Category Archives: Procurement Innovation

Procurement 2020: We’re Off Track, But Can We Get Back on Track? Part I

As per our recent post that asked if we were on track for Procurement 2020, we’re off track. Way off track. So far off track that we can’t even see which direction the track was in.

Hackett told us way back in 2008 what we needed to do to get where we needed to be, but most Procurement organizations are still nowhere close to where they should be, even though most of it is easy-peasy.

Business Process Sourcing

This is easy to get under control, it just requires some good planning and process mapping. Specifically, an organization has to map all of its processes, define the knowledge-centric strategic aspects versus the manual-processing tactical aspects, and then figure out the benefit of each part of the process with respect to the cost.

If the benefit is low, the cost is high, and the process is tactical, it is a prime candidate for outsourcing. If the cost is low, the benefit is high, and the process is knowledge-centric, the process is a poor candidate for outsourcing. Organizations need to maintain their knowledge and strategic advantages and outsource that which brings them no benefit when performed internally.

An organization that takes the time to map its processes and understand them can find the right candidates for outsourcing and manage them appropriately.

Supply Performance Management (SPM) & Supplier Relationship Management (SRM)

While this was a major oversight in first generation Sourcing systems, this is a common module in second generation Sourcing systems and over the past few years a number of expert consultancies and solution vendors have come on the scene that can help you get your SPM and SRM processes up to snuff. They have n-step processes that can be used to help you get an understanding of where you are on the SPM and SRM maturity curves, what you can do to get better, and how you can figure out how you compare to the market average and the best-in-class.

In addition, there is a lot more information on SPM and SRM, what it is, how to do it, and the importance of it to your supply chain on the various blogs and publications then there was a decade ago. Those who seek out and make use of this information can progress well ahead of the curve. (And a couple of overviews will be made freely available to SI readers over the next month or so as part of a larger offering … stay tuned.)

Knowledge Management

A decade ago, it was unheard of to have more than half of spend under management, and if you said that one day you’d have integrated spend data, you risked being put in an asylum. However, with modern platforms that provide an organization with the ability to not only push all payments through a common platform, but all purchases through a common platform that supports integrated internal and external catalogues — whether they be cXML punch-out, EDI, flat-file, data-base driven, or custom entries — things have changed. When all requisitions and purchases can go through one platform, all spend gets in one database, and the organization has visibility into all of its spend and can plot a course to get the majority of its spend under management.

In other words, we can return the engine to the tracks, but an effort will have to be made to do so. How much of an effort? Stay tuned for Part II.

Why You Should NOT Build Your Own e-Procurement Platform

A couple of months ago, SI ran a short series on Why You Should Not Build Your Own e-Sourcing System, which also included pieces on Why You Should Not Build Your Own Spend Analysis, Why You Should Not Build Your Own e-Negotiation Platform, and
Why You Should Not Build Your Own Decision Optimization because he heard that a few public sector organizations have this crazy idea that they can build their own and that it can, somehow, compete with best-of-breed solutions on the market today. As per that series, this is not the case.

Neither is it the case that an organization should build its own C(L)M system, as per SI’s post last week on Why You Should Not Build Your Own Contract Management System. It seems that there are (at least) a few organizations that not only think they can (which is often true) but think they should (which is usually not a good idea). Unfortunately, it doesn’t stop there.

Since basic e-Negotiation and e-Procurement is a commodity, and there are even free and open source solutions for both still available on the net (like WhyAbe and archived versions of open source by Coupa and Bupros), some organizations and public sectors think they can roll their own and, believe it or not, do it cheaper and better than just acquiring a low-cost on-demand solution (which might even cost less than the resources the organization / public sector body would require to maintain their own software and hardware, not counting the dollars they would have to invest up front to roll their own). When it comes to B2B or B2C, building your own in this day and age is, well, ridiculous. With so many options to choose from, the chances of your organization not being able to find a cheap, easy solution that meets at least 80% of your needs, and 90% with a few minor process changes, is low. Not only are there no cost savings (which becomes clear when a full total cost of ownership is done, see this classic SI post on X), there’s no value generated by building your own solution. Inflation is coming back with a vengeance, GDP is slowed to a crawl in first world countries, and risks are multiplying faster than Fibonacci’s rabbits. Wasting money on anything with no risk of value generation is just not something 99.99% of companies can afford to do.

While most P2P functionality is straight forward, and the cycle, which has more steps than pre-contract Sourcing, is simpler as it is more tactical in nature, a few requirements, while simple in theory, are actually quite complex to implement technically. In particular, the following three functions are quite demanding to implement technically.

Requisition Management

While the process of managing an approved requisition is no more complicated than managing any other e-Document, the process of approving a requisition can be quite complicated as it could require one or more approvers in one or more departments with the rules for determining who approves dependent upon the item, it’s category, it’s dollar value, it’s (un)approved status, the overall amount of the requisition, and whether or not any affected budget for the buyer, category, or department would be exceeded if the requisition was approved. The approval chain could actually consist of multiple approval chains that need to be executed in parallel, which can possibly be overruled by the last approver in the sub-chain or the entire chain (if it had to get final approval from a VP or CXO because of the amount), and which might need to be approved all-or-nothing for the requisition to help the requisitioner. This implies the need for powerful, configurable, and flexible workflow management that is rather time-consuming and sometimes tricky to implement and not always going to be available in an open source solution that you can easily integrate into a roll-your-own solution.

Purchase Order, Invoice, & Good Receipt Management

Not only do all of the these e-Documents have to be tracked, but they have to be cross-correlated in many-to-many-to-many relationships. For example, a purchase order may need to be split across multiple vendors, each of whom may ship the order in pieces due to geographic stock location and customer locations, and issue multiple invoices, and then the shipments might arrive in pieces, requiring each invoice to be associated with multiple good receipts, or which might arrive in unison, require one goods receipt to be associated with multiple invoices. Similarly, a shipment might arrive before an invoice, requiring goods receipts to be associated with one or more purchase orders. There’s a lot of cross-correlation logic here. Plus, documents can come in as XML, EDI, CSV, PDF (which need to be processed using OCR), or platform specific formats – so there is a lot of pre-processing that needs to be done as well. And then an m-way match has to occur against each line, because, otherwise, the platform is not very useful.

e-Payments & Tax Reclamation

These days, an organization that wants to go e-Payment has to support ACH and wires, and do very difficult secure integrations into a bank; Paypal, Stripe, and similar online platforms for small businesses; and credit cards so its employees can use their P-cards, and integrate into a credit card processor. It’s a lot of integration work that has to be done precisely, because if anything is not done up to Bank, Paypal, or CC Processor spec, and it gets hacked, it will be on the hook for all of the fraudulent payments that will result. And that can add up to hundreds or thousands or millions of dollars very quickly. Very, very quickly. This is one example of just because you can, it does not mean you should.

You’re not buying running shoes here. Just don’t do it.

Economies of Anti-Scale

Late last month, Mr. Smith reposted a couple of great posts on why Bigger Procurement is Not Always Better Procurement (Part I and Part II) over on SpendMatters UK. While sometimes bigger spend equals bigger discount, this is typically only true for the acquisition of consumables where there is a predictable economy of scale that kicks in at higher volumes — such as the production of identical goods on a production line or the sale of multiple software licenses.

In some markets, as Peter points out, increasing volume decreases costs. Let’s review his examples to understand why.

Short-Term Contingent Labour

Let’s say you want 100 additional workers for 20 days to help you stuff boxes for the Christmas rush. You might think that you should get a much better rate than the 10 workers you hired for your annual 4th of July promotion, but this is not likely to be the case. First of all, lots of organizations in your position will want extra workers for the Christmas rush, and the contingent labour organization will only have so many. Secondly, even if there is demand, why would an organization want to hire resources that will then be on the bench until at least February (for the mini-Valentine’s day rush)?

Bulk Pre-Paid Hotel Room Rates for a Year

Hotels, like airlines, make their money during peak travel and peak conference / festival seasons, and during these times, when they can charge the full amount allowed under law, the last thing they want to do is give you a room for 30% off of the normal rate, which is typically less than 35% of what they could be charging. As a result, the best deal you’re going to get is the average price they got for a room last year, as they will be hedging their bets.

Energy

Most energy plants still rely on oil, coal, and natural gas and, as a result, energy costs are dependent on the somewhat unpredictable prices for these limited resources. Plus, these energy companies can always get the maximum allowable price from consumers and small to midsize businesses with no negotiation power, so if they are selling most of the energy they are producing, and giving a big contract might require them to occasionally buy energy from the spot market during peak (heating/air conditioning) season, your big contract, that requires a big discount, is not attractive to them.

These are all economies of anti-scale. An economy where volume increases uncertainty (such as the short term contract for contingent labour who could be benched for long periods of time if hired by the contingent labour provider or the energy example), decreases profitability (such as the hotel example where having to give you a room during peak seasons cuts profit by 60% or more), or increases overhead cost per unit beyond a baseline is anti-scale. This last case includes any situation where customization is required or limited edition runs are required, as is common in jewelry or toys and games. Customization requires labour, and beyond a certain number of customized units, the provider would have to hire more labour who could not be fully utilized at the time of contract signing. This adds risk, and cost. Similarly, it does not matter how many limited edition collector cowbell* orders of 1,000 you put in if each requires a specialized mould to be produced. Each mould and line set up requires a fixed amount of time and that fixed overhead does not scale with more custom orders.

Thus, when sizing a spend opportunity, it’s important to first identify if you are dealing with a scale or anti-scale economy. There will typically be a much larger savings potential with an economy of scale than with an economy of anti-scale. Thus, if your organization is being measured primarily on savings, it’s important to identify those economies of scale categories as soon as possible.

* Even if you will always need more cowbell!

How Should Your Procurement Department be Organized?

Earlier this week we talked about the importance of a Procurement Centre of Excellence (CoE) with functional excellence in key processes that can elevate the efficiency and effectiveness of the organization against its goals and objectives (as well as stating that this does not mean you form CoEs within CoEs as that’s just redundant), but this whole topic begs the question, how should the Procurement department be organized?

When it comes to a departmental organization, there are three common theories as to how a Procurement department should be organized, which included decentralized, centralized, and centre-led. These days most consultants either preach centralized or centre-led. There are advantages and disadvantages to each model, and the best model will depend on the needs of the organization and, often overlooked, the suitability of the organization to the CPO’s leadership style.

In a centralized Procurement model, all Procurement is directed through a single, central organization. This has many advantages as it allows corporate spend to be fully leveraged, sourcing processes to be standardized, team knowledge to be captured and documented, and best practices to be improved through continual execution by a central team. However, the localized expertise that was specific to a business unit is often lost, maverick buying increases when local site managers do not agree with the centrally mandated decisions (and there is no technology platform that can be used to enforce the decisions), and reaction time to localized disruptions increases.

In order to try and minimize, or negate these disadvantages, some of the more advanced Supply Management organizations moved to centre-led models to try and achieve the best of both worlds. In the centre-led model, the organization forms a a centralized procurement centre of excellence (COE) focused on corporate supply chain strategies and strategic commodities, best practices, and knowledge sharing that leaves individual buys and tactical execution of categories that are not worth sourcing centrally to the individual business units. With appropriate category balancing, the centre-led model is believed to provide the best of both worlds — all of the advantages of the centralized and classic decentralized model of Procurement with minimal disadvantages.

However, until the specific needs of the organization are analyzed and the management style of the CPO is taken into account, it is hard to say which model is better. For example, if the organization is very centralized in its operations, and the individual departments, or heads of, are all in the same geographic area, then the perceived disadvantages of centralization are not there. There are no geographically dispersed units that can easily ignore the directives from a centralized organization, no delayed reaction times as the centralized team can quickly interact with the individual departments, and the localized expertise can be involved whenever it is needed. Moreover, there’s nothing to prevent a centralized organization from having a centre of excellence. The centre of excellence (CoE) is simply part of the Procurement team that focusses on best practices, market intelligence, education, and support for the rest of the team.

So the answer is, it depends on what’s right for the organization, as long as what’s right is identified, and built, with the goal of enabling and supporting a CoE in mind.