Category Archives: Procurement Innovation

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.

In Sourcing, B2C cannot replace B2B, but B2B can learn from B2C.

As long as it doesn’t go app crazy. For years the doctor has been hearing about how mobile is the next big thing in Procurement, and even though mobile hasn’t really caught on, now a handful of vendors are staring to talk about how apps are the next big thing in Procurement. This is a bit ridiculous. When it comes to Procurement, there’s not an app for that. Can you really get market intelligence from an app? Can you really do spend analysis in an app? Can you really do should cost modelling in an app? Think about what “apps” on your “smart”phone really do. Take a few notes. Convert a few units. Play a simple game. Check your bank balance. Store your boarding pass. Simple, discrete tasks. Nothing about strategic sourcing or enterprise Procurement is app friendly.

But enough ranting. Today’s post is about how B2B can learn from good B2C technology. In particular, how B2B can learn from B2C for:

  • total purchase cost calculation
  • order and requisition management
  • collaboration management

These days, thanks to a number of web sites, consumers are becoming smarter when it comes to analyzing the total costs associated with big purchases like cars and houses as a number of sites, including AAA/CAA and BoA/CMHC, have calculators that allow the buyer to understand the total cost of buying, and maintaining, the vehicle or house they are considering including taxes, insurance, and other incidental costs. These consumers, who are not experts in car or house buying are using templates built by people who are experts to do total cost calculations.

B2B Procurement can learn from this and create sourcing and procurement platforms that come with built-in cost model templates for common categories of direct goods and RFX templates that can be used in sourcing common indirect categories to ensure that the organization asks the right questions, collects the right costs, and makes the right decision. The reality is that across an industry, indirect spend categories are common and there’s no reason that an organization can’t source a solution with pre-built templates for the common indirect categories it sources, which will likely constitute 90%+ of indirect spend. Unless the category is high-dollar, there’s not much point paying a large amount of money to a third party organization, even if the third party is an expert, because it is not likely that the savings will be enough to justify the cost. For most indirect categories, this is likely to be the case.

In 2009, AMR did a study that found that, in an average organization, 30 cents to 40 cents of every negotiated dollar of savings never hit the bottom line. There are a number of reasons for this which include, but are not limited to expedited shipping, volume increases, and maverick spend. In many cases, the biggest culprit is the latter — maverick spend. Maverick spend typically happens because a purchaser is unaware of a contract, unaware of how much it costs to buy off contract, or frustrated with the difficulty of buying on contract with current systems. (It can also be the case that the purchaser doesn’t care because they’re not in Procurement, but this usually isn’t the case.)

This situation can easily be rectified by incorporating some features of best-of-breed consumer shopping technology, such as that employed by Amazon.com, that not only allow a buyer to find the product or service they need, but see which of those are on contract. In other words, just like a search on Amazon.com can find all instances of that book you want, and, if you desire, only show you those eligible for Prime, a Procurement platform that enables a buyer to find all instances of a product they are searching for in an integrated catalog that contains all products and services available from approved vendors — whether in a punch-out site, an online database, or an offline catalogue (maintained by Procurement) — and see which of those are on contract can enable on-contract requisitions and purchase orders. Plus, since it will be easier to buy on-contract than to buy off-contract, there will be a lot less circumventing of the system.

And when it comes to collaboration, B2B can actually learn from best-of-breed professional, and even social, networks and communication platforms. For example, Linked-In not only allows a user to post their resume and connect to fellow professionals, but it also allows them to join discussion groups that allow them to post relevant information on a topic and comment on it. And sites such as join.me and Webex allow for real-time virtual meetings and collaboration.

Incorporating these types of technologies into a Procurement Project Management program allows for collaboration to not only take place on line, but all collaborative communications to be maintained and archived in the platform. This not only helps with conflict resolution, but it goes a long way to preventing disputes in the first place as the platform captures all communications and allows each party to see what it agreed to.

B2B technology can be improved by taking the best B2C innovations and appropriately incorporating them into B2B platforms, but it has to be done intelligently. Not all consumer technology is B2B appropriate, especially if it was designed for C2C purposes, and apps are prime example. However, as it has historically been the case that many innovations start in the consumer space, it’s no surprise that B2B can be improved by appropriating appropriate consumer technologies. It just has to be the right technologies appropriated in the right way and put to the right use.

Procurement Myths Debunked! Part II

Over on spendmatters.com/cpo, the maverick has been doing a great job knocking out Procurement myths one by one, with twenty (20) down and five (5) to go. While the doctor did not co-author this series, as per a post this spring, he did consult on them and believes that all of these are myths that you need to be aware of.

The next 10 myths are:

  • Sourcing is Better than Supplier Management for Value Creation
  • Efficiency and Effectiveness: You Can’t Have Both
  • Apply the Kraljic Model to Spend Category Procurement
  • Technology is Only a Tool
  • Procurement Owns Spend Management
  • Procurement ROI is the Single Best Procurement Metric
  • “No PO, No Pay” is a Best Practice
  • Spend Category Taxonomies are Hierarchical
  • Procurement Needs a Mandate
  • Supply Management is a Department

Of these, the doctor‘s favourites are:

  • Technology is Only a Tool
  • Efficiency and Effectiveness: You Can’t Have Both
  • Spend Category Taxonomies are Hierarchical

Technology is not just a tool, it is a transformation engine that allows its users to be more efficient, effective, and transformational. It’s a process enabler, and the process at the same time. The level of your technology is directly proportional to the level of your Procurement maturity.

With the right platforms that enable the right processes, Procurement can be efficient and effective. It can also save money and provide increased value generation opportunities. For example, using technology enabled marketplaces to identify more sustainable suppliers can not only cut costs but also increase value as it gives marketing more to work with and allows the organization to increase brand value, which correlates to sales, with less effort and less money.

Finally, there is no one taxonomy, and if there was, it definitely wouldn’t be hierarchical. Products can be grouped by function similarity, component similarity, and department or geographic utilization, for example. Services by function, geography, and strategic nature, for example. Products and services can be mixed or kept separate. The best category definition at any given time will depend on market conditions, supplier capability, and projected utilization over the expected duration of the contract.

Supply is fluid, and Procurement must be as well to keep up. And it definitely must avoid the traps laid by the common Procurement myths.