Make sure you’re focussing on how to improve in a blameless way and that you’re proposing innovation and a vision the organization can get behind, with a little persuasion.
  • The Fight is Noble. The goal must be about more than making or saving money, reflect a larger organizational cause, and align with the values of the organization. Make sure it addresses risk, sustainability, or corporate social responsibility if you really want to tip the odds in your favour.

If you follow these tips, you’re well on your way to a successful Quest for Purchasing Fire. Bon voyage!

Share This on Linked In

Don’t Squander Your Intelligent Failures!

A recent HBR post that asked if you were “squandering your intelligent failures” noted that instead of learning from failures, many executives seek to keep them hidden or to pretend that they were all part of a master plan and no big deal, which is all too true and a shame because you can often learn more from a failure than from a success (which sometimes, in CPG, is just pure luck and hard to learn from).

Furthermore, some scholars believe that learning from failure is crucial to organizational learning, because they demonstrate where assumptions are wrong, where future investment would be wasted, and where directions need to change. More succinctly, failures are about the only way in which an organization can re-set its expectations for the future in any meaningful way … but only if you take the time to learn from them!

According to some scholars, including Sim Sitkin (who is mentioned in the post), the most useful failures (from a learning perspective) is an intelligent failure, which he defines as a failure that results from an action that is:

  • carefully planned (which allows you to identify when things go wrong),
  • genuinely uncertain,
  • modest in scale, and
  • managed quickly.

Such an action plan not only prevents a catastrophe, but allows you to identify not only when something goes wrong, but why. If you take the time to figure out the way, and do so in a timely fashion, you can learn from the action and propagate that knowledge throughout the business, especially if you insure that underlying assumptions (which turned out to be wrong) are explicitly declared and that you can test results at well defined checkpoints. As such, should a failure occur, it is an excellent learning opportunity and should not be squandered!

Share This on Linked In

7 Tips to Align Procurement with the Boardroom

A recent article by Alexander Arsath Ro’is of Benefit, an Amsterdam Procurement Consulting Company, provided 7 tips on how to “align procurement with the boardroom” that are worth a second look. Based on research they conducted with two Dutch universities, which led to the construction of the “Benefit Boardroom Alignment Assessment Methodology”, they concluded that the following best practices would benefit any company that wants to align procurement with the boardroom and wants to start with an accurate assessment of the current state.

  1. Tell the Board First
    Make sure your Board understands the challenges before you start an assessment of your current state.
  2. Be Absent from Assessments
    This will allow the CEO, CFO, COO, and other CXOs to speak freely about their expectations of Procurement.
  3. Put Your View Across
    Initiate dialogue with the Board to challenge views in a positive way and talk about opportunities that will arise from a proper alignment.
  4. Remember, It’s a Start
    Alignment isn’t a precise measure — it’s a way to get perceptions in tune with reality.
  5. Ascertain What Others Want
    The goal is to be on the same page with what the Board expects and what your internal customers want.
  6. Create Understanding
    Effective alignment will only result when Procurement fits with the rest of the organization.
  7. Ask: Are You Ready
    An assessment won’t help if the organization isn’t ready for an accurate assessment of where things are and isn’t willing to do what’s necessary to get where it needs to be.

Share This on Linked In

Transformation is Necessary for High Procurement Performance

Last week, where I walked you through The Hackett Group’s 18 value streams that can take you from a naive apprentice to expert sourcerer, I noted that your procurement needed to be transformational. I also provided you with some examples of transformational value streams that included process re-engineering, financial hedging, and supplier collaboration. But I didn’t address how you shift from a strategic mindset to a truly transformational one.

The key is to think about reinventing your procurement organization. That requires going beyond simple strategic sourcing where you are sourcing current needs using the best tools, processes, and information available to thinking about your long term needs beyond the current project (and contract) and coming up with a strategy to make any savings you secure sustainable over the long term. For example, you might focus on securing a long term contract with a supplier who could become a strategic partner, or with a third party manufacturer committed to upgrading it’s production equipment and processes to deliver year-over-year cost reductions, or with a design firm who works with you to continually re-engineer designs to be more cost effective to produce.

As this recent article in Industry Week about how “to achieve high performance” points out, transformation is the process by which companies, business units, or locations make a step-change improvement in their operating performance. It’s more than just an incremental improvement. It’s a new way of operating. It’s not just shifting from cost savings (tactical) to cost reduction (strategic), but to cost avoidance (transformational). It’s going beyond a focus on lowest TCO to a focus on highest value. For example, maybe you could save 10% if you could increase your order from 75K units to 100K units, but when all is said and done, the company is measured on profit. Maybe it’s better to create a slightly higher quality version of the product, only order 50K, pay a little more, but sell them at a higher profit margin. Whereas a strategic sourcerer would try to negotiate the 10% discount on the possibility of 100K of demand as a stretch goal, the transformational sourcerer would accept a slightly higher price-point for 50K, slightly improved, units to maximize total company profit in the long term.

So where do you start? As per the Industry Week Article, you start by recognizing the gaps between your performance and that of best in class companies. If you don’t understand how much better you could be doing, you’ll probably never acquire the drive to be truly transformational. As a result, you’ll leave significant value on the table without even realizing it.

Then you set stretch goals that seem unattainable but are, in actuality, just a little beyond reach. Given that over 80% of all activity in most business processes is a waste — adding no customer value whatsoever — there’s a lot of room for improvement. And since no one says you have to get there all at once, shoot for 50% improvement. If you get 20%+ every year, you’ll be pretty close to your goal after a few years.

Finally, you get a strong organizational leader on your side. As with every other effort, the support of a strong C-suite leader is the key to success. At some point, someone is going to need to make a tough call because you’re going to have to radically change how things are done and there is going to be a lot of resistance at first. But that’s good, because that probably means you’re on the right track.

Stay there, and you might just find out what transformational procurement really is!

Share This on Linked In

What’s Your Procurement Value Level? … or Transformational? (III)

In Parts I and II I reminded you that Pierre Mitchell of The Hackett Group invited you to participate in a study designed to help you identify where you were on your procurement journey by way of 18 value streams that range from “naive apprentice”, where you’re measuring performance at an elementary (tactical) level, to “expert sourcerer”, where you’re extracting procurement value at a very advanced (transformational) level. Then I covered some of the seven tactical value streams and some of the six strategic value streams. In today’s post I will cover the final five transformational value streams, which range from:

Internal Procurement process cost savings are found from process re-engineering
through
Benefits due to currency hedging, inflation hedging, options/derivatives, etc.
to
Revenue uplift from supplier collaboration (e.g., innovation, diversity advantage, joint marketing, etc.)

Very few companies are transformational in their procurement. A company that is transformational goes beyond just taking cost out of the supply base, but finds ways to take costs out of all aspects of company operations while making the entire company leaner, meaner, and smarter about it’s organizational finances and processes. A truly transformational Procurement department positively impacts every area of the organization.

Internal Procurement process cost savings are found from process re-engineering

Instead of being reactive and trying to reduce costs after 70% to 90% of costs are baked in during the design phase, Procurement works with Engineering and R&D to help them select materials and specifications that will be the most cost-effective in the long run when multiple options exist. Instead of shaving a few percentage points off of list price, Procurement can be shaving a few dozen percentage points off of total cost by going out to market with designs that are much more cost effective to produce.

Benefits due to currency hedging, inflation hedging, options/derivatives, etc.

Instead of just looking at the total cost in today’s market, Procurement looks at the expected total cost over the lifetime of the contract and works with finance to select options that will insure the expected cost reductions are realized in spades over the contract duration.

Revenue uplift from supplier collaboration (e.g., innovation, diversity advantage, joint marketing, etc.)

Once a Procrement organization has truly embraced transformational procurement, it works with its suppliers to not ony take cost out of the end-to-end supply chain, but also to inject more value that will allow for greater revenue on each sale. Cost are reduced, revenue is increased, and the company’s profitability becomes world class.

Share This on Linked In