Category Archives: Sourcing Innovation

IS TCO a No Go Without Optimization?

At this point in time, very few people are still in the stone ages of Supply Management and buy on price per unit (PPU) alone, the first level of sourcing value. However, there are still a number of buyers in a number of organizations that still buy on landed cost or total cost of acquisition (TCA) and buy solely on the sum of price per unit, transportation, duty, tariff, temporary storage, and other costs that are incurred from the time an order is placed until the time the product is received. These organizations are still in the dark ages of Supply Management and need to find the light very, very quickly (especially with Trump Nation and Brexit on the way). And while most modern Supply Management organizations attempt to buy on total cost of ownership (TCO), the third level of sourcing value, not all succeed.

TCO is the most commonly used metric today by analysts, consultants, vendors, and (I’m sorry to say) bloggers alike. It is designed to be a comparative cost metric that quantifies the overall cost of each acquired unit from a direct, indirect, and quantifiable market perspective that takes a broader look at the cost of a product from an acquisition, utilization, and delivery perspective. In addition to the landed costs, it typically also considers indirect utilization, supplier switching, and transaction costs as well as cost adjustments for quality, waste, and brand power (if your supplier has a brand that increases the selling price of the product you create with the component).

TCO is designed to capture the ‘true cost’ of a product (or service) from a supplier and does a much better job of helping you to compare apples-to-apples when determining the best buy for your organization. And even though it’s not the ultimate metric, as that’s total value management (TVM), the next level (and pinnacle) of sourcing value measurement, you cannot apply TVM until you have mastered TCO (which is a big component of TVM just like total cost of acquisition is a big component of TCO), and you can’t master TCO until you can model it.

But most sourcing solutions don’t let you model TCO. And the few that do don’t let you optimize it. That’s why it’s important when selecting a strategic sourcing solution you get an optimization-backed solution with support for deep cost models and, preferably, bills of material. They might still be few and far between, but a few more hit the market in the past year, and we expect more will be coming due to the power, and utility, of such solutions.

So is TCO a no-go without optimization? Not necessarily, but it sure is a lot harder to do without optimization.

One Vendor Won’t Rule Them All … And One Ring Won’t Bind Them!

A common question (from buying organizations and investors alike) these days is which vendor is going to win out in the end? Who will still be around in 5, 10, and 20 years and which horse should take all the bets?

The answer is no single vendor is going to win. And the reason for that is many-fold. One, different types of companies need different types of vendors. That’s why SpendMatters SolutionMaps (where 3.5 of the 4 SPT maps were developed by the doctor) classifies vendors according to six different buying personas. While six personas doesn’t quite cover all the buyers out there, it covers the majority and shows that most vendors don’t do everything well.

Two, different locales around the world have different regulatory and compliance requirements, as well as (culturally) different ways of doing business, and one vendor is not always going to be the right fit, if they are even a fit at all.

Three, different organizations are at different stages on their e-Sourcing journey and need a different amount of complexity — and if they are just beginning, there’s no way they will be able to start with, and adapt to, a complex 42-step sourcing platform designed as a one process fits all. (Yes, those still exist, and they are the reason some organizations are abandoning major players with solutions they’ve invested millions in for mid-market solutions that cost a tenth of the price with a tenth of the functionality.)

As a result, different organizations value different things depending on where they are on their journey. Companies just starting their e-Sourcing journey just want a simple, configurable, workflow that can be configured to minimal requirements. Companies a bit further along want to easily centralize and manage their supplier information. Companies further along want to be able to centralize all their spend and do advanced analytics. (Or vice versa, depending on who whispered in their ear first.) Companies quite advanced on their journey want advanced modelling and optimization capabilities.

In other words, the sourcing platform with the best workflow management solution will be a winner among the newbies. The sourcing platform with the best supplier lifecycle management platform will be a winner among those that need good supply base management. The sourcing platform with the best analytics will be a winner among those that need a good understanding of their spend. And the sourcing platform with the best optimization capability will be a winner among those that need to extensively model and optimize their supply chain.

Just like there are a multitude of winners in real estate who can make money focussing on low rental, suburban housing, condos, high-end mansions, low-end commercial, and high-end commercial, there will be a multitude of winners in the sourcing space. The best in each category — and each persona — will win.

Why’s it all about the platform when it should be all about the power?

As we all know, the last year has been all about the M&A frenzy as the big try to get bigger by gobbling up any player with any modules they don’t have or any player with customer bases in a region they aren’t in, and doing so in a manner that doesn’t always make sense to analysts. As the doctor indicated in his post last month on “Surviving a M&A: The Customer Perspective”, acquisitions should lead to synergies and do so from a customer, solution, and/or operations perspective.

Preferably, an M&A should culminate in synergies of all kinds. Why? An M&A that doesn’t synch on an operations perspective doesn’t reduce overhead costs, and that means you don’t get any economics of scale, which is something all the traditional textbooks say is the first thing you should look for. If there are no customer synergies, then there are no cross-sell or up-sell opportunities, and that’s typically the next thing the textbooks say you should look for.

And, especially in our space, if there are no solution synergies, then a lot of money is wasted, as the point of the acquisition should be to build a better, or at least, a more complete platform. Otherwise, one company is paying a lot of money for something that will just get tossed in the bit bucket because supporting non-synergistic platforms gets too expensive too fast and the non-synergistic pieces will get sunsetted faster than the sun in Alert, Nunavut in late February.

So why doesn’t the recent M&A Frenzy make a lot of sense to the doctor? Not only has a fair amount of it been lacking in obvious synergies, but a lot of it has been to simply expand platform offerings, without focussing on the power of the solutions being bought or how the acquisitions will help the platform.

The past year has seen the acquisitions of traditional catalog providers and leading spend analytics and optimization providers. In some cases, the power is limited … and in other cases the power is limitless. But in the majority of cases, to date, the integration has been pretty limited. It’s been more or less just plugging a module into a whole without an analysis of not only the power of the solution but how the solution could enhance the rest of the platform in new and innovative ways.

For example, let’s take optimization. Just plugging it into a S2P platform is pretty good, especially given the dearth of optimization solutions on the market today, but is it great? How do you take an offering to market that the market will understand is better than the other leading vendors which have optimization? After all, if it’s just the same process — construct RFI, send it out, get data, pump into model, get result, make award, push into contract management — what’s better from the perspective of an average Joe? But if you have an advanced Procurement solution, can plug it into the catalog and analyze not only the cost, but the total cost if the order can be piggy-backed on other orders from on-contract suppliers who can add it to forthcoming shipments, give you contract-level discounts, etc. that’s value. And if you are looking to assemble a standard kit for a new hire, can run all the various combinations and determine which variant is best over a given time frame, that’s value too.

And a catalog solution can enhance sourcing if it supports punch-out and integrated search and anytime a buyer is considering sending out an RFI, can be integrated to identify current market pricing and source suppliers from the data within the catalog and in punch-out sites. If the buyer compares this pricing to current pricing, this can let the buyer know if going to market will likely be good (if market pricing is significantly less than current organizational pricing) or bad (if market pricing is significantly higher and the best option is just to extend the contract with the incumbent if pricing will stay about the same).

At the end of the day, Procurement is about generating value — and if the platform addition doesn’t generate additional value, what’s the point?

So You Need a Sourcing Platform That’s Next-Gen To You. Where Do You Start? Part II

In our last post we noted that there’s no single right answer or easy answer here. It’s very situational. We also noted that some consultants will always tell you to start with Sourcing, while others will tell you to always start with Procurement, even though it will often be a chicken and egg situation. You need to score big wins, and that requires Sourcing. But to pick the right categories, you need good data to analyze, and that requires Procurement. But that doesn’t take into account that sometimes the best starting point is SRM or CLM for an organization where the most benefit can come from supplier development (because the organization is locked into strategic suppliers) or CLM (because compliance is key to cost, and brand, control).

So where do you start?

It’s very situational dependent, but your biggest issue should drive it. So if you think your biggest issue is that:

  • you can’t do enough sourcing events

    start with e-Sourcing

  • you’re events are generating limited returns

    use decision optimization with extensive models that factor in all known direct & indirect costs and even costs of capital

  • you can’t find the right suppliers

    start with a modern SRM platform that integrates with a true supplier network for granular supplier discovery that takes a plethora of business needs into account

  • you have to (quickly) ensure compliance with a newly introduced regulation

    start with a CLM platform with embedded semantic-based / deep learning analytics that can quickly scan thousands upon thousands of contracts and determine those in compliance, those not, and those that need to be manually reviewed (due to the presence of non-standard clauses, enforcements that appear to be country specific, etc.)

  • your over-spend, and need for audit recovery, is too high

    start with an I2P solution with m-way matching (contract, PO, Goods Receipt, etc.)

  • your maverick spend is too high

    start with e-Procurement / P2P with an embedded catalog (with visual-guilt driven guided buying), flexible requisition & approval processes, and no-PO / no-Pay enforcement capability

  • you need to get your services spend under control

    start with a Sourcing platform with a VMS/CWM module or a VMS/CWM solution that can integrate with a BoB S2P solution

  • you are unsure of where your best opportunities lie

    start with a modern spend analysis solution with integrated prescriptive analytics that can go deeper than just top N

In other words, you let the issues drive the starting point. After all, we all know what happens if you try a big bang implementation and take on the entire extended S2P process at once … the project goes up in a big bang and you risk ending up as one of the top supply chain disasters of all time (especially since everything will need to talk to the ERP)!

So You Need a Sourcing Platform That’s Next-Gen To You. Where Do You Start? Part I

There’s no single right answer or easy answer here. It’s very situational.

Some consultants will always tell you to start with Procurement because:

  • you get manpower and transactional savings immediately
  • you will get the majority of your spend properly categorized in ONE system (which will enable better spend analysis and opportunity selection later)
  • you will stop overpaying and duplicate paying invoices with 3-way matching and reduce recovery requirements
  • you will reduce cycle times and be able to take advantage of early payment discounts
  • and so on …

Some consultants will always tell you to start with Sourcing because:

  • you can invite and compare more supplier bids with modern RFI tools
  • auctions are a great way to realize a quick category price reduction
  • timeline reductions allow you to source more spend
  • portal-backed SIM makes it easy to keep track of suppliers and contacts with up to date information
  • etc.

But this doesn’t take the chicken and egg situation into account.

  • you can’t identify significant savings without a modern optimization-backed platform-backed sourcing solution that allow you to identify new opportunities, which means you need to start with a Sourcing platform if you need savings fast
  • but you can’t identify the best categories without good data, which is captured in a good e-Procurement/P2P system, which means you need e-Procurement to capture the data you need to identify the right opportunities (using spend analysis in the sourcing platform)

Or the fact that the biggest savings opportunity for your particular organization might be a best-of-breed niche SRM or CLM solution due to your biggest savings opportunities lying in supplier development or compliance.

So where do you start? Stay tuned for Part II.