Category Archives: Procurement Innovation

Claritum – Medicine for the Procurement Soul, Part I

While Claritum might sound like the latest miracle drug for the sinus, it’s really the latest miracle drug for Procurement — and when SI says miracle, it’s because, properly used, it really does work better than expected.

So what does Claritum cure? SOOM. (Not VOOM, SOOM!) Spend Out Of Management. How does it cure this? Before we can answer that, we have to identify the main types of SOOM.

If Spend Under Management, SUM, is typically spend that is (strategically) sourced or requisitioned/ordered through the e-Procurement system (by way of a catalog, punch-out, requisition, or spot-buy) and tracked then SOOM is, simply put, everything else. What does this everything else look like?

  • maverick spend
  • one-time buys (for promotions, special projects)
  • print/packaging
  • Travel & Expense (T&E)
  • Event
  • MRO
  • Marketing Services
  • Uniforms and Apparel
  • Furniture
  • office products / consumables
  • low-dollar services and temporary labour
  • unique needs not met by current suppliers
  • misc. p-Card spend, including the strip club bill

Essentially, it is the “tail” spend of the organization (especially if it shows up on the p-Card of a certain executive or salesperson). In an above-average organization, this will typically be 20%-ish of spend. In a below-average organization, with a lot of spend managed by various departments and a lot of maverick spend, this could be 40%-ish of spend.

In other words, SOOM is everything Sourcing hasn’t sourced and Procurement can’t manage. Why can’t Procurement manage the spend? Let’s take the examples one by one.

  • one-time buys (for promotions, special projects)
    there is no RFX template, so the system is just by-passed
  • print/packaging
    thesystem isn’t set up to handle print jobs, so the staff just goes to staples or office depot
  • Travel & Expense
    there is no T&E platform support, so everyone just uses their own credit cards and expenses a month to three later because it’s easier
  • Event
    event management has unique requirements, and so is done offline
  • MRO
    service calls are unplanned, parts are bought as needed, and janitorial supplies are too insignificant for sourcing
  • Marketing Services
    marketing statements of work and account management requires special support, not in a standard RFX, so the tool is again bypassed
  • Uniforms and Apparel
    sizes, colours, etc. aren’t on the standard RFX, and it’s one time, and it’s easier to order through the supplier site, so that happens
  • Furniture
    it’s a one-time buy, so just go to the furniture store, put it on the p-Card
  • office products / consumables
    there’s no simple reorder form, so it’s simple to just have the accounts manager ship and bill you the monthly order and pay on the p-Card
  • low-dollar services and temporary labour
    it’s easier to call up the temp labour agency or the consultancy of choice, have them send the resource, and bill you later than try to go through the process
  • unique needs not met by current suppliers
    since the system isn’t set up for supplier discovery, you do the web search, have a few chats, find a supplier you feel comfortable with, have them ship the products, send the invoice, and then you instruct AP to pay it upon goods receipt
  • misc. p-Card spend, including the strip club bill
    for anything non-standard, if the p-Card is accepted, it is easier, especially if it’s spend you want to hide the spend until it’s too late for the organization to do anything about it (and there is a process that allows you to do so)
  • maverick spend
    for anything the buyer wants to break the rules for

In other words, the main reasons Procurement can’t manage the spend are:

  • the buyer doesn’t want the spend managed,
  • the process doesn’t support the spend, or, primarily,
  • the Sourcing and Procurement platform(s) don’t support the spend.

And that’s the kicker. Most platforms have been designed to capture the strategic or high-volume spend and customized to that, following the 80/20 rule under the assumption that most of the savings is in the top 80% which has the volume leverage and supplier relationship leverage. And while this is mostly true, especially since advanced sourcing can save an average of 10%, indicating that there is 8% potential savings, this 8% savings is only achievable over a 3 year timeframe, as most organizations only strategically source about 1/3 of their spend annually. In other words, an average organization repeatedly sourcing the same spend only saves about 3% annually. What goes unnoticed is the bottom 20% of spend which, due to lack of analysis and effort, typically contains an overspend of 10% to 30% (with an average overspend in the 15% range). This is significant. 15% of 20% is 3%, about the same as an organization pushes to the bottom line with strategic sourcing. And this spend is made every year, and this savings, if the spend could be managed, is available every year. If I’m losing out on 50% of my savings, I Want A New Drug!

So if you had a platform designed for this tail spend, which supported the right processes needed by the individuals who contribute to tail spend, most of this spend could be captured. And that’s what the Claritum platform is designed to do – capture all of the tail spend that buyers throughout the organization need to make. How does the Claritum platform do that? Come back for Part II.

Authoritative Sustentation 63: Board of Directors

As per our authoritative damnation post on the board of directors, they can be your best friend or your worst enemy, but they’ll probably be your ongoing nightmare because their dictates can drive your daily duties even more than the wacky whims of the CEO.

If all the board does is chant “savings, savings, savings”, then guess what the CFO has to chant. That’s right! “Savings, savings, savings.” But this isn’t the only craziness the board can throw your way. They can get razor-focussed on outsourcing. They can decide that the organization should have no FTE obligations and try to make as many jobs as possible contingent labour. Or they could decide the organization has to acquire or merge with someone soon and task you with supply chain analysis of the most likely candidate organizations.

So what do you do? Dance to their tune every time it changes? Well, you have to — but we’re no longer in the age of the folk, ballroom, or line dance, so you should do your best to make sure those aren’t the dances that come your way. How do you do that?

Stop waiting to follow the leader and start planning to lead the leader. What do we mean? Regardless of any lip service the executive or the board may throw towards the press about a desire to do support minority businesses, increase overall sustainability, or focus on innovation, they profit when the company profits, and profit, which they generally associate with higher revenues (which they demand of sales) and lower costs (which they demand of Procurement), is all they really care about.

So if you want to stop looking for illusive, and possibly non-existent, savings, then start focussing on how you can increase profit and come up with value-generation plans that you can sell to the board.

For example, Procurement can add value by:

  • helping Sales sell into new markets
    maybe the problem is high distribution costs, which Procurement can rectify as it’s already sourcing from the market and knows the lowest cost shippers;
  • helping Finance improve working capital
    as it’s understanding of in-depth cost modelling and (strategic sourcing) decision optimization can help it work with finance to create an optimal payment plan model that optimizes early payment discounts, invoice factoring, and supplier interest charges or late fees
  • helping Engineering improve quality and lower costs during NPD
    as a leading Procurement organization has expertise in Supplier Management

And Procurement can bring a plan to do so to the board before the board gives it a plan that would take it back to the Procurement dark ages.

Have We Reached B2B 3.0 Yet? Part 5: B2B 3.0 in Procurement

In our third post we exemplified our definition of B2B 3.0, simply defined as the first generation of technology that actually puts business users on the same footing as consumers, as the first generation of B2B technology that adds real content, community, and open-connectivity to B2B platforms through cutting edge technology like:

  • web services
  • intelligent agents
  • meta-search
  • real-time collaboration
  • semantic technology
  • mashups
  • analytics and
  • workflow

But we didn’t explicitly map these technologies to the different Supply Management technologies or workflows that you as a Supply Management professional have to use on a daily basis. That’s why our last post covered some of the necessary, but not necessarily sufficient, requirements of a modern Sourcing platform (defined as the platform that is typically used from the time a need is identified until the contract is signed, covering the “planning” and “sourcing” phases of the strategic sourcing execution lifecycle if you will), and today’s post is going to outline some key requirements that Procurement suites should possess if we are going to consider them as B2B 3.0 platforms.

As with our last post, this list is not all inclusive, and simply possessing all of this capabilities will not make a suite B2B 3.0 (because it’s not a suite, it’s just Procurement), but if these requirements are not missing, then the suite will not make the cut. In mathematical terms, these are necessary, but not sufficient, conditions.

In order to avoid confusion, we are using Sourcing Innovation’s standard definition of a Procurement platform from a technology perspective, which is defined as the the platform that is used from the time the first order needs to be placed (after a contract is signed, or the need for a spot-buy that does not have to be strategically sourced identified) until the last order is placed, received, paid for, and gone out of warranty. Such a platform will often be used alongside an SRM platform, but will not necessarily contain SRM as that is not a key capability in the procure-to-pay cycle, which is the latter half of the larger source-to-pay cycle.

From a historical perspective, the primary “capabilities”, organized into one or more modules, that such a platform would possess would include requisition, approval, and PO management; invoice and receipt management; m-way match; payment platform integration; tax tracking and reclamation support; discount management and cash flow tracking; and budget management. Such a platform may or may not includes special capabilities for T&E or contingent labour, which may be managed through separate, parallel workflows in parallel platforms.

From this viewpoint, some key capabilities that such a suite must possess include:

  • intelligent requisitions
    semantic technology and predictive algorithms must be brought together to help a user properly define what they want, preferably against standard goods, services, and work order “catalogs” so that the proper goods and services can be selected or, if a sourcing project is required, sourced; the platform should guide the buyer to the right type of good (FGPA and not off-the-shelf motherboard), service (database programmer and not administrator), or ATM installation (and not acquisition) based upon what the user free-form enters in the description field (when he bypasses the wizard-based workflow that was custom-designed to get him there)
  • auto-generated purchase orders
    that are generated against a contract, approved requisition, or recurring order to make sure all data is complete, and all part numbers match both supplier and buyer databases
  • automatic m-way match and invoice correction
    not only should the system automatically m-way match every invoice that comes in, but it should automatically kick-back any errors to the suppliers with a complete description (missing data, invalid prices, etc.) and a suggestion for an auto-corrected re-submission – the goal is that only when there is a dispute that needs to be manually resolved should a human be involved; this also goes for payment, if the invoice is against a contract, against a pre-approved requisition, or within a payment threshold, it should be automatically queued for payment – manual approval should only be required in exceptional circumstances
  • working capital optimization
    not only should the platform support early payment discounts and invoice factoring, but it should be capable of using this information to present cash-flow optimized payment schedules, subject to no late payment or max late payment rules by supplier, that schedule all approved payments to optimize the organization’s working capital without unduly burdening suppliers (and hiking their costs, which will just result in price hikes to the organization in the following year)
  • tax database integration
    the system should pull in tax rates in real time, verify all taxes paid are correct, track each tax paid by appropriate municipal, state, federal, or union body, determine which taxes the organization is eligible to get back in rebates, link to appropriate filing documents, and automatically fill out the necessary documents for rebates as appropriate
  • intelligent catalogs
    that seamlessly integrate supplier catalogs, be they EDI, XML, or custom format, open web-store catalogs (from un-contracted merchants or contract merchants for un-contracted products), and buyer developed catalogs that custom define products and services unique to the organization (and automatically suggested by the intelligent requisitions above) that not only allow any product or service that could be requisitioned to be easily found, but that guide the user to any contracted, preferred, or low-cost alternative
  • returns and defects and warranty tracking
    the system should also track all products rejected at the warehouse due to defects, all returns within the warranty window, and all related warranty service costs that can be billed back to the supplier and insure that defective items received are taken off of the invoice before it is paid and returned and warranty items are credited and taken off future payments

In other words, the requirements for a modern B2B 3.0 Procurement platform, even from this short list, are well beyond what has traditionally passed for an e-Procurement platform that, in the early days, was anything that could manage requisitions, approvals, purchase orders, and manually entered invoices. Do any of the platforms out there make the cut? We’ll get to that. But first we had to provide some food for thought.

Should All Service Spend Be Subject to Procurement

Last week, Spend Matters UK ran a great post that asked “why do executives employ their friends as consultants”, which noted that one of the most problematical spend categories is professional services, and in some organizations, this is even more problematic than contingent labour spend, marketing spend, and legal spend. Why? Not only do some executives in some firms often engage senior experts and big 5 consulting firms on six, seven, and eight figure (plus) deals without any notice or without any respect for the process, but they often do so without any background checks or references whatsoever.

Sometimes, as pointed out by the public defender, the consulting firm or expert is being hired because the consulting firm or expert was hired in the past and did a great job, and, more importantly, there is a need for speed.

Sometimes, as also pointed out by the public defender, the budget holder is simply lazy. He knows the consulting firm or expert will do an okay job, and that’s good enough for him.

But sometimes, as documented by the public defender, there is an emotional dependence on the supplier, and that’s a good enough reason for the budget holder not to rock the boat, and other times there is a personal relationship, which is a great reason for the budget holder but not so great for the organization.

And sometimes, as clarified by the public defender, the reason is not a good one, or even a legit one. The budget holder might be making the award on the future expectations of a favour or because of a bribe and/or kickbacks that have been, or will be, received.

But if bribes and kickbacks was the worst situation that could happen, that wouldn’t be so bad. It would just mean that the award was costing the organization more than it should (and maybe significantly more than market average). If the work is quality, and identifies an ROI, that’s not too bad.

You see, if proper process, and due diligence is not taken, the organization could:

  • guarantee a large minimum payment regardless of work quality, completion, or dismissal (such as a 1M payment for early termination)
  • hire someone with a known criminal record for fraud
  • hire someone with known terrorist associations who will try to steal trade secret technology protected under a defence act

And if you think overpaying an average consultant who will take twice as long to produce an inferior result is bad, imagine how much worse each of these situations would be.

So, while maybe it is the case that not all spend should be under the control of Procurement, it is the case that all spend should follow the proper Procurement process under the guidance of Procurement so that all the facts, and options, are available to the budget holder. And since the CFO and CEO can be held criminally liable for certain oversights in the business, they should support this as following a good Procurement process and policy is the best CYA defense there is.

The Song Remains the Same – So Why Can’t We Sing It?

As the world’s second oldest accepted profession (or is it the third as maybe astronomy came first, as we have examples of astronomy dating back 17,300 years), Purchasing should be well understood by now.

Even the first Purchasing Manual, The Handling of Railroad Supplies — Their Purchase and Disposition, written way back in 1887 by Marshall M. Kirkman and printed by Chas, N. Trivess, has the basic definition of the requirements of a purchaser down flat:

The purchase of goods embodies many varied talents and experiences. The ability to buy advantageously, depends largely upon the knowledge of men possessed by the purchaser and his skill in taking advantage of this knowledge. His value will, moreover, be dependent upon the discretion allowed him, and his judgment in exercising it. The position also requires technical skill. The person filling it must be experienced, otherwise his acts will not command the confidence or respect of his associates. His wisdom and fairness must be such that if he selects material contrary to the requisition made upon him, the person thus over-ruled will tacitly acquiesce therein and abide by the demonstration of its wisdom afterwards. (Pages 38 and 39).

Even though today we might write this paragraph as:

The purchase of goods requires talent and experience. The ability to take advantage of supply market dynamics depends on having the appropriate knowledge and the skill to take advantage of that knowledge. The ability to deliver value depends on having the discretion, and authority, to do so. The position also requires technical skill and the ability to use the tools, old and new, provided to the purchaser. Moreover, the purchaser must be experienced and skillful, otherwise others will not respect her decisions. Her wisdom much be such that if she selects new products or services than the ones the organization, and its employees, are used to, the organization, and employees, will understand that she made the best decision taking all of the information from all of the stakeholders, and suppliers, into account.

A few new words, but the same old wisdom. However, in addition to these few new words, now we have to deal with much more complicated words and a plethora of acronyms like:

  • ABC
  • ATP
  • B2C
  • CLM
  • DPO
  • EOL
  • FIFO
  • GRC
  • HIS
  • HTS
  • ITU
  • etc.

that will drive even the sanest of men mad as a hatter. In an effort to capitalize on a newly recognized opportunity, the consultancies have invented a new language to make the simple complex, and the practical improbable, and the vendors have followed suit. The only thing new since the introduction of the telephone is the platforms that exist to support you, powered by the internet and the latest advances in computing technology. So while most consultancies go on and on and on about EQ, you’ve always needed EQ, just like IQ, and the critical factor is TQ. Today’s purchaser requires much more than the ability to use a phone, keep a ledger, add some numbers, create a shipping schedule, and navigate trade law to succeed. Advanced analytics and optimization. Automated workflows and P2P automation. Complex cost modelling and CAD/CAM skills. Not your traditional everyday purchasing situation that existed before the information age.

So learn the tech, and your job will be a lot easier. And keep reading SI which will, as it has always done, continue to alert you to the technology platforms and skills that you need.