Category Archives: Spend Analysis

Don’t Forget The Most Important Principle of Performance Measurement

SIG just ran a great article on the “Three Guiding Principles of Performance Measurement” that hit upon a key point that is regularly and repeatedly overlooked. Simply put,

Your data is good enough. Really, it is.

As the author says, your data will always be murky. No matter how many times you clean it, massage it, enrich it, transform it, and polish it up, there will always be errors. There will always be omissions. There will always be inaccuracies.

But that’s okay. Remember the 80/20 rule, which is just as appropriate here as it is everywhere else. (In fact, more appropriate.) The law of the vital few states that roughly 80% of the effects come from 20% of the causes. This says that only 20% of your data is vital anyway. And since it is expected that at least 80% of that data will be clean, it’s going to be quite straight forward to spot important trends. (That go just beyond who your top suppliers are, but which items are ordered the most. What types of purchases are regularly bought off contract. What products are really selling best. Etc.)

And if the decision being made is critical or risky, the data will always come up short. There will always be some flaw, some missing piece of information. Because if there wasn’t, the proverbial pointy-haired boss could be an effective manager. Executive decisions will always require a bit of a risk, but they will be much better when there are data to base them on then when there aren’t. So measure, manage better, and manage some more.

Next Generation Sourcing

As stated in yesterday’s post, for Sourcing to continue to have an impact in a modern Supply Management organization, it needs to be taken to the next level. And I’m not just echoing the statements of The Altimeter Group, AMR, CAPS, Greybeard Advisors, The Mpower Group, Purchasing Practice, or my own persistent ramblings over the years (as I have been pushing for Total Value Management and Next Generation Sourcing strategies since day one). A modern supply management organization truly needs to take their sourcing practices to the next level if they are going to continue to distill value from Sourcing.

When you consider that:

  • Once you institute RFX, the manpower savings from automating bids can only be claimed once.
  • By the time an organization gets to the third auction, there are no more savings to be had as the fat from supplier margins has been squeezed out.
  • Once the allocation has been optimized across the supply base in a way that minimizes unit costs, transportation costs, (interim) storage costs, etc., re-running the optimization won’t lower costs further unless something changes — such as the identification of a new supplier, an alternate material (that is cheaper), or additional demand (that increases the economy of scale).
  • Once contract management and monitoring is put in place and no invoices are paid that are not for delivered, defect-free products, at contracted rates, there is no more on-contract leakage to be stopped.
  • Once controls are put in place to stop off-contract purchases that should be on-contract (through integration of the e-Procurement system with the Contract Management system), there is no more off-contract leakage to be stopped.
  • And once spend analysis has identified all the opportunities, the savings won’t actually materialize until something is done about them. This something cannot be appropriately identified unless the appropriate information is available to the knowledge worker.

As a result, in order for a mature Supply Management organization to continue to extract considerable value from (e-)Sourcing, e-Sourcing needs to be taken to the next level. Whether you call it DDSN2 (Demand-Driven Supply Networks), Next Practices, or Total Value Management, the message is the same. Take your Sourcing to the next level, or risk decreasing returns.

So where does one start? Upgrade or bring in a modern e-Sourcing platform. For some organizations, who are already using a top-tier provider and who have purchased a suite license, this will just mean learning how to take full advantage of the end-to-end integrated functionality and improving processes. For others, using point solutions from top-tier providers, this will mean buying licenses to the whole suite and/or integrating the point solutions with other solutions they already have. For the market majority, this will likely mean either replacing existing first generation systems (from providers who haven’t made any updates to the base functionality in the last five years) or, in laggard cases, skipping first generation e-Sourcing systems entirely and starting off with modern systems that have better, integrated, functionality.

And then, once these systems are in place, processes are updated to capture more data and consider more information in sourcing decisions, in a process that one vendor on the leading edge likes to call High Definition Sourcing.

Since this process is the closest to what Sourcing Innovation believes is necessary for organizations that want to take their sourcing to the next level (and, in the words of CAPS, become value-focussed), this will be the subject of the next series of posts (starting next week). Stay tuned!

Information … Information … Information

Yesterday’s post discussed the lack of realistic starting points for an average organization that wants to merge onto the value focussed path and the need for information. Then the post discussed e-RFX applications and how they are not always the answer as most are not configured for collecting more than a moderate amount of data, and the information required to make the right decision might require a large amount of data to be collected.

For example, consider the information required to make the right decision in a global freight bid where the company has over 5,000 lanes across five continents that are currently being serviced, in part, by almost 500 carriers. Not only will there be a need to collect up to 1,000,000 LTL and TL bids to know what the lowest rates are, but there will be a need to collect data on capabilities (refrigerated, freezer, hazardous martial, etc.), capacities, and serviced lanes. And then, once all of the information has been collected, past performance, guaranteed service levels, (commitments to) sustainability (such as biofuels and hybrid vehicles) will have to be considered in addition to costs and on-time-delivery capabilities. And if multiple carriers are almost equal, long term viability, strategic partnerships, and/or commitment to social responsibility might also need to be considered.

All-in-all, this represents a significant amount of data that needs to be collected, analyzed, and distilled into useful information — data that is not even going to be collected if a firm is still using a first-generation e-Sourcing platform. This is because:

  1. Traditional RFX tools, which are now a commodity (as every provider and their dog has one — trust me), are not built to collect that much information.
  2. Most of the RFX tools that can handle that much information, typically by way of Excel import and export, are not designed with supplier usability in mind. No supplier is going to quote 5,000 lanes at multiple LTL and FTL levels if they only service 3,000 and 2,000 can be broken into 20 cross-regional groups where each lane in the group is priced the same by mile.
  3. Of the few tools that allow for generic pricing and (typically) single-dimensional overrides, most won’t designed with the ability to easily design multiple levels of overrides and the OLAP-like navigation that’s really need to quickly zoom in on the relevant data items (which need to be viewed or altered).
  4. And while most of the better RFX tools allow a user to define as many RFIs, RFPs, and RFQs as the user desires, these generally have to be crammed into rigid workflows that may or may not fit the scenario at hand.
  5. Plus, while most of the tools can push data out into an auction or a SIM tool (that is the foundation for SPM and/or SRM), most don’t allow data to be pulled back in, since the first generation e-Sourcing model was a linear RFX -> Auction -> Decision Optimization -> Award -> Contract Management -> SPM flow.

And then, once you get past all that, you still have to analyze the data to distill the information required to make a good award decision. Because even the best strategic sourcing decision optimization on the market will fail if it’s not provided with the right data AND the right constraints (or, depending on your choice of terminology, rules). The right constraints can only derived by a knowledge individual that has the right information at her disposal.

So how do get the right information? You take your sourcing to the next level. So what does this Next Generation Sourcing look like? Stay Tuned.

VFS Enablers: Competitive Enablers in a New Wrapper

Generally speaking, I’m not hard on CAPS Research because they tend to produce some of the best research and papers in the space, but I had to take a crack at VFS in yesterday’s post because I don’t think we need another acronym. And while it may look like I’m taking another crack at their recent “Value Focused Supply” publication in this post, I’m trying to point out that the next level of strategic supply management in your organization, regardless of what you call it, isn’t that hard to obtain. It’s just the next rung on the ladder, and only one small addition to the capability repertoire will get an organization there.

According to the white paper, the critical enablers of VFS are:

  • executive engagement
    No initiative will succeed over the long term without executive engagement, which is also a critical enabler of classic competitive supply strategies.
  • value chain goal alignment and measurement
    This is a fundamental requirement of any supply strategy designed to enhance an organization’s overall competitive position — and a core requirement for any enhanced competitive supply strategy, such as DDSN and TVM.
  • supply market understanding
    Without supply market understanding, even a simple e-Auction will fail miserably.
  • collaboration approaches
    The best results always materialize from collaboration.
  • supplier relationships
    Without a good supplier relationship, quality, on-time delivery, and emergency orders are at risk.
  • organization and human resources
    The right people will always be required to pull the strategy off.
  • information/analytic capabilities
    This is essentially the only enabler that’s new, sort-of. While information/analytic capabilities are a requirement of competitive sourcing strategies, as good information is necessary to select the right strategy and analyze the bids, classic competitive sourcing did not require decision optimization, modern (POS-based) forecasting techniques, inventory optimization strategies, or (true) spend analysis.

Thus, any organization that has mastered standard competitive sourcing can easily move on to next generation sourcing strategies simply by adding a new tool or two to their toolkit — complete overhauls not required.

Share This on Linked In

Should You Really Care About the Finance Classification Hierarchy?

A recent article in CPO Agenda on “a meeting of the minds” that discussed the need for Procurement and Finance to establish a common framework put forward five suggestions on what an organization can do to make it happen. Four of the suggestions were really great, but the last one, which said that Procurement and Finance should “establish common organization and spend classification hierarchies in spend analytic and value-tracking pipeline tools” has me scratching my head.

If the article had suggested that Procurement and Finance should establish a common reference classification hierarchy that Procurement could map too, that would be different, but instead the article says that “the spend analytics programme and value-tracking pipeline should share a common organization and spend classification framework“. There are two problems with this logic.

First, there is the built-in fallacy that one spend cube is enough. It’s not. You need a spend cube for AP data, a spend cube for Invoice data, a spend cube for utilization data, etc. You need a spend cube, and an appropriate hierarchy, for everything you can think of analyzing. The real savings in spend analysis doesn’t come from analyzing canned reports — it comes from having a hunch, analyzing the data, and walking away with either a savings opportunity or a better informed hunch as to where the savings opportunity truly lies. A true spend analysis system lets the user build new cubes and hierarchies at will, because, otherwise, data analysis is avoided and savings go unrealized.

Secondly, the hierarchy most appropriate to Finance and the financial and tax reporting they need to do is often the least appropriate hierarchy for Procurement and the spend analysis it needs to do. As a result, a compromise isn’t going to help either party. It’s just going to create a common language that Finance can use to explain why it now takes them 50% longer to do reporting and that Procurement can use to explain why they can’t find any savings opportunities.

The answer is to define a common reference classification that each side can map too after they performed their analysis and created their reports. After all, ETL Tools are a dime a dozen these days, and most good spend analysis or BI tools come with one or more built in. As a result, such mappings can be easily automated to occur automatically on a fixed interval or after analysis is completed and each department can then view the hierarchy in a manner that makes sense to them. No need for unproductive compromises.

However, as mentioned at the start of the post, the other four suggestions are good. To develop a common language:

  • Establish a savings framework (and definitions),
  • define and implement a disciplined engagement model,
  • produce timely, consistent, and accurate reporting, and
  • capture opportunities created for profit improvement.

Check out “a meeting of the minds” for more details.

Share This on Linked In