Category Archives: Sourcing Innovation

For Successful Sourcing Sometimes You Have to Listen to a Lawyer

the doctor is always on the look-out for good articles on (strategic) sourcing and its importance to overall procurement performance in today’s stressful supply environment. Especially if the article isn’t yet another seven steps to sourcing success article. This article by Chris Eastham of fieldfisher was really close, as it provided nine tips to improve sourcing efficiency after telling you that

  • Sourcing is a Live Wire
  • Geo-Political Drivers cause Chaos
  • Technological Drivers cause Complexity

and these collectively compound your struggles, which are exacerbated enough due to organizations taking approaches that don’t serve their overall strategic objectives such as:

  • an insufficient focus on business drivers
  • only seeking piecemeal advice from Legal
  • a lack of project management (that results in key activities happening out of order)
  • a lack of early stakeholder engagement
  • an unsuitable project team (that doesn’t have the right subject matter experts)

And the author is dead on here. These are common mistakes. The author, as noted in our introduction, also had nine tips that included the following six:

  • early engagement of all stakeholders
  • realistic (not overly ambitious unrealistic) plans
  • core team with (enough) subject matter experts from day one
  • the desired results and a business case up front
  • do multi-round tenders that include detailed RFIs
  • define rules of engagement for stakeholders and vendors

But it was the following three that need to be highlighted because the doctor doesn’t see this advice enough in seven steps to successful sourcing articles.

  1. document all key requirements for the project in advance
  2. document all key product and service requirements, including any necessary terms and conditions that must be agreed to for the vendor to engage with the business
  3. get the right Legal team on board before the event is launched

Why are these three tips so tantamount to triumphant sourcing events?

  1. multiple reasons to document all key requirements for the project
    • if you don’t document all key requirements, you can’t be sure you know them
    • you can’t get the project right if you’re missing key requirements
    • you need to make sure you don’t invite any vendors that can’t even meet the key requirements
  2. multiple reasons again to document all key product and service requirements
    • if you don’t document all key requirements, will you buy the right product or service for you and, more importantly
    • you can’t share all the key data with vendors, which is important to ensuring they quote on the right products or service and
    • they can’t self select out if they can not meet any of your core business requirements, which means you could waste time analyzing their bids, optimizing the perfect award, only to start over when they figure out they’re not right for you (or, even worse, when they deliver the first order and nothing works)
  3. multiple reasons to get the right Legal team (which might just be one in-house counsel, or might be three hot-shots from an external firm for a complicated, 100M purchase that can make or break the company)
    • they know the key requirements that need to be addressed and in the contract to minimize internal risks
    • they know the risks of the dealing with companies in other geographies and what you have to consider for the suppliers you are planning to invite to the event
    • they know what should be in the contract, and communicated as such up-front, what should be in an appendix, and what is not crucial
    • they know the data you have to collect to meet the different regulatory (reporting) requirements that your organization has to adhere to, and which requirements you have to communicate with suppliers to make sure they can, and agree to, give you the right data

In other words, Legal, especially for any buy that is financially significant, strategically significant, or risky, is key to get involved in the right aspects up-front. (And note that if you build a team with the right stakeholders, and document the right requirements, Legal will be able to work quickly and efficiently, and even more so if you are willing to use standard templates and insist that vendors agree to your standard contracts and standard terms.)

Procurement Automation: Good. Automated Procurement: Bad.

We shouldn’t have to say this. It should be very clear by now. But given that a number of vendors are using the terminology interchangeably, possibly to convince you they have the right solution, maybe it’s not clear. But it needs to be. Because procurement automation is NOT the same as automated procurement and while procurement automation, properly done, is the best investment an average over-burdened and under-resourced Procurement department can make, on the flip side, AI-driven automated procurement is the absolute worst. To put things in perspective, downgrading Excel to Lotus 1-2-3 would be a better move. But let’s back up, and start with some definitions.

Procurement Automation is the process of automating certain procurement tasks that can be best accomplished by machines and procurement automation technology is the technology that automates the tasks that can be best done by machines. In simpler terms, it automates the “thunking” by doing all of the tactical, almost mindless, work that is a waste of a senior Procurement professional’s time.

The Source-to-Pay cycle is full of tasks that are best done by machines when appropriate rules and boundaries are defined. For each major area, we’ll outline some of these tasks as an example.

Intake/Orchestration

Procurement Automation will analyze the request, identify similar requests made in the past, identify the actions used to resolve those requests, identify the suppliers considered and selected, the products and services used, and other information. It will present that information to the buyer, including the suggested actions, and allow the buyer to one-click initiate any of the suggested actions, which might include a sourcing event, contract renegotiation, catalog purchase, etc.

Sourcing

Procurement Automation will, when a user kicks off a sourcing event for one or more products, automatically bring up the suggested suppliers, automatically suggest the appropriate questionaries and forms, automatically suggest the appropriate Ts and Cs to insist on up front, automatically send the RFP to suppliers, automatically analyze the responses to make sure they are complete, in the correct format, and in an expected range; automatically compare the responses to find deviations from the norm; automatically highly the lowest and highest costs, CO2 factors, etc. and present all that information to the buyer.

Supplier Management

Procurement Automation will, when a supplier is selected, automatically handle the onboarding; monitor the data for changes; monitor the performance metrics; monitor the OTD; monitor third party financial and risk metrics; and alert the buyer to any issues and performance changes that are detrimental or may indicate forthcoming problems.

Contract Management

Procurement Automation will, when an award is selected, push the award into the Contract Management system, automatically generate the draft contract, send it to the supplier, highlight any redlines the supplier makes when it comes back and automatically inform the supplier if any non-negotiable terms and conditions (including those they agreed to when they responded to the RFP), and automate the generation of the response email when the buyer does their redlines.

e-Procurement

For catalog buys, it will automatically generate the POs, route them for necessary approvals, distribute them to the suppliers when approved, automatically match the ASNs when they come back, alert the buyers if ASNs are not received in a timely basis, and match the invoices when they come in.

Invoice-to-Pay

When the invoice comes in, it’s automatically matched to the purchase order, it’s checked for price accuracy, identified as partial or full, verified to be non-duplicate, and if any checks fail, it’s bounced back to the supplier with a description of the issues and a request for correction and resubmission. If the resubmission deals with the problems, it’s queued waiting for goods receipt/confirmation if not present, or matched if present. If the match is made, then it’s automatically sent down the approval chain, and if it’s not made within a certain time period, an alert is raised.

In all cases, it’s automating the tactical tasks that don’t require any decision making and only involving the human when necessary.

In contrast, Automated Procurement is the process by where entire procurement processes are handed over to the machine to fulfill instead of the human. In other words, when an intake request comes in and the buyer marks it for sourcing, an Automated Procurement solution will handle the entire event up to and including the award and auto-generate and distribute the Purchase Order(s). The buyer is completely bypassed and the right inventory showing up at the right time at the right price is left entirely up to the machine. Sounds good in theory. Looks good in practice when it actually works, which it will some of the time. But grinds the company to a halt when it fails.

A machine that pursues lowest cost will select an unproven non-incumbent supplier for a critical part when the suppler, who has not supplied that particular part to the company before, outbids the incumbent. It will not detect that the bid was made in an desperate attempt to help the financially struggling supplier stay in business, that the bid is not sustainable, and that the supplier is not capable of producing the part at the indicated level of quality. Then, when the first shipment is mostly defective, and the promised rush replacement order never arrives because the supplier goes out of business, the production line for the 75K luxury car folds all for lack of a single control chip. (A similar situation has occurred in the past. Recently, chip shortages stopped Cherokee production in 2021, and that wasn’t the first occurrence. Or even the second, or third.)

Machines are not intelligent. Not even close. And expecting them to make a good decision every time with no logic whatsoever (as modern Artificial Idiocy algorithms just stack probabilistic equations on top of probabilistic equations almost ad infinitum) is lunacy. So while you should invest in the best Procurement Automation tech you can get your hands on, you should steer clear of any and all Automated Procurement Solutions those fancy new startups try to sell you. While those solutions may work 90% of the time, that last 10% of the time, they won’t work that great. And, in particular, that last 1% of the time they will fail so miserable that the disruptions and losses that result will more than cancel out any and all savings and efficiencies you might get from the 90% of the time the tech worked in the beginning.

How Medium Sized Enterprises Can Better Manage Spend

McKinsey & Company recently ran a long article on how medium-size enterprises can better manage sourcing that noted that the big reasons that mid-sized companies have difficulty reining in external spending are:

  • a lack of spending transparency
  • a myopic focus on the short term
  • talent gaps
  • underused digital tools and automation
  • exclusion of procurement and supply chain in business decisions

And noted that any action plan that a medium-size enterprise comes up with for procurement cost savings should include:

  • establishing CoE (Center of Excellence) teams
  • improving forecasting
  • expanding use of digital procurement tools
  • gaining greater market intelligence
  • establishing a culture of — and process for — continuous cost improvement
  • incorporation supplier-driven product and service improvements

And they recommend a ladder model that consists of the following steps:

1) Set Aspirations
2a) Rapid renegotiations with top suppliers
2b) Make-vs-Buy Analysis
3) Build spec catalog to enable market engagement
4a) Conduct request-for-quote (RFQ) rounds
4b) Build parts catalog
5a) Validation of suppliers and production parts
5b) Consolidation of SKUs and modularization

And this is all very good, and when you read the article for the details you will understand why it’s all very good, but it doesn’t really provide a clear, step-by-step, roadmap on where you should start.

Fortunately, Sourcing Innovation did provide a partial roadmap in it’s 39 Steps … err … The 39 Clues … err … The 39 Part Series to Help You Figure Out Where to Start with Source-to-Pay which outlined the order in which an organization should get the tools (and thus the associated market intelligence) it needs to effectively tackle spend (and forecasting), work with suppliers, and establish a culture of continuous improvement. About the only item we didn’t address on the McKinsey list is the establishment of CoE teams — the right structure is highly organization dependent, and will be better enabled by the implementation and adoption of the right tools.

So, if you missed the series, go back to the beginning and understand where you start, why, and how a proper, ordered, logical implementation of Source-to-Pay in a modular fashion will help you maximize savings, efficiency, and even sustainability within your allowed budget.

Efficiency Is In The Process, NOT THE MARKETPLACE!

the doctor really should stop reading the “news” and “best practice” articles the internet pushes his way because most of them are rubbish and just make him angry, but then again, if he didn’t get angry, what would he have to write about?

One of the articles recently was about how procurement can push efficiency and sustainability into the organization. The sustainability advice of “look for eco labels or EPA ID or products with recycled content” was pretty abysmal (because, duh!), but the efficiency recommendation of “create an e-marketplace to give your buyers an online catalog of goods and services” was just appalling.

That’s only efficient for organization end-users charged with restocking the supply cabinet in the office or keeping the MRO stock levels high enough to guarantee the production lines keep going when the store room gets low. That’s not injecting ANY efficiency into the Procurement process.

When you consider even the most basic strategic procurement process, you have to:

Identify the Need
and efficiency here is an intake management solution that allows you to collaborate with the end-users / end-sellers to make sure you’re procuring the right products for them to ply
Identify the Potential Suppliers
and efficiency here is a solution for supplier discovery, evaluation, and onboarding
Identify the Evaluation Requirements
and efficiency here is an orchestration solution that allows procurement to integrate all of the requirements from the users, the business, and the organizational goals
Evaluate the Bids
and efficiency here is an RFX solution with integrated analytics
Negotiate and Sign the Contract
and efficiency here is a contract lifecycle management that at least supports the contract negotiation process with complete document (and version) tracking and preferably also includes support for initial contract creation from award, key issue tracking, and e-signature integration
Determine the Appropriate Ordering Strategy
and efficiency here is determining whether the best fulfillment is regular shipments (if the factory uses X thousand units a month), auto-reorders on inventory level triggers (if the usage is/sales are irregular, but the product can be pulled quickly), or (managed) catalog-based orders as needed
3+-Way Match (against an invoice)
and efficiency here is a solution that makes it easy to ensure the invoice matches the goods receipt that matches the PO (at a minimum, and you also want to make sure the PO matches the contract etc.)

Efficiency is injecting efficiency into this process, not just setting up a marketplace!

Dear (Software) Vendor: If you Missed the Ten (+ 2 Bonus) Best Practices for Success, Time to Catch Up Now!

  • Part 1 Best Practices #1 to #3
  • Part 2 Best Practices #4 to #7
  • Part 3 Best Practices 8 to 10
  • Part 4 Bonus Best Practice #1
  • Part 5 Bonus Best Practice #2

In twenty years as an independent analyst and consultant, the doctor has never encountered a small/mid-size vendor who wasn’t doing at least one of these, usually there were a couple they weren’t doing, and the lack of these practices (and knowledge) was (and sometimes still is) holding these vendors back. In other words, you definitely should read these. We are only posting these articles once.