Category Archives: Procurement Innovation

Best-In-Class Procurement is About Cost Avoidance, Not Savings!

In a recent post over on his Purchasing Certification Blog, Charles asked “why doesn’t Procurement save as much on non-traditional categories” in response to his review of Aberdeen’s latest “CPO Agenda” research report which found that Best-in-Class Procurement achieves 10% savings on managed spend while laggard Procurement achieves savings of 16% on managed spend. His assumption was that Procurement didn’t do as well on non-traditional categories and that dragged the average down.

As far as I’m concerned, the situation is the exact opposite. If the Procurement department is truly a Best-in-Class Procurement department, each time they negotiate a contract they get the best deal possible. Once you’ve negotiated the best deal possible, there’s no more “Savings” to be had until either the indexed market price for the core commodities, components, or labor that makes up the product or service cost decreases or a disruptive innovation comes along that allows the product or service to be produced more cost effectively. Since that doesn’t happen every day, or even every year (as commodity and labor costs tend to increase and production efficiencies quickly reach a ceiling on popular products or services), if Procurement did it’s job right, there are no “Savings” to be found on the majority of categories sourced in the last year.

The fundamental truth — which is hard to see with the recent myopic focus on “Savings” — is that there is no such thing as “Savings” in a perfect Procurement organization. If Procurement did its job perfectly, it negotiated the absolute best deal. This would mean that there are no “Savings” to be had because, if there were, that would mean that Procurement did not do its job perfectly.

A Best-in-Class Procurement organization is all about Cost Avoidance. After all, since most products and services increase in cost over time, a great Procurement department finds a way to contain, and even eliminate, cost increases even when raw material costs go up 10% and labor costs go up 5%. They work with the supplier to find ways to improve supplier efficiencies, or they work with sales to find ways to increase volumes, so that the supplier can commit to the same price and still maintain a reasonable margin even if its costs increase 5% to 10%. And then, if prices happen to drop for a category that comes up for renewal, they renegotiate the renewal to represent the effective cost decrease and never pay a penny above the best price that can be achieved.

Using this definition, and this logic, this tells me that a Best-in-Class company should see diminished “Savings” year after year as they get better and better at getting the best deal each and every time they tackle a category, leaving the only “Savings” opportunities to be those opportunities where product costs (either due to commodity price or labor price decreases or production efficiency increases) have decreased since the last time a contract was cut. And this is much better than finding “Savings” because it means they didn’t waste capital in the first place, which they left free for the business to fund operations and growth!

Remember, even Wal-Mart, despite the popular perception, cannot roll-back prices forever, especially in categories where commodity prices rise day after day! (Heck, sometimes they even roll-up by 50%! Case in point, last time I was there I was going to pick up “our” brand of coffee because they advertised, in their flyer from the previous month, that it was 4.99 everyday, which is a price you can only get in the grocery stores on sale. Well, I’m there, and I go to get some on my way out, and it’s 7.57 … a 51% increase.) At some point, until a disruptive innovation comes along, a Best-in-Class Procurement department is going to get the best deal and there will be no more “Savings”. The better the department, the sooner they hit the floor. The sooner they hit the floor, the sooner they maximize “cost avoidance”, which is what Procurement should be all about.

In other words, I think the numbers are just fine and that Mr. Bartolini did a good job of uncovering numbers that reflect the actual reality of how a good Procurement department really performs!

P2P On a Budget … Is There Any Other Way?

About the same time I was authoring my rebuttal on why there’s nothing more important than a good “test drive” — even in e-Procurement, yet another e-mail from the SSON hit my inbox. This one started off promoting P2P on a Budget … and all I could think was “is there any other way?“. After all, as per my previous post, the only requirements for a P2P system is that it permit e-Procurement, possibly through a (n integrated) third-party (e-Procurement) platform that permits electronic ordering, and that it permit payment approval, possibly through a(n integrated) third-party (e-Payment) platform. That’s not a lot of functionality, and definitely not a lot of value, so you shouldn’t be paying that much for a P2P solution in the first place.

That being said, since most people still don’t know the difference between P2P, EIPP, and e-Procurement (see my last post for an explanation), I thought I’d check it out in case some of the “experts” they gathered didn’t know the difference either and offered up valuable e-Procurement advice in place of relatively valueless P2P advice.

When the editors said that sometimes you have to spend a little to save a lot and that investment during all but the most terminal of cash crises can result in savings that can make the difference between success and a very final failure, they’re right. Right now, small investments in spend analysis, sourcing expertise and supporting systems, expert consultants (like yours truly), and e-Procurement systems to minimize your transaction costs, prevent maverick buying, and enforce negotiated prices can save you a small fortune (or, if you’re particularly inefficient, which at least 85% of companies are given that only 15% have a CPO in the C-suite, a large fortune).

However, the article on how to get the best from your procure-to-pay process was pretty useless as the contributors were all over the map. The contributor from Eli Lilly talked about the importance of speedy invoice management, which doesn’t really save you anything. The contributor from Lockheed Martin discusses the importance of JIT delivery, which is off-topic. And the contributor from Schneider Electric took a broad brush to demand management, spend management, and cash management without any apparent understanding of where P2P fits in a discussion that tackled (human) resource allocation, contract management, differentiated spend management, demand management, centralized invoice management, and process standardization. Finally, the contributor from Emerson Argentina talked about stock reduction, volume leverage, and extended payment terms. And it got worse from there.

In my view, it was a wasted effort on SSON’s part and a total waste of any reader’s time because getting value from P2P is easy. Here’s the magic formula.

  1. Standardize your processes and make them e-Procurement friendly.
  2. Adpot a low-cost SaaS end-to-end e-Procurement platform that supports purchase orders, invoices, and electronic requisitions through “cart-based” interfaces that can be “integrated” with your current AP and e-Payment systems through standard XML interfaces and securely transmitted data files or feeds.
  3. Load your catalogs, integrate your punch-outs, define your buying rules, and, most importantly load your contracts and price tables and make sure they override catalog and punch-out prices (or obtain a compliance monitoring solution).
  4. No requisitions not through the system.

That’s it. Instant value. Buying rules ensure that no purchases can be made off-contract without authorization. Price rules ensure that suppliers don’t “accidentally” change punch-out pricing and buying rules can be defined to insure that “approved” products don’t get replaced with “unapproved” ones. Authorizations insure that no one spends above their allowance without approval. And the net result is you never pay more than the contract price, discounts and rebates are captured up front, and unnecessary spend is stopped dead in its tracks. This means you don’t have to pay a consultancy $10K to help you find and recover $100K in over charges from your office supplies vendor or $50K to help you find and recover $500K in overcharges from your hardware provider who’s best price on a system configuration that hasn’t changed in a year only declined 0.3% a month when most hardware depreciates 3% a month.

Of course, if you want to take the hard road, you can do it the hard way and read the 20 or so pages provided by the SSON which does a great job of leading you in circles and never getting to the point.

A Procurement “Metric of the Month” is a Bad Idea

As a prominent blogger, I get a lot of e-mail (or should I say spam?). One of them had “Procurement Metric of the Month” in the title. I was about to trash it, as this is one of the worst ideas I’ve ever heard (as I’ll explain shortly), but then I noticed it was from Hackett. Needless to say, this got my attention. Why would one of the leading research firms in the space, which produces the very useful and relevant Book of Numbers, be touting a “metric of the month”?

It turns out they weren’t promoting a “metric of the month”, which would be an incredibly bad idea because a metric is only useful if you benchmark against it month after month after month for an extended period of time to measure your progress (and changing metrics too often gets you absolutely nowhere), but a new free research offering as part of their Hackett Performance Network (where, if you qualify, you can get access to selected research reports, performance studies, and webcasts). Designed for Finance, HR, IT, and Procurement, this new offering is apparently going to showcase an important metric in each area each month, starting with “Tax Book Entries Requiring Correction Percentage”, “Outsourcing Utilization by HR Process Category”, “IT Business Value Contribution through Portfolio Optimization”, and “Level of Supply Risk Management Adoption”.

With respect to the latter metric, which focusses on procurement, Hackett points out how 67% of world-class organizations implement supply risk management consistently across the business as compared to only 13% of their peers, indicating that top performers are 5 times as likely to have a comprehensive supply risk management strategy. Considering that effective supply risk management is a way for procurement to elevate its value proposition and help the business protect its brand, cost leadership, and stability, this makes sense. It’s free, so check it out. Just don’t take “metric of the month” literally.

Do More With Less in Procurement

“Do More With Less” is the new mantra of businesses who are slashing budgets and, unwisely, slashing head counts. It’s a darned good thing it’s not a new mantra for procurement who has always been trying to “Get More From Less”, and do so with too few resources. That’s why I enjoyed a recent article in the Spring Edition of the CPO Agenda by Nick Martindale who outlined eight strategies being used by companies that really are “doing more with less”. These strategies, and others like them, will not only help you survive the downturn, but position your procurement department to be the organizational leader of tomorrow.

  1. Prioritize Workloads
    Understand where your finite resources will deliver the most bang for the buck and focus on those endeavors. Don’t oil the squeaky wheel … if it gets too loud, simply replace it. Focus on strategic sourcing projects and lean supply chain transformations that will reduce cost, improve efficiency, and take the waste out of your processes. That’s where the savings lie.
  2. Increase Productivity
    Eliminate redundant activities. Streamline sign-offs and processes. And, most importantly, don’t put off the acquisition of new systems. With pay-as-you go SaaS systems, you’ll save more than the small monthly fee you have to spend on them. Stop thinking about it. It’s a no-brainer decision.
  3. Refocus Strategic Initiatives
    Strategic initiatives are more important than ever, but the reality is that you can’t wait five years for payback, especially when there are strategic activities you can take now that start realizing payback next quarter. Start with those, and work your way up.
  4. Use Technology to its Fullest
    A real spend analysis system will allow you to slice and dice the data anyway you want, exposing opportunities you wouldn’t find otherwise. If you need to bring in an expert to do this, do so. Most consultants, who will work on a results-basis, can save you millions with these kinds of tools. Use them!
  5. Shoot the Mavericks
    Or at least prevent them from buying off of contract. Force all buys to go through an e-Procurement system that only allows orders against the contract without approval from a senior manager (for exceptional circumstances only).
  6. Reassess Spend Priorities
    Your best sourcing opportunities six months ago are not necessarily your best sourcing opportunities today. Every time you finish a project, reassess the next set of projects in the queue before you begin. There might be a new opportunity in the marketplace worth re-prioritizing your queue for.
  7. Use External Expertise
    You don’t know everything, and with a staff who can barely keep up with their increased workloads thanks to hiring freezes, you don’t have time to figure it out. Bringing in an expert will help you identify numerous opportunities that you’d otherwise miss.
  8. Outsource Non-Critical Activities
    Sometimes a third party really can do it better. And sometimes the quick-hit savings you’ll get from a GPO, while not necessarily the best possible, will be very significant to you, especially since you’ll get savings AND free up your staff to focus on core categories where they expertise will allow you to identify even more savings.

A Simple Guide to Improving (Procurement) Organizational Efficiency

Recently, the CPO Agenda published a simple guide on how to “improve organizational efficiency” that is worth a quick review, as an efficient organization is one that expends minimal time, resources, and cash on any specific activity. According to the article, it’s a simple 5-step process:

  • Review Processes
    Review all of your processes and their associated workflows for inefficiency, and eliminate it. You shouldn’t need multiple systems to accomplish one task (and if you currently do, chances are you can eliminate one or replace multiple systems with a new, lower-cost, SaaS offering).
  • Reassess Tasks
    Eliminate any task that doesn’t have value (unless it’s necessary from a regulatory, compliance, safety, or quality viewpoint). Reviewing all invoices manually? Implement a modern e-Procurement system that automatically compares invoices to POs and POs to contracts and only presents exceptions for manual review.
  • Remove Unnecessary Layers
    Three approvals for a $75 toner cartridge? Get real. Establish budgets and budgetary controls in the mandatory e-Procurement software and only require additional approvals if reasonable spending thresholds are met.
  • Collaborate Cross-Functionally
    Make sure process and system improvements make everyone’s job easier. If you can consolidate tasks across departments, you can get additional efficiency gains.
  • Drive Extra Savings
    Once your processes are streamlined, your unnecessary approval and management layers removed, and extraneous tasks abolished, you have more time to focus on strategic cost savings initiatives. Be sure to bring in experts to help you with this.