Category Archives: Procurement Innovation

Boost Your Procurement Value Engine

As per our last post on the subject, Procurement does not exist to buy stuff (which was its origins, but thanks to the Internet, everyone can buy stuff), but to provide value to the organization. But the identification of organizational value is not always straight-forward. Every organization is different, and every Procurement function has a different level of organizational maturity. As per the classic Hackett Hierarchy of Supply, a supply organization could still be at the level of supply assurance, could have moved on to analyzing landed cost, may have begun its entry into the modern era with an analysis of TCO, might be poised to become a leader with a foray into demand management, or, and this is the highest level of maturity, may be focussed on the art of value management.

But delivering value first requires understanding what value is to the organization (and how Procurement can contribute to it) and then requires getting a mechanism in place to repeatedly deliver that value at regular intervals. There are various mechanisms that can be considered, but regardless of the mechanism you choose (and whether it is process-based, platform-based, or a hybrid approach), it needs to be powered by an engine. And in particular, that engine, which needs to keep on churning out value like a real engine keeps churning out power, needs to be efficient and effective.

One has to keep the productivity plateau in mind. An organization that only focusses on efficiency will, at best, fail slowly. Similarly, an organization that only focusses on effectiveness will, at best, survive. But what an organization really wants to do is excel, and that requires the right intersection of efficiency and effectiveness. In particular, the organization has to focus on effective goals, implement them as efficiently as possible, and then use the savings to take on even more effective goals.

So how does a Procurement department improve its productivity? Generally speaking, the Procurement organization increases its value (for money, VfM), and the basic formula for that is simple:


Value Increase = Reduce Input + Increase Output + Reduce Energy
 

while focussing on categories important to the business

And how can it do that? In a category-agnostic way, it can:

  • reduce demand
  • increase Spend Under Management (SUM)
  • decrease contract costs
  • increase contract compliance
  • decrease storage and utilization costs
  • reduce risk

And how can it do this efficiently? In a general way, it can:

  • implement systems to improve cycle times
  • implement processes to reduce maverick spend
  • manage market dynamics better

And how can it translate the general to the specific? That’s a harder question to answer, but one that is addressed in considerably more detail in a new white paper co-authored by the doctor and the procurement dynamo, sponsored by Pool4Tool, on how to Boost Your Procurement Value Engine. Part I of a II-part series (with Part II coming out in Q3), this paper will give you the insights you need to understand the various levers you have to deliver true value and how you can do so in an efficient, effective, and sustainable manner.

It’s Time To Rev Up Your Procurement Value Engine. But Do You Know How?

Procurement doesn’t exist to just buy stuff. Procurement exists, at least if it’s a modern Procurement organization, to identify and deliver organizational value. Long gone should be the days when Procurement, staffed by the island of misfit toys, existed only to process the paper work that allowed manufacturing to buy the parts it needed or the back office the paper and calculators required to do the day-to-day accounting.

But the identification of organizational value, as long-time readers of SI know all too well by now, is not always straight-forward. Every organization is different, and every Procurement function has a different level of organizational maturity. As per the classic Hackett Hierarchy of Supply, a supply organization could still be at the level of supply assurance, could have moved on to analyzing landed cost, may have begun its entry into the modern era with an analysis of TCO, might be poised to become a leader with a foray into demand management, or, and this is the highest level of maturity, may be focused on the art of value management.

However, delivering value takes more than just realizing that your function is to deliver value. It is understanding what value is to the organization and how Procurement can contribute to it. Simply put, one way of defining value to the organization is whatever allows the organization to increase its revenue potential. (More sales, more market share, more brand recognition and brand love, and so on.) One way of assisting the organization in the capture of this value is to deliver products, services, and knowledge that will assist the organization in strengthening its Unique Selling Points (USPs) or Unique Value Propositions (UVPs) that give the organization the competitive advantage it needs to increase its revenue (or profit) potential.

It is not easy to do, especially since a Procurement organization has to understand not only what it must do, why it must do it, and how it will achieve it, but how to be good at it. Few organizations get demand management under control and step up to the highest level of the pyramid. Fewer still can stay there as they will struggle with the how. And even if they occasionally understand the how, they may never master the art of being good.

If one wants to be good and drive to success, one has to have a vehicle powered by a finely tuned engine that can deliver value lap after lap around the sourcing track. Such an engine must be efficient, effective, and sustainable. Only then will Procurement be able to get good and stay good. So what does such an engine look like, what sort of value will it deliver, and how will it deliver that value?

For the answer, check out the new white paper co-authored by the doctor and the procurement dynamo, sponsored by Pool4Tool, on how to Boost Your Procurement Value Engine. Part I of a II-part series (with Part II coming out in Q3), this paper will give you the insights you need to understand the various levers you have to deliver true value and how you can do so in an efficient, effective, and sustainable manner.

Claritum – Medicine for the Procurement Soul, Part II

As per 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.

So what does Claritum cure? As per Part I, Claritum is the cure for SOOM. (SOOM, not VOOM.) Spend Out Of Management. How does it cure this? By providing a platform for spend not typically captured by the traditional Sourcing or Procurement platform so that the spend can become spend under management. This way, unless it’s spend that has to be made off site (at an event, during travel, etc.), or the buyer wants to keep the spend out of the system (because he doesn’t want the preferred product or wants to hide what the spend truly is for as long as possible), it can be made through the system that supports a process to get the right product or service at the right price.

Claritum provides a consumer shopping site solution that can be offered by the organization’s Procurement department, their service provider, or GPO. This shopping solution offers the traditional product catalogs that you will find on consumer sites like Amazon and competing provider catalog sites. It also contains standard rate-card service requisitions that you will find on (contingent and service) labour management platforms. Plus, it contains (the ability to create) template requisitions for all standard tail-spend categories, which can be searched and added to the “cart” as easy as standard catalog items. And, as expected, it contains free-form RFX ability for buyers to requisition anything not already covered. Basically, everything that can be bought through a platform can be bought through the platform and the only spend that should not be captured is on-site T&E spend (tickets for travel can be requisitioned through the platform, and the senior buyer responsible for T&E can process the request, create the PO, and then there is a PO to match the p-Card payment to) and on-site event spend, which should be a very low amount of tail-spend.

Now, this might not sound that special, as providers like IBX and Deem offer a lot of this capability, but this is just the surface of the Claritum platform. First of all, the Claritum platform was designed with multi-organizational use in mind and can be administered by a GPO who manages contracts for multiple clients, who can customize the catalog and offerings to the need of each client individually. Second, the RFX management process, which is tightly integrated into the catalog, is very deep and the requisitions can be set-up to make sure the right requests go to the right buyers and then the right approvers, and the right buyer can select the right suppliers, manage the process, select the winner, and send it back to the requisitioner who can then complete the process (and confirm the need) by adding the award to the cart, and checking out, which sends the request to the proper approver(s). Third, the API allows the platform to be integrated with all organizational ERPs, AP systems, and supplier catalogs, to make sure the right data gets into and out of the system. And fourth, and this sets it apart from all its competitors, it has the ability to manage stock inventory within the platform. Items come from the stock-room (or supplier store-room) first before requests for new shipments are made. And that stock-room inventory, including automatic replenishment rules, can be managed by an internal inventory manager, the GPO, or the vendor, depending on where the stock is located and who is (contractually) required to manage it.

Considering that many big organizations use GPOs or service providers for at least a portion of the tail-spend, it only makes sense to have a platform that can be managed by those same providers for the portion of tail-spend they manage. The Claritum platform is the only one that SI has seen that truly has these three components. The buyer store. The deep sourcing and procurement platform (which can be internal to Procurement, external in the GPO, or managed jointly). And the full featured supplier portal.

So if you want to get your tail spend under management, the doctor recommends that you check out the Claritum platform today. It really is worth a close look, even if you already have a S2P platform, because the extensive API will support integration and the ability to capture organizational spend outside of Procurement is the next big savings opportunity in many organizations. And if you have the choice of platform, Claritum is the one that should be Stuck With You.

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.