Category Archives: Procurement Innovation

Innovation IS A Growing Problem in Procurement

I was very pleased to see a recent article in the Supply Chain Management Review that said it will be necessary for procurement professionals to develop new ways to define and identify needs inside their organizations, to assess the capabilities of the organizations’ internal resources to meet those needs, and to match them against all available external resources.

The article makes two interesting observations. First, that executives in industries such as automotive and pharmaceutical, where R&D expenses are rapidly rising and where returns have been steadily decreasing, have started looking to their suppliers for innovation in component designs, in quality processes, and in manufacturing processes. Second, that R&D managers who try to utilize seeker-solver networks often make costly mistakes with poorly constructed challenges. (Either the challenges are too tightly defined, with inherent biases that lead to the same dead ends, or their definitions are too loose.) In both cases, R&D managers are “reinventing the wheel” in procuring services and making expensive mistakes as a result. And even when they make slow headway, they lose process capability when managers retire or transition out of the R&D organization.

The article suggests that firms use knowledge brokering and procure solutions by finding them instead of creating them. They indicate that the knowledge brokering cycle – where you capture good ides, keep them alive, and imagine new uses for old ideas – has been used successfully used for years by contract design firms (such as IDEO and Frog Design). The argument is that since knowledge is unevenly distributed, reusing mature ideas in different contexts is more cost-effective than inventing the same ideas from scratch.

The article also endorses “open innovation” – the use of purposive inflows and outflows of knowledge to accelerate internal innovation and expand the markets for external use of innovation, respectively – as the internet has added a powerful twist to the open innovation concept that can significantly reduce the cost of innovation by pairing corporations (seekers) with R&D challenges and external scientists (solvers) who can approach problems from many different angles. Since somebody “out there” may already have solved your problem (or at least have the wherewithal to do so easily), and might be willing to do so at a fraction of what it would take to replicate the solution in-house, it pays to take a shot at seeking them out.

Then the article points out that there is a persistent limitation to knowledge brokering and open innovation – they do not engage the procurement professionals whose job it is to help define make-or-buy parameters. In addition, even though procurement is charged with managing the inflows and outflows of goods and services, they are traditionally not tasked with managing the inflows and outflows of knowledge. Furthermore, procurement is still charged with price reduction, and not revenue generation.

The answer, of course, is to recognized procurement as drivers of revenue through innovation – and not just drivers of cost reduction – and to forge links between procurement, R&D, and HR. Then, procurement needs to start launching experiments, track results and build bridges, and begin to lay the foundations for an innovative culture.

The 6 Days of X-asperation: Day 6 – Questions to ask your e-Procurement Vendor

For our last post in the X-asperation series, we’re going to conclude with e-Procurement as we tackle the generic questions that you should be asking every vendor, and the types of answers you should be expecting. And just like the X-emplification post, we’re going to keep it short and sweet.

1. What do I have to do to get a good handle on how to make effective use of this technology, and for an organization of my size, how long is it going to take?

You need to answer the following questions:

  • Do I need to alter my processes to implement and use the system?
    If you need to do some process re-engineering, it’s probably going to take a couple of weeks, if not a couple of months, of work before you are ready for the system.
  • What do I need to do to switch over from my current system?
    Chances are you’ll need to undertake either a data integration, or historical data propagation, project and this needs to be adequately planned for. It will probably require at least a couple of weeks.
  • How long is it going to take to train people on the new system?
    You want your people to have some basic training on the new system before you switch over.

An average mid-size organization that needs to switch systems is probably going to need to do (at least) a few weeks of process analysis and preparation before it can switch to a new system, or bring a system in for the first time.

2a. How much functionality is my organization realistically going to be using in 12 months?

e-Procurement is for buying – and that’s as straight-forward as you get. If the tool is easy to use, then, provided that buyers can buy what they need, when they need it, they’ll use the e-Procurement tool to create requisitions, which in turn become purchase orders when authorized and result in invoices when accepted by the suppliers, which in turn get sent to the accounts payable system(s), and they’ll be doing this from day one. An e-Payment tool will be used to pay approved invoices to suppliers that accept e-Payments using accepted payment methods such as ACH or wire.

Unfortunately, lots of things can’t be bought effectively using many of today’s e-Procurement systems, despite vendor claims to the contrary. These include “soft” categories like commercial print, PC’s and computing, and contingent labor. Furthermore, allowing everyone in the organization to punch out to an office supplies catalogue typically doesn’t save a dime, although it may reduce the number of complaints to management about “how slow” Procurement is. So be cautious — very cautious — about the claims of e-Procurement vendors with regard to overall savings. After all, one only has to look at the history of e-Procurement, and the savings claims made in the past that were never realized, to understand that achieving savings goals is a much harder problem than simply enabling a catalogue buying system.

2b. How much functionality do I really need?

The ability to locate the goods and services you need in the system quickly and easily, the ability to create purchase orders, the ability to authorize purchase orders, the ability to accept and approve, or reject, invoices, m-way matching, and simple upload utilities that allow correctly formatted invoices to be uploaded directly into the accounts payable system(s),

2c. And how does this functionality solve my #1 pain today, which is X?

If you’re looking at e-Procurement, then you have two problems. Your tactical procurement team is taking too long to place and approve orders and your maverick spend rate is too high. You’re looking for a tool that makes it easy to add contracted goods and services to the system, to specify contract terms, conditions, and rates, and to allow approvers to verify that if there is a contract that covers a purchase, the contract is being used. If it doesn’t help your buyers buy and your CPO keep maverick spend under control, it’s not the tool for you.

3. How much training is my team going to require to effectively use the software? How long is it going to take them to absorb this training?

It shouldn’t take more than a day to get even the most junior of purchasing agents up and running on the full capabilities of the tool. Remember, it’s supposed to make their life easier – not harder!

4. How much is this software REALLY going to cost me in the first year and each subsequent year?

It depends on whether you’re buying a point solution, or a true end-to-end e-procurement system, and whether or not the system is enabled with catalogues, punch-outs, networks, or marketplaces. Point solutions are literally a dime a dozen and should be in the low five figures per year. True end-to-end solutions are rarer, and those integrated with useful catalogue or network solutions rarer still. True end-to-end solutions will be in the mid to high five-figure range per year and those integrated with networks or e-Payment solutions will be in the low-end of the six figure range per year.

5. You say you care about your customers and that you are going to provide great service. Prove it!

Ask for references. Talk to them. If the vendor has an upcoming user meeting or conference, ask to go to it. Ask for examples of results their customers have achieved on the platforms recently, and how they can help you achieve the same.

6. Can I take it for a test drive or a short term lease?

e-Procurement, by definition, is web-based, and good systems are at least hosted ASP, and most of the new systems are true multi-tenant on-demand SaaS, so the vendor should have no problem setting a couple of buyers for your organization up on the system for a test drive and should be able to give you access to any standard vendors it has integrated through punch-out, XML, or other means, into its offering. And they should be willing and able to give you short term access (for a week or two) to review it for free.

7. Can I buy it or implement it in pieces?

Just like you should buy the entire e-RFx or e-Auction tool functionality up-front, you should buy the entire functionality of the e-Procurement and e-Payment tool up front, as it shouldn’t be that expensive and you should get a slightly better price that way.

the doctor Wants to Remind You It’s Sourcing AND Procurement

I’m reminding you of this because it appears that there are still some vendors out there that would have you believe it’s e-Sourcing or e-Procurement, or some fractured combination of both – because that’s what they have and they want all of your business.

e-Procurement and e-Sourcing are not the same thing. They’re too halves of a whole, one tactical and one strategic. Alone they bring value, but combined they bring much greater value. The best way to see this is with a picture. (Click on the image below to enlarge it.)

As you can see from the image, sourcing leads into procurement, usually off of a contract, and procurement leads into sourcing, through the analysis step. Without procurement, the organization wouldn’t have a large transaction database and extensive visibility into spend, the key to a successful spend analysis effort, which is the first phase of e-Sourcing. And without sourcing, there would be no strategically negotiated contracts to buy against, and procurement managers would be spending willy nilly, making the current level of maverick spending that you have to deal with pale in comparison.

Furthermore, as you can see from the picture, e-Sourcing is more than just e-Auction and Contract Management (even though they are the solutions offered by the largest number of providers), and e-Procurement is more than just order management, invoice management, and e-Payment. Each step is important, and the most important steps, particularly from a savings perspective, are the steps that most solution providers don’t have solutions for – true spend analysis (not static reporting on a data warehouse), decision optimization (not monte-carlo simulation – leave that to the casinos), reconciliation (since the only way you realize the negotiated savings is to make sure you’re paying what you’re supposed to, and not paying for anything you didn’t actually receive), and, in global trade, tax reclamation (Global Data Mining hasn’t found billions of dollars in savings for their customers because they got lucky).

After all, even though these are crude, inefficient, poor man’s solutions, you could, if you were brave (or is that masochistic) enough, you could use office documents and e-mail to achieve core RFX functionality, you could do basic contract management with an open source content management system (or an Access data base and a college programmer if you were really daring), hold your auctions using a conference call service, manage your purchase orders and invoices with a basic accounting system, and pay with P-cards.

Now, as I pointed out last week in the doctor would like to remind you the one system solution is still a pipe dream, you’re not going to get all of this from one vendor, and that’s okay. The key is to assemble a complete solution that meets your needs, subject to your process and goals. And, as I have previously pointed out, as long as you adopt platforms that use common architectures and standard protocols for data interchange, it’s not too hard to build a complete end-to-end solution that will generate the value you want – as it’s there for the taking.

The Amazon Effect Is Aptly Named

CPO Agenda recently ran an interesting article in their Winter edition called “The Amazon Effect” which, although it asked a good question, did not, in my opinion, give a full answer. The article made a great point when it noted that many users find traditional e-Procurement systems frustrating when compared with consumer websites. This is one of the main reasons why CAPS Research in 2006 found that only 36% of total spend goes through an e-Procurement system in most organizations, as quoted by the article. The reality is that systems like SAP are so complicated, that even experts have problems.

But let’s get one thing straight – even though, as Aberdeen pointed out when it noted that efficient e-Procurement initiatives increase the spend under management by 35% in an average organization while reducing maverick spending by 41%, implementing a user-friendly e-Procurement system will go a LONG way towards increasing organizational use (and maybe even lead to a 433% improvement in spend under management in extreme cases), it won’t solve all your problems. Let’s face it – not everything you buy is office supplies or other products that neatly fit with the “shopping cart” system that so many vendors these days are trying to reduce their e-Procurement systems to. Can you put a “temp labour worker” in a cart? (In the US? Legally?) Can you put “customized machining services” in a cart? Can you put a non-catalogue one-time buy in a cart? Depending on the flexibility of the cart application, the answer could be a resounding no.

The strength of an e-Procurement system lies not in its look and feel, but in how much organizational spend it can capture – since that’s where the true value of an e-Procurement system is. Usability is important – but if the system can’t capture non-traditional spend, and can’t do so in a straight-forward and efficient manner, users will continue to bypass the system regardless of how slick it’s cart interface is. It’s time to wake up and smell the coffee – enterprises aren’t consumers. They don’t go down to the local office supplies store and buy a ream of paper, a pack of pens, and a can of coffee for the home office. They buy office supplies by the palette, custom products by the thousands, or millions, and temp labor services on the fly. If you can’t handle that – then nothing else matters.

So, the Amazon Effect is merely that – an effect. It’s not a solution.

The 12 Days of X-emplification: Day 12 – e-Payment

Sooner or later you have to pay the piper, and that’s why I saved this topic for last. Although e-Payment falls under the e-Procurement umbrella, that we covered back on Day 5, most e-Procurement solutions don’t handle e-Payments, and most e-Payment solutions are actually stand alone solutions. Thus, it’s important that this topic be covered on its own.

Since the underlying concept of e-Payment is relatively simple, like the post on e-Procurement, this post is going to be a little shorter than the other posts in the series, although it actually has twice as many questions. e-Payment, in principle, is not that complex and it just boils down to whether or not the system does what you need it to do (without costing you a king’s ransom).

1. Does it integrate with your ERP and/or e-Procurement Platform?

If it doesn’t integrate, there should be an easy, well-defined methodology for getting invoice data out of your ERP and/or e-Procurement platform and the e-Payment data back in. Furthermore, if it doesn’t integrate directly, make sure to ask for a demo of the integration capability, with a test system that mimics your systems (and preferably a test system that you control), before signing on the dotted line. Remember, e-Payment, like e-Procurement is supposed to make things easier – if you have to re-key data, then it’s likely not any easier than whatever process you are using today.

2. Does it integrate with your AP system?

Your accounts payable system not only needs to track what needs to be paid, but when it was paid, how, and whether or not it was paid in full. Again, since you don’t want to re-key data, you want a clear, easy integration path. In this case, batch export and batch import using XML files is sufficient, since AP doesn’t necessarily need real time status, but you need a mechanism that is as seamless and easy as the mechanism that integrates the system with the ERP and/or e-Procurement system used by procurement on a day-to-day basis.

3. What level of volume can the system support?

If you make a lot of transactions over the course of a day, you don’t want a system that craps out if you try to put more than one transaction through a second. In particular, since you will have peaks and troughs, and since your goal is to grow your business, you want a system that can reasonably support five to ten times your peak activity today. Ask for benchmark results conducted or certified by a third party – you want to know the system is up to snuff.

4. Does it detect duplicates?

You don’t want to be paying the same invoice twice – because if it’s a less-than-reputable supplier, you might have trouble getting the payment back or getting a credit towards future purchases – and this is assuming you can even identify the duplicate payment at all! If it’s less than a certain percentage of spend, your accountants might think it less costly to write it off as a loss than try to hunt the error down. Since this will negatively affect your implemented savings metrics, you want to be sure this doesn’t happen.

5. What is the true cost of the system?

Since many e-Payment systems are priced per transaction, either a fixed rate for each transaction or a percentage of each transaction, you want to be sure you have a good handle on what a system is going to cost you before making a decision. Ask them for complete purchase, installation, operation, and maintenance quotes and a sample calculation based upon your expected throughput. Then do your own calculations.

6. How are rejected transactions managed?

Not paying the piper is generally not an option, especially since you never know what rats he might lead your way if you don’t, so you want to make sure that all rejected transactions are appropriately caught, flagged, and managed. If it was a system error, it should be retried after a small period of time has elapsed. If it was an account error, it needs to be flagged and brought to the attention of a human being to correct the information. If it was a lack of funds error, all payments in the queue need to be put on hold until the issue is resolved.

7. What types of payment are supported?

Electronic check / ACH, wire, P-card, credit card? If you’re locked into only one or two methods, and the methods aren’t right for you, it doesn’t matter how good the system is technically – it’s not the system for you.