Category Archives: Procurement Innovation

Are we defined by our markets? – or – Smart Procurement Uses Yahoo!

One of the most interesting sessions I attended at INFORMS was the Online Auctions I session in the Auctions and e-Commerce cluster which consisted of the following talks:

  • How Can You Price a Phrase? Search Engine Auctions as Evolving Practices by Charles W. Smith
  • The Geography of Trade on eBay and MercadoLibre.com by Asis Martinez-Jerez
  • How Much is a Dollar Worth? Tipping versus Equilibrium Coexistence on Competing Online Auction Sites by John Morgan

Each of these talks fundamentally tackled a different aspect of a challenging sociological question whose answer may define us much more than we define it. Do we shape the market or does the market shape us? Although neither of these talks directly answered this question, the insights offered by the speakers are definitely worth due consideration.

In the first talk, Charles told us that real auctions are a discovery process – they define the value of a commodity for which we do not know the true value. This tells us that eBay is not a true auction, since the items traded on it have a well defined value (range). On the other hand, search engine auctions are true auctions since they are defining how much our basic terminology is worth as a means of indexing information. This also tells us that not only is procuring advertising online no easier than procuring advertising offline – but it is fraught with challenge as we have no idea how to accurately price a phrase – whereas a century of advertising has assisted us in pricing a service (if not its return).

This is all based on the theory of markets accepted by the speaker – that markets are definitional practices that generate meanings as interactive and mutual role-taking social practices that evolve over time. Furthermore, their generated meanings are not only subject to external factors, but they affect non market practices and our daily lives. For example, we don’t look something up on the internet, we google it. We don’t auction it on the internet, we eBay it.

In the second talk, Asis explored whether or not the internet has altered the geographies of trade as it crosses international borders and sites like eBay allow you to buy and sell worldwide. After all, with 34B in sales in 2004, eBay can essentially be used as a proxy for eCommerce. What Asis found was that the same location effect is more persistent in online trade than offline trade. Commerce is abnormally high within city and state (provincial) borders and abnormally low across borders. Asis theorizes that trust and cultural factors are the driving reasons, but this is hard to prove from pure numeric data. This tells us that if you’re going to buy something online, you should probably only consider local vendors since the odds are that you are going to end up buying local anyway.

In the third talk, John ran an experiment to determine whether or not eBay and Yahoo are in equilibrium coexistence or if the US auction market is tipping to one side or the other. In the experiment, which used a large number of identical coins offered for sale on both markets using the different types of auctions offered (reserve vs. no reserve, soft vs. hard close, etc.), John determined that revenues on eBay are consistently 20 to 70 percent higher than those on Yahoo and that eBay auctions attract approximately two additional buyers per seller than equivalent Yahoo auctions. This tells us that you should sell on eBay, but buy on Yahoo for smart procurement – and that the market is most likely slowly tipping towards eBay and that, as they have in most of Europe, Yahoo auctions in the US will most likely eventually disappear. (As a contrast point, Yahoo essentially owns Japan, and eBay and Yahoo are essentially equal in popularity in China and other parts of Asia.)

Supply Chain Education is Important

As with any professional field, the appropriate education is often a critical sucess factor. And, as with any professional field that is constantly changing, continual education is often key to continued success. Moreover, although the academics will often tell you this continued education should be delivered by them either through more advanced degrees, specialist degrees, or appropriately designed continuing education courses, the reality is that it is what you learn that is important, not who delivers it. In other words, we are no longer in a world where the medium is the message, we are in a world where the message transcends the medium and we are the message – and the message that we convey is what is important.

This means that professional development courses and certification programs, if appropriately designed and delivered, can be just as effective as academic programs, if not more so – especially if they are tailored to the challenges we address in our daily routines and convey to us the knowledge we need to do our jobs, and do them better.

To this end, I’d like to formally point out that if you are a traditional purchasing manager looking to update your capabilities from those of a twentieth century purchaser to a twenty-first century strategic sourcing professional, you have a professional option through Next Level Purchasing (now the Certitrek-owned NLPA)- the first (and only?) organization to offer training, and certification, over the internet at your pace.

Observant readers may remember that I’ve referenced Next Level Purchasing a few times before and wonder why I’m drawing extra attention to them now – and the answer is simple. First of all, until recently, there were very few academic programs with supply chain components, and most of these programs do not have extensive modules on today’s eSourcing enabled strategic sourcing best practices, as most of this technology is quite new. Therefore, this program provides a great way for you to update your skill set very quickly. Secondly, after a great discussion with Charles Dominick, the founder of Next Level Purchasing about current and future course offerings, I’ve decided to review a course or two* to help you understand the benefit of their unique offering and how you can use their offering to jump start your advancement to a Next Level Purchaser.

* I may not get to it until after the Supply Chain Directions Summit hosted by eyefortransport in San Francisco at the end of the month.

Riding the Rails with Coupa

As you may recall, Sourcing Innovation was one of the first blogs to bring you a detailed preview of Coupa, the revolutionary new enterprise open-source e-Procurement application from Silicon Valley. One of the most interesting aspects of this technology is that it is being built on Ruby on Rails (RoR), as discussed by co-founder Dave Stephens on his blog Procurement Central [WayBackMachine].

This is a bold move considering that RoR is still a relatively new technology that is essentially unproven in the enterprise application market beyond the corporate website, but one that could pay off big time for Coupa when you consider the rapid development time enabled by RoR as compared to other enterprise platforms such as Java and .NET (where WORA* does not apply). Personally, I’m still a big Java fan, but I can see RoR becoming the platform of choice in a couple of years for a number of reasons:

  • faster development time
    following the mantra of “convention over configuration”, RoR sacrifices flexibility for convenience, allowing developers to do more, quicker, and better within the framework provided which makes basic assumptions that significantly decrease the amount of configuration required
  • MVC architecture
    unlike most enterprise frameworks that have preceded it, RoR was built on the MVC architecture from the ground up and has built in object-relational mapping capabilities
  • full stack framework
    whereas some platforms require extensions from multiple vendors, Rails provides all of the components commonly needed by most web-based systems
  • designed for reusability
    RoR adheres to the DRY (Don’t Repeat Yourself) philosophy and its framework was designed to allow every piece of knowledge in the system to be expressed in just one place
  • preconfigured application structure
    RoR automates the creation of project structure and automatically creates all files and components needed by default (no need for a fancy IDE to automate these tasks for you)
  • simplicity
    rails wasn’t designed to do everything, and its focus on the common features used by a majority of programmers a majority of the time removed much of the complexity inherent in many application frameworks; note that this does not limit its capability, as it includes a robust extension mechanism to allow development teams to add (only) the capabilities they need
  • strong community uptake
    a large number of developers, especially in the open source community, are latching onto RoR as their development environment of choice as it overcomes the shortcomings of web scripting languages such as PhP and the impracticality of J2EE for (rapid) web-based development
  • XML compliant
    so if you need to integrate with a non RoR app, no problem!
  • rapidly maturing environment
    just like Java, RoR is rapidly maturing from a neat language for cool web page development to a full fledged enterprise application development platform – I’d say it’s pretty close to Java 1.2 in terms of lifecycle, which is where Java truly became a solid language for application development

In other words, instead of jumping onto someone else’s bandwagon, Coupa has decided to jump into the driver’s seat and lead the charge in the development of eProcurement applications.

And if you want to join the RoR movement early, but don’t know where to begin, consider checking out www.daveastels.com, especially if you are in the NorthEast, for courses, resources, and best practices consulting.

*WORA: Write Once Run Anywhere

The Efficio Survey (on the Changing Face of Procurement)

As mentioned in Spend Matters, Efficio recently released a study that looked at the changing face of procurement in Europe. Like Jason, I’m not going to spoil the report for you, but merely point out six key imperatives for procurement presented by Efficio.

  • Become a manager of relationships
    Procurement must possess highly developed relationship skills to effectively manage both internal and external stakeholders as well as suppliers.
  • Grow into the role of managing networks, not “vendors”
    As businesses continue to focus on core strength and outsource specialist activities, they have to manage increasingly complex supply chains.
  • Focus on value, not only on cost
    Procurement’s new role of managing whole networks of business partners will increasingly require it to extract value from those relationships as well as cost.
  • Broaden the skills base
    Procurement clearly needs a much broader set of skills than the core functional skills of tender execution and supplier negotiations.
  • Become part of the business
    Procurement must continue to integrate with the organisations in which it operates and be seen as a multi-talented business problem solver.
  • Don’t stand still
    Procurement needs to constantly focus on overcoming the challenges that lie ahead, and on proving its worth through excellent internal customer service and tangible results.

These recommendations are a great start, but I’d like to toss out five more of my own:

  • Smart Sourcing, not Low Cost Country Sourcing
    Remember, it’s not unit cost, but landed cost, that has the larger impact on your overall cost, and when the number of “touch” (or transition) points from a Low Cost Country is typically four times the number of “touch” (or transition points) from a local supplier, you can see how your transportation costs can really add up. A good post on Low Cost Country Sourcing is JB’s post “Global Sourcing: Does Innovation Matter?”.* (This post was in response to my challenge post, Is Low Cost Country Sourcing to China Really Innovative?.
  • Visibility, not Reduction
    All though a lean, rationalized supply chain is important, effective supply chain control is requires more than just a good design, it requires visibility, a topic I visit regularly. See my post Global Supply, Visibility, and Performance, for example.
  • Data, Data, Data
    Bad data and / or bad classification can cost you a lot, especially in global trade. For more information, see my post on Managing Global Trade Data.
  • Compliance, Compliance, Compliance
    Some estimates state that up to 70% of negotiated savings are never realized! Make sure all contracts are tracked and monitored from the date of inking to the date when the last product is delivered. Buyers have to buy against them, payments have to be on schedule, agreed upon rates need to be adhered to, and, most importantly, rebates and post-order discounts need to be recouped.
  • Don’t forget Legal!
    Major procurements often come with a lot of risks. Make sure you engage legal counsel from day one to make sure you mitigate all of your legal risks before they happen. (See my post on Key Concepts for Major Procurements.)

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.

The E-Procurement Benchmark Report

This summer Aberdeen released its fourth “E-Procurement Benchmark Report”, E-Procurement 2.0, where Aberdeen found that like your local mail service, e-procurement steadily delivers.

According to the report, enterprises participating in the 2006 benchmark report that they:

  • increased their spend under management by 36%
  • reduced their requisition-to-order cycles by 75%
  • reduced their requisition-to-order costs by 48%
  • reduced their maverick spend by 36%

However, the report also found that there is tremendous opportunity for many procurement organizations to improve their performance as a significant gap exists between the Best-in-Class companies and the rest of the field. Specifically, best-in-class companies have the following significant advantages over all others:

  • 28.6% improvement in spend compliance
  • 90.9% improvement in spend under management
  • 41.6% impact on requisition-to-order cycle-time
  • 23.3% impact on requisition-to-order costs

There’s a lot of good information in this report, and I’d suggest you download a copy and read it if you haven’t already while it’s still sponsored. More over, the “Steps to Success” are dead-on.

Moreover, if you’re not employing e-procurement solutions, given the expected improvements outlined above, there is no absolutely no reason you shouldn’t be, especially since a funny thing happened since Aberdeen Group delivered its initial E-Procurement Benchmark Report in 1998: solution providers developed functionality effective, cost-efficient, and rapidly deployable e-procurement solutions and large, mid-size, and small enterprises utilized them to place more spend under management and ignite the transformation of their procurement organizations.