Category Archives: rants

You Might Be Getting the Basics Right, but That’s Not Enough

Last November, the public defender ran a great post over on Spend Matters UK on how “Procurement [is] Still Not Getting the Basics Right – and it’s Happening Too Often” and that’s not only why Procurement is often getting a bad rap, but why Procurement is getting a bad deal.

Case in point, the example given by the public defender where a recent tender used a complex scoring mechanism that scored “price” and “discount” separately and, even worse, weighted early payment discount higher. As a result, a tender of 100 with a 3% early payment discount got weighted higher than a tender of 95 with a 1% early payment discount! In other words, a best case cost of $97 was preferred over a best case cost of $94.05 — an overspend of almost 3%! That’s outrageous.

Another case is point, suppliers of complex services get invited to participate in electronic sourcing events with no prior engagement, and a tick-bock procurement process with no scope to include references, case studies, or suggest site visits for creative discussion. How should such a supplier expect to be judged, if they even expect to be judged at all? This is the well-known classic three-bids and a buy when you already have the bid you plan to accept. A smart supplier will not bid.

Now, as a regular reader of SI, that’s not the common practice in your Procurement department, but it doesn’t mean the common practice is good enough. Just because you know to weight all price factors in unison, that doesn’t mean that the weighting is right. If quality, reliability, delivery time, guaranteed delivery of supply, or another factor is critical, it needs to be weighted as highly. No point getting a 3% unit discount if you lose out on 20% of sales due to late shipments and stock outs. All of the critical factors need to be included and weighted, and, just as importantly, the suppliers must be made aware of the criticality of each factor so they can determine whether or not they even want to bid. If you need 15 days delivery, and a supplier can’t guarantee less than 21, the supplier needs to know that up front. Otherwise, they will get upset that they wasted time bidding on a tender they could not win.

Similarly, it’s not enough to do a proper, verbal, invitation over the phone, give the supplier a chance to include references, case studies, and suggest alternative proposals, if you know that one of the critical requirements of the bid or organizational preference (or prejudice) would preclude the supplier from getting the award. It’s not professional to invite the supplier unless you believe the supplier has an honest chance.

It’s not enough to do the process right if you want to be the BEST Procurement organization. To be the BEST Procurement organization you need the best process and the best ethics. You need to be known as the honest buyer who only invites suppliers who will be evaluated fairly and have a fair shot of winning the business if they are willing to tighten the belt buckle and make an honest effort of putting the best proposal forward. Then, when you make the award, no matter who gets it, chances are, you will be among the customers of choice from day one because you wanted to be both the best Procurement organization and the best customer.

So get the basics right. And then do one better.

SI’s Prediction for 2016 – It Will Only Get Hotter!

Last year, SI, which welcomed you to hell in the year of damnation (with 100 Damnations Down to date in the dirty dozen categories), avoided predictions because, as it clearly explained in its 2014 Series on The “Future” of Procurement and the follow up series which did a “Future” Trends Expose, most predictions are trash, with most futurists recycling the same old garbage year-after-year, and even though we are only four days into this year, it appears this year will be no exception.

the doctor is already seeing a number of 2016 posts about how this is the year we replace “negotiate” with “collaborate” (which the thought leaders have been saying since strategic sourcing decision optimization started becoming common in the leading Sourcing organizations, also known as the Hackett Group top 8%), that analytics will take off (which is the same speech we heard 15 years ago when Business Objects and Cognos were the names in analytics), that the skills gap will finally be addressed (which reminds the doctor of conversations he was having nine years ago), and so on. It looks like the amount of future sh!t that is going to be dumped upon you this year is greater than the truckload Biff Tannen had dumped upon his head in the original Back to the Future movie, way back in 1985. (A reference that is very appropriate because every year at this time it seems we get taken back to the future.)

The only prediction SI has ever really liked is last year’s prediction by Mr. Smith who “predicted all predictions will be wrong” on Spend Matters, because that’s one of only two predictions you can count on for this year. The other SI will give you now so you can get the prediction post itch out of your system and get back to work:

It Will Only Get Hotter!
You’re still in hell. Budgets are still too tight. Your platforms are still too out of date. The training budget is still zilch. Risk are still increasing. Commodity prices are still going through the roof. The emerging market, which is where the population growth is happening (especially now that China’s one child policy has been eased and a couple can have two children if either is an only child and the middle class in India is increasing), is gobbling up commodities and energy faster and faster (as even a small growth rate in the two countries that account for over one third of the world’s population is substantial) which is not only causing rampant price increases but shortages. Product lifespans are continuing to decrease and consumer preferences are changing faster than you can predict. The procurement equivalent of the second law of thermodynamics is in full effect and the result is chaos.

Last year, you might have been in the frying pan. This year, no matter what happens, you will be in the fire trying to dance between the flames. You have been warned!

It is NOT Direct or Indirect — It is Strategic and Complexity!

Now that we’ve set the record straight on sourcing, it’s not a suite, it’s just sourcing; and optimization, it’s not optimization, it’s strategic sourcing; it’s time to set the record straight on another rampant misconception perpetuated by vendors who make their living off of the ignorance they perpetuate.

It is not direct or indirect — it is strategy and complexity.

The right way to source a category has absolutely nothing to do with whether it is a direct category for your organization or an indirect category for your business. Nor does it have anything to do with whether or not it is a category regularly sourced by your GPO or whether or not the GPO has it under contract.

First of all, as we elucidated in our most recent paper on “Complex Sourcing: Are You Ready”, even the categories that were traditionally seen as the simplest indirect categories are sometimes actually among the most complex “direct” categories that the organization possesses!

Secondly, what is indirect for your organization is direct for another organization, and a supplier in particular. Calling it indirect only masks the fact that, at some point in the supply chain it is a complex direct category and if your supplier, or GPO, is not approaching it correctly, a significant amount of money is being left on the table.

While there are some that would very much like to forget that before the introduction of e-Negotiation (e-RFx and e-Auctions), a number of “indirect” categories used to cost organizations millions — such as tires in automotive, lights in aviation and printer ink in back offices everywhere — this is not the right thing to do. We have to remember that these organizations never understood how much these “secondary” categories were really costing them and that, sometimes, 100% profit margins were the norm, because they often did not have the ability to go out to market like we do today.

Thirdly, while a product organization might see services as indirect as such a category would be labelled as non-core, and, similarly, while a service (or financial) organization might see a product category as indirect as it too would be labelled non-core, if such service, or product, is essential for the organization to deliver the product, or services, the organization profits on to the end consumer, how can such a service, or product, really be non-core?

For example, if successfully selling that next generation cellphone requires augmenting the supplier’s design team with a new design team that can enhance usability above the competitor’s product without sacrificing a low-price point or quality, that is a critical service and should not be treated as a secondary outsourced indirect category. Similarly, if delivery of your big data analytics services requires a specific high-end laptop configuration that can not be easily met by all providers, and a sub-par configuration would result in delays or service degradations, this is not a category that can be thrown over the wall to a GPO either.

In other words, direct or indirect has no correlation to the complexity of a category or its strategic importance to the business and, thus, should not be used to determine the appropriate sourcing strategy. The right way to initially classify a category is to use a basic measure that that captures its strategic importance and its complexity and any category with a measure that exceeds a certain threshold must be strategically sourced. The rest can be sourced using simple spot-buys or other traditional methods provided that they are not too complex, or too strategic in someone’s view, for these traditional methods.

There is no ONE platform!

As much as we would like to realize the dream of one platform for Supply Management, it’s not going to happen — at least not within our professional lifetime. The internet, and software development, might be moving in cat years, but let’s face it, it’s been 90 cat years since true first generation strategic sourcing, e-Procurement, and other fledgling Supply Management products hit the scene and we still don’t have a single end-to-end strategic source to pay platform! (Yes, there are source-to-pay platforms, and some are rather good, but there is not one that is not missing some key piece of functionality for strategic sourcing, such as optimization or advanced analytics, or for e-Procurement, such as e-Invoicing and automated m-way match.)

But what can we expect, with the exception of a handful of organizations (that can be counted on your fingers, minus your thumbs), we haven’t even reached the era of one ERP. Larry had a dream, but outside of Oracle, I believe the number of global organizations that successfully migrated their international operations to one global (Oracle) ERP instance is 5 (and that’s why the vision of one platform went away and Oracle acquired so many other leading ERP platforms, leaving only its rival SAP standing at the end of the day once the acquisitions on both side are tallied up.)

We have the situation that no one vendor, and this includes SAP, Oracle, and IBM even after their string of acquisitions over the last 90 cat years, has a platform that fully addresses basic Sourcing, Procurement, and Logistics, and once you start factoring in CLM, SRM, Sustainability, Talent Management, and Innovation Management needs, nothing comes close, or will come close, for at least another 60 cat years at the current development pace. In addition, with the constant pace of innovation in terms of process, and the constant shift both towards globalization and specialization, nothing may ever come close.

Sauron may have forged the one ring, but not even the almighty Google will forge the one platform. So you have to stop focussing on finding the right vendor and shift to finding the right platforms to serve your Supply Management needs. To do this, you have to first ask, what is the workflow?

Even though the organization may have different processes and procedures for T&E, P-Card, indirect, and direct purchases, depending on category, department, amount, and budget owner, there is still one (mega) process that is followed.

There will be a needs identification followed by an identification of whether or not an inventory, contract or preferred vendor exists to fill that needed followed by a determination of whether an event is needed or not, followed by the determination if a requisition is needed, followed by an order (which may or may not require a purchase order) followed by goods delivery and an invoice, followed by acknowledgement and inventory, followed by determination of an approval process, followed by an approval process for the invoice, followed by a payment, followed by data capture and archival in the right systems. There is a mega-flowchart that defines the mega-workflow that is defined by everything the organization needs to directly and indirectly support the process that defines system needs and integration needs.

The answer is to identify one or more minimal set of overlapping platforms that fulfill the workflow needs, integrate with the underlying ERP and / or (Master) Data Management (MDM) systems, and, directly or indirectly (through the underlying systems) integrate with each other. Once these system sets are identified, one works with the vendors that best meet the organization’s overall needs and implement the systems that accomplish the workflow. That’s how progress is made. Nothing is gained by seeking out the one platform. It is a myth, and a myth that destroys organizational progress and productivity.

There’s No Return on Customization.

the doctor does not attend many events, but hen he does one thing he regularly hears is Company B saying that there is no platform that meets there needs so they are buying Solution S from Company X and customizing it through the vendor or a third party.

Before one more organization does this, the doctor needs to scream DON’T! In this day of age there is no return on enterprise software customization … no matter what the vendor or 3rd party may tell you.

Why?

1) Time to Delivery

If the functionality is truly valuable, by the time it is delivered, another vendor is sure to have equivalent functionality on the market ready and waiting for your implementation.

2) Up Front Cost

Custom development is a huge cost — which may never be realized given the average IT project failure rate and the average return.

3) Maintenance Cost

Out of the box functionality is covered under standard warranty and standard maintenance agreements — custom modifications usually require high hourly rates to contract scarce development talent for as long as is needed to fix any bugs or do any required upgrades.

4) Delayed Upgrades

While everyone else gets upgrades and new, free, features on the provider’s schedule, you get to wait and wait and wait until the talent has the time to address, and complete, the necessary upgrades to the custom modifications you made to allow the base system to be upgraded — this can be months (or years) and efficiency losses will add up on a daily basis!

When you put it all together, the costs will typically outweigh the benefits. So put the effort in to finding the right vendor with the right system and when it comes to customization, just do NOT do it! The only company that profits off of customizations is the vendor doing the customizations, because they are the company at the bottom of the money pit while their clients keep shovelling the money in.