Category Archives: Spend Analysis

Trade Extensions: No Rest for the Wicked-ly Powerful – Part II

As per yesterday’s post, it’s been less than five months since we last checked in with Trade Extensions, who had traded up to a Fact Sheet User Interface and added a slew of new features, including improved RFI support, multi-dimensional rankings in e-Negotiation, Google Earth integration, new incumbent rules, and an OLAP foundation to reporting, including the implementation of a new n-way comparison report. Since then, Trade Extensions has been on a tear to add new functionality as fast as it can to make the platform not only one of the most powerful expressive bidding optimization platforms on the planet, but also one of the easiest to use — listening to its users (which include the Fortune 1000) and adding features and functions that make an average buyer’s life easier, taking usability to a whole new level yet again. And while earth-shattering technology improvements are cool, it is usability that is the ultimate key to to adoption, use, and, ultimately, cost avoidance and reduction in your sourcing organization.

Scenario Creation & Analysis

Not only are there new rules that allow partial awards to be fixed based upon existing scenarios, but the number of constraint categories has doubled. While there were only general and incumbent constraints in the past, there are now an entire category of scenario reference rules and post processing rules. With respect to scenario reference rules, not only can allocations be kept, but bids can be favoured or penalized as well. The post-processing rules are also quite useful. Allocations can automatically be rounded and allocations that don’t meet a minimum number of units can be removed (or re-assigned to the supplier who meets a minimum allocation with the lowest total cost).

Feedback Mechanisms

The buyer now has fine-grained control over what the supplier sees, and can even mix feedback types. For example, if the buyer only wants the top three suppliers to know they are top three, but suppliers four to six to know their exact rank, they can specify that specific rank starts at bidder four, and the top bidders default to “top 3”. In addition, if the supplier does not meet a minimum bid increment, which can be defined in a number of ways (including, minimum dollar or % decrease over last bid), the supplier gets a nice red error that the bid is not acceptable AND a message indicating the minimum increment required. Finally, and this is really cool, the user can define custom color-coded bid feedback fields based on dynamic formulas that now only let the user know where they rank, but how competitive their bid is (against the current bids from the competition) in English using a buyer defined scale such as “Competitive”, “Slightly Competitive”, “Not Competitive”, and “Not Acceptable”.

Plus, the buyer can now chat with users online in an integrated IM client, and immediately see who is online when they log in as it is a widget on their project management dashboard.

Odds and Ends

The “dashboards” for RFX and auction phases have also improved. The summary, bidder summary, and lot summary are now completely customizeable by the user, support custom fields, and user-defined colour codings in the rankings. In addition, there is integrated show/hide, drill-down functionality, and customizeable pop-up (bid, trend, and bidder activity) charts where a user can select one, some, or all of the rows in each report.

They have also added a basic workflow engine that allows buyers to initiate rate requests, lot requests, and allocation publishing requests of project managers / administrators when new needs arise during a project. This allows managers and supervisors to maintain control and a complete project history to be maintained. The workflow is fairly basic at the present time, but I suspect it will mature and fill out quickly given Trade Extensions’ track record of rapid application development over the past two years. (Especially since the feature is being used by a couple of very large companies.)

All and all, it’s a lot of new functionality in a short time frame that makes the tool extremely useable by an average buyer.

Quick Hit Cost Savings Projects

Since it’s impossible to get away from cost reduction, inspired by a recent SIG article on “Strategic Cost Management: The Survivor’s Playbook to Savings”, which listed the following high-impact projects for same year savings:

  • Software Maintenance-Rate Reduction
    Identify all of the maintenance contracts, annual spend, and maintenance percentages. Develop a standard maintenance agreement and standard percentage for annual maintenance, require an exception appoval process with senior management involvement for any alterations, and focus (re)negotiations on highest savings opportunities. Savings of 5%+ is not uncommon.
  • Software Maintenance-Elimination
    Eliminate maintenance on all non-critical systems or all systems where annual maintenance cost is low. (In the latter case, even if the system is critical, it will cost less to re-instate the maintenance on a system at a later time if it is required than to pay maintenance on all such systems.)
  • Legal Services-Hourly Rate Reduction
    Most legal firms raise costs annually regardless of competitive market conditions. (Threaten to) conduct a sourcing exercise and watch rates drop quickly.
  • Legal Services-Bundles and AFAs (Alternate Fee Arrangements)
    For general legal services that are project or task oriented, and not litigation oriented, bundles or AFAs can save the company a significant amount of money.
  • Desktop Printers-Elimination
    Shared multi-function devices, with password printing, are much cheaper to operate than individual desktop printers.

here are a few more quick-hit cost savings projects that will generate cost savings if the organization has not run them (recently):

  • Marketing-Print
    Unbundle print from creative services and then run a quick sourcing project. Significant cost reductions in the 10% to 20% range (or more) will quickly materialize when printers are being faced off against each other.
  • Office Supplies-Live SKU Guarantees & Price Checks
    Everyone knows that a quick auction will drop prices across the board, but most category experts also know that the vendors make this back by raising prices a few months down the road when they think no one is looking and by bidding expiring SKUs, which will be substituted with higher price items down the road. Insisting on a clause that states that all SKUs must not be schduled to reach end of life within the contract term, and that any SKU that is retired must be replaced with a SKU of equivalent, or greater, functionality at current, or reduced, cost will prevent those overpayments and insure that significantly greater savings materialize.
  • Computers-Overpayment Recovery
    Most vendors don’t honor the “best price” clause and generally charge the same rate for the life of the contract, even though most computers and components decrease 2% to 3% a month. A careful spend audit will typically reveal 10% or more in overpayments that can be targetted quickly.

It’s Easy To Move Beyond Spreadsheets and Improve Operational Decisions

All you have to do is survive the uprising that results when you ban spreadsheets from the organization.

Industry Week recently published a very nicely thought out and written piece from SAP on “how to move beyond spreadsheets to improve operational decisions” using business intelligence that sounds wonderful in theory but doesn’t work in practice. Why not? Because the first thing a user does when they get a new system is dump the data to a spreadsheet they can play with because

  1. they are used to the spreadsheet environment and
  2. the vast majority of BI tools don’t have the capabilities the average analyst needs to do the analysis she needs to do because they all work off one version of the data that cannot be altered in any way.

Thus, an average BI system only worsens the problem as users create and share more and more spreadsheets in an effort to get around the limitations of yet another system with yet another version of the truth. There are only two ways to move beyond spreadsheets. They are:

  1. Ban Spreadsheets
    and force your users to work within the limitations of the BI tool or
  2. Adopt a Real Analysis Tool that Supports a Spreadsheet Interface
    and allows your users to continue to use the interface they are comfortable with in a productive, value-creating, manner

Spreadsheets are not going to go away just because you’ve introduced yet another system. It’s delusional to think otherwise. Your only choices are to ban them or embrace them in a manner that is actually helpful.

Demand for Procurement Systems is Up In General

But, as far as I am concerned, the specifics are still in question. Over on Software Advice, Michael Koploy recently published a post on “2011 Market Trends: Procurement Systems” where he noted that the six trends he’s following, namely:

  • Demand
  • Cloud Adoption
  • Application Usability
  • Strategic Sourcing
  • Spend Analytics
  • Contract Management

With respect to the first four, he’s definitely right. After 2-3 years of spending freezes, and displacement of seasoned pros from big shops to mid-tier shops, pent-up demand is nearing an all time high. Also, a lot of shops, especially in the mid-tier, have figured out that they’re not IT, shouldn’t try to be, and want the IT to be someone else’s headache. Today’s generation of workers expects usability, and won’t settle for anything less. And with continuing pressures to cut costs (or lose your job), a number of organizations are finally getting behind strategic sourcing, even if they’re not entirely sure what it should mean to them.

But I’m not sure about the last two. Yes, demand for “BI” and “Analytics” is up across the board, but I’m not still convinced that most organizations have any clue whatsoever as to what real “spend analysis” is.

Spend analysis is:

  • NOT automated cleansing and mapping
    Sorry, but someone else’s rule set will not be anywhere close to 100% applicable to your organization’s data, and a rule set only catches known screw-ups in data entry, not unknown ones. Let’s say you’re in IT. Then HP obviously means Hewlett Packard. But if you’re in construction, it could just as easily mean Harry’s Pumps (or, if you’re in apparel, Hilary’s Pumps).
  • NOT automated Top N reports
    While it’s important to track your Top N suppliers, categories, etc., the greatest opportunities for savings aren’t necessarily going to be in your Top N categories or with your ToP N suppliers. Even without an analytics system, chances are your Procurement people have a pretty good idea who the Top N suppliers are or what the Top N categories are and aggressively negotiating them. In many organizations, the biggest opportunities for savings are in the Next N categories and in better optimization of the Top N categories that goes beyond simply identification. In the first case, let’s say the Top N are 40% of spend and the Next N are 30% of spend. Let’s say the immediate opportunities for savings are 3% in the Top N and 9% in the Next N. That’s 1.2% savings on TCO on the Top N and 2.7% savings on the next N. Which is greater? Also, let’s say a number of categories use a common, pricey, metal or mineral that accounts for 30% of total cost and that, if demand was aggregated across the categories, the average cost could be chopped by over 10%. Well, that’s a 3% savings if you buy the metal or mineral on behalf of your suppliers. A Top N report ain’t gonna show you that!
  • NOT a Freakin’ Dashboard
    A dashboard only tracks progress on identified opportunities. It does not track progress on unidentified opportunities! It only allows you to see that you’re not screwing up something you just fixed, it doesn’t show you that you’re screwing up ten other things.

But when most people make their purchase decisions, this appears to be what they are evaluating based on what they buy and how they implement.

Then there’s Contract Management. To be useful to Procurement, a Contract Management (CM) has to do more than simply store and index contracts for easy retrieval. While it’s important to be able to quickly put your finger on a contract when a dispute arises, that’s not management. That’s e-filing. In the context of Procurement, true management is tracking purchases against the contract in near real-time and insuring that before an invoice is paid, it’s paid at contracted rates. This requires some integration of the CM system with the e-Procurement and/or e-Payment system.

So far, most CM systems are still being bought stand-alone or loosely coupled.

In other words, demand for Procurement Systems is up, but not always for the right reason. And this includes demand for new reverse auction features. I’m getting tired of repeating myself, but I guess I have to say it again.

Listen, bub, a reverse auction IS NOT an advanced sourcing application. If you want real savings, you need a decision optimization system.

When Will Analysis Be Ubiquitous?

It seems that analysts across the board are finally recognizing the need for good data analysis. For example, this recent article in Industry Week on “mastering complexity, driving out complication”, notes that what most manufacturers are missing today is an adequate way to analyze and interpret collected data in terms of what are the potential impacts and risks on the business. Add this to all the articles preaching the need for spend analysis to get direct, indirect, and logistics costs under control, and one sees that the need for analysis across the board is now ubiquitous.

But yet only a small number of companies have solid analytical tools. Most companies still don’t have basic spend analysis applications that allow them to see where their organization spend is going. Far fewer still have Enterprise Manufacturing Intelligence (EMI) applications. But until there are data analysis applications across the supply chain, significant cost-saving opportunities are going to go unidentified. So when will analysis be ubiquitous? How many more years are we going to have to wait?