Category Archives: Sourcing Innovation

If you still think you don’t need to get with the program … Part I

… maybe we should ask why?

Earlier this year, SI authored a paper, sponsored by Synertrade, on The importance of program management for savings and value realization (registration required), that laid it bare as to why you need to get with the program.

And then, over the past few months, over on Spend Matters Pro [membership required], the doctor, with the help of the prophet, the maverick, and the revolutionary, has been penning a series on Program Management and how you might go about actually doing it across the Source-to-Contract cycle. For those who might have missed it, here are the links:

But, of course, the how to is irrelevant if you don’t accept the why. Without getting into too many details, as you can download The importance of program management for savings and value realization for free upon registration, the main reasons we pushed you to get with the program were:

  • lost opportunities,
  • lost time,
  • lost innovation, and
  • lost value

But maybe you think you have all the answers with your current non-program based S2P platforms and systems. Maybe you think your processes are sufficiently refined such that you can identify all the opportunities, attack them efficiently, and still innovate acceptably without program management. And if this is the case, you’re probably quite happy with an easy to use, adoptable, second generation S2P platform(s) and see no need to modernize again. But you need to. Why?

Come back for Part II.

Maybe It’s Time You Go Direct … Part II

In our last post we noted that most sourcing platforms were designed for indirect sourcing, commonly described as the sourcing of finished/consumer goods and services, because it was easy, quick, and allowed an average organization, even a manufacturing, pharmaceutical, or Oil & Gas company, to get big savings — at least initially. After a while, the savings dry up, and unless an organization acquires an advanced optimization-backed sourcing platform, they’ll disappear entirely. (And even with such a platform, the returns will shrink over time.)

The organization will hit a brick wall, unless it goes direct. Why?

Because going direct is the only way an organization can get true insights into the costs, and opportunities, associated with each product it sources. Because, when you get right down to it, there is no indirect sourcing from a product perspective — your indirect is someone else’s direct. And if it’s indirect for your provider, you’re just paying a handling fee to a third party to handle purchase from the source and transportation to a locale closer to you (because you don’t want to deal with import / export, remote suppliers, etc. etc. etc).

And, more importantly, as direct manufacturers know well, up to 80% of product costs are locked in during design finalization and/or product selection. So the only way to take costs out is to understand what costs are going in. But when you go direct, you create detailed should cost models. You tie them to material costs and component costs defined in a bill of materials and roll up the costs with overhead production costs and understand precisely what a product should costs and whether a bid is in line with expectations. This way you know when quotes are higher than they should be (possibly due to collusion), when they are inline with expectations, or when they are lower. If they are inline with expectations but higher than you need them to be, you can understand what the cost drivers are. Then you can ask suppliers to identify designs with alternate materials, or at least less of the high cost materials, and then select those suppliers who will work to bring costs down. If the costs are lower, you can interrogate the suppliers to find out why. Do they have a lower cost source of raw materials? Are labour or energy costs significantly lower than usual? Or is the specification the supplier is quoting toward not up to snuff? The latter is extremely important — it can prevent a purchase of a poor product that could cost the organization dearly.

The power of a direct platform for continual cost insight, and cost saving, is incomparable, especially when compared to an indirect platform. And there’s nothing a direct platform can’t source. It’s the harder sourcing project — indirect is just a bill of material with one entry. And a service project is just a roll-up of service line items.

So why don’t you have a direct platform? Sure, most platforms, including the one you’re using, don’t make the cut, but some of the newer up and coming platforms do, even the S2P platforms. For example, Synertrade has been able to do direct since day one. Ivalua acquired DirectWorks and is integrating direct into its native end-to-end code base. Jaggaer acquired Pool4Tool and has been working on a universal data model (& bridge) to link it to its indirect platform. And even Zycus can suck in a BoM (although it can’t do BoM management) for sourcing purposes.

So go direct. Finance will thank you.

Maybe It’s Time You Go Direct … Part I

Most sourcing platforms were designed for indirect sourcing, commonly described as the sourcing of finished/consumer goods and services, because it was easy, quick, and allowed an average organization, even a manufacturing, pharmaceutical, or Oil & Gas company, to get big savings (as most of these organizations spent all their time and effort on direct sourcing). Why? These were typically the least well managed, and the most bloated, categories and simply inviting more suppliers, who had to complete a pre-defined RFX that allowed for apples-to-apples comparisons, pushed prices down, and if the market conditions were right, auctions pushed prices down further and it was not uncommon to find a number of categories where 20%, 30%, or even 40% savings could be found during the first event simply by squeezing the unnecessary fat out of the margins.

But this is the very reason why the first generation sourcing platforms boomed and busted, and why auctions rose and fell in an average organization during the noughts. The organization would save a huge amount the first auction, typically at least 15%. They’d then save a respectable amount during the next auction, say 5%, because all the suppliers came back with their pencils sharpened ahead of time. But the third auction would fail miserably, and most of the time prices would increase. Once all the fat is squeezed out of the margin, competitive RFX or auction will not save any more and, in fact, over time, inflation will creep in, the supply/demand imbalance will shift, and, without something new, costs will rise.

The next step, if the organization is analytical, is generally to bring in analytics, identify the categories with the best opportunities due to market price trends, supply/demand imbalance, or sheer volume leverage the organization had. Careful picking, even if the category was sourced twice, or thrice, before will still lead to some savings. At least once.

And when those savings run out, then you look at optimizing TCO when all costs, discounts, transportation costs, discounts, and associated lifecycle costs are modelled. You build your risk mitigation rules and by splitting the award, choosing the carriers and lanes carefully, and just being smart, more savings materialize. Typically over a few events as your volume leverage increases, your sophistication improves, and your events get bigger.

But there’s always another brick in the wall, and you’re always going to hit it. Unless you go direct. Why? Guess you just have to come back for Part II!

Zycus – Expending their Horizons in the EU

Zycus recently held their inaugural event in Europe — the last three days in Prague, to be precise. the doctor was there and he has to say he was impressed with

  • the conference organization
    (less snafus or lack of organization then a few conferences he’s been to recently organized by larger peers),
  • the content
    (they did a great job blending content from them, their partners, their customers, and leading analysts),
  • the progress
    both on the customer front and the product front

Recently we’ve seen a number of companies break out of Europe and into North America — like Ivalua and Synertrade — but we rarely see companies, even those from North America (and definitely those from India), break in, especially in a short time-frame. In the last two years Zycus has went from almost no presence in Europe to a known provider of S2P services with dozens of local customers among its 300+ worldwide deployments supported by local partners.  That’s quite impressive.

This last fact is key — Zycus understands fully that Europe is not India or America. It is dozens of countries with dozens of languages and dozens of local cultures that need to be supported by a provider that wants to effectively support its customers and the continent in, and on, which they do business. And Zycus understands that there are local implementation partners and providers in Europe that understands these needs. So while some providers try to sell locally with their own staff that they hire in Europe (who can’t know everything as they are few), others try to sell exclusively through partners (who are better equipped for local support, but if not well trained, can’t accurately represent the provider), they sell as a partnership with the local implementation partner, provider of software and provider of service (but take all the responsibility for ensuring the customer receives a successful deployment).

And a successful deployment is something they are quite capable of achieving. Not only do they have 300+ people to support implementations, but they have a history of working with partners to ensure that any localizations that need to happen, happen. We expect that as long as all parties go in with a solid understanding of what needs to happen, and what the true effort is, deployments will be appropriately planned and be successfully realized. And customer progress will continue.

Then we have the product front. Zycus continues to develop and have made good progress on a couple of modules, and their iRequest module in particular. While this may seem the least sophisticated from a sourcing perspective, it is the most important from a success perspective.

When one thinks about why most mavericks try to bypass the Procurement department, it’s typically because they see the Procurement department as a bottleneck. Too long to get approvals. No visibility into the sourcing event. Etc. Etc. With iRequest, anyone in the business can make any sort of request or requisition to Procurement and follow it through to the conclusion, with visibility not just into the status, but into the sourcing event, contracting process, or anything else that is relevant. It links into almost all of their other modules and allows a buyer to kick off events, approval chains, and information request processes with relative ease. It makes Procurement look like an enabler and that is key to organizational acceptance and success. It’s definitely worth checking out.

More coverage on Zycus, here and in depth on Spend Matters Pro (membership required), is coming, so stay tuned.

Supply Management Priorities are Hard to Define

As per yesterday’s post, figuring out your priority can be particularly painstaking because the maximum benefit is only realized when certain supporting systems are in the mix.

If we reverse our last post, you might well think that you need the following core modules to benefit from the indicated modules, and you might well be right.

Spend Analysis –> Product Management, Category Management
e-Negotiation –> Spend Analysis, SSDO, Guided Buying
SSDO –> Spend Analysis
Contract Management –> Spend Analysis, Requirements Definition, Product Management
Catalog Management –> Supplier Management, e-Negotiation, Guided Buying
Purchase Order / Invoice Management –> SSDO, Guided Buying, Catalog Management, Supplier Management
Supplier Management –> Opportunity Analysis, e-Negotiation
Risk management –> Opportunity Analysis, Contract Management
Product Management –> Contract Management, Guided Buying

But something interesting falls out of this. You don’t really need anything to get started on supplier management, and the only thing you need to benefit from e-Negotiation is a way to make use of the data (be it spend analysis, optimization, category-management based guided buying, etc.). And when you start on your supplier management journey, it’s supplier information management (followed by data-backed supplier performance management).

What does this tell us? The starting point is a (set of) solution(s) that helps you get your supply management master data under control. After that, the primary buying categories, the market, the internal situation, and a host of other factors will need to be balanced to select your next (set of) priority(ies), but without data, you’re not going anywhere.