Category Archives: Procurement Innovation

Procurement Myths Debunked! Part I

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 first 10 myths are:

  • Hit Your Metrics
  • Pay No Heed to Cost Avoidance
  • Stay Away from Maverick Spending
  • Surveys are Silly
  • The Shared Services Model is Bad
  • PMOs and CoEs are Bad
  • Spend Should Always Decrease
  • Category Management is Best
  • Take Negotiated Savings Out of Budgets
  • Sourcing and P2P Definitions are Set in Stone

Of these, the doctor‘s favourites are:

  • Stay Away from Maverick Spending,
  • Spend Should Always Decrease, and
  • Take Negotiated Savings Out of Budgets.

While avoiding maverick spend is generally a best practice, sweeping it under the rug, even if it is small, is not a best practice — nor is mandating a stop until you understand why there is maverick spend. Is it because the buyer doesn’t know, doesn’t care, or thinks he has found a better deal? If the buyer didn’t know, then there is an issue with the process (of communication) somewhere, and fixing it will prevent future maverick spend. If the buyer doesn’t care, then there is a personnel issue that needs to be dealt with. If the buyer thinks he has a better deal, why? Lower cost, higher quality, quicker acquisition, or false perception. In the first three cases, the Procurement pro needs to investigate to see if there is a new opportunity she was not aware of, in the last case, an education program is probably required.

While spend is important, it is not the most important thing. Organizations exist to make profit for their shareholders. Profit is revenue minus expenses. That means that profit is increased when spend is decreased, or revenue is increased faster than spend is increased. The best way to to increase revenue faster than spend is to increase value. That’s why value creation, and not spend reduction, is the most important thing.

Savings are not a means to cut budgets — they are a means to find additional revenue for investment into opportunities for future value creation. These days, no department has enough money, and no one has enough money, or time, for training. If budget is freed up, it should be used to invest in training and new technologies, not to blindly increase shareholder dividends.

But these are just a few of the myths. More to come!

Has The Role of Procurement Really Changed?

This spring, Xchanging, one of the four largest Procurement Outsourcing Providers and a provider of Procurement and Sourcing technology (through MM4) released the initial results of its 2015 Global Procurement Study. According to the study, the role of Procurement has changed. It has evolved from a cost saving function to an invaluable strategic partner.

Based on the results of the study, the doctor doesn’t agree. If Procurement is an invaluable strategic partner, the kind that generates value for the organization, then why are the top 4 most important KPIs that Procurement is measured against cost related? And, more specifically, why is cost-savings realized, at 47%, 2.5 times as important as the next most important metric of revenue impact, at a mere 19%. If Procurement was really strategic, should not revenue impact be (almost) as important as cost-savings realized? And, more importantly, why is ROI only the 8th most important metric at 8%?

A truly strategic Procurement function generates value, and value is measured not just as savings (realized), not just (additional) revenue (impact), but overall profit margin, captured in an ROI metric. And not just one that captures savings from outsourcing/technology partners.

Moreover, the rest of the results are not that impressive either.

  • The most common reason for missed objectives is lack of internal engagement.
  • The most important skill set with the greatest perceived skills gap is relationship management.
  • The most common challenge is time pressure, faced by 79% of operations.
  • 59% consider talent shortage a challenge and 13% consider it an extreme challenge.

Procurement is on its way to becoming strategic. The realization that relationship management is key, that skills are needed, that new talent will be required, and that there is never enough time will push the organization to adapt better practices, processes, and technology, and this means that Procurement will evolve and get more strategic over time. However, it’s strategic and value to the overall organization will be limited until the organization measures Procurement more strategically. If a CPO’s bonus, and more importantly, a CPO’s job, depends on hitting an ill-defined cost-savings measure, than that is where the CPO is going to focus, and while doing so, miss out on a number of mid-term and long-term value generation activities that could, over time, take the organization from average to best in class. (There’s a reason that it’s the Hackett Group top 8%, and that’s because very, very few organizations realize what it takes to truly take Procurement to the next level.)

Regardless of the results, Xchanging should be applauded for undertaking this study across 830 Procurement professionals across the US and the EU. Until the C-Suite puts their measurements where their mouth is, the reality must continue to be documented.

A CoE in a CoE? Are we going too far?

SI is all for Centres of Excellence, CoEs, but when he read the recent post over on Spend Matters on “Why Your Procurement Organization Needs a Market Intelligence Centre of Excellence”, one has to wonder if we are taking the CoE concept a bit too far.

Now, the post is not really advocating for a CoE in a CoE, as it is advocating a Market Intelligence Centre of Excellence (a MI CoE) in any organization with over 2 Billion of spend, which is a reasonable suggestion given the importance of market intelligence in Sourcing endeavours, but one has to ask, where is this CoE going to live? Presumably it will live in Procurement. But managing a CoE is no small endeavour. A CoE requires good management practices, and good management practices generally stem from a CoE. In particular, a Procurement CoE should manage the MI CoE. And the net result is we have a MI CoE within the Procurement CoE.

A Procurement CoE should have functional excellence in all of the functional areas relevant to Procurement. It should have excellence in market intelligence, spend analysis, should-cost modelling, sourcing best practices, optimization, contract negotiation and management, order and inventory management, payment management, and procurement project management. But these should not be individual centres of excellence, as many of these activities overlap and support each other and market intelligence supports all, and is supported by all, of them.

The Procurement organization Centre of Excellence should definitely build its Market Intelligence competence up to the level of functional excellence, as that will improve all of its Sourcing and Procurement activities and enable it to realize better results, but it shouldn’t take the CoE concept too far. A CoE in a CoE just gets a little redundant.

World Class Procurement Organizations Are Beginning to Align with the Business

A recent publication from The Hackett Group for Procurement Executives addresses “How Procurement Organizations Are Reinventing the Stakeholder Experience” that looked at world class procurement organizations, which continue to outperform their peer group by a wide margin (by up to 5M in cost savings for a typical company), and found a surprising result.

We’ve known for quite some time that world class Procurement organizations, also known as The Hackett Group Top 8%, outperform their peers. We’ve known that some of these generate savings up to 41% higher than other (laggard) organizations. But we did not know that almost twice as many world class organizations (83% vs. 44%) have dedicated resources that act as liaisons between Procurement and the rest of the business.

As the authors state, raising stakeholder satisfaction levels builds trust and helps procurement gain the organizational permission to take on higher-value work. This is confirmed by the Hackett Group’s database of thousands of benchmarks across hundreds of performance studies which found that organizations that continue to invest in activities that elevate their role to that of a trusted advisor are taken more seriously, especially when they communicate that activity appropriately to the other departments in the organization. Furthermore, when these Procurement organizations are seen as a valued business partner, they generally report 68% higher savings! (This comes by way of an average cost reduction of 3.5% vs. 2.1% and an average cost avoidance of 1.2% vs 0.7%.)

Simply put, world class Procurement organizations have climbed to the top of the hierarchy of supply (which the doctor and the maverick discussed in their piece on “The CPOs Agenda I: Availability and Delivery”), having mastered supply assurance, cost reduction, and demand management. They listen and engage the internal customer, understand the customer’s needs, manage the relationship, offer them a superior service experience, and get better results. They follow all of the best practices the doctor and the maverick have been, and will be, discussing* over on the spendmatters.com/cpo site, and are seeing the return.

* The Agenda series has been broken up into three series:

  • the Conundrum# serieswhich discusses the outside-in issues putting pressure on, and shaping, Procurement
  • the Agenda serieswhich discusses the most pressing objectives on the CPO’s plate that are required to respond to the outside-in issues
  • the Value Drivers serieswhich discusses the primary actions that a CPO can take to realize the objectives on their journey to master the hierarchy of supply

# the doctor‘s terminology

The Ten Commandments of Procurement, Atheist Style

Earlier this month, on Canada Day, while LOLCat was proactively learning the pledge of allegiance (which LOLCat will need when Canadians re-elect Harper), Mr. Smith on Spend Matters asked what were “The Ten Commandments of Procurement” that you adhered to that were absolutely, unarguably, true under all conditions.

To get your creative juices flowing, a few weeks ago, Sourcing Innovation gave you the Ten Commandments of Procurement, Christian Style. And in case that wasn’t enough, two weeks ago SI gave you the Ten Commandments, err, Precepts of Procurement, Buddhist Style, and then last week, we gave you the Six Commandments, err, Philosophies, of Procurement, Hindu Style. But we’re not stopping there — not everyone is religious. So today’s post is for the atheists as we give you the ten commandments of Procurement, atheist style!

1. Be open-minded and be willing to alter your processes and practices when better ones are presented to you.

Even if you are using the best practice that is out there, that is only the best practice that is out there today. A better way might be discovered tomorrow. A good professional recognizes when something better comes along and strives to make use of it.

2. Strive to understand what the market situation really is, not what you want it to be.

Even if the market situation went unchanged for ten years, that doesn’t mean it hasn’t changed in the last few days. Consider the recent avian bird flu crisis. Like the dairy market between 2000 and 2006, the price of eggs stayed within a narrow band for years years until the recent avian flu crisis.

3.Supply Chain Mapping is the most reliable way of understanding your supply chain.

Not spend analysis, not (internal) customer surveys, not best guesses, mapping. To truly understand your supply chain you have to sit down and map it. Nothing except a complete raw-material source to finished product sink map for your primary product lines will allow you to get a full picture of the complexity of your supply chain.

4. Every category manager has the right to be in control of their spend.

You might be responsible for sourcing the category, but it is not your budget — it is Engineering, Marketing, HR, or Legal’s, etc. Not only is the budget owner a key member of the cross-functional team, but should have the final say on event design and final award.

5. A rigid set of rules is not necessary to be successful at Procurement. Only a desire to do the right thing is.

Procurement success is not driven by process, it is driven by passion. A passion to be the best Procurement professional you can be.

6. Every decision has consequences and you must be prepared to accept them.

There are tradeoffs between every option presented to you as a Procurement professional. Costs can only be reduced to a certain point before quality or reliability are affected. Outsourcing a function may save money, but could cost the organization valuable skill and knowledge in the long term.

7. Treat your customers and suppliers as you want them to treat you.

Just because Procurement is the Rodney Dangerfield of the corporate functions, that doesn’t mean it should be nonchalant in its dealings with the other functions. It should treat them the say way it wants to be treated.

8. Sustainability is not just important to corporate sustainability, but to our sustainability. We should leave the planet as good as we found it.

Environmental responsibility is not just a means to insure corporate sustainability by increasing the brand reputation, not just a means of insuring a continuous supply of raw materials by switching to renewable resources, and not just a means of insuring a continuous supply of fresh water and energy for production by going lean and using renewable energy, but it is a way of insuring our future and insuring that those that come after us will not only have a job they can love and look forward to, but a life they can love and look forward to. And the happiest worker is the most productive worker.

9. There is no one right way to source.

Every category is different, every product is different, every supplier is different, every market is different, and every professional is different. There is no one right way. There are conditions that make certain types of sourcing methodologies more appropriate or easier, but there is no hard and fast rule and it is up to me to work with the cross-functional way to identify a way that works best for us.

10. The ultimate goal is that, after, a sourcing event, the overall situation is better for everyone than before the event occurred.

You’re not just there to source a product or a service, but a solution to whatever problem your (internal) customer is having. Savings is good, cost avoidance is better, a new revenue source is better still, but solving their problem is what is truly priceless.