Category Archives: rants

Spend Analysis Is Not Strategic. It Isn’t Always Strategic! Part II

That’s right, in and of itself spend analysis is Not strategic. This isn’t to say that spend analysis isn’t one of the most important actions that your supply chain can take in its effort to reduce costs, improve efficiency, and make the most effective use of business resources, but that the art of simply doing a spend analysis is not strategic.

Spend analysis provides a picture of the products and services the organization is spending money on, whom the products and services are being bought from, the organizational buyers who are spending the money, where the products and services are being bought from, and where the products and services are being shipped to and/or utilized. But this process is not strategic — it’s tactical. Furthermore, this information alone is not strategic. Let’s say the organization is spending 2M on computing equipment. So what? On it’s own, this information is not strategic. And unless the spend is significant (at least 1% of organizational spend) and the number one goal is to reduce total organizational spend by 5%, or the equipment needs to be unique (the organization’s proprietary trading platform only runs on hardware that natively supports AIX Unix), it’s not going to be used strategically. If the analyst compares spend to market prices and determines that reasonable savings are available (5% to 15%), the decision might be to run a sourcing event, but if it’s just another cookie-cutter RFX/Reverse Auction and/or TCO optimization with the same supplier base, it’s not strategic.

And then there’s the most common use of spend analysis in an organization that knows how to use it. Ad-hoc queries to determine if a (duplicate) invoice is being paid twice, if the wrong amount was paid to a vendor, if a department is on budget, if a category has enough spend to warrant a sourcing event, etc. Not strategic. Very important, but not strategic.

The reality is that very few events are strategic, because very vew categories are strategic. Unless it’s a unique product or service, unless the spend is a significant percentage of organizational spend, unless the product or service directly relates to a (long-term) organizational goal, or unless you’re looking for a strategic-partner to share in development, production, costs, or risk (mitigation)s, it’s probably not strategic. It’s probably still important, because every cent and resource counts in today’s economy, but let’s stop confusing tactical with strategic.

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It Isn’t Always Strategic! Part I

There’s been a lot of debate about The Life and Death of Strategic Sourcing ever since Dalip Raheja claimed that Strategic Sourcing is Dead back in August (with numerous posts indexed at this link), and while most of it has been good, there’s been one major point missing in all of the debate to date:

Sourcing is NOT always Strategic!

That’s right! Sourcing is NOT always Strategic!

First of all, most of what you buy is not critical to operations.Consider all of the following which is bought by most businesses on the planet:

  • office supplies
  • office computing equipment
  • janitorial services
  • HR support
  • print material for marketing
  • electronic discovery for legal services
  • outsourced manufacturing for commodity products

Not Strategic!

  • office supplies

    who gives an albino rat’s behind who made your stapler and copier paper and where they came from

  • office computing equipment

    for 99% of companies out there, as long as it runs Microsoft Office and an internet browser, who made the machine is irrelevant

  • janitorial services

    it’s not too hard to wash a window, sweep a floor, or empty a trash basket

  • HR support

    there are at least six top-tier HR-support agencies out there whose services are essentially indistinguishable

  • print material for marketing

    any print shop that can print 8.5″ x 11″ brochures in 16M colours does the trick

  • electronic discovery for legal services

    there are a number of software packages out there that do exactly the same search on exactly the same file formats and thousands of monkeys who can use them

  • outsourced manufacturing for commodity products

    if you’re manufacturing office supplies, clone PCs, or children’s toys, there are hundreds of factories that can get the job done

Let’s look at the definitions of the word strategic:

  • Merriam-Webster: (a) a careful plan or method : a clever stratagem or (b) the art of devising or employing plans or stratagems toward a goal
  • Wikipedia: a word of military origin, refers to a plan of action designed to achieve a particular goal. In military usage strategy is distinct from tactics, which are concerned with the conduct of an engagement, while strategy is concerned with how different engagements are linked
  • Business Dictionary: Art and science of planning and marshalling resources for their most efficient and effective use

These say that strategy is

  • carefully thought out,
  • goal focussed,
  • efficient, and
  • distinct from its implementation, which is tactical.

Thus, if you simply jump to strategic sourcing techniques, you are not being strategic. If you’re not planning how to efficiently use all of the affected resources, you’re not being strategic. If you’re not thinking about why a certain plan of action is being considered, you’re not being strategic, and, most importantly, if what you are doing does not relate to a major business goal or objective, it’s not strategic.

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Don’t Forget the Time Zone!

You’d think that this would be obvious in the year 2010, but it’s ridiculous the number of companies that advertise on-line events, for which they are obviously seeking a global audience, and don’t include the time zone. Not only does most of the world NOT run on your timezone, but most of them don’t have a clue what time zone you’re in. And don’t give me that B.S. that “your customers know where we are”, because, if you have multiple offices, I guarantee that at least some don’t. And if you are doing it at a partner or customer office that is not in your head-office time zone, how are they supposed to even have a clue?

And learn what daylight standard time means. It’s amazing how many events I see for 11:00 EDT in December (not possible!) or EST in July in New York (again, not possible!). And don’t take the timezone shortcut and just use ET, CT, or PT. Remember, not all provinces and states (like Saskatchewan and Arizona) use daylight savings time, and the usual assumption is that if an abbreviation is used, you mean xDT in summer and xST in winter.

And if there is any possibility of confusion (and with timezones there usually is), spell the timezone out. BST can mean British Summer Time, Burma Standard Time, or Bangladesh Standard Time.

Don’t be a Dummy! Use the fully qualified timezone.

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A Most Favoured Nation’s Rant

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

News yesterday:

U.S. Sues Michigan Blue Cross Over Pricing
(Source: New York times, Oct 19, 2010)

The US Department of Justice and the State of Michigan have sued Michigan Blue Cross over their practice of having a clause in their contracts requiring that hospitals never charge other insurance companies less than they charge Blue Cross. In some cases they allegedly required the hospitals to charge 25-39% more than they charged other insurance companies The plaintiffs charge this is anti-competitive behavior.

US purchasing shorthand calls such clauses ‘MFN’ (Most Favored Nation) clauses.

My response:

Well duh, it's about dxxx time! These clauses are a refuge of lazy-axx purchasers who rely on their competitors to do their price negotiations. The clauses I've run into also would require sellers to open their books to audit so buyers can actually check what a seller charges others. If that isn't anti-competitive, I don't know what is.

It's also futile and, in some cases, comical. I had a major client who wanted me to agree to such a clause. They were some of the most lackadaisical price negotiators I've seen. They had just asked me to become an employee of their temp agency (for the same consultant rate) because they didn't have a process to reliably send 1099 tax forms reporting my income to the US Internal Revenue Service. That raised their cost 20% and increased my profit by 7% because now they didn't have to pay the employer's share of Social Security and Medicare. I was waiting for them to ask for a 7% price reduction but the request never came. Sure I signed their agreement but I made sure that my services to them were 'different' than services to others.

So if anyone thinks you're accomplishing anything with these clauses, look again. If it's not a more or less standardly defined good or service, all you've done is increase bureaucracy. If it's a standard product, I agree with the plaintiffs that it's anti-competitive.

Thanks, Dick!

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