Category Archives: Procurement Innovation

The Efficio Survey (on the Changing Face of Procurement)

As mentioned in “The Changing Role of Procurement in Europe” on 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.

(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.