Category Archives: Procurement Innovation

Exact Purchasing is a Pocket Cube Part 1

Last month we told you that Jason was right when he said that we need exact purchasing, but as we clearly stated then, and stated now, it’s NOT a new matrix. Especially when the original Kraljic matrix didn’t really fix anything in the first place (as it just gave us a methodology to start thinking about Procurement methodically so that we could start on a journey to actually fixing Procurement).

However, any methodology that wants to fix Procurement can’t just try to reinvent the Kraljic Matrix, even if it takes a data, vs process, centric approach. (Although the correct answer will involve both data and process.)

There’s two reasons for this.

First, any answer must take into account people, process, and data. (It’s not tech, tech is just that which implements the process on the right data with the support of people, who at least need to define the process the tech will employ if automation is being deployed.)

Second, any answer must properly take into account the complexity, market risk, and category impact. The only way this can be done is if EACH dimension is analyzed separately — not bundled together in some arbitrary mish-mash of factors that tries to pretend two (or more) dimensions are more-or-less the same.

In traditional Kraljic, you balanced profit vs a risk-complexity mish-mash. It sounded good, except risk and complexity are NOT the same thing. Risk is external (market) risk that you can try to mitigate, but that you have no control over. Category and product complexity is completely under your control — you control the design, the raw material mix, the production process, etc. You can choose to make the product simpler or more complex, use better or worse materials (as long as they meet minimum/maximum industry and government safety and compliance requirements), or less (or more) intensive production processes. Your choice.

In the proposed Busch model, you replace impact with influence and map that against a risk-complexity mish-mash, and then you use this mapping to translate Kraljic’s definition of what a category is into an actual data-backed strategy to purchase it. It’s progress, but not the answer.

The answer, as per our last post, is the pocket cube, where you break out risk and complexity into their own dimensions and deal with the categories accordingly. Especially when there is a mis-match between the risk and complexity ratings.

It’s easy when the risk and complexity match in severity, and Jason is dead on when the risk, complexity, and category impact (not cost, or profit, but criticality) are low and when the risk, complexity, and category impact (again, not cost, or profit, but criticality) are high. In the first case, it’s transaction focussed (but not necessarily continuous real-time transaction monitoring) and in the latter case it’s fundamentally a cost-based architecture, but more complex than Jason presents.

Where it gets tricky is the grey areas when there is a mismatch in two of the categories and, more specifically, when risk and complexity are diametrically opposite. But we’ll get to that in a later post. Starting tomorrow, we’ll take the first two of the four easy categories.

AI has NOT changed the fundamentals of Procurement. It HAS Strengthened Them.

Procurement, one of the last-areas of the back-office to be hit, is still drowning in the AI-Hype machine that is going full-force 24/7/365, as a result of the self-propagating A.S.S.H.O.L.E. that does nothing but excrete derivative nonsense on a continuous basis, piling it so high that it’s hard not be be Blinded By The Hype!

But, as we’ve seen, this new age of Agentic AI is not accelerating us into the Intelligence Age, but instead devolving us into the Neolithic Age (as it’s now been proven that these technologies are eroding [our] critical thinking skills, and only a few critical thinkers seem to realize that AI is dulling our minds).

Plus, it’s not effective. Studies by MIT and McKinsey last year demonstrated that only 5%/6% of early adopters saw a return. That’s a 94% failure rate, which is even worse than the general technology failure rate of 88% that is the highest it’s ever been in two and a half decades of project failure.

All AI has proven is that you can fail much faster than ever before, but still lost just as much money. That’s because the situation in Procurement is the same as in every other back-office function. Results come from the classic formula of:

  1. PEOPLE first
  2. PROCESS second
  3. TECHNOLOGY third

You need good people more than ever. Sure AI can “process” mounds of data at speeds we’ve never seen, but that doesn’t mean it can extract meaningful intelligence, and even if the intelligence is accurate, that it’s actually useful. Remember, these systems not only process data faster, they hallucinate faster than a field full of hippies at a Woodstock revival concert. But since their grammar and paragraph construction is now better than 90% of the population thanks to the social media revolution that has resulted in the average person having an attention span less than a goldfish and an IQ significantly less than our great-great-great Victorian grandparents, the majority of the population is willing to accept anything they pump out as accurate (even when it’s not).

Only top trained people can properly process complex situations, come up with the right solutions, and execute them. They should be using the most advanced tools available to them to process and make sense of the data using modern Augmented Intelligence technologies, but they should NOT be doing what a dumb system, guaranteed to hallucinate on a regular basis, tells them.

Once you have good people, they need to implement good processes that ensure best practice execution not only by them, but by everyone else who is involved in the process, inside and outside the organization (in partners, providers, and clients). Process allows emerging talent (with good education, great cognitive capacity, and an exceptional [dumb AI free] work ethic) to execute at the level of top talent with the guidance the top talent built into the process, and get the experience they need to become the next generation top talent in the organization.

Finally, once you have the right people, who know what to do, and the right processes, that help them get things done, then, and only then, do you identify the right technology to fit into, and accelerate, the processes. Maybe it’s AI, but chances are it’s traditional, domain-specific, (A)RPA that supports the process to automation levels of 95% to 99%. Dependable, fit-for-purpose, technology is always faster, better, and significantly cheaper than general purpose hallucinatory AI that may, or may not, work on any particular problem.

If you want to survive the current chaos, remember these fundamentals.

And if you can’t remember more than one fundamental, just remember PEOPLE first!

(While you can still find, and hire, people who know what they’re doing. Those of us who grew up before tech took over are getting older and greyer. Without us, not only will you not survive today, but you’ll have no one to train your staff for tomorrow. To think that, as a race, we survived The Great Extinction and, more recently, the The Great Decline during the Younger Dryas era only to risk global civilization collapse as a result of The Great Retardation.)

The King is Dead. Long Live the King!

Learn the phrase, because you will soon be living it in every aspect of your life — it’s not only the new fashion in western politics, but the new fashion in enterprise tech tripling down on the AI hype when the big AI vendors are losing money faster than ever before (as compute costs skyrocket, competition heats up, and a lot of people are getting fed up with a total lack of return on their investments)!

However, in the meantime, as the hype wave makes it way though the mass market, a slew of startups emerge building on LLMs and fake AGI offerings, and the marketing mania takes over, expect the e-Procurement is Dead, Sourcing is Dead, and Contract Management is Dead rhetoric to hit all time highs as these new players cr@p their new apps as fast as they can, with new — natural language centric — interfaces, more automation, and instant gratification. (At least when these apps work as desired.)

As these offerings get adopted at a rapid pace in organizations who are just adopting modern solutions (which make up half of the space, or more), replace first generation apps from the noughts in organizations who decided that anti-complex is the way to go, and start to get noticed, the rhetoric picks up the pace and echos.

But that’s all it is — rhetoric amplified through a microphone. Sourcing, Procurement, and Contract Management are not dead, the fundamental requirements are not changing, and these systems are not being adopted en-masse. Not just because they don’t always work very well, but because they don’t fit. (And even when they do, they are just replacing one interface with another.)

First of all, in the public sector, you have to follow rules and frameworks even for tail spend. These systems have no guardrails, and by their very nature can’t guarantee the rules will always be followed. So these systems can’t be adopted.

Secondly, in many large private organizations, very large investments have been made in big suite models (which still have long term subscriptions in place), so unless the new AI solution enables functionality (regardless of interface) that does not exist in the current platform, or allows for a considerable number of seat-based licenses to be dropped on renewal (for a similar or less number in the new, cheaper and more functional, app), it’s not even going to be considered. Even if buyers get blinded by the hype because the CFO is going to say no.

But yes, some organizations will be in a position to adopt these systems, echo that SaaS is dead, hail the new Agents / AI as king, and go back to doing the same old thing through a shiny new interface.

So while THE PROPHET might find it fun to pontificate who killed the e-Procurement king, the reality is that no one killed the king, because the king will die a death by a thousand paper cuts, and then his clone will be put on the throne.

Why? Well, using THE PROPHET‘s examples:

  • most intake/orchestration platforms just put lipstick on the pig you are already using (and the pig isn’t very happy about it), and the king you will get is Merkimer’s clone
  • ERP will do what they always do, acquire what their customers are already using (and this time do it in fire sales as investors who paid 10X for suites get desperate for anything back as the growth in these suite companies stalls), and the king you will get is the next CEO, who will be picked to clone the current CEO in form and function
  • people will see through the BS of “concierge AI employees” when they falter on more complex purchases, over spend on basic items, and allow Sony PlayStations to be charged to the snack budget (because the only AI employees that perform are those based in India), and they’ll keep the king they have until he nominates his successor (whom he expects to be just like him)
  • the viper strikes from fed up merchants being overloaded with RFIs and RFQs to quote items in their public catalogs at non-discount volumes will be laced with poison, and the only way the king will survive is to back down …
  • data aggregators and intermediaries will thrive, and they help to select the next king, but they won’t be king

The King is Dead. Long Live the King!

We Need Exact Purchasing … But It’s NOT a New Matrix!

We all know the Kraljic matrix is broken, and that it has been broken for a while. As Jason Busch starts off in his article on how Supply Management Must Become Exact Purchasing, Kraljic was right at the time, but it’s time to come back to where we started. And, more importantly, recognize that the Kraljic Matrix was designed as a starting point for supply management to think critically — and Supply Management was supposed to evolve from there. But it never really did.

Sure we got the Purchasing Chessboard by Kearney to supplement a host of seven step methodologies, procurement game plans, new techniques for managing indirect spend, lean supply management, and a slew of techniques from every niche consultancy to enhance your supply, and category management, strategies, but almost all of these are based on the classic 2 * 2 Kraljic matrix with refinement.

In his post, Jason, who rightfully says that procurement at scale is not one-size-fits-all tells us that answer is Exact Purchasing, or more specifically, The Exact Purchasing Quadrant, where he tries to map cost influence vs contract-and-supply complexity because Kraljic told you what a category is when he mapped profit impact vs. risk / complexity, but he didn’t tell you what to do with it. According to Jason, if you have:

  • low cost influence and low complexity, you transaction capture
  • low cost influence and high complexity, you govern the relationship
  • high cost influence and low complexity, you manage market risk
  • high cost influence and high complexity, you architect the cost

And Jason’s mostly right. Depending on the category in question, you’re generally going to apply one of those approaches.

Jason doesn’t stop there. He tells you that the thread that ties all four of these together is data at the core. And he’s right. Without a data-based (not necessarily database) approach, you’ll never effectively manage, and thus never effectively purchase, a category. Moreover, Jason does a great job at telling you what the core data is, where it resides, and where it could sit in your next generation enterprise Supply Management Solution (SMS). But he falls short when dictates the velocity, because that depends on the criticality. And even worse, the depth of data required depends on the criticality — which can also change the quadrant a category falls in!

For example, while packaging, print & marketing, and NPD are definitely strategic (Kraljic) cost architecture (Busch) categories for some companies (i.e. CPG, Advertising Agencies, and Manufacturers), they are tail-spend for other companies (i.e. Retail Store, Luxury Brands, and a Services Consultancy).

Jason’s improved approach still fails because it suffers from the same fallacy as the original Kraljic matrix — that complexity and risk are a single dimension. They’re not. Complexity is a factor of the product or service that you design and is an internal dimension that you have complete control over. Risk is a factor of the external environment that impacts your ability to create and deliver the product or service and depends on the financial stability of your supplier, the geopolitical situation in which it operates, the trade routes that exist between your supplier and your location, your supplier’s supply chain, and everything else in between — these are all factors you can’t control. Furthermore, it’s not profit impact (Kraljic) [which is short term] or cost influence (Busch) [which depends on spend], but criticality, which is measured in value impact [and what happens if the buy is unprofitable, of poor quality, or unavailable]. A category with zero savings potential can risk a 100M product line if your products can’t be completed without it (and we’ve seen this many times over the last two decades as critical sensors or single-sourced components shut down automotive lines or lack of RAM [from the decennial plant fires] or custom control chips [from trade slow-downs or insufficient production] greatly impacted personal computer / laptop or game system production — costing major brands hundreds of millions of dollars).

The reality is that Supply Management / Exact Purchasing / Get My Stuff (and Git-r-Done) is NOT a 2 * 2 matrix. It’s a(t least a) 2 * 2 * 2 pocket cube (and a 3 * 3 * 3 cube in large Enterprises) that is different for every organization where you take into account:

  1. complexity – low (med) or high
  2. market risk – low (med) or high
  3. criticality – low (med) or high

And as you progress from the lower left of the cube (where all dimensions are low) to the upper right of the cube (where all dimensions are high), you’re simultaneously following a three-dimensional path down a bi-furcating decision tree that takes you from non-critical items where you are simply managing as transactions to highly strategic items that you are cost architecting to the best of your ability, monitoring at least weekly, and alerting the category manager to on every major market event. In the middle, you will deal with your leverage and bottleneck items using well-timed market events to mitigate risk and managed relationships to ensure smooth supply, with the depth, and velocity, of the data correlated to the criticality of the item to your operation.

You do that, and you’ll finally be on the road to Exact Purchasing.

And I’ll leave it to Jason to work out the details of the starting cubic, as he’s so intent on fixing Purchasing (now that he’s semi-retired and can pontificate on the philosophical of purchasing).

(And once Jason does that, I’ll tell you how execution differs between small, medium, and large enterprises because “strategic” doesn’t mean the same thing at different levels, there is no one-size-fits-all platform, and, after a lack of operational readiness [which THE REVELATOR will happily fill you in on], this is likely the second biggest reason new technology acquisition projects fail in our space.)

Despite what they say, Size Matters! Part II

In Part I, we noted that size really does matter … when you are selecting a ProcureTech or Source to Pay solution, and, in particular, it’s the size of YOUR spend that matters (and not the size of the vendor or even the vendor offering).

We noted that there is no one-size fits all, that the three main tiers of organizations (small, mid-sized, large) have three different needs (which are nuanced, especially in the mid-market as going from small-mid to big-mid can require leaps in complexity), and that you should be paying based upon the tier you need.

But with 3 tiers of solutions out there, the reality is that if you select a bigger solution than you need, you’re going to pay a lot more for a much smaller return. And that’s just NOT good Procurement.

So what should you pay?

It’s all based on your size, maturity, and need. Well, we answered this a bit in the past when we did our series on how much should you outlay for source to pay. (Part 1, Part 2, and Part 3.)

In the series we did in 2023, our answer was 120K to 500K+ (a year), and we were mainly focussed on the mid-mid-market upward. The answer today is similar.

Small Enterprise, < 20M in external spend, 12K to 24K a year. All you need is basic e-Procurement and basic process support. Many shareware suites and low coding platforms will allow you to configure a lot of what you need. At 20M, your full savings potential is 2M or less, and you’re likely to only realize a quarter of that in the first year, or 500K. So spending more than 24K on a license (when you’ll also have implementation and support costs) does not guarantee a worthwhile return.

Medium Enterprise < 500 M in external spend, 60K to 240K a year. You need basic sourcing execution and e-Procurement. A baseline solution does enough at the lower end, and an enhanced solution with deep supplier management, deep P2P+, and some compliance and risk capabilities. Here, the potential savings could be as high as 50M at the high end, or as low as 3M on the low end, with a potential opportunity ranging from 1M to 10M in the first year. At the low end, especially considering the personnel costs, you probably don’t want to pay more than 100K to guarantee a return. At the higher end, you could pay a Million for a small suite and get a return, but considering there’d only be a couple of categories where it would deliver any incremental value, why pay a Million when there are solutions for 250K that deliver the same value for 90%+ of activity. (For the few categories where it’s worth it, just hire a consultant with access to specialized tools!)

Large Enterprise >= 500M in external spend, 480K to 1M+, depending on the particular deep capabilities you need and any specialized modules and support you need. There’ll be more than enough categories to justify the additional spend, and saving an extra 2% on a 50M category will pay for the increased platform cost!

That’s the rule of thumb. Higher or lower depends upon the expected return. This means that before you spend more, you should work out a realistic ROI. If the return isn’t realistically there, you don’t spend more than you need.

Now I know plenty of vendors will disagree with me, but when solutions exist at all tiers that do everything an appropriately sized buying organization will need at the price points above, why pay more? (Even though the ABC suites will tell you that you should!)

Also, please note, these are license costs with basic support only. If you want or need more support or services, expect to pay more. (And do the ROI on the services before you contract them.)