Category Archives: Technology

Claritum – Medicine for the Procurement Soul, Part I

While Claritum might sound like the latest miracle drug for the sinus, it’s really the latest miracle drug for Procurement — and when SI says miracle, it’s because, properly used, it really does work better than expected.

So what does Claritum cure? SOOM. (Not VOOM, SOOM!) Spend Out Of Management. How does it cure this? Before we can answer that, we have to identify the main types of SOOM.

If Spend Under Management, SUM, is typically spend that is (strategically) sourced or requisitioned/ordered through the e-Procurement system (by way of a catalog, punch-out, requisition, or spot-buy) and tracked then SOOM is, simply put, everything else. What does this everything else look like?

  • maverick spend
  • one-time buys (for promotions, special projects)
  • print/packaging
  • Travel & Expense (T&E)
  • Event
  • MRO
  • Marketing Services
  • Uniforms and Apparel
  • Furniture
  • office products / consumables
  • low-dollar services and temporary labour
  • unique needs not met by current suppliers
  • misc. p-Card spend, including the strip club bill

Essentially, it is the “tail” spend of the organization (especially if it shows up on the p-Card of a certain executive or salesperson). In an above-average organization, this will typically be 20%-ish of spend. In a below-average organization, with a lot of spend managed by various departments and a lot of maverick spend, this could be 40%-ish of spend.

In other words, SOOM is everything Sourcing hasn’t sourced and Procurement can’t manage. Why can’t Procurement manage the spend? Let’s take the examples one by one.

  • one-time buys (for promotions, special projects)
    there is no RFX template, so the system is just by-passed
  • print/packaging
    thesystem isn’t set up to handle print jobs, so the staff just goes to staples or office depot
  • Travel & Expense
    there is no T&E platform support, so everyone just uses their own credit cards and expenses a month to three later because it’s easier
  • Event
    event management has unique requirements, and so is done offline
  • MRO
    service calls are unplanned, parts are bought as needed, and janitorial supplies are too insignificant for sourcing
  • Marketing Services
    marketing statements of work and account management requires special support, not in a standard RFX, so the tool is again bypassed
  • Uniforms and Apparel
    sizes, colours, etc. aren’t on the standard RFX, and it’s one time, and it’s easier to order through the supplier site, so that happens
  • Furniture
    it’s a one-time buy, so just go to the furniture store, put it on the p-Card
  • office products / consumables
    there’s no simple reorder form, so it’s simple to just have the accounts manager ship and bill you the monthly order and pay on the p-Card
  • low-dollar services and temporary labour
    it’s easier to call up the temp labour agency or the consultancy of choice, have them send the resource, and bill you later than try to go through the process
  • unique needs not met by current suppliers
    since the system isn’t set up for supplier discovery, you do the web search, have a few chats, find a supplier you feel comfortable with, have them ship the products, send the invoice, and then you instruct AP to pay it upon goods receipt
  • misc. p-Card spend, including the strip club bill
    for anything non-standard, if the p-Card is accepted, it is easier, especially if it’s spend you want to hide the spend until it’s too late for the organization to do anything about it (and there is a process that allows you to do so)
  • maverick spend
    for anything the buyer wants to break the rules for

In other words, the main reasons Procurement can’t manage the spend are:

  • the buyer doesn’t want the spend managed,
  • the process doesn’t support the spend, or, primarily,
  • the Sourcing and Procurement platform(s) don’t support the spend.

And that’s the kicker. Most platforms have been designed to capture the strategic or high-volume spend and customized to that, following the 80/20 rule under the assumption that most of the savings is in the top 80% which has the volume leverage and supplier relationship leverage. And while this is mostly true, especially since advanced sourcing can save an average of 10%, indicating that there is 8% potential savings, this 8% savings is only achievable over a 3 year timeframe, as most organizations only strategically source about 1/3 of their spend annually. In other words, an average organization repeatedly sourcing the same spend only saves about 3% annually. What goes unnoticed is the bottom 20% of spend which, due to lack of analysis and effort, typically contains an overspend of 10% to 30% (with an average overspend in the 15% range). This is significant. 15% of 20% is 3%, about the same as an organization pushes to the bottom line with strategic sourcing. And this spend is made every year, and this savings, if the spend could be managed, is available every year. If I’m losing out on 50% of my savings, I Want A New Drug!

So if you had a platform designed for this tail spend, which supported the right processes needed by the individuals who contribute to tail spend, most of this spend could be captured. And that’s what the Claritum platform is designed to do – capture all of the tail spend that buyers throughout the organization need to make. How does the Claritum platform do that? Come back for Part II.

Environmental Sustentation 22: Natural EMPs

In our post on environmental damnation 22, natural EMPs, we noted that EMPs, short for electromagnetic pulses, which are short, typically intense, bursts of electromagnetic energy that are generally disruptive, if not damaging, to electrical and electronic equipment, are a huge overlooked supply chain damnation because today’s information driven supply chains run on communication systems that control the chains, as well as the finances that pay for them. A single well-placed burst can take out an entire data centre, and if your organization is not setup in a distributed infrastructure with distributed off-site backups, your entire operation will come to a screeching halt — indefinitely!

No one thinks about this because people believe that the only real concern is EMP weapons, but these are only possessed by a few military operations that are unlikely to ever use them as they could destroy their equipment at the same time, but this is not true. Natural EMPs, which cannot be predicted and cannot be stopped, can do just as much damage and are much more likely to fry your equipment and bring down your supply chain than a rogue attack by a terrorist group that happened to get their hands on an EMP.

As per our damnation post, whether you realize it or not, there are a number of natural events that cause natural EMPs including, but not limited to:

  • lightning,
  • solar flares, and
  • earthquakes and volcanoes.

There is typically warning of the potential of each of these events, as well as the area and the likelihood, but the warning could be brief and the ability to prevent nonexistent, so any warning is likely to be too late.

So what can an organization do to protect against this damnation?

First of all, it can make sure that critical equipment is shielded, and located in shielded rooms. Low power EMPs will then not be much of a threat to that equipment.

Second of all, it can install equipment to divert as much of the pulse as possible. For example, a well placed lightening rod can divert lightening, and any EMP that might accompany it.

Thirdly, it can make sure it has a distributed infrastructure with real-time failover and distributed, real-time incremental back-up. Then, an EMP that takes out part of the IT operation in one locale will not take down the entire information (and financial) chain.

It’s not much, but it is enough. And at the same time, the organization also protects against fire, flood, and the FBI (raid) destroying a critical data centre.

Per Angusta: Purchasing CRM

Per Angusta is an interesting SaaS company in the Procurement space. While most Procurement companies focus on the Sourcing or Procurement process, or supplier management, Per Angusta focuses on the workflow that ties it all together — a workflow that is typically managed in Microsoft Excel Spreadsheet Hell.

In particular, Per Angusta is a SaaS platform built to manage sourcing pipelines, track savings for organizational validation, and make Procurement’s impact visible to the organization — which, as per Sigi Osagie (the master of Procurement Mojo), is the key to building your Procurement Brand.

One of the unique things about the Solution is that the Sourcing Project Management Tool is not only designed to manage the sourcing workflow, but to integrate with your best-of-breed sourcing and procurement tool either out of the box (and, out of the box, integrates with Rosslyn Analytics, HICX, Market Dojo, and other Per Angusta partners) or through the API that is being released shortly.

The solution contains all of the basic project management capabilities you would expect, as well as a few unexpected ones including, but not limited to, deep configuration capability, a supplier data repository, and even Slack integration. Moreover, the strengths of the solution are exactly what you need — flexible project definition and the ability to track deep negotiation details. The platform can track projects of different expense types, document proposed negotiation strategies, and document the requirements of each stage: need definition, sourcing, negotiation, and signature. This is a very powerful capability as it allows the Procurement team to demonstrate that over 80% of the costs are locked in during the design and sourcing phases, and that very little savings can be obtained if the stakeholder waits until the (end) of negotiations and the contract phase to engage Procurement.

The Per Angusta platform is one that is worth exploring in detail, and for a very in-depth review, you can check out the recent piece over on Spend Matters Pro co-authored by the doctor and the prophet.

SourceMap: Striving to Bring Supply Chain Visibility to the Masses

SourceMap is a supply chain mapping tool that is designed to help an organization map out their end-to-end supply chain to help them gain critical insight and understanding into their performance, costs, sustainability, and risk. Especially risk. Most companies don’t understand the risks hidden in their supply chain — the sole-source parts, the over-dependence on high-risk geographic areas, or the ability of a single port strike to knock out multiple shipping lanes. (Nor do most companies understand the cost of risk, which is discussed in detail in Sourcing Innovation’s upcoming white-paper on Playing With Fire, but that’s a discussion for another post.)

SourceMap, born as a research project at the MIT Media Lab to publish and measure the environmental footprint of all the products on earth, was launched as a public platform for supply chain mapping in 2009 that allowed individuals to see every aspect of a product’s life — the good and the bad. Then, in 2011 it partnered with the MIT Centre for Transportation and Logistics to pursue opportunities in automating supply chain visualization and risk management. Shortly after, the 2011 Tohuku tsunami hit and wiped out over 45,000 buildings, damaged over 144,000 more, shut down all of Japan’s ports (including 15 that were located in the disaster zone). All told, it did over $300 Billion in damages and sent shockwaves throughout global supply chains. Companies were scrambling to understand the impact on their supply chains, SourceMap was approached, an incorporation followed, and the private sector solution was born.

Hands-down, SourceMap is the best visualization of the supply chain to hit the scene since Resilinc, which is, in Sourcing Innovation’s view, is still the leader in Supply Chain Risk Management solutions, but if all an organization needs is visibility and Supply Chain Visualization, SourceMap is now a leading contender in that arena. SourceMap has the ability to use an organization’s ERP data, public data sources, and survey data from the organization’s suppliers, the suppliers’ suppliers, down to the raw material suppliers, to create a complete point-to-point map of the supply chain that an organization can use to trace it’s products from source-to-sink on a (Google Earth) Map and visually see what is happening. This is a very powerful feature that allows an organization to gain insights into their supply chain that they never knew before. And just like an organization is typically shocked the first time they run a spend analysis (we spend that much with who?!?), they are typically just as shocked when they run a map and see that a number of distributors and tier 1 suppliers are using, or outsourcing a significant portion of, spend to the same tier 2 supplier and just pushing the single-source point of failure an organization is trying to avoid one step further down into the Supply Chain.

And the SourceMap solution, which only needs common location data points, can quickly import and combine all data sources an organization can get its hands on and SourceOne can often create a starting supply chain map for an organization in less than an hour. It’s not complete or perfect, but it allows the organization to quickly drill into the supply chain and see where the data, and focus, is needed.

SourceMap is quickly becoming the new supply chain visibility solution to watch, and for a real in-depth analysis, Sourcing Innovation would recommend the in-depth write-up that the doctor and the prophet collaborated on over on Spend Matters Pro (membership required) that provides four pages of deep insight into the solution.

Why You Need Mass Adoption Of An Optimization-Backed Sourcing Platform

Last week, in our post on why Higher Adoption is Where the True Value of Optimization Lies, we emphasized the importance on not just having optimization, but an optimization-backed sourcing platform that can be used by the most junior of buyers. We focussed on the efficiency, time savings, and value such a platform would bring, but didn’t give you any hard numbers. While the hard numbers will be hard to come by, SI expects that the savings that hit the bottom line from such a platform will increase by at least 150% over using stand-alone optimization, and more than likely will double what an organization would see if it just used a regular strategic sourcing platform without optimization. We know that 2.5X is not a very impressive number when vendors go around talking about 10X ROI, but the ROI that vendors promise is relative to the cost of the platform, not the ROI relative to the organization’s bottom line, and that’s what really counts.

The reality is that, at the end of the day, after COGS, depreciation, taxes, etc. are factored in, a good Procurement organization might only take 2% off of the bottom line. This doesn’t sound that impressive, unless the organization is a 10B organization where 2% is 200M, in which case it’s knock your socks off impressive. Now imagine if that same Procurement organization could increase the straight to the bottom line savings by 150% and show a bottom line savings of 5.2%. That’s another 320M in annual savings for a total savings of 520M! That’s buy everyone on the Sourcing team a custom made Jaguar savings because no other initiative is going to take that much off the bottom line.

But you don’t have to be a 10B organization to see the impact. Imagine you are a small mid-size organization with only 100M in annual spend. Instead of seeing an average year-over-year impact of 2M, you’d see 5.2M. If a fully burdened FTE is 200K and you had a small Procurement department of 5 people managing your spend, the department’s ROI would go from 2X to 5.2X in a single year, and that is quite significant.

So where are these, quite conservative, numbers coming from?

  • A Best In Class Organization has 80% of spend under management (Hackett, Gartner, etc.)
  • A Best in Class Organization will strategically source approximately 1/3 annually (due to resource restrictions) (Crowd Wisdom approximation used by many vendors)
  • A Best In Class Organization with stand-alone or hard-to-use optimization capability will only put the top third of complex, strategic, or high volume spend through the organization (Generous crowd wisdom approximation based upon SI’s interaction with optimization vendors)

As a result, (at most) one-third of one-third of four-fifths of spend gets optimized on an annual basis, or about 9% gets optimized using strategic sourcing decision optimization and the full extent of its capability.

However, if the organization has an optimization-backed sourcing platform that is configured for one-click evaluations and automatic weighted auction awards for low-cost / standard categories,

  • 98% of spend can be under management (as it can flow through the platform as easy as it can flow through an auction or spot buy RFP),
  • one half of that can be sourced annually due to efficiency gains
  • and all of this spend will be subject to optimization.

This means that about one half of organizational spend, or about 48% of spend, can get at least partially optimized on an annual basis. In other words, an organization can subject 5x its spend to optimization on an annual basis.

The net result is that an organization that adopts an optimization-backed sourcing platform that can be used by every buyer will see at least 150% more savings hit the bottom line every year. Why?

If we look at the numbers:

  • the average return from Procurement at a world class organization is 4.7% (Hackett Group)
  • the average return on tail spend (which is never strategically sourced) is 7.1% (Hackett Group)
  • the average return from SSDO on a strategically sourced category where the full power of the solution is enabled is 12% (Aberdeen)

This leads to the following (where we assume 20% of spend is “tail spend”):

Traditional:
09% using SSDO @ 12.0% savings = 1.0% savings
18% using SS   @ 04.7% savings = 1.0% savings
TOTAL = 2.0% savings
 SSDO Platform
38% using SSDO @ 12.0% savings = 4.5% savings
10% using SSDO @ 07.1% savings = 0.7% savings
TOTAL = 5.2% savings

Now, mileage will vary among organizations, but this example should make it pretty easy to see that optimization is a huge value driver that will have a significant impact on your bottom line when it is widely deployed.

So if you want to know what to look for in an optimization-backed sourcing platform, download Optimization: Higher Adoption is Where True Value Lies (registration required) today and find out what you need to take optimization from a success to a smashing success in your organization.