Category Archives: Strategy

Strategic Spend Visibility: Untapped Potential for Cost Reduction

Chances are that most sourcing professionals have read all of the Aberdeen and AMR reports on spend analysis and spend visibility and are quite impressed at the opportunity for savings they reported — on the order of 10% to 15% on 55% to 75% of untapped spend and 6% of spend in managed categories, and are now itching to bring spend analysis and spend visibility into the organization. But before this step is taken, it is important to realize that these research reports fail to consider the spend analysis value curve, which tends to flatten out within one to three years. That’s right! If an organization embarks on a traditional spend analysis and visibility program, which is tactically oriented, it will find that the savings opportunities quickly dry up and that the 5X to 10X ROI that was initially experienced quickly becomes, if the organization is lucky, a 1.5X to 2X ROI. This is because all the platform does is help the buyers maintain negotiated cost reductions during contract renewals and catch repeated attempts at maverick spending after organizational users think that they are no longer being watched.

Why do the savings disappear so rapidly with a traditional, tactical, spend analysis or spend visibility initiative? Because there is only so much that can be done with Accounts Payable (AP) data. More specifically, all that AP data does is identify the top spend buckets by supplier, category, and commodity, and, correspondingly, the low-hanging fruit savings opportunities which are easily identified as the top categories, commodities, and supplier relationships where the organization doesn’t have contracts and performance management programs in place (and where the typical payment amounts are above the range that defines “market average”). Since this analysis is relatively quick and easy to do (once there is visibility into organizational AP data), and since a good spend visibility solution will decrease sourcing cycle time by 50% to 75%, it’s not long before an average organization exhausts its savings opportunities from a tactical spend visibility project.

But this doesn’t have to be the case! A shift from a tactical view to a strategic view, which includes other types of data, can multiply savings opportunities and, more importantly, find new opportunities year after year. For example, adding invoice data allows for the identification of overpayments and uncollected rebates, which are common in categories like office supplies, electronics, and (offsite) storage and which often represent millions of dollars in instant refunds. It also allows for the improvement of inventory turns, which can quickly shave 10% to 20% off of inventory costs.

And if the data is enriched, a whole plethora of new opportunities open up. Adding diversity data allows an organization to target government MWBE programs. Third-party corporate data can be used in fraud detection. Carbon footprint data enables regulatory compliance. And so on. The opportunities, and savings, become endless. In fact, a strategic program could multiply the organizational savings opportunity by five in the first three years and generate strong returns for years to come! That’s why strategic spend visibility is needed.

And that’s why you should download Sourcing Innovation’s new Illumination, sponsored by Rosslyn Analytics, on Strategic Spend Visibility – Untapped Potential for Cost Reduction (Page Down; Registration Required). It just might change the way you think about spend analysis and spend visibility.

Even Good Times Call For Lean Supply Chain Strategies

A recent article over on the Harvard Business Review blogs told us that we should “stand by for the same old strategy mistakes”, because you see the same ones over and over again every time a downturn starts to trend up again. Moreover, similar fundamental strategy mistakes are often made by supply chain organizations when the economy starts to improve. As a result, there are lessons to be learned. Three easy ones are:

  • Too many supply chains.Many companies think they should have multiple supply chains — one for commodity electronics, one for custom parts, one for chemicals, etc. — as this will allow for a razor-sharp focus on streamlining operations around a category. The reality is that you should have only one supply chain (from a planning and management perspective), because every (distinct) supply chain costs money to manage and operate. Just like a business loses when it splits its focus (as 20% of operations will end up accounting for 80% of profit), a supply chain loses when it splits its operations.
  • Throttling back on cost reduction.When times improve and profits start to increase, supply chain often starts to think it can ease up on the push for ever lower prices, give suppliers a break, focus on quality, and / or focus on collaborative initiatives that will take cost out in the future. While it is important to focus on (these) other initiatives, you can never cease your cost reduction quest.
  • Pushing too hard for supplier consolidation.While it is true that most companies have too many suppliers in the supplier master, with 20% of active suppliers accounting for 80% of spend, and while it is true that a smaller supply base can enable greater spend leverage, too much consolidation too fast can greatly disrupt your supply chain.

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7 Tips to Align Procurement with the Boardroom

A recent article by Alexander Arsath Ro’is of Benefit, an Amsterdam Procurement Consulting Company, provided 7 tips on how to “align procurement with the boardroom” that are worth a second look. Based on research they conducted with two Dutch universities, which led to the construction of the “Benefit Boardroom Alignment Assessment Methodology”, they concluded that the following best practices would benefit any company that wants to align procurement with the boardroom and wants to start with an accurate assessment of the current state.

  1. Tell the Board First
    Make sure your Board understands the challenges before you start an assessment of your current state.
  2. Be Absent from Assessments
    This will allow the CEO, CFO, COO, and other CXOs to speak freely about their expectations of Procurement.
  3. Put Your View Across
    Initiate dialogue with the Board to challenge views in a positive way and talk about opportunities that will arise from a proper alignment.
  4. Remember, It’s a Start
    Alignment isn’t a precise measure — it’s a way to get perceptions in tune with reality.
  5. Ascertain What Others Want
    The goal is to be on the same page with what the Board expects and what your internal customers want.
  6. Create Understanding
    Effective alignment will only result when Procurement fits with the rest of the organization.
  7. Ask: Are You Ready
    An assessment won’t help if the organization isn’t ready for an accurate assessment of where things are and isn’t willing to do what’s necessary to get where it needs to be.

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Three Tips to Get Strategy Right

A recent blog entry on “strategy on the morph” from The Conversation over at the Harvard Business Review had three great tips on how to get your strategy right in these turbulent times that need to be highlighted.

  1. Distribute the right to make strategy throughout your organization
    Strategy needs to be a collective effort — not an edict handed down from on high — and people need to be empowered to make the right decisions.
  2. One process does not fit all decisions
    Some processes need to be long and drawn out because the decision will affect everyone at all levels of the organization … others, that involve decisions that will only affect a single department, can be made more quickly. The key is knowing what process to use when, and distributing that knowledge throughout the organization.
  3. Resources — money and talent — needs to move as fast as decision making
    A strategy needs to be executed. Otherwise, it’s just another pointless decision.

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What’s Your Procurement Value Level? … or Transformational? (III)

In Parts I and II I reminded you that Pierre Mitchell of The Hackett Group invited you to participate in a study designed to help you identify where you were on your procurement journey by way of 18 value streams that range from “naive apprentice”, where you’re measuring performance at an elementary (tactical) level, to “expert sourcerer”, where you’re extracting procurement value at a very advanced (transformational) level. Then I covered some of the seven tactical value streams and some of the six strategic value streams. In today’s post I will cover the final five transformational value streams, which range from:

Internal Procurement process cost savings are found from process re-engineering
through
Benefits due to currency hedging, inflation hedging, options/derivatives, etc.
to
Revenue uplift from supplier collaboration (e.g., innovation, diversity advantage, joint marketing, etc.)

Very few companies are transformational in their procurement. A company that is transformational goes beyond just taking cost out of the supply base, but finds ways to take costs out of all aspects of company operations while making the entire company leaner, meaner, and smarter about it’s organizational finances and processes. A truly transformational Procurement department positively impacts every area of the organization.

Internal Procurement process cost savings are found from process re-engineering

Instead of being reactive and trying to reduce costs after 70% to 90% of costs are baked in during the design phase, Procurement works with Engineering and R&D to help them select materials and specifications that will be the most cost-effective in the long run when multiple options exist. Instead of shaving a few percentage points off of list price, Procurement can be shaving a few dozen percentage points off of total cost by going out to market with designs that are much more cost effective to produce.

Benefits due to currency hedging, inflation hedging, options/derivatives, etc.

Instead of just looking at the total cost in today’s market, Procurement looks at the expected total cost over the lifetime of the contract and works with finance to select options that will insure the expected cost reductions are realized in spades over the contract duration.

Revenue uplift from supplier collaboration (e.g., innovation, diversity advantage, joint marketing, etc.)

Once a Procrement organization has truly embraced transformational procurement, it works with its suppliers to not ony take cost out of the end-to-end supply chain, but also to inject more value that will allow for greater revenue on each sale. Cost are reduced, revenue is increased, and the company’s profitability becomes world class.

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