Category Archives: Procurement Innovation

(Cost Reduction) It Only Starts With Cost Cutting

Looks like someone’s been secretly reading my blog. But seriously, you know I’m not going to be able to resist a review of any article entitled “Sourcing Innovation (It Only Starts With Cost Cutting)” (Managing Automation Magazine, registration required), after all, that’s pretty much what this blog is about.

According to the article, sourcing and procurement needs to shift away from a single-minded focus on cost cutting to a more holistic approach that considers quality, risk, and product innovation as well as cost. New emphasis needs to be placed on process optimization and collaboration both internally and with suppliers. … Well, yeah!

More interesting is that it also notes that many manufacturers are turning to options-based contracts and indexed-based pricing to counter rising costs and price volatility, especially for energy. This is more interesting – since I find options-based contracts to be uncommon, even though Jason Busch has preached their virtues in this blog as well as his own Spend Matters in “Sourcing Innovation: Securitizing Direct Materials”*. (As for indexed pricing, hopefully you are doing that already!)

It also discusses how HP uses Procurement Risk Management (PRM) (also known as Supply Risk Management) engineering to manage uncertainty in the procurement process by way of a set of mathematical and statistical solutions that analyze hundreds of potential scenarios and determine the likelihood of potential outcomes. Knowing the most likely outcome(s) allows you to predict volumes with confidence and make commitments to a supplier about volume levels and prices.

And, of course, it discusses decision optimization, although it simply lumps it in under the “spend management” heading. (Ouch!) For example, Oracle Sourcing from Oracle Corp. (Redwood Shores, CA) generates recommendations after analyzing various combinations and permutations to balance cost, quality, risk, and product innovation as well as “what if” scenarios. Decision optimization in a nutshell … too bad the author doesn’t look below the 100 million threshold when picking representative companies … since there are much more innovative decision optimization companies out there than Oracle. (And if you don’t remember, start with my optimization series over on the e-Sourcing Forum [WayBackMachine]: Parts I, II, III, and IV).

It’s a good article, but I would have liked more. But then again, it took thirteen installments of The Future of Sourcing to even scratch the surface of Sourcing Innovation.

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

The Internet and the Purchasing Knowledge Revolution

A great presentation at the Fourth Annual International Symposium on Supply Chain Management was Rod Sherkin’s presentation on The Internet & the Purchasing Knowledge Revolution.

Rod Sherkin, of propurchaser.com started off by reminding us that purchasers are very busy people and that shorter planning cycles (as a result of flexible manufacturing), smaller inventories, and unreliable information can make them busier by the day.

Then Sherkin reminded us that one of the best way to reduce your time as a purchaser is to manage one of the major time traps – price hassles. Do this by:

  1. Tracking suppliers’ input costs and
  2. Tying what you pay to their costs.

For example, if you are buying steel office chairs – find out what percentage of their cost is raw materials and tie your overall cost to their cost of steel. Every time steel rises or falls by a fixed percentage during the term of the contract, your price should go up or down according to a fixed amount, depending on the percentage that steel contributes to your supplier’s total cost. For example, if steel is 50% of your supplier’s cost, and you set a threshold of 3%, then every time steel goes up by 3% you should accept an increase of 1.5% in product cost but, more importantly, every time steel goes down by 3%, your supplier should concede you a cost reduction of close to 1.5%.

Furthermore, the best suppliers should see an advantage to linking your prices to their costs and prefer to compete in a transparent arena where they can win by keeping their costs down and their productivity up.

They should be more than willing to agree on a base market index and, furthermore, tie that to a neutral currency index. After all, if they are buying from China and a neutral China steel index shows steel going up by 4%, but you are buying in American dollars and the dollar has risen 13% in the same time period, then your costs should actually decrease since your buying power has increased by 8.65% (1.13/1.04).

And with the internet, you should have no problem keeping a watchful eye on your supplier’s relative cost increase or decrease on an agreed upon time period (every shipment, month, quarter, etc.). (After all, neither your accounts payable or their accounts receivable are going to be overly interested in calculating cost differentials on a daily basis.)

In addition, if you track your suppliers’ inputs, you can, in addition to negotiating automatic price reductions:

  • attract low cost producers (as they live to compete in open markets),
  • strengthen the supply chain,
  • reduce suspicion and acrimony, and
  • benefit sellers as well as purchasers.

Spend Management Changes Business

Before the Sourcing Innovation Series, where the mighty prophet of the spend management space Jason Busch offered up his thoughts on “Sourcing Innovation: Securitizing Direct Materials”* and “Sourcing Innovation: Next Generation On-Demand”*, he published a whitepaper for Ariba entitled “Spend Management: Changing Business”, A Case for Reexamining Procurement’s Role In Organizations of All Sizes, that you should read, or read again, as you’re unlikely to find all of the nuggets of wisdom Jason packs in on a first read.

Spend Management can lead an overall business strategy. And it can create significant competitive differentiation that is much harder to replicate than a product or service that is sold on the revenue side of the business … Spend Management is not a business strategy and philosophy. It is the business strategy and philosophy that leaders practice and followers fail to fully understand.

Spend Management is not just cost management. It is not just procurement. It is not just new software. It is not just an incremental change in function or process. It is not a new fad or methodology being pushed by the consultants simply to define their value and take your money. It represents a new type of thinking, a way of taking integrated approaches to not just procurement, but all aspects of non-revenue generating operations. It is a way of thinking about your global supply chain strategy that will reduce costs, improve processes, and increase profits even when inflation is rampant, economies tight, and transport lanes continually overtaxed.

At the very core, it is the process of driving sourcing innovation to new levels across your organization. Continual Spend Management Innovation, to squeeze more and more from every dollar you spend, is your ultimate goal as it is the only way to guarantee long-term sustainability of results. You focus on value, which could be defined as the simultaneous maximization of total cost, production efficiency, and innovation.

Spend Management success requires creating specific goals and having a destination point in mind. To do this, it is necessary to identify where a company stands today and how to overcome the gap between the current state and market leadership. After all, there is no panacean spend management solution, even though there are a number of platforms that cover different aspects of spend management, which include spend visibility, eRFX, eProcurement, catalog search, contract management, supplier performance management, category management, and supplier risk management, quite well. After all, if you know where you need to go, you’ll get there a lot faster.

Accelerating Spend Management results requires that executives move beyond looking at procurement solely as an agent for cost reduction. To sustain results, organizations must now examine cost, spend, vulnerabilities, and risk as assets to be managed and reduced. … Organizations need to think creatively about the best – and most cost-efficient – ways to mitigate and manage vulnerabilities and risk to drive Spend Management results. Every company is different. Every supply chain is different. And every solution that outperforms a competitor will be slightly different. The key is to learn from the best – and then improve upon it.

When upgrading capabilities and investments, it is not necessary to switch out existing providers. It is now possible to use and improve what they already have by turning to other providers to augment and enhance existing capabilities. I’ll say it again, there is no panacean spend management solution. Although some providers offer extensive integrated solution suites, some of which are quite spectacular, each provider tends to have a strength in a different area, such as eProcurement, eSourcing, contract management, spend analysis, supply visibility, or supplier risk and / or performance management, and the best solution for your company will probably be a combination of vendors – and sometimes you’ll even have multiple vendors that offer the same capability as you will find some vendor solutions more suited to certain parts of your supply chain than others. However, since most of the best vendors on the market today offer on-demand solutions, building an optimized heterogeneous solution should not be problematic.

To ensure that an organization is headed down the Spend Management path to sustainable savings and potentially industry-shaping results, it is essential for executives to keep three key objectives in mind. First, they should take a flexible approach and expect the same dexterity from their partners, realizing that Spend management is not a one-size-fits-all proposition. Staying nimble allows a company to take advantage of opportunities as they arise, and to react to – or ideally predict – changes in market conditions. Second, they should establish longer term goals and programs without sacrificing near-term objectives that can motivate the organization and prove the value of Spend Management as a continuous process. And third, they should invest in creating company-wide systems and capabilities that use the best of internal and external knowledge and processes to maximize – and guarantee – ongoing results.

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

The Unique Solution for Travel Procurement

Earlier today we discussed the unique challenges of travel procurement – a nightmare shared by your employees as well as your finance team. After all, when booking a single trip can take an hour by the time you book your flight, rental car, hotel, airport transportation, off-airport parking, and dinner reservations and when finance has to sort through (tens of) thousands of expense reports literally by hand to determine whether their preferred carrier owes them a discount, how could you call it anything but?

Last week I was fortunate enough to see the answer. It’s called the Rearden Commerce Network (rebranded Deem in 2012) For those of you who read Spend Matters regularly, you’ll probably remember Jason more-or-less gushing about them as well in posts such as “Rearden unShrugged”* where he called Rearden the future of “personal” services Spend Management for employees.

Services are tough. They’re calendar-based, time critical, and dynamically priced. There’s a reason there is no Amazon, Google, or Yahoo for services. Even the brightest software engineers cringe at the thought of trying to build a single platform to handle such a diverse array of services. But as far as I can tell, Rearden has done it. Sure the interface still looks Web 1.0, but the capabilities are Web 2.0 all the way. And when they say you can book a complete trip in 10 minutes – they mean it. I saw it – and it works! I’ll tell you one thing – from an applications perspective, few software packages on the market today impress me. Even today, I equate most software applications with undifferentiated organic fertilizer (which is probably why you hear me mention so few companies in this blog – that, or I really am another one of those arrogant PhDs). But Rearden’s solution impressed me.

If you are a mid-size or larger company with a lot of travel related spend, I can not think of a single reason why you should not be using Rearden now! When your employees who travel regularly are probably wasting up to 20% of their time on travel arrangements (instead of a more palatable 5%, or less), when you have no way of easily tracking who you are spending your travel budget on (and if you qualify for discounts) and, more importantly, no way of enforcing that employees are buying against your preferred contracts when possible and sensible when there is this easy to use system that lets your employees do almost everything they need in a one stop shopping experience, allows your finance team to figure out whom you are spending on and in what amount, and allows your procurement team to enforce flexible spending rules. It’s a great addition to your supply chain suite!

Now, I’m not entirely sure whether it will scale up in the future to support all services in a consistent, coherent manner, even though they claim the platform was built to support any service you can imagine, but it is certainly capable of supporting any T&E service you can throw at it, and this is a very significant feat from both a business and a technological perspective. I can’t wait to get some time with their senior technology guys to do a deep dive into the architecture and technology. (After all, I need to use the PhD sometime!) If it’s as impressive as the business capability, I might just be inquiring as to whether or not that Director of Applications Engineering position that they are advertising can be done remotely.

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

Coupa Charges Ahead!

Yesterday I was fortunate enough to have a long chat with Dave Stephens, fellow blogger (Procurement Central, [WayBackMachine]) and founder of Coupa. We talked about a number of topics (and I’ll post more when I get the chance), including what Coupa is focusing on for their next enterprise release as they slowly grow (and set up shop in their new offices in Foster City, California).

Besides a lot of minor updates (which appear in both the open source and enterprise version), to appease the open source community at large (like better sorting and slicker interfaces), they are making improvements in three key areas – administration (much easier to use), buying templates and (visual) form construction (enterprise-only), and budget-based procurement (enterprise only) – probably the first “killer-app” for Coupa.

One of the problems with most approval-based eProcurement systems is that they don’t take budgets into account – which is very important not just in a budget-based shop where the approver would first have to log into another system to see how approving a large requisition would affect his budget, but in any business as a manager needs to see how an approval affects not only the total budget, but her unit’s spending to date. After all, you don’t want to overspend your (share of the) budget without a good reason, and you want to make sure that non-priority purchases are only made if it makes fiscal sense.

I was fortunate enough to see the work in progress on the enterprise edition, and it’s looking really good. The admin functionality, and functionality in general, has advanced nicely since 0.1 (and to some degree, since 0.2) and the form-based templates, definable and customizable at will by the system administrators, will give Coupa a great boost as it will now be perfectly suited for not only your office supplies, spot buys, and other odds-and-ends MRO spend, but also for your services spend as well. One-time legal services or consulting project spend, special advertising, promotional, or print spend, and other odd purchases (such as visa or passport application fees) will now all be able to be processed through the same system. This is VERY SIGNIFICANT. After all, Aberdeen has found that MRO is 26% of the total spend of a company (on average), and can be as high as 63%! Even if you’re not able to negotiate significant savings into your contracts, the presence alone of an eProcurement system, like Coupa, will save you bundles of cash since you’ll be able to virtually eliminate maverick spending with the built in compliance – one of the most significant costs to your organization!

I’ll post more later when I have the time, including some of the benefits of their forward thinking architectural choices, but for now, I suggest you download it and check it out. It might still be a pre-release, but there’s enough there to start giving it serious consideration – after all, it’s the early supporters and adopters that will get to guide its development over the next year or two, since open source projects build their roadmap based on customer feedback, not what an arbitrary executive or investor thinks is the right solution for the marketplace. Plus, they have documentation now!