Category Archives: Sourcing Innovation

Your Supply Base Is Too Big – But That Does Not Mean You Should Consolidate

You should right-size, but right-size doesn’t mean down-sizing the supply base like consultants in the 90’s used the term right-size when they wanted their customers to down-size their work-force. It means identifying the right number of suppliers for the category, and the right suppliers to fill those slots. If you are sole-sourcing or dual-sourcing a category, and the one or two suppliers are risky or in at-risk regions, you might need more.

The right number of suppliers is not a magic number, it’s the right number of suppliers you end up with after you have identified the right suppliers for each category. For a large organization, that has 60,000 suppliers, that’s probably a substantially smaller number (by a factor of 2 or 3), but it’s not consolidation and cutting across the board.

The reality is that most of the unnecessary supplier proliferation is in the tail spend, not the strategic spend that is analyzed every few years. There are a few extra suppliers in the strategic spend, particularly when organizational units or individual buyers go rogue and don’t buy off of contracted or preferred suppliers, but the majority of needless supplier sprawl is in the tail spend. (Where, as we noted earlier this week, you should be auto-buying.)

So how do you go about right-sizing? First of all, for each product or service in the tail spend, select preferred suppliers and make sure that they are only suppliers available in any and all solutions the buyers can use. Then, make sure that the organization puts in place a no PO, no pay policy and communicates that to all suppliers, and, in particular, the suppliers that are no longer preferred suppliers. This will minimize the suppliers who will respond, especially if the organization refuses to pay invoices that are unmatched to POs.

Then, use auto-class solutions on the transactions to try and identify products or services that could come from the same supplier and try to reduce the supply base further by eliminating those suppliers that can only supply one product or service when there are enough suppliers that can supply that product or service that can also supply other products and services.

And then stop there. While this won’t necessarily get down to the optimal number of suppliers, or ensure the optimal supplier is in each category, it will likely reduce the number of suppliers in the tail by a factor of 2 or 3 and make the tail a lot more manageable. And that’s what’s key – manageability, especially when you want your auto-buy to work quickly and efficiently and eventually consolidate enough volume that you can negotiate with the supplier in the future if you need to.

Scared of AI? Just Start with Auto-Buy.

Specifically, start with auto-buy on your tail-spend and non-strategic spend.

Seriously. If you’re a relatively mature organization using SSDO (Strategic Sourcing Decision Optimization) on your higher dollar or strategic categories, using auctions and RFX for mid-dollar and somewhat strategic categories, and GPOs or catalogs for significant spend categories, there’s still one category of spend that’s costing your organization a small fortune. That spend is tail spend. Up to 30% in some organizations, the average overspend is typically 15% or more (and can be up to 20% or 30%). Do the math in the typical case. Fifteen percent of thirty percent is 4.5%. If you’ve tackled your strategic sourcing categories two or three times now, chances are you’re trying to eek out 6% savings on the top 33% of spend. That’s about 2% savings.

What’s costing you more? If you’re an advanced or leading organization – the tail spend. But it’s not something you can do much about — it’s tail spend because you don’t have the manpower to deal with it. Yes, you can put a GPO or catalog in place, but it only works if you can force buyer to not only use it, but always select the right product when there are multiple options — not something most platforms can do (well). Especially if the preferred option is temporarily out of stock and something is needed tomorrow. (And the what’s the second preferred option? The third? And if it’s common, shouldn’t it be in inventory?)

And, more importantly, since most tail spend consists of individual requests, some of which should be aggregated, if the requests are directed to different buyers, how will they ever know if there are requests that should be aggregated? (They won’t. And that’s how it is.)

So why are your people even trying to manage parts of the tail-spend when, in fact, a modern AI platform can do it much better. It can amalgamate all similar requests, analyze usage trends, gather market prices, scour and compare options in your catalog and your GPO’s master contract, identify third party options available on the network, analyze usage and feedback reviews and data, determine the options that best meet your users’ needs, and select the one that offers the best value (lowest cost against reliability against organizational need) at a cost that doesn’t exceed market cost. So even if it doesn’t get the best deal, it at least ensures you don’t pay more than market price across your tail spend, which is 15% better than you are doing today.

So now that we have systems — including, but not limited to, Dhatim, LevaData, and Xeeva — that can auto-buy, it’s time to find one that works for you and get the tail spend under control. (And use them to recommend options for higher-value and more-strategic buys that you might not come up with on your own.)

Source-to-Pay UIX 2017 (Collected Links)

What Makes a Great U(I)X?

What Makes a Great e-Sourcing U(I)X?

What Makes a Great (Strategic Sourcing Decision) Optimization U(I)X?

What Makes a Great Spend Analysis U(I)X?

UX Epilogue

Can You Stop Your Event Dead In Its Tracks?

The best laid schemes o’ Mice an’ Men … often go awry. And in the Supply Manager’s world, they often do. And, to be frank, more often than you realize. And sometimes market reality will shift in an instant and continuing a current event could cause considerable loss, and not the significant value that was initially expected.

In this case a Sourcing or Procurement event, even if for a critical product or service needed in a short time frame, will need to be stopped in its tracks. But can you do it? Or will you continue with an auction only to see costs (significantly) increase (if there is no ceiling? Or an RFX only to get no responses at the deadline (with not enough time to try again)? Or a catalog buy for a product that shouldn’t be bought (because excess supply at a non-preferred supplier just resulted in a huge price drop the organization could safely take advantage of)?

And then, even more importantly, the right event will need to be kicked off in its place. An RFX or Auction might need to be replaced with a strategic renegotiation with an incumbent? A catalog buy might need to be replaced with a spot-buy auction to a set of acceptable suppliers with equivalent products? A simple RFX might need to be expanded to a more complex optimization-backed multi-round RFX to take advantage of new entrants shaking up the market. And so on.

But for this to happen, four critical abilities need to be in place.

  1. The ability to detect market shifts that would necessitate a significant change in Sourcing or Procurement strategy.
  2. The ability to determine the appropriate Sourcing or Strategy to shift to.
  3. The ability to quickly terminate an existing event (type).
  4. The ability to structure and launch a replacement event quickly.

1. The ability to detect market shifts.

This requires continuous, real-time, market monitoring which, to be honest, cannot be done without significant software support, and is a proper application of AI in sourcing and procurement. (But this is a subject for another post [series].)

2. The ability to determine the appropriate strategy w.r.t. the shift.

This requires both software support — to extract key details of the shift, summarize it in a meaningful way, and suggest the option(s) likely to be best — and senior buyer wisdom to make the right decision.

3. The ability to quickly terminate an event.

This requires the ability to quickly terminate an event, and do so in a way that will not result in offended suppliers and lawsuit. While not likely possible in the public sector, with proper foresight, and notification, as part of the terms and conditions a supplier must accept to participate, this can happen.

4. The ability to launch a replacement event quickly.

This requires the ability to set up new events quickly, reusing as much information as the current event as possible. This will require great software support (but not necessarily AI).

As you can see, not easy, but sometimes it literally is the difference between a multi-million dollar win, and a multi-million dollar loss.

Sourcing is Full of Secrets …

… and each and every one costs the organization. Sourcing is supposed to be the savings engine that powers the enterprise value engine that relies on enough cost control to maintain the cash flow required by the enterprise.

But achieving savings in souring requires success, and success can only happen if the event is appropriate and appropriately conducted. But, even though many organizations think they know the right way to conduct an RFX, Auction, or other sourcing event, the reality is that they don’t really know the right way. They know the basics, but the basics are never enough.

Why not? Because little mistakes are often made from minute one they add up, costing the organization opportunity with each mis-step. So what are the common mis-steps? There are a number, but the following three are big ones that should never be overlooked.

1. The Specs

Too often the specs provided by the stakeholder are taken as the specs and accepted more-or-less as-is with just a few minor tweaks and clarifications. The problem with this is that the specs are what the stakeholder thinks they need, not what they actually need. Take Engineering — the specs are written to match the component from their favourite supplier. Take Marketing — the specs for an engagement are usually a mirror of those supplied by their favourite agency. And so on. But if Engineering is being tasked to design a new controller, the FPGA doesn’t necessarily need to be the one they’ve used in the past. There might be a better option. And if Marketing needs to get costs down, then they need to consider separating out creative services from production services from material spend, and not request all-in-one proposals. And so on.

2. The Invited Suppliers

Typically, the invited suppliers are, more or less, the same suppliers invited to the last event or the small set of known suppliers in the database. Only for a mostly new category is supplier discovery done, and, typically, these are suppliers in the supplier network, which, of course, is limited to those suppliers the organization have done business with or those suppliers the organization wants to do business with. But these are not always the best suppliers for the stakeholder and/or the organization. And the sourcing team doesn’t do enough discovery to find the potentially best suppliers, and deprives the organization of what could be a new source of value.

3. The RFI

Many sourcing events don’t start with an RFI that focusses on the appropriateness of the supplier before inviting the supplier to submit a bid on a product or service. The stability, sustainability, social responsibility, and support capability of the supplier in the locales the organization does business in should be considered even before the ability to offer the product or service is evaluated.

Get this right, and maybe your events will be more successful and identify greater value as time goes on. And that’s the true purpose of Sourcing: Value, not Savings.