Category Archives: Procurement Innovation

Where is the Procurement Innovation Today?

Last week, in They Terk Er Jerbs!, we noted that the age of robots (and software assistants) is here and there’s nothing we can do to prevent it now that they are roaming the floors of Walmart. We also said, especially in our follow up post on how they They Terk Er Jerbs! Good for them. that this can be a good thing since the jobs these robots are best suited for are boring, repetitive, relatively simple jobs that sometimes even suck your willingness to live.

And by doing these jobs, they can free you up to do more complex, creative, and value-generating jobs, including those jobs that couldn’t be done before.

Of course, we have the problem that most organizations only see the cost savings that result when you eliminate 20 paper pushers with automated invoice processing software that can automate 95% to 98% of the work, leaving only 2% to 3% of invoices that need manual intervention. Yes this is a savings, and yes it is significant, but it’s a one time savings. What do you the next year? Competition still increases. Costs still rise. Margins still fall. Not only is your place on the Fortune 1000, or Global 3000, threatened (or your possibility of ever getting there), but maybe even your business viability.

You get year over year savings by identifying value year over year. At the end of the day, it’s all about keeping a healthy profit, defined as Sales – Costs. You can only increase sales so much in a given market for a given product. At some point the market is saturated and your position is maximized. You can only decrease cost so much with just an RFX or Auction … all that does is take the fat out of the margin.

To find real savings, you have to figure out how to take cost out of the product — either out of the production process (lean initiatives or component substitution or design improvements), the transportation (through carefully amalgamated global shipping), the packaging (through package redesign), or even the margin through appropriate product consolidation with the right supplier (who can operate at a lower margin for higher volume). This doesn’t happen without a lot of investigation, analysis, exploration, and relationship building and management and the creative personnel to do it. Machines can’t do this. (While they can analyze the data and identify the best potential opportunities, they can’t realize them.)

The only way to truly find savings (and maybe even more value through better aligned value-added services) year after year is to have a team of people who can analyze the supply chain for them. This means that the best way for an organization to succeed is to employ invoice automation to free its people up from tactical invoice processing to, possibly after appropriate training, pursue more strategic opportunities and programs that will take identify additional value year over year without any additional overhead (since the invoice automation pays for itself and the team pays for itself).

So, the true Procurement Innovation today comes when organizations use automation not to replace headcount, but augment headcount to allow them to find more value than they would otherwise have time to find. And indirectly achieve an ROI from the software automation that is far higher than just the ROI from the automation alone.

And the great thing is that since these AI’s aren’t truly intelligent, they don’t mind doing the same mind-numbing task to infinity and beyond.
So let ’em take our mind-numbing soul-crushing jobs. We’ll keep our soul, and fly in the clouds while they dig in the mines.

They Terk Er Jerbs! Good for them.

Because, if they were intelligent, if they weren’t already insane, they would be! One definition of insanity is doing the same thing over and over and expecting different results. But an even better one is wanting to do the same mind-numbing task over and over and over again until anyone with a modicum of intelligence would go insane.

Like screwing the same rivet 10,000 times a day. Walking up and down the same 20 aisles looking for sold out products day after day. Or performing well-defined calculations millions and millions and millions of times. This last task is something good accounts payable and procurement folk have to do over their career without AI if they want to realize the savings they should.

I say let the machines do that. And then find ways to do more intelligent actions with the results that the machines can’t do. That’s Procurement Innovation. And if you were on the ball and set up your Google Alert and noticed that the doctor was in L.A. yesterday giving a talk on Procurement, and, more specifically, Procurement Innovation. Procurement Innovation that is going to arise when you let the machines do the tactical drudge work and focus on the more strategic aspects of product acquisition. And give yourself time to get innovative … and creative … instead of just pushing virtual buttons all day. (In some P2P systems, it takes 15 clicks to actually get a product delivered when it should take 0. And how many products do you need? It’s amazing you aren’t insane! Someone should calculate the mental strength and willpower of a Procurement professional. That would be an interesting study.)

One needs to remember that AI is not I, but it is A. It is artificial, and it is extremely well suited to running lots of advanced calculations against expert defined models, well-defined variables, and big data sets to identify opportunities, outliers, and options for pursuit even the smartest of us couldn’t see because our mental calculation powers stop in the ones per second while a typical laptop’s calculation capacity is in the millions per second. Even if the best algorithms we have are, relatively speaking, dumb, the machine will outperform us in evaluating data against models and desired outcomes and identifying the best directions to pursue (which is different than being able to evaluate the perceived best options and actually pick the best ones).

And because of this, it is extremely well suited to checking invoices against POs, goods receipts, and contracts — which is one key to making sure the savings that are negotiated are actually captured. The best I2P systems today with advanced OCR can reach invoice processing accuracy (IPA) levels of 98% with no human intervention, including automatic return to supplier if issues are identified, and the proper configuration of rules can enable up to 100% of these automatically processed, corrected, and confirmed invoices to be automatically queued for payment (and paid). Considering that the average invoice “error” rate in an organization is 10% to 15% and that this typically results in overpayments of 1.5% or more, automatically processing 98% of invoices and eliminating 98% of the errors is huge.

And it’s a key component of two of the innovations — true automation and overspend prevention — that the doctor highlighted in his talk that can be addressed today, and tomorrow, and change your work, and even your life. (When you work smarter, you will get smarter.)

The Procure to Pay User Experience Should NOT be Overlooked!

The history of enterprise software systems is fraught with implementation failures. This is especially true in the ERP and MRP space, which have contributed to some of the biggest supply chain failures in history (including Hershey Foods, Adidas and Foxmeyer). But not all failures are catastrophic. The majority are just the result of (significant) project overruns in terms of time and money or the inability to deliver critical features or functions in the original system specification. And this is more common than one may think. Some estimates put the rate of project overruns in IT as high as 85%. That’s problematic.

Why are there so many failures? The reasons are many. Some are the result of poor change management; others are the result of the selection of inappropriate process automation for the company; and still more are the result of limited or low-quality information. If one goes through the list of possible reasons, we see there is one commonality across the majority of failures: the user experience. Poor change management leaves users confused. Inappropriate process selection frustrates users as it increases time and effort (rather than decreasing it), and low-quality information makes users question why they are migrating to a new system at all. (And when significant system features or functions fail to be implemented at all, that’s the worst user experience.)

That’s why the user experience (UX) is important, and why the doctor has been writing tomes on it this year, starting with a number of multi-part series co-authored with the prophet over on Spend Matters on:

What Makes a Good UX? Part I
What Makes a Good UX? Part II “Smart Systems”
What Makes a Good UX? Part III “Mission Control Dashboards”

The UX One Should Expect from Best-in-Class e-Sourcing, Part I
The UX One Should Expect from Best-in-Class e-Sourcing, Part II

The UIX One Should Expect from Best-In-Class Auctions, Part I
The UIX One Should Expect from Best-In-Class Auctions, Part II

The UX One Should Expect from Best-In-Class Optimization … Part I
The UX One Should Expect from Best-In-Class Optimization … Part II
The UX One Should Expect from Best-In-Class Optimization … Part III
The UX One Should Expect from Best-In-Class Optimization … Part IV

The UX One Should Expect from Best-in-Class Spend Analysis … Part I
The UX One Should Expect from Best-in-Class Spend Analysis … Part II
The UX One Should Expect from Best-in-Class Spend Analysis … Part III
The UX One Should Expect from Best-in-Class Spend Analysis … Part IV
The UX One Should Expect from Best-in-Class Spend Analysis … Part V

… with SRM & CLM on the way …

But that is just the beginning. Now that we have fairly adequately covered the core Sourcing technologies, we need to cover P2P, and that, as we all know, is the domain of the revolutionary. So, starting last week, the doctor teamed up with the revolutionary and, in the months to come, we are going to bring you deep, deep insight into Procure-to-Pay, both from a UX and a FX viewpoint so that at the end of the day you have deep insight into not only what P2P has to do, but how it should do it.

Our first instalment of “The Procure-to-Pay User Experience” premiered last Thursday over on Spend Matters Pro (membership required), and more will be coming.

Stay tuned!

It’s Hard to Find Fraud in Big Spend Stacks …

Let’s start with T&E spend. While most organizations might believe that this spend, which is primarily for low value amounts on fairly well understood products and services, does not hide much in the way of fraud, that’s not always the case. Nor is the fraud limited to employees upgrading to business class, upgrading from rooms to suites, and spending a bit too much on drinks at the client dinner. (But even this can be very expensive. If this off-policy spend results in negotiated volume-based rebates failing to materialize, this can be very costly.) But that’s not the case. It cal also contain:

  • the same receipt for a $500 business entertainment submitted two (three, or even five) times, one month apart, on different claims and never noticed
  • a pet hosteling bill that looks just like a hotel bill
  • an invoice from Benny’s buddy Bob for 20% above market rates who drove him to the airport (instead of a licensed service at market rates)
  • that double billing by your no-longer favourite hotel for a room charged to your guest and then charged on your tab is really hard to spot (especially when some rooms were picked up and some rooms weren’t at your recent event)
  • collusion between an employee and a spouse who owns a travel “services” company can account for a lot of extra travel “services” billings that weren’t delivered
  • suppliers who know you have holes in your T&E monitoring can submit fake invoices for services never delivered
  • etc.

It’s really hard to find these low-impact fraud needles in a T&E haystack, but these needles can add up quickly — especially for products and services never even delivered! Only automated processing that can compare multiple entries across multiple dimensions and learn typical patterns can identify the majority of errant fraud that passes through your T&E system.

Moreover, as an organization learns to detect certain types of fraud, the fraudsters get smarter. No static system can keep up! AI based systems are key to an organization’s success.

In particular, AI-based systems that can work on multiple types of spend. T&E is just one category. There’s also invoice data for sourced and procured products and services that can be six to eight times the T&E volume in an average organization. And when we go broad, there are even more options for creative fraud from less-than-honourable parties. For example, you could see things like:

  • $4.95K shipping fees for $5 items because the tolerances in the system don’t kick anything up for review with shipping less than $5K
  • invoices from fake suppliers with the same name as your tendered suppliers with faked registry numbers and different bank information for payment
  • invoices from corporates owned by spouses of employees for services not delivered submitted by the employees and approved by colluding associates doing the same thing
  • etc.

For some of these instances, humans have almost zero chance of surfacing the infraction when its 1 invoice in 1000. A new solution is needed. A number of players are tackling the problem with modern AI solutions, but do the approaches have what it takes to find the gold in them there hills? Only time will tell.

How Do You Identify The Day After Tomorrow’s Supply Chain Paupers?

Well, assuming the day after tomorrow comes and they are still around the day after tomorrow, they will be easy to spot. Not only will they still be trying to use Excel, but they will still be using Excel and will only recently have started exchanging documents using XML, using last decade’s e-Procurement technology.

They will not have advanced to modern e-Procurement applications, yet alone modern sourcing or supply chain visibility solutions. They will be in the process of simply moving from paper to e-Paper, trying to still conduct RFIs through e-mail with Excel (and just uploading the results to the first generation decade(s)-old e-Procurement solution), and generally trying to keep their outdated procurement processes in tact.

However, as we now know, first generation procurement and sourcing, focused primarily on e-document exchange, simple RFXs, the odd auction, and basic reporting is not enough. You need modern e-catalog management for procurement spot buys, analytics for opportunity identification, optimization for at least TCO management (if not TVM), and SRM for supplier information, relationship, and performance management.

But this is not enough. These day’s, there’s never enough time to sift through all the data to identify the opportunities, never enough time to collect enough market data to qualify even the ones you have identified, and certainly never enough time to construct category specific models on even a fraction of those to determine if they opportunities will be realized with an appropriate sourcing event — which can take years of experience to properly identify.

You need a next generation solution that can automatically collect, maintain over time, and trend market pricing data; run all your data through multiple types of automatic analysis and compare your spend against historical spend and market data (and look for variances); pull out the categories with opportunities; run trending algorithms to project your demand against expected contract prices based upon projected market demand, supply / demand (im)balance, and economic factors; calculate the potential savings if nothing was done; use historical data and automated reasoning (enriched with context) to (probabilistically) identify the best sourcing or procurement strategy; and then use appropriate workflow automation to automate as much of the event as possible (and if it is a spot-buy under a threshold, automatically procure from a catalog, an approved supplier under contract, or a three-bids-and-a-buy RFQ against approved suppliers).

In modern terms, the next generation solutions will be Cognitive Sourcing or Cognitive Procurement solutions. While they are not true artificial intelligence, with enough data and great models, you don’t need true AI to automate acquisitions where there is no strategic value and no significant value to investing human time. Good examples are office suppliers, janitorial services, and sometimes even laptops. Yes, replacing laptops across a large office can be in the millions, but laptops against a standard config are commodity. Just do an automated auction [with ceilings and floors] against a set of approved suppliers and let the most aggressive supplier win.