Category Archives: Supplier Management

We Need Exact Purchasing … But It’s NOT a New Matrix!

We all know the Kraljic matrix is broken, and that it has been broken for a while. As Jason Busch starts off in his article on how Supply Management Must Become Exact Purchasing, Kraljic was right at the time, but it’s time to come back to where we started. And, more importantly, recognize that the Kraljic Matrix was designed as a starting point for supply management to think critically — and Supply Management was supposed to evolve from there. But it never really did.

Sure we got the Purchasing Chessboard by Kearney to supplement a host of seven step methodologies, procurement game plans, new techniques for managing indirect spend, lean supply management, and a slew of techniques from every niche consultancy to enhance your supply, and category management, strategies, but almost all of these are based on the classic 2 * 2 Kraljic matrix with refinement.

In his post, Jason, who rightfully says that procurement at scale is not one-size-fits-all tells us that answer is Exact Purchasing, or more specifically, The Exact Purchasing Quadrant, where he tries to map cost influence vs contract-and-supply complexity because Kraljic told you what a category is when he mapped profit impact vs. risk / complexity, but he didn’t tell you what to do with it. According to Jason, if you have:

  • low cost influence and low complexity, you transaction capture
  • low cost influence and high complexity, you govern the relationship
  • high cost influence and low complexity, you manage market risk
  • high cost influence and high complexity, you architect the cost

And Jason’s mostly right. Depending on the category in question, you’re generally going to apply one of those approaches.

Jason doesn’t stop there. He tells you that the thread that ties all four of these together is data at the core. And he’s right. Without a data-based (not necessarily database) approach, you’ll never effectively manage, and thus never effectively purchase, a category. Moreover, Jason does a great job at telling you what the core data is, where it resides, and where it could sit in your next generation enterprise Supply Management Solution (SMS). But he falls short when dictates the velocity, because that depends on the criticality. And even worse, the depth of data required depends on the criticality — which can also change the quadrant a category falls in!

For example, while packaging, print & marketing, and NPD are definitely strategic (Kraljic) cost architecture (Busch) categories for some companies (i.e. CPG, Advertising Agencies, and Manufacturers), they are tail-spend for other companies (i.e. Retail Store, Luxury Brands, and a Services Consultancy).

Jason’s improved approach still fails because it suffers from the same fallacy as the original Kraljic matrix — that complexity and risk are a single dimension. They’re not. Complexity is a factor of the product or service that you design and is an internal dimension that you have complete control over. Risk is a factor of the external environment that impacts your ability to create and deliver the product or service and depends on the financial stability of your supplier, the geopolitical situation in which it operates, the trade routes that exist between your supplier and your location, your supplier’s supply chain, and everything else in between — these are all factors you can’t control. Furthermore, it’s not profit impact (Kraljic) [which is short term] or cost influence (Busch) [which depends on spend], but criticality, which is measured in value impact [and what happens if the buy is unprofitable, of poor quality, or unavailable]. A category with zero savings potential can risk a 100M product line if your products can’t be completed without it (and we’ve seen this many times over the last two decades as critical sensors or single-sourced components shut down automotive lines or lack of RAM [from the decennial plant fires] or custom control chips [from trade slow-downs or insufficient production] greatly impacted personal computer / laptop or game system production — costing major brands hundreds of millions of dollars).

The reality is that Supply Management / Exact Purchasing / Get My Stuff (and Git-r-Done) is NOT a 2 * 2 matrix. It’s a(t least a) 2 * 2 * 2 pocket cube (and a 3 * 3 * 3 cube in large Enterprises) that is different for every organization where you take into account:

  1. complexity – low (med) or high
  2. market risk – low (med) or high
  3. criticality – low (med) or high

And as you progress from the lower left of the cube (where all dimensions are low) to the upper right of the cube (where all dimensions are high), you’re simultaneously following a three-dimensional path down a bi-furcating decision tree that takes you from non-critical items where you are simply managing as transactions to highly strategic items that you are cost architecting to the best of your ability, monitoring at least weekly, and alerting the category manager to on every major market event. In the middle, you will deal with your leverage and bottleneck items using well-timed market events to mitigate risk and managed relationships to ensure smooth supply, with the depth, and velocity, of the data correlated to the criticality of the item to your operation.

You do that, and you’ll finally be on the road to Exact Purchasing.

And I’ll leave it to Jason to work out the details of the starting cubic, as he’s so intent on fixing Purchasing (now that he’s semi-retired and can pontificate on the philosophical of purchasing).

(And once Jason does that, I’ll tell you how execution differs between small, medium, and large enterprises because “strategic” doesn’t mean the same thing at different levels, there is no one-size-fits-all platform, and, after a lack of operational readiness [which THE REVELATOR will happily fill you in on], this is likely the second biggest reason new technology acquisition projects fail in our space.)

Safe Vendor Selection is Hard!

Every week another vendor is going bankrupt or calling it quits. Every week another vendor is getting acquired. Most of the startups, even the over-funded ones, are not going to make it. Even assuming you know what functionality you need, it’s very hard to select a vendor that is not only good for you but likely to be around for the length of the initial engagement, which is probably 3 to 5 years (mid-sized to large) because, any shorter, and you’re spending more time on vendor evaluation, selection, implementation, and integration than actually using the vendor’s product! (And even if you can get a year-to-year contract, you know you still want the solution to last for at least three years to get a return on the time you spent investigating, selecting, and implementing the solution … which might only hit majority adoption at the end of the first year!)

So how do you select a vendor that is not just “good” but “safe”?

Well, let’s go back to our process for vendor assessment and selection.

Stage 0: Find a reasonable candidate pool based on your needs based on quick high level assessments.

Stage 1: RFI Creation

This is where you focus on weeding out vendors that

  1. don’t have technology that might actually solve your problems (without getting into deep details and demos)
  2. don’t have the necessary (cyber) security and privacy protections (especially if you are processing payments or private data and have to comply with industry and governmental regulations)
  3. are just too risky from a viability perspective for you to deal with
  4. don’t give you a back-up plan if something goes wrong

If it’s a point-based best-of-breed solution designed to solve one problem that could be replaced with another solution through the API, you can probably take a bit of a risk. But if it’s a foundational sourcing execution or procure-to-pay platform that is going to power your sourcing events and category management or your procure-to-pay process, this is not a vendor you can afford to have shutdown or get acquired by a buyer who doesn’t want to support it (because they’re buying for the customer base or dev team).

So how do you figure this out? It’s not perfect, but as we pointed out before, you calculate the relative corporate debt. If it’s too high, the vendor is not financially viable, even if it is “well funded” because most investors, even PE, won’t wait more than 5 years for their return — which is hard to get in tight economies when they invested at a multiple that’s (way) too high — and typically any multiple above 5X to 7X IS if you want a return in 5 years. (That’s why you always need to ask who’s funding your ProcureTech Vendor. If it’s customers, you’re safe. If it’s PE, you have to investigate deeply. A few firms are willing to wait [more than 5 years] for their return if the long-term is very profitable. But a lot of firms are of the “strip-and-flip” mentality, and that’s not good for anyone. And those in between start losing patience around the 3-year mark if they don’t see the sales growth they want, even if their growth expectations are ridiculous!) Collect the key financials and run the equation.

As for security (and privacy), you ask for their SOC 1/2 and certifications and any other certifications that are mandatory or designated as essential by your risk management department. If they don’t have the minimum, you drop them (unless they are in process).

As for functionality, you ask them to describe (at a high level) how they support your key core requirements. The in-depth descriptions and demos come during the RFP process later. The key to selecting a “safe” vendor and not being pressured to select a possibly “unsafe” one because you didn’t do all the right checks until after you fully verified the tech (and you can’t start the process again) is to do the majority of key non-tech validations up front, not at the end.

Moreover, by doing this analysis up front, you ensure that you aren’t wasting time analyzing vendors you can’t risk from a business perspective! Capability assessments take time. If you wait until the end to look at viability, you’re wasting a lot of time whereas the RCD calculation, certification verification, and verifying key requirements of other stakeholders often takes a fraction of the time as the in-depth tech assessment.

As for the back-up plan, here’s all you need to ask up-front:
Can I export 100% of my data, in a standard format, anytime I want it?

Not 90%. Not 95%. Not 99%. 100%!

Not submit a request and ask them to export a database or wait for a weekly backup process to backup and shoot you a copy. Request on the fly, it zips up (possibly into a multi-part archive) on the fly, and you can download on the fly.

If you can always get all your data, then, even if you mess up on the risk or viability assessment or something unforeseen by both parties happens, you have the most critical thing — your data — and you can always go with the next best solution! (And then make sure the clause is in the contract because it’s the most important clause in the contract.)

Now, this isn’t a complete list of requirements, as it will depend upon the industry and geography you are in and what type of solution you are selecting, but it’s a good start!

What is a Strategic Supplier Relationship?

Simple question. Sophisticated answer.

This was posed by THE REVELATOR in a recent LinkedIn article referencing his recent post on Procurement Insights’ Influence on Walmart’s Supplier Management Transformation.

First of all, the supplier has to be strategic.

For it to be strategic, it should be a supplier that is strategically selected, strategically engaged, strategically developed, and strategically managed. The goal of all of this should be to identify, build, and maintain a stellar supplier, as per a series we did here on how do you identify a truly stellar supplier.

But it’s more than that. Because strategic is more than just identifying long-term aims and interests and the means of achieving them, it’s execution. And when two parties are involved, its execution on both sides.

This means that it’s also critical that you are a strategic customer for the supplier. And while it’s hard to completely define what that is, as every supplier could have their own definition, at a minimum, just like a supplier should be stellar for you, you should be a customer of choice for the supplier, a topic we’ve also covered in the past.

But that’s not enough, because you can classify a supplier who supplies high-volume components as strategic with stellar service based on a set of KPIs, and the supplier can classify you as strategic based upon spend threshold and the fact that you always pay your invoices on time, and there can be nothing strategic about the relationship.

Unless there is active collaboration, a mutual commitment to mutual development, a shared goal along strategic objectives, and trust, there is nothing strategic about it and the relationship will fall apart the minute a major disruption or event occurs such as a supply shortage two or more tiers down in the supply chain that forces a supplier to choose which customers get their orders and which don’t (because it cannot fulfill all its contracts due to a force majeure event), or a sudden bankruptcy from your customer that forces you to cancel a big order (which will result in them not bidding/accepting further business from you).

For a relationship to truly be strategic, there has to be regular communication and collaboration on the shared goal of supporting the upstream supply chain of your current and potential customers utilizing the same values (sustainability, quality, performance, etc.) and a commitment to work together to solve problems when the going gets unexpectedly (and almost catastrophically) tough. When there is a shortage of a critical material, you will get your supply first, or if that’s not possible, the supplier will work with you to design an alternative (that uses a different raw material) or find alternate sources. When your biggest customer goes belly-up bankrupt, you will work with them to find additional, substitute, business you can give them to maintain the relationship and the business until you find a replacement customer.

Strategic means dependable, and that the dependability is both ways.

(Supplier) Diversity is Dead!

Editor’s Note: This is an extended version of a comment that was made in response to an inquiry by THE REVELATOR on LinkedIn about the progression of supplier diversity.

The simple fact of the matter is thus: diversity threatens fascists who want authoritarian dictatorships. This means that as long as far right wing agenda politicians keep getting elected in first world countries (which has been happening more than not over the last decade), not only is DEI (Diversity, Equity, and Inclusion) not going anywhere, but it is going to be rolled back, and done so faster than most policies that came before in countries which equated diversity progress with measurable outcomes.

The sad reality of the situation is that as soon as the board/chief/president of an organization or governmental department concluded that you were not diverse if you did not have x% of whatever minority the board/chief/president thought you should have x% of by time y, and started equating diversity success with measurable outcomes, we went from a situation where “equal opportunity” was replaced with “minority designated role”. And instead of being a further step in the right direction, it was often a step backwards. Under equal opportunity, if two candidates were roughly equal for a role, the role is to go to the minority candidate. And that’s a good thing. However, under “minority designated role”, non-minorities are banned from consideration, and this is not a good thing if there are no qualified minority candidates available for the role. A senior role that should demand a full University degree (Bachelor’s or higher), a decade of experience, and one or more certifications may end up going to someone who just has a 2 year associates degree, only 3 years of work experience (barely relevant to the role), and no certifications as that is the most qualified person who applied.

What many firms fail to take into account when considering diversity mandates is the number of qualified candidates in the minority who are actually in the vicinity of, and who are then actually interested in, and willing to take on, the position. For example, if you were to demand that half of your coding team need to be women, good luck with that when only 25% of STEM graduates in North America are female. (So if you did get 50%, a lot of other companies wouldn’t get any female hires.) Or if you demand that 1/5th of your workforce be hispanic, to mirror the US population distribution, but it’s an in office job in a major city in an expensive neighbourhood where 95% of the local population is white, good luck with that. You might meet your quota, but you know that the vast majority are not going to be qualified for the role.

And DEI didn’t stop there at some organizations and institutions in North America. As soon as people figured out that a DEI program or a particular minority designation could be used to exclude people of certain religion(s) they didn’t like, it went from a tool of inclusion to a tool of subversive discrimination. (So much for equity and inclusion!) Then came the backlash; the labelling of anything even remotely related to DEI, equal opportunity, or humanity as woke; and a full on assault by the fascists and authoritarians.

More specifically, in countries where they have enough power in the government, the authoritarians are dismantling any and all programs they have control over, barring any third party organizations with such policies from doing business with their government, and doing whatever they can to overturn all DEI and Equal Opportunity legislation they can, as far back as they can.

Moreover, given that these far right wing parties are being well funded by donations from the tech bros who spend more time meddling in global politics than running their own ventures, there are not many options for progression of ANY diversity on the global stage.

You’re Not Doing Supplier Performance Management (SPM) Right Unless it Improves You!

This post was inspired by a LinkedIn post from Celia, founder of Vendor Score IT, who says that if your suppliers aren’t evolving, they’re holding you back.

Celia is perfectly correct in that you will be held back by suppliers who refuse to progress, but another key point that really needs to be addressed that all of the supplier performance management advocates miss is the following:

If you’re not evolving, you’re holding your suppliers back.

When you need to step up performance, you can’t put all of the blame or all of the responsibility on the supplier. You have to take some too. First of all, you selected the supplier. Secondly, you didn’t monitor the supplier closely to ensure that the supplier performed up to your level of expectation. Thirdly, you know what the customer wants, as well as the performance you expect, better than your supplier. Fourthly, you should be leading the innovation charge, as the one responsible for value-add for the end-customer.

Furthermore, when it comes to Supplier Performance Management (SPM), while it’s super easy to just drop the under-performing suppliers and replace them with better performing ones … simply adopting better suppliers doesn’t make you any better as an organization. In fact, not only will you have a new set of suppliers in the lower median who then become under-performing, but overall performance scores will go down because you are not enabling them to perform better.

You don’t want to ditch poor metrics because they are holding you back, vendor reviews to ensure they are striving to get better, or take a growth mindset to make them perform better.

You want to ditch poor metrics because they are forcing suppliers to perform sub-optimally to score well in your system, you want to do “vendor reviews” to open dialogues about how you can help them improve (because, with a three year commitment, they’ll buy a new machine, upgrade their warehouse and use new pallets to reduce breakage, improve quality control processes, etc.), and use your growth to fuel theirs as well.

How do you identify the bad metrics? How do you identify where you are holding them back (vs. them holding you back)? How do ensure that you get the growth you need? By taking the mindset that it’s at least as much your fault as there’s (and probably more), by going in with a joint improvement mindset, by listening to them (and, if necessary, reading between the lines to see how their focus on certain metrics, such as OTD or year-over-year production cost decrease [when energy costs are going up and it’s forcing them to sacrifice quality], is actually degrading their performance), and asking them to contribute to improvement plans. (i.e. You make it clear that you are going to work with them on joint improvement, not just dictate plans to them or expect them to do all the work. And that they should take advantage of that because, otherwise, you’ll find another supplier who will work with you if they won’t. A good supplier will jump at this opportunity.)

By improving your organizational performance, you will encourage your suppliers to improve their performance as well!