Category Archives: Sourcing Innovation

Can You Even Identify Savings to Realize?

A few week ago we sort of put the cart before the horse when we noted that Realizing Those Savings is No Easy Feat because many organizations will undertake sourcing events, cut contracts, but then fail to realize 30% to 40% or more of the expected savings (and this has been the case since AMR’s classic studies on savings realization over a decade ago, well before they were bought and absorbed by Gartner).

So even though it’s sort of putting the cart before the horse to put an infrastructure in place to capture savings, without such an infrastructure, identified savings won’t realize. So it’s really not a bad idea to start with Procurement platforms that capture savings, because you need them.

However, today we’re going to assume you have such an infrastructure in place, and ask the question, even if you do, can you identify real savings? It’s a lot harder than you think. It’s not the lowest cost. Or the lowest landed cost. It’s the lowest total cost of ownership … over the product lifetime, which could be for years if you offer a warranty. Because not only is their warranty costs, there are return logistics costs as well!

But it’s not easy to capture all of the relevant costs in an RFI, nor is it easy to build the models that can accurately model total lifetime cost of ownership in Excel. That’s why the doctor has been promoting optimization-backed sourcing platforms for years — only those platforms can accurately compute lifetime costs and allow for the right fact-based negotiations and award decisions.

But it’s not just cost that needs to be considered, it’s value and service levels. You need customers to want your products, and you need delivery times you can depend on. But value and service guarantees cost money, and in inflationary markets, that means costs just go up and up.

If market prices are increasing, and you need to improve service levels and add more value-based features to appease customers, can you even identify savings?

The answer is, without the right platforms that allow you to look at your costs holistically and find ways to minimize them beyond just a price-based bid, is that you can’t … at least not after the first time you’ve “strategically sourced” a product. Additional savings will come from better category definition and alignment, smarter network design, better inventory management and aligned inventory levels, and up-sell opportunities from more appropriate, sustainable, sourcing selections.

And that will require the right upstream technology that will include the following:

  • supplier discovery to identify the right suppliers
  • optimization backed sourcing to make the right value-based decisions
  • supplier management to make sure the relationship and performance can be managed
  • risk management to identify, monitor, and mitigate potential disruption risks
  • analytics to analyze past, current, and ongoing price and KPI performance
  • CLM to manage the contract, obligations, and identify the time for renewal, renegotiation, or termination

And that’s why you see a proliferation towards Strategic Procurement Technology Suites and why the doctor has teamed up with Spend Matters to analyze them. Platforms are becoming key to identifying real, sustainable, savings — but only if they are the right ones for the customer base they are installed in.

Don’t Underestimate The Importance of Workflow …

One of the big reasons that, even four years after the doctor told you about the Procurement Damnation of Project Management most vendors haven’t done anything as per my post last week (read here), is that they have little or no workflow management, a capability that we told you is vital to the modern platform in our post three weeks ago where we were Digging into the S2P Tech Foundations.

Workflow is more than just a platform’s ability to guide a buyer through the application to complete a specific task, workflow is the ability of the platform to be adapted, and adapt, to the processes an organization needs to support, and the ability of the platform to support management of those processes and the projects that create them.

This is something a large majority of software application developers don’t get, and, as a result, something a large majority of applications don’t have. And it’s something that needs to be baked in at the foundations of an application, or the application will never have good workflow capability.

Why is there so little? Because classic application design philosophy, inspired by the waterfall model of software development, has been:

  • identify a problem
  • define the problem
  • translate into requirements
  • detail into functional specifications
  • build a software solution that implements the functional specifications
  • iteratively test and debug until stable enough for release

And the agile philosophy didn’t change much. The only difference is that instead of attacking the full extent of the problem and translating the full problem into requirements, you focused on a core piece of the problem, translated it into requirements, fleshed out, built, and then went back and extended the core, extracted the new requirements, fleshed those out, built new pieces and integrated into the existing solution, and so on.

No thought was given as to how to create a set of self contained units that could be strung together in a workflow to solve bigger problems, which is key to providing a platform that would allow the workflow to be extended and altered and allow the organization to change over time.

And if you’ve invested five to ten years in a platform that has been profitable, do you really want to go back to square one and build it up from foundations the proper way? Especially if you think you can still make money on what you have? Probably not.

And looking to the bigger picture, that’s the state of Procurement 2.0 and why we need new, evolutionary, platforms if we are every going to realize the extent of Procurement 3.0. But that’s another post.

AI Won’t Solve Your Talent Problem!

Talent is Still the Biggest Issue Facing Procurement Today … so what are you doing about it? (Besides still cutting the training budget as soon as cashflow gets tight and delaying necessary system purchases because you can’t take a long term view.)

As SI has repeatedly said, Procurement Pros need to be jacks of all trades and (almost masters of all but in reality) masters of one (Procurement) (Trend #17), and that’s no easy feat when the skills and knowledge a Procurement pro needs to do her job effectively increases every year.

And new AI / Cognitive technology doesn’t decrease the skill sets and knowledge required, despite what one may think. In fact, it only increases it Why? First of all, do you have assisted intelligence, augmented intelligence, or a cognitive system that is as close to true AI (artificial intelligence) as one can get with today’s technology? And, more importantly, does your Procurement Pro understand what you have, what the differences are, and what the respective limitations are.

If the solution is just assisted intelligence, then it’s an automation solution (RPA) with some expert knowledge encoded to handle typical situations with certain assumptions. If the assumptions are invalid, will the software detect them? If the situation goes beyond the realm of typical, will the software detect it? And even if the software does, will it be able to do anything without expect guidance? An example of assisted intelligence is an automated auction where the platform automates the sourcing of an item or service designated for auction among pre-approved bidders and goes from demand specification to final award without human input. But will it detect if the bids are complete? Within expectations? That bidders are bidding on the right product or service? Maybe the buyer assumes shipping included, but the bidders aren’t including shipping, and since the system only has a ceiling, it doesn’t know that the bids are way too low, and awards to the lowest bidder, that is actually the highest as the bidder is the furthest away and has the highest transportation cost.

Same goes for augmented intelligence. However, with augmented intelligence, the software goes beyond simple RPA with fixed expert rules — it is able to analyze a lot of parameters and pick the closest matching scenario and associated workflow. For example, an opportunity analyzer that takes into account current market pricing, supply availability, bidder responsiveness, current market trends (upward and downward), projected demand, etc. and advises the buyer on the type and timing of the sourcing event as well as the best workflow. But what if the market pricing is a week out of date and the market price just jumped up 20% (due to a fire in a major supplier’s plant) and reversed the trend? That changes everything, but the solution may not detect it and instead advise the worse sourcing event.

Cognitive platforms that continually monitor the situation are better, and if they learn from the actions the expert users take over time, better still, but they still can’t cope with an exception al situation they haven’t been coded for, or trained for. For instance, even if they detected that last minute spike in pricing that reversed the pricing trend and, thus, changed the optimal sourcing strategy, will they understand why the spike happened and the best alternate strategy? Or will they default back to the recommending the default strategy in a situation where costs are increasing … e.g. switching from auction to multi-stage RFI with optimization-backed analysis? Neither is right in this situation. In this situation, its extend the current contracts with your non-affected suppliers, increase the number of units, and lock in supply early, even if cost is higher.

In all these situations, only a knowledgeable, experienced, and sometimes expert Procurement Pro is going to be able to make the right decisions … and a novice relying on the systems is going to make the worst, and most costly, decision imaginable.

There’s no true AI, no all knowing software, and no replacement for a real expert.

The reality is that, at the end of the day, these systems make your experts more efficient — and multiply their productivity — they don’t replace their expertise.

Visibility is Key to Managing Suppliers

For the first part of this week, we have been talking about the significant overlap between sourcing and supplier management and the necessary platform elements needed to support both. Key elements included performance, relationship, and risk management, because all are necessary for sourcing and supplier success.

Spend Matters recently ran a 3-part series on a sub-set of the issue, based on a recent interview with Ecovadis, that talked about how Visibility is Key to Managing CSR Risks in Indirect Spend (Part I, Part II, and Part III). But visibility is needed for more than just addressing risks in indirect spend. It’s also needed for addressing risks in direct spend.

Direct spend has all the same risks, they just aren’t one step removed through an intermediary. And you have to trace all of the products down to the raw materials to identify not only in your supply base, but your supplier’s supply base, their supplier’s supply base, and their supplier’s down to the mine, the farm, or the harvester.

But it’s not just the suppliers you need visibility into, it’s the environment that surrounds them. After all, a natural disaster can cut them off. An economic downturn can render them bankrupt if the currency they do business in (and keep the majority of their cash on hand in) crashes. A geo-political uprising can cut them off at the border. A port strike can cut off their primary shipping routes. And so on. You need a full 360-degree view around the supplier to ensure success.

But how do you get that? You can’t watch everything everywhere, and when you consider the extent of the global supply chain, you almost have to.

That’s why it’s key to have a platform that can integrate with 3rd party sources as you will need to integrate dozens, if not hundreds, of data sources to keep on top of all of the data you need to populate the models to evaluate and track the risks.

And that’s why two of the key elements we look for in a platform are integration and dynamic data model extensibility. You never have enough data. Without the right data, you don’t have the visibility, and that’s key to success. Or at least to preventing major unexpected disruptions.

Digging Into Significant Sourcing Supplier Management Synchronization Part II

Earlier this week we started to describe the second most significant change to the upcoming Q2 Release of the Spend Matters Solution Map, and that is the introduction of a new common sourcing – supplier management section because you can’t do sourcing without suppliers and you don’t manage suppliers without the ultimate goal of doing business with them

This new section contains the following common sub-categories:

  • Enhanced Information Management for discovery and onboarding
  • Performance Management for tracking performance
  • Relationship Management for managing the relationship
  • Risk Management for keeping tabs on, and managing, the risk
  • Enhanced Portal for information management and collaboration

Our first post explained why these sub-categories were relevant. In our last post we covered the first three sub-categories. Today we’re going to start discussing what’s important to consider in the remaining two categories.

So what are the key capabilities we’re looking for in the risk management and enhanced portal sub-categories?

Risk Management

  • Assessment because if you can’t assess a risk, you can’t properly identify the magnitude of the risk and the need to monitor it
  • Mitigation Planning because credible risks need to be planned for and mitigated
  • Model Definition to allow you to quantify both the likelihood of the risk and the expected cost should the risk materialize
  • Monitoring & Identification to allow for the events that could (potentially) materialize to be monitored for and detected
  • Regulatory Compliance to quantify the extent to which the platform can track compliance requirements and a supplier’s ability to conform to them
  • Supplier Risk Management to model overall supplier risk based on assessment, models, external monitoring, third party data, compliance, and performance

Supplier Portal

  • Information Management to allow a supplier to maintain, or at least comment on, their data (and data related to them)
  • Performance Management to allow a supplier to respond to their performance review’s and conduct 360-degree reviews on the buyer
  • Relationship Management to allow the supplier to raise issues, respond to issues, and collaborate on corrective action plans
  • Collaboration to allow full interaction and feedback

These are also all key capabilities for sourcing and for successful supplier management.