Category Archives: Sourcing Innovation

Category Management – More than Just a Fad

As per this recent post on “benchmark data points to big advantages of category management” over on SCMR that summarized new data released by APQC, companies that have adopted category management practices – managing product categories separately and customizing them according to specific customer needs – outperform others on a number of key supply chain metrics. Specifically:

  • shorter supplier lead time –
    median lead time of 6 days compared to 28 days
  • faster cycle time –
    median turnaround time of 8 hours compared to 72 hours
  • higher productivity –
    199% more POs processed per FTE
  • fewer FTEs required to order materials and services –
    companies without category management require 2.5 times as many FTEs to order materials and services and have less FTEs to focus on more strategic endeavours

So, if your organization is not already managing on a category basis, maybe it’s time to do so for key categories.

Cost Control – Hwong Style

Those who know Henry, who, before taking on a VP role at Rearden Commerce, held senior roles at Ariba, Provade, Elance, PeopleSoft, and Moai, know that he’s on the ball when it comes to Sourcing and Procurement. Thus, I was very interested to see what his prescription for Cost Control was as he was relatively quiet during his time at Ariba where he took on a more internally focussed role.

But, as per this recent article over on CPO Agenda on “How to Control Costs”, he’s back in the spotlight and eager to share his wisdom with the world.

According to Henry, the secret to cost reduction is not to put more spend under procurement’s control (which is hailed as the holy grail by at least one analyst firm), not to enable enterprise-wide visibility (which is hailed as the holy grail by providers of spend visibility software), and not to put an end to off-contract purchasing (which is hailed as the holy grail by consulting firms a-plenty). While each can reduce costs, the real sercet is to moving towards a more holistic approach to managing the entire lifecycle of a purchase. This is because a platform model that supports the entire procure-to-pay process (and as many categories as possible), gives procurement chiefs the one common driver behind all of the strategies reflected in the survey responses: control.

What a CPO really needs to reduce costs is control over those costs, and, more specifically, control over the processes that drive those costs. Some categories should be purchased centrally, others should be decentralized. Some should be purchased on multi-year contracts. Others should be purchased on a spot-buy every day, week, quarter, or month. Some categories should only be bought on contract. Some should never be bought on contract. The CPO needs the control to ensure that the right policy is followed for every buy. That is the ultimate key to cost control.

In addition, if you really want to control cost, instead of consolidating the supply base, which is the first instinct in 3 out of 5 procurement professionals, you instead expand the supply base. As Henry says, while consolidation presents you with fewer throats to choke, it also increases your exposure to disruption if one of those suppliers fails or has a quality / delivery issue. Plus, when you give users fewer choices, the immediate impact will be an increase in off-contract buying. Thus, if you want to make an impact, you expand the supply base since working with more suppliers can actually increase compliance and interestingly enough reduce costs, as the procurement team has more leverage to work with when negotiating terms.

Finally, if you’re really serious about cost control, you tackle the biggest obstacle of them all — the cultural obstacle. Procurement teams are often not involved in strategic planning decisions and are brought in after major decisions are made and after much of the costs have been locked in. Even having the information that procurement can provide about supplier choices and costs … could play an important role in keeping costs low in the long-run.

It’s a great article that provides great insight into the real drivers of cost — cultural, control, and consternation (about having too many throats to choke). It also provides some great advice on strategies an organization can use to combat wild price changes in dynamic commodities and some insights on where Henry thinks the challenges in Procurement lie. Check it out.

Innovation in Sourcing

Today’s guest post is from Chetan Raniga, who is General Manager, Americas at Trade Extensions.

As someone who’s been in the strategic sourcing field for over ten years as a consultant and product manager, it’s been interesting to see the rapid evolution of sourcing solutions over the past few years. Leading solution companies now realize that users need solutions that feel familiar; that’s why Excel integration is common among leaders in the supply management arena. It’s the same reason Coupa has screens that almost mirror Amazon.com — providing an interface and workflow that’s both familiar and intuitive. Another example is the use of dashboards — the charts and alerts in Trade Extensions remind users of Mint.com, a popular personal finance site, though they show vastly different types of data!

Here are some other changes for the better:

Collaboration and Workflow:
The sourcing solutions of the past were extremely tactical (e.g., automating the process of running an RFQ or auction for a specific category), and therefore, didn’t give buyers the ability to share ideas, exchange documents, and view the real-time status of their sourcing initiatives. Now, platforms provide robust project management capabilities with Gantt charting, custom workflows (e.g., only have new suppliers go through the qualification step), document sharing, and Skype-like chat features. A buyer can see exactly which suppliers, team members, and stakeholders are online, and instantly communicate with them. Audit trail and logging capabilities have also gotten stronger, which is important for the confidence of both buyers and suppliers in using these platforms. Multiple teams are now using these platforms to share data. For example, a Direct Materials sourcing group can incorporate freight pricing from a tender conducted by the Logistics team. The group can use the platform to determine which items will use the suppliers’ freight (delivered pricing) and which will use the 3rd party carriers’ freight (FOB plus freight).

Flexibility:
Systems of the past didn’t provide the flexibility that we have today in collecting inputs. Labels such as ‘Price per Unit’ would be hard-coded or the cost formula would only support a limited number of operators and functions. Data entry was also cumbersome and error-prone since it involved either manually entering or copying-and-pasting vast amounts of data. Today’s solutions integrate with Excel, so that existing data and formulas can be easily leveraged. For example, item, demand, and cost component data stored on separate Excel spreadsheets can be uploaded with one click. Even better, some solutions allow users the ability to customize the supplier’s bid form. This is critical to change management since companies can continue to use their existing bid forms in the bid gathering phase but obtain the decision support and reporting benefits in the analysis phase. These improvements have led to even shorter RFQ/P creation times.

It’s also now possible to run auctions with optimization (a step forward in utility from the original concept of reverse auctions), and to run RFQ/Ps with feedback — blurring the line between RFQs and auctions but also going further by providing custom feedback (e.g., a custom message of “Not Competitive” is shown when the bid is x% greater than the median price).

Usability in the Analysis Stage:
The one sourcing area that has lagged in adoption has been the use of optimization (which the doctor has defined as the application of one or more rigorous analytical techniques to a well-defined model to generate the absolute best decision from a multitude of possible alternatives in a rigorous, repeatable, and provable fashion). It sounds complicated, and in the past it really was. For example, if a customer wanted to see what the result would be if all the business went to incumbents at their current proportions, then she’d have to create a rule limiting allocation for each item and affected supplier. That’s painstaking when you have a couple of hundred items — but most projects had thousands of items! Nowadays, in a modern optimization solution (which include the solutions by Trade Extensions and BravoSolution), the buyer just selects one rule, written in plain English (as shown below).


Even better, new platforms allow buyers the ability to create rules in Excel and then upload them. In the example below, the buyer is setting limits by plant and supplier simply by completing a table.


Reporting:
The solutions of the past didn’t offer much in terms of reporting. Most had a couple of pre-defined reports that exported to Excel. Buyers had to spend additional time modifying the reports — even changing labels and creating pivot tables — before they could present the results to their peers and managers.

Solutions today have made major strides in this area. Leading spend analysis tools (which include BIQ as well as Trade Extensions) allow users to create custom reports that can be saved as templates and re-used. The ability to choose specific dimensions (rows), columns (facts), and other information means that users no longer have to go outside the system for further manipulation. Some tools even allow the ability to drill-down/up on data (e.g., view allocation data by country first, then by region, then by state, and finally by city/plant).

We have heard buyers comment that their analysis time is shortened by three-and-a-half (3.5) weeks on average by using the new decision support and reporting capabilities mentioned above.

Thanks, Chetan!

Procurement Mastery in 2015

While far from a complete picture of what Procurement Mastery will look like in 2015, Accenture’s outlook for 2015 in their recent “Compulsive Contributors” report, identified three areas of emerging excellence which are among the foundations of Procurement Mastery for any organization that wants to make it to Next Level Supply Management. In brief, they were:

  • Excellence in Risk Management
    Disruptions are becoming more common by the day as supply chains increase in length and complexity. If there was ever an appropriate use of the term “the new normal” (there isn’t, by the way), this would be it. Masters have to be very adept at identifying, predicting, detecting, and mitigating risks before they turn into full blown, costly, disruptions.
  • Closed Loop Spend Management
    Leading Procurement organizations work closely with finance, manage supply and demand, and “close” the loop on the end-to-end spend cycle.
  • Analytics
    Using data to understand what you are spending, with whom, on what, from where, what is being obsolesced before it is used, and what might not even be needed in the first place. Using data to understand supplier performance. And using data to predict what might happen next. The masters will embrace, and get value from, predictive analytics long before the contenders.
  • A Transformed Workforce
    There is a talent management process in place that manages the full lifecyle, from recruitment through development to retirement. And the caliber of the talent, as a result of this program, is above the norm.

What’s a BHAG (and why is it important)?


Today’s guest post is from Robert A. Rudzki, President of Greybeard Advisors LLC, who has (co-) authored a number of acclaimed business books, including Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise, On-Demand Supply Management, and the just published text on Next Level Supply Management Excellence that is a follow up to the now-classic Straight to the Bottom Line.

In the classic leadership book Built to Last (James C. Collins and Jerry I. Porras), the concept of BHAG was introduced. A BHAG (Big Hairy Audacious Goal) is a common element among long-lasting, successful companies and organizations. A BHAG engages people. It is tangible, energizing and highly focused. People “get it” right away; it takes little or no explanation. President Kennedy’s pronouncement that “We will land a man on the moon” is a famous example of a BHAG that literally captured the minds and hearts of an entire nation.
On a similar note, management guru C.K. Prahalad tells executives to think big. “Set ambitious goals and then figure out how to mobilize the resources to achieve them — rather than the other way around. Most companies limit themselves because they focus primarily on what they believe they can afford.”

Do you have a BHAG for your supply management organization? If not, you should. It’s a valuable component of an overall transformation plan.

What about so-called SMART goals, a concept many companies have adopted? SMART goals are Specific, Measurable, Attainable, Realistic and Timely. There is not necessarily a conflict between BHAG and SMART goals. Think about it this way: BHAGs are often at the department or company level, provide overall guidance and excitement, and typically are multi-year endeavors. SMART goals help translate the overarching BHAG into near-term goals on a personal level.

BHAG and SMART: important elements in the arsenal of a good leader.

Note: part of this column was excerpted from Chapter 1 of the book Next Level Supply Management Excellence by Robert Rudzki and Robert Trent.

Thanks, Bob.