Category Archives: rants

Your Procurement Sucks … and Here are 3 Likely Reasons Why.

Yes, SI is trying to get your attention and yes there is the vanishingly small possibility that nothing SI says in this post applies to you because you are the top 8% of the top 8%, but let us face facts. The possibility that the entirety of this post does not apply to you is significantly less than 1% and we can say with near 100% confidence this post will benefit you.

Procurement May Not Be Dead (as per our four part series on Procurement is Dead! Long Live Procurement!) but that doesn’t mean your job isn’t if you don’t eliminate the situations on this list and enter the modern age of Procurement. So take careful note of not only what is wrong with your Procurement, but the hints we give you for addressing these problems.

You’re drowning in paperwork

Invoices. RFPs. Catalogues. It’s not the 90s anymore, it’s the teens. If you don’t have a modern e-invoicing, e-RFX, and e-Catalog/e-Shopping solution there’s no hope of you ever getting your Procurement on track because you’ll never be able to process the mound of paperwork that is getting bigger and bigger every day as your organization grows and more invoices go in, more RFPs go out, more suppliers respond, and more suppliers send you their catalogues that get bigger every year.

You’ve never sourced Marketing, Legal, HR, or any spend outside of MRO and For-Sale Products

If all you are sourcing are office suppliers, MRO, and resale products, you are likely only sourcing half of the organization spend, at most. These areas, T&E, and other areas you are not sourcing are accounting for greater and greater portions of organization spend. Many studies indicate that 10% is the magic number for marketing spend. With more and more work being assigned to contingent labour, consultants, or outsource partners, this can be 20% of spend. T&E is also 10% of spend at many organizations. Then there is legal, which can be quit high, p-Card spend, event, spend, etc. If Procurement is only responsible for half of spend, why is it even needed at all? A third party can manage MRO, a GPO can manage office spend, and VMI can manage products for resale.

The only metric on your scorecard is savings.

This might have been a great metric in the noughts when inflation was essentially zero, many suppliers had inflated margins during the right-sizing craze of the eighties and the outsourcing craze of the nineties to record highs, and new suppliers were desperate to win business at any cost and double digit percentage savings were the norm in sourcing events across the board. But inflation is on the rise, hyper-inflation is around the corner, margins have been trimmed to low single digits as a result of over-use of auctions, and savings is a word that will soon only appear in the history book. We’re in the age of demand management (for consumables and internal spend), spend management (to keep cost increases in line with actual inflation), and value management (where value-added services that can increase revenue is sometimes more important than reducing spend).

If any of these situations applies to you, fix it fast, or your procurement will remain in the dark ages. Not a situation you want to be in.

What’s the Real Reason for the Driver Shortage?

SI has regularly blogged about the driver shortage and the dire predictions that the shortage in the US alone could top 100,000 drivers in a few years. (See this classic post on how new estimates put the driver shortage at 240K drivers, for example.)

A lot of reasons have been given for this including, but not limited to:

  • low wages
    truck drivers make an average wage over 4K less than per capita income and 13K less than median household income
  • poor working conditions
    truck drivers often have to be behind the wheel up to 14 hours a day (sometimes sitting in traffic or in lines to load/unload for over half of that), six days a week, and they don’t often get to eat well
  • poor healthcare
    as they have the worst plans possible, can’t keep regular appointments, and can’t always see a doctor on the road
  • danger
    not only do truck drivers often have to sleep in their cabs in unsafe conditions, risk getting robbed on the road, but 12% of all work-related deaths in the US are from truck drivers in auto accidents

But is the real reason that we have a driver shortage perception and stereotypes? When you get down to it, almost 95% of truck drivers are men. Even though the stereotype of the driver as a brawny, macho man dressed in a lumberjack shirt has fallen by the wayside, driving is still very much a man’s world. And even if the majority of drivers are not perpetuating the man’s world stereotype, they certainly aren’t doing anything to counter it. Consider this article over on the BBC from late fall that asked Why Don’t Women Become Truckers?

All over the world it’s the same – a woman driving a lorry gets funny looks and has to listen to unfunny jokes.

How are we ever going to solve the driver shortage if 51% of the population doesn’t want the job?

In other words, the real reason for the driver shortage may be the industry’s own fault.

First Clue that the New Public Procurement Policy is Going to Cost Everyone Money

Effective immediately, our policy is to only buy “Made in X”, where “X” is the local country or state.

Why is this going to cost you money?

First of all, it’s going to eliminate competition. And we all know what happens when competition goes away. Suppliers, who know they don’t have to worry about being replaced, as there’s only a few alternatives, and they’re already in your door, stop working as hard to be as cost competitive, innovative, or valuable to your organization.

But if that was the worst that could happen, it wouldn’t be so bad.

The reality is that as soon as a “buy local” policy comes into effect, suppliers are going to also (pretend to) “buy local”, which of course is going to raise their costs, because their suppliers are going to also stop working as hard to be as cost competitive, valuable, or innovative because the market is small, they’re in the door, and they know their competitors will also be content to maintain the status quo so they won’t have much competition. And this will continue down to the raw material supplier.

But if this was the worst that could happen, it still wouldn’t be so bad.

The reality is that once a supplier knows that it’s effectively the only game in town, it’s not going to worry about cost increases. In fact, it’s not only going to stop asking how much it has to raise costs to cover its increased costs and ensure it maintains nice, fat margins, it’s going to ask how much it can raise prices and just how fat its margins can get. It’s borderline corruption.

But if this was the worst that could happen, it might still be something that could be grudgingly accepted and dealt with.

The reality is that not all suppliers will be content to inflate their margins. In locales where corruption is common, this is only going to encourage more corruption. As per the public defender‘s post on how “Made in Nigeria” Public Procurement Policy Will Simply Lead To More Corruption, this sort of policy provides the perfect cover for both parties in a typical corrupt procurement transaction. How so? Read the public defender‘s post. Simply put, the buyer can now get away with saying “I had to buy local, and this looked like the best choice” and use it as a defence when caught.

How to Save a Whopping £500 on 1.0M of Spend!

Unless you are a best-in-class purchasing organization (and that is not the case for 92% of you), then you need to save. Budgets are shrinking. Costs are rising. Growth and consumer spend is flatlining. And if you don’t get your costs under control, you will be out of a job one way or the other.

But there’s a right way to save, and a wrong way to save.

The right way to save is to apply advanced analytics and optimization across your strategic and high spend categories which has proven time and time again to save an average of 10% across the board year after year when properly applied.

The right way to save is to influence and control demand. The only time demand should increase year over year is when it is for products or components that are for sale, or go into for sale products, and sales for those products are increasing. Demand should not increase more than x% for office supplies or MRO where x% is the increase in workforce, and, in fact, in many categories, should be decreasing year over year. For example, paper spend should decrease (since so much can be distributed online). MRO should decrease, as better inventory management and higher quality parts should decrease the number of products required. Etc.

The right way to save is to increase the value of the product sourced without increasing the price, so that even if costs stay constant, value increases and allow for an increased revenue stream.

So what’s the wrong way to save? Capital manipulation. In particular, earlier customer payment and later supplier payment.

The majority of analysts, accountants, and consultants, especially the unenlightened ones, will dazzle you with calculations that show how if you decrease accounts receivable from 30 days to 15 days and extend accounts payable from 30 days to 60 days, the extra 45 days of working capital you have will save you a fortune as you’ll either have to borrow less or can invest more and generate a huge savings on every Million that stays in your coffers an extra 30 to 60 days.

For example, if you have an annual cost of capital of 6% and you typically have to borrow 50% of required working capital to pay your suppliers on a timely basis, you will be paying:

  06% ACC   12% ACC  
Borrowed Amount 30 days 60 days 30 days 60 days
1 M  5,000 10,000 10,000 20,000
10 M  50,000 100,000 100,000 200,000
50 M   250,000   500,000   500,000 1,000,000

And as soon as a CFO at a mid-size company believes that if he can squeak out an extra 60 days across 50 Million of expenditure at 6%, he can save £500,000, a blind mandate to delay payment terms and expedite payment collection goes out across the board. And then CFO pats himself on the back and goes on a well deserved corporate retreat to the next conference he can find at a mountain resort.

But what actually happens?

If you do the proper calculation, you see that very little is actually saved because the savings is on the cost of capital for the payment days of the amount, NOT cost of capital for the payment amount. Which is a much smaller number. If you do this calculation, the real numbers are:

  06% ACC   12% ACC  
Borrowed Amount 30 days 60 days 30 days 60 days
1 M  500 1,000 1,000 2,000
10 M  5000 10,000 10,000 20,000
50 M   25,000   50,000   50,000 100,000

Remember, in the long run, the payments still have to be made and, most importantly, still have to be made on a monthly basis. So while you might see a savings the first month, there will be no further savings because all you have done is shifted all payments ahead by x days. A payment delayed is not a payment negated.

Moreover, all you’ve really accomplished is p!ss!ng off the supplier. And any chance of being a customer of choice has been thrown under the bus, where you effectively threw the supplier, who now has to borrow more capital to stay in operation, often at a rate double yours. In other words, the whopping £5K you saved likely cost the supplier £10K and, at the end of the contract, the first thing they are going to do is increase their costs substantially to cover their loss. So, at the end of the day, your short term savings of £5K is likely going to cost you £15K or more (especially when you consider the value associated with being a customer of choice). But hey, the CFO is always right, right? Wrong!

Don’t believe the doctor? Check out the public defender‘s blog that goes through this calculation in even more detail.

AI Will Not Save Procurement — Thought Leaders Will

In yesterday’s post we pointed out that despite strong claims to the contrary, AI will not save Procurement (and, if hastily applied, will only hasten its demise). Procurement is at a crossroads, but the last thing it should do is sell its soul to the demon that spawned modern AI.

As the public defender pointed out in a recent co-authored piece on The Future of Procurement, courtesy of Trade Extensions, Procurement will survive, as long as it redefines its role to meet the needs of the new enterprise.

As highlighted by the public defender, Procurement will, among other roles, be the organization that

  • brings to the table an understanding of what markets and suppliers can offer to support the strategic direction of the business
  • brings to the table an understanding of what platforms will best support the organization’s business, not just the day-to-day sourcing and procurement solutions
  • brings to the table the deep expert market research and negotiation skills that are required to not only secure supply but transportation, talent for operations, and good customer relationships
  • brings to the table the value engine that increases organizational efficiency and effectiveness and innovation that takes the organization to the next level

But it will do more than that. It will be the department that helps set the strategic priorities for the organization. It will be the department that defines the best strategy for talent acquisition and management. It will be the department that will define not only where the organization fits in the supply chain, but how the supply chain will run to support the organization. It will be the new nerve centre of the enterprise, created by the thought-leaders of tomorrow.