Category Archives: Procurement Innovation

How Can Indirect Spend *NOT* Be Well Managed in 2023?

the doctor gets a lot of press releases. Some of them contain a lot of BS (which is good, he writes best when he’s on an angry rant), others contain a lot of “findings” that, if true (and the findings usually are for the right for the right subset of the market), are simultaneously scary and ridiculous. In this particular case, as the doctor writes this, he received a press release that said the research finds that 82%+ of procurement leaders say their indirect spend is not well managed, leaving substantial cost savings on the table.

The question is, how is that number so high? We’ve had source-to-pay suites for a decade (which were originally designed to source indirect products and services, create catalogs of those sourced selections, support purchase orders only for items in the catalogs, and ensure invoices matched the item prices in the catalog. And for those willing to do custom integration, it was possible to integrate a best of breed sourcing solution and a best of breed catalog management solution and a best of breed e-invoicing solution and achieve this in the late 2000s.

Now, in a mixed solution, there was no guarantee that the sourcing event would choose the best mix (since early solutions generally didn’t support optimization or advanced analytics), that the catalog would force the lowest cost (or even preferred) selection when there were multiple options, or that the invoice management could detect when shipping costs were too high or handling fees shouldn’t be there, but there was still management and any overruns were not substantial (at least compared to pre-solution overages in indirect; an organization could easily cut out 80% of the fat, which could be as high as 30% in some categories; so if the overage went from 30% to 6%, that was well managed — and solutions have only become better over time).

What’s even worse is when the expected reality is put into hard numbers. According to the press release “two-thirds of suppliers (68%) report increased demand for their offerings compared to the past year and nearly half (43%) are planning to increase prices in 2023“. Thanks to global inflation, prices are going up as demand does (which is still pent-up post-pandemic), and we know it, but knowing costs will be uncontrollable to an extent is a tough one.

Of course the press release says that the key to cutting cost is to implement (autonomous) technology that saves on day one, which you should know by now, but the question is why have so many companies not yet implemented basic S2P functionality, either as a suite or as BoB integrations, as such technology would have ensured indirect was well under control, and reduced a likely organizational overspend by (85% of 15% of 35% =) 5% (est. realization * avg. savings * avg. indirect spend) of total spend, which would go straight to the bottom line! No autonomous tech needed!

For those interested, the press release came from a third party PR firm and was based on Globality’s 2023 Research Insights for CFOs.

Do You Have a Data Foundation?

Last week we asked Where’s the Procurement Management Platform as the future of procurement is a platform that allows Procurement to build up, maintain, and evolve the solution it needs to be successful over time, over time. Such a platform needs to be the foundational data source for Procurement, but not necessarily the data hub that is used to integrate all of the organizational and external data into the core data source (which is either the internal data store or the data store supported as the platforms foundational data source).

While a procurement management platform could be the data foundation, since it’s primary purpose is process based procurement solution integration, it isn’t necessarily … after all, an API / Integration Engine focused on process doesn’t need to support every data source out of the box, nor does it need to make integration with arbitrary data sources easy, and, most importantly, it doesn’t need to support advanced data processing and transformation features, which is key when trying to integrate multiple data sources into a foundation that can be universally processed by the platform and support true end-to-end spend, and risk, analysis.

Like a Procurement Management Platform, which we may see four (4) of by year end, Data Foundation solutions are also quite few and far between. The reason? Most “data” solutions are focused on BI [Business Intelligence], Spend Analysis, or Contract/Document management, etc. and most “data” feeds on risk data, supplier data, catalog data, etc., which means they are built for certain data types and processing operations. This means that they will support a straight-forward integration for any data source with similar data types, or data types with compatible processing operations, but not any others.

When you look across Source-to-Pay and the broader Supply Chain spectrum, there are a lot of different applications that support a lot of different processes that need a lot of different data requirements of different types and formats. You need a modern MDM [Master Data Management] solution that works on web and cloud data, can pull in and process data on the fly, and push it back out enriched as needed. And support any data format and standard, not just flat files or relational tables in text (like old school MDM).

This capability is a lot rarer than you think. Most suites are built on transactions, most supplier networks on relational supplier data record, and contracts on documents and simple, hierarchical, meta-data indexes. But you also need models, meta-models, semi-structured, unstructured, and media support. And that’s just a start. But there are possibilities emerging. Just watch this space.

2030 is too late for Center-Led Procurement!

Especially since 2020 was too late! And organizations should have been there by then since center-led procurement was being discussed as the next generation model in the mid-2000s and, more importantly, as the futurists were predicting that the future of work, and companies, was remote and distributed last decade, every company should be “center-led” by now.

(Note that we mean “center-led” and not “centralized” where one central office handles all major procurement projects globally. We mean center-led where a centralized function determines the best procurement path for each category — which could be centralized, distributed, multi-level, or mixed — and provides guidance to all of the global teams and makes sure they build the right procurement — and supply chain — models up front.)

In fact, by now, all organizations should be working off of a virtual center-led model where the “center” is the Procurement A-Team, where the members could literally be spread out over the 6 continents to “locally” absorb the situations in each geography before making decisions and to always have someone available to answer questions on not just a follow-the-sun but follow-the-local-business hours model.

And while virtual / remote / distributed work still seems to be an entirely new thing that most companies didn’t think of before the pandemic and that most companies are trying to eliminate entirely now that the pandemic has been declared over (even though the next pandemic is just around the corner and, yet again, no one is prepared for it), those of us in IT and Supply Chain have been doing it for two decades (and the doctor has been primarily been working remote for the past 19 years — the tech has been there, and has worked, for two decades … and now that high speed is in just about every urban area globally, there’s no reason a hybrid/virtual model cannot work and work well).

The reality is that the pandemic not only brought global supply chains crashing down but brought to light the high risk embedded in them a few of us saw a decade ago, which went beyond the obvious risks of “all your eggs in one basket” (even though Don Quixote was published in 1605) and “The Bermuda Triangle“*1, but also included the risks of relatively centralized procurement where one team in one part of the globe made the all-our-eggs-in-the-China-basket and managed the relationship with one team at one factory in another part of the globe; so if either team got completely locked down with little remote/virtual support (and we saw some countries limit people to 1KM from their homes and China lock down entire cities and not even let people leave their apartments), the entire chain was shut down even beyond the worst case that some of us were envisioning a decade ago (and made our definitions of bad — which was factory goes out of business, shipping lane closes, or ship sinks — look good by comparison because, at least then, you could still go to work and travel to find a new factory, organize a new lane, or spin up the factory 24/7 until you remade the order).

However, with virtual center-led, you not only have a team that knows how to work distributed and remote, and who knows how to use that setup to better mitigate operational risks, but who also has a risk-mitigation mindset that any supply base should also be distributed and different locations remote from each other (two factories in the same town is not risk-mitigation; an earthquake destroys the roads, the entire town gets quarantined, or political borders shut and its effectively one cut-off source of supply) and will help the different parts of the organization design more risk-adverse, or at least risk-aware, supply chains — tapping into local expertise in each part of the world to make the best decision and allowing the organization to move management of the chain around as needed and local teams (because you’re not sourcing your Canadian snow-plow and igloo building services from India, for example) to always have remote access to guidance and best practices in snow-removal services RFP construction (and know how from Norway and Japan).

In other words, center-led procurement (of which you can find a lot of guidance on in the archives here and over on Spend Matters, especially since, now retired, Peter Smith of Spend Matters UK was a guru on this as well as sustainability) of the virtual kind is what you need to be doing now if you want to last until 2030.

 

*1 which, while statistically no more dangerous than any other part of the oceans, exemplifies the fact that even the biggest ships, with an entire year of your inventory on board, can sink, especially when oceanographers have finally realized [even though mathematicians working with wave models understood this concept decades ago] that rogue waves are not a once a in decade occurrence, but a DAILY occurrence on this planet, it’s just that the ocean is so big that the fraction ever covered by ships is so microscopic that the chances of any ship encountering a rogue wave are infinitesimal on a ship-by-ship basis)

Furthermore, No Modern 2020 Platform Will Be Without What-if?!

As you may have noticed, the doctor has been on a bit of a bent lately defining what a modern S2P platform is as he’s completely fed up of all of the “digital” bullshit where marketers are trying to sell everything old like its new again and technically advertising solutions that are less powerful than the doctor could code on his 8088 three decades ago! (It had a 2400 baud modem so the requirement of network connectivity was even met.)

And if you think the doctor is being a bit extreme, go back and re-read the definitions of “digital” and “analysis”, ask some pointed questions to these vendors about what their solutions can really do, and you’ll find that maybe, just maybe, he’s not being that extreme at all. It’s sad how many vendors believe that a fancy new UX on a weak Procurement 2.0 solution all of a sudden makes it 3.0 and 4.0 ready when all they are really doing is putting lipstick on a pig (and no self respecting pig wants to wear lipstick)!

Yesterday we defined the levels of analytics and hopefully made it clear that there shouldn’t be a single platform on your consideration list that doesn’t have at least basic prescriptive capability and that you should also make sure the vendor is on a permissive journey before signing on the bottom line!

But that’s not all you need to demand in a platform. You also need to demand a platform with embedded What If? capability.

It’s going to be a while before the predictive analytics work across all the situations a procurement specialist need them to work in, and even longer until the platform supports the insights needed for permissive analytics. But, in the interim, the procurement specialists still need to extract value from analytics — and that value is going to come from What If?.

What If? the demand next year is the same as this year, what will the total cost be if the cost stays flat? What if demand rises 10%?

What If? the delivery is late by a day? By 3 days? By a week? What if the order is routed to the backup supplier? The backup location?

What If? the supplier’s financial woes get worse? What if the supplier goes bankrupt?

What If? the contract milestone isn’t hit? What is the impact? What is the risk?

The procurement professional needs to be able to ask What If? throughout the platform and, more importantly, throughout the analytics. Some Reports should be interactive and allow the user to project the next quarter, year, etc. of data using current data and advanced What If? algorithms. Anything less won’t be enough.

… And Advanced Analytics Should Be a Must in 2020!

Just like any vendor can claim to have a digital procurement solution because, as we clearly explained last week, email and spreadsheets technically count, any vendor can claim to have analytics. Consider the definition:

the analysis of data, typically large sets of business data, by the use of mathematics, statistics, and computer software

And then consider the common definition of analysis:

a presentation, usually in writing, of the results of this process

This means that any software that provides a canned report summarizing a data set (average, mean, etc.) qualifies. MRP software from four decades ago had canned reports that did this and qualify. Thus, since computers are modern in the grand scheme of human history, any vendor can tell you with a straight faced that they have a modern platform with a modern analytics solution if it runs on a computer, supports bid collection in a spreadsheet, and contains a canned report summary — especially if they were an English or Arts Major (especially since we are in the post-modern phase in their worldview).

DO YOU REALLY WANT TWO-PLUS DECADES OLD TECHNOLOGY?

Think carefully about this — because if you don’t ask the right questions and use the right measuring stick, that’s precisely what you might get if you don’t get beyond this “digital” and baseline “analytics” crap.

What you have to know is that there are levels to analysis. And while the number of levels might very depending on how granular you want to get, there are at least five in today’s technology platforms, and these are the seven levels the doctor likes to use.

1. Classificative
At this level, data is classified into buckets for the purpose of basic analytics.

2. Descriptive
At this level, basic statistics are run to compute summary, typically canned, reports on the data.

For decades, this is all you got, and many vendors still try to pass this off as sufficient.

3. Diagnostic
At this level, the user is either given the ability to define their own reports to drill in and find the potential root causes of issues identified in the reports or to run more advanced statistics (beyond just average and mean) to identify correlations between data to find potential root causes of issues.

Most platforms developed or upgraded in the last five years in S2P, Sourcing, and Spend Analysis have this capability. But this is not enough any more, especially when there are do-it-yourself software packages for under 1K that can allow you to get to the next level, which has been around in specialized demand planning and analytics for decades.

4. Predictive
At this level, the platform employs statistical trend analysis, advanced clustering, and/or machine learning to identify trends and predict future costs, risks, performance, etc.

A few platforms are starting to incorporate this, but this should be a baseline requirement considering ERPs, demand planning, and advanced BI tools have had at least some capability here for close to 2 decades

5. Prescriptive
At this level, the platform is not just identifying and computing future trends, but providing advice on what to do as a result of those trends.

Leading platforms are starting down this path, but given that the foundations of prescriptive analytics have been around for over two decades and that best practices in sourcing and procurement have been around almost as long, if a platform can’t provide not only insight and recommendations what to do with that insight, it will never even achieve 3.0 objectives … meaning 4.0 will never be a reality.

In other words, any platform without some prescriptive capability is behind and not one you should be investing in.

6. Permissive
At this level, the prescriptive analytics is used to power automatic actions based on embedded rules. If the platform determines a commodity that is typically on a one year contract is at an all time low, it might initiate the renewal event two months early to lock a rate in if a rule is defined that says events can be initiated up to three months early if prices drop below contracted rates and are projected to be within 2% of the projected low.

Few platforms are here, but you should be looking for a configurable platform with rules that permit simple automation based on both entered and derived data values from the application and the data it contains. Permissive analytics is a cornerstone of the Procurement 4.0 promise so make sure your chosen vendor is building in permissive analytic capability. It can be fledgeling to start, but something needs to be there or it won’t be there when you need it.

7. Cognitive
At this level, the platform embeds machine learning and advanced AI techniques to not only make good predictions but choose the right actions to take on those predictions without any user intervention for run-of-the-mill sourcing and procurement processes and events. When we reach Procurement 4.0, such systems will not only eliminate 98% of tactical work to allow buyers to focus on the strategic, but eliminate 90%+ of strategic work identified as relatively low value (at the time) and allow buyers to focus on strategic efforts that present the greatest opportunity to provide value … truly optimizing the limited Procurement resources available.