Category Archives: Procurement Innovation

Ensuring Executive Support in Your Quest for Purchasing Fire

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Last year, over on the e-Sourcing Wiki, I brought you The Quest for Purchasing Fire, a twelve step guide to selling sourcing and procurement initiatives internally in your organization. Last month, the SSON published the “top ten tips for ensuring buy-in from the top”, which complements the wiki-paper nicely. Because you have to:

  • Have a Compelling Business Case
    Anything less than a complete, finely detailed, business case with backed-up ROI calculations and you’re just asking for rejection from an executive with too many time requests and a need to kill some as quickly as possible.
  • Create a Sense of Urgency
    If you can’t demonstrate why the organization can’t wait to take advantage of your cost saving initiative, it will likely get put on the back burner
  • Understand Your Organization’s Internal Processes
    Go through the channels and make sure not to offend anyone who could cause trouble if not included.
  • Be Open and Honest About Endeavors
    Be honest about past mistakes and any shortcomings you may have and how you plan to correct them with this initiative.
  • Keep Company Staff in the Project
    Not only do many organizations still distrust consultants, but getting company staff involved early is key to obtaining buy in.
  • Maintain a Tight Focus
    You’re not trying to save the world … so don’t tackle everything at once.
  • Be Bold Where it Counts
    Even though you’re not trying to save the world, be sure to have a plan that aims high with respect to the problems you are tackling.
  • Give Examples from Beyond the Organization
    Demonstrating how similar projects have helped your competitors will go a long way towards alleviating fears of the unknown.
  • Demonstrate Your Risk Awareness
    Every project involves risk … be sure to address all of the likely, and unlikely risks to let management know that you’re aware of the risks and actively taking steps to mitigate them.
  • Highlight the Compliance Benefits
    As the article says, pull up your SOX.

Purchasing’s Best Practice Tips for Buying in a Recession

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Purchasing recently ran an article on “best practices for buying in a recession” that contained five tips for buying in these troubled times. While most of the tips were pretty basic, sometimes the basics are best, and they are worth repeating.

The tips were:

  • Put the pressure on business stakeholders
    Put the onus for achieving defined savings goals on the business unit executives (with backing from senior management).
  • Give your suppliers a check-up
    Make sure your suppliers are healthy and not on the verge of bankruptcy. Do this by insuring your suppliers are paying their suppliers on time, aren’t burning through too much cash too fast, and have the resources to weather the storm.
  • Help key suppliers
    Start by paying promptly. Delaying payments for ridiculously long timeframes will just cost you more in the long run (since suppliers will likely not be able to get financing as cheaply as you and, at contract renewal time, will have to up their prices to cover the loss).
  • Don’t forget the fundamentals
    Consolidate buying, extend contracts with preferred suppliers, and continually monitor your suppliers’ health.
  • Get Lean
    Control inventory, control commodity costs, and minimize waste.

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.