Where Should Procurement Have the Greatest Impact?

Ivalua and Procurement Leaders recently did a study on Purpose-driven Procurement: Entering an Age of Holistic Value that was partially covered over on EPS News that ran a typical, bland, headline on how Procurement’s Value Exceeds Cost Control.

Procurement can add value beyond cost control, and should add value beyond cost control, but what stands out the most in this article, and likely in the Ivalua/Procurement study, was the highlighted figures on areas in which Procurement has made the greatest impact (by % of respondents). Of the fifteen (15) areas presented in which Procurement should be making an impact, only three areas were selected by more than 30% of respondents, and the top 2 were the same old, same old responses of delivering cost savings and cost avoidance which are, in this market, the last two areas Procurement should be delivering value. First of all, times are such that there are, or soon will be no, cost savings in any category. Secondly, it’s not “cost avoidance” it’s “need avoidance“. It’s not just about saving money. In an age where your carbon footprint may soon be more important than your bank account, you don’t want to buy anything you don’t need, and you don’t want to waste anything.

In fact, today, the top ten things that Procurement should be doing are likely the bottom 10 things on the response pyramid, which were ten of the best responses such a survey could have included! Procurement is more than savings, cost avoidance, risk management, and theoretical sustainability (as most organizations won’t let Procurement spend a penny more than necessary to meet a need, even if that penny is to a much more sustainable supplier — there’s a lot more bark in the marketing then there is bite in the implementation; the doctor is aware of many surveys and has had many conversations where, if the buyer could pay 1% to 3% more than the lowest cost, sustainability would be substantially more; the reality is that, at most organizations, it doesn’t matter if the lowest cost is from the dirtiest, most unethical, supplier on the planet — the CFO wants cost reduction, the CEO wants profit, and the buyers were told to meet the targets and make the investors happy, not do the right thing. Hopefully more countries will pass carbon caps, carbon taxes, and sustainability laws because only then will Procurement get to serve the Purpose it wants to serve).

Procurement is the enabler that can transform the organization. And to demonstrate that, let’s review the bottom 10.

  • Supplier Diversity and Inclusion (16%): while you shouldn’t have arbitrary targets (as there is no one magic number that’s the right number), you should always look for diversity that you can include to widen your horizons — you never know where the next big idea, product, or saviour (when your strategic supplier becomes unavailable as the result of an unexpected event) will come from
  • Developing Team Skills and Talent (16%): while the first line to be cut from the budget is always the training budget when it should be the last line to be cut (when the world evolves faster everyday than the day before, and the job you do today will, in some ways, never be the same job in the future), Procurement can maximize the budget you have, find the right partner to improve your skills in a fair exchange (they train you for free if you use their products or services), and even train you on better processes and practices on their own
  • Digitalisation (11%): while this is not a conversation we should be having in 2023 (when Nicholas Negroponte told us all we should get used to Being Digital in 1995), most departments in most organizations are still woefully behind when it comes to technology (and the average employee has more modern apps on their personal smartphone than on their work computer), and that’s where Procurement can help as it needs to digitize to manage its sourcing, procurement, and supply chain and has already been through (part of) that process
  • Improving Cash Flow (11%): Procurement is in the best position to optimize outbound cash flow, balancing payment terms with cost reductions with risk minimization, and can even use that knowledge of cash flow optimization to help Finance select the right terms for short term investments, loans, or even factoring on the organization’s invoices to big, slow, clients
  • Contributing to Revenue Growth (11%): Procurement’s analytics skills that it uses to predict demand can also predict the products/services that are the most popular and the ones that the organization could use to grow revenue by shifting production, marketing, and sales focus to those product lines
  • Improving Product/Service Quality (7%): Procurement can do more than just find new suppliers, they can help with product innovation and service improvement; they can identify suppliers with alternate designs that use alternate, more sustainable, materials that can build a better product and consultants with more experience and expertise to offer a better service
  • Drive Innovation from the Supply Base (6%): Procurement is the perfect partner to drive innovation; it is the first, consistent, and for better or worse, the last department to interact with the supplier, and in order for it to keep the CEO and CFO happy (and get the mythical savings which, after a certain point, don’t exist), it has to develop suppliers to an extent — no reason it can’t be helping you drive innovation
  • Support Mergers and Acquisitions (5%): let’s put it this way, if there’s no synergy in Procurement, there’s no synergy in the companies, and the company being considered should NOT be a target; so at the very least, Procurement should be one of the first sniff tests; it can also determine the synergy potential, the cost avoidance and efficiency potential, the innovation potential from an improved supply base, etc. etc. etc.
  • Demonstrate ROI to the Bottom Line (4%): Procurement NEEDS to be better educating the C-Suite on how its activities hit the bottom line across the board, not just on a few categories it finds savings in
  • Asset Disposal Activities (1%): We need to move towards a circular economy, and that means buying goods that meet as many of the R’s (refuse, reduce, reuse, repair, recondition, refurbish, remanufacture, repurpose, recycle) as possible, which will always include recycling when it’s impossible to get any more value out of the asset, and Procurement, which understands the product best, will understand how best to dispose of it to ensure it is recycled and all of the raw materials reused in the most sustainable method possible

And this is where Procurement should be focussing. Let’s hope Procurement gets there sooner rather than later.

Efficiency Is In The Process, NOT THE MARKETPLACE!

the doctor really should stop reading the “news” and “best practice” articles the internet pushes his way because most of them are rubbish and just make him angry, but then again, if he didn’t get angry, what would he have to write about?

One of the articles recently was about how procurement can push efficiency and sustainability into the organization. The sustainability advice of “look for eco labels or EPA ID or products with recycled content” was pretty abysmal (because, duh!), but the efficiency recommendation of “create an e-marketplace to give your buyers an online catalog of goods and services” was just appalling.

That’s only efficient for organization end-users charged with restocking the supply cabinet in the office or keeping the MRO stock levels high enough to guarantee the production lines keep going when the store room gets low. That’s not injecting ANY efficiency into the Procurement process.

When you consider even the most basic strategic procurement process, you have to:

Identify the Need
and efficiency here is an intake management solution that allows you to collaborate with the end-users / end-sellers to make sure you’re procuring the right products for them to ply
Identify the Potential Suppliers
and efficiency here is a solution for supplier discovery, evaluation, and onboarding
Identify the Evaluation Requirements
and efficiency here is an orchestration solution that allows procurement to integrate all of the requirements from the users, the business, and the organizational goals
Evaluate the Bids
and efficiency here is an RFX solution with integrated analytics
Negotiate and Sign the Contract
and efficiency here is a contract lifecycle management that at least supports the contract negotiation process with complete document (and version) tracking and preferably also includes support for initial contract creation from award, key issue tracking, and e-signature integration
Determine the Appropriate Ordering Strategy
and efficiency here is determining whether the best fulfillment is regular shipments (if the factory uses X thousand units a month), auto-reorders on inventory level triggers (if the usage is/sales are irregular, but the product can be pulled quickly), or (managed) catalog-based orders as needed
3+-Way Match (against an invoice)
and efficiency here is a solution that makes it easy to ensure the invoice matches the goods receipt that matches the PO (at a minimum, and you also want to make sure the PO matches the contract etc.)

Efficiency is injecting efficiency into this process, not just setting up a marketplace!

The 1-Step Guide to Responsible AI in Procurement

Forbes recently published an article on Responsible AI Procurement: A Practical Guide For Selecting Trustworthy AI Vendors. It wasn’t bad, but it missed the point.

Today, there’s only one way to responsibly address AI in Procurement.

JUST SAY NO!

1) We don’t really understand proper AI Governance (especially when most vendors are using third parties which are illegally scarping content, not checking for bias, and tweaking models on the fly without consideration for the new problems the on-the-fly tweaks will cause).

Plus, it’s not just ethical codes of conduct, it’s agreeing on what the ethics are, and, most importantly, making sure the models are transparent and unbiased — but we don’t know how to do that today, especially since all these models are huge black box models.

2) You can demand all the evidence you want from the vendor as backup for the vendor claims, but if you can’t verify it, how can you trust it?

3) These models require huge datasets to train. Even if you know the data set used and the processing method used, how can you be sure every element was properly vetted? Just like one bad apple can spoil the bunch, just one bad element in a clustering or optimization model can spoil the entire model. Just one!  It only takes a small amount of bad data to spoil a model, regardless of the model used.

4) These models can fail, and sometimes fail spectacularly. If you don’t understand the model, you don’t understand where it can fail, and thus what to look for. Also, many minor incidents (which can foretell future catastrophic failures) will go unnoticed if a human isn’t checking everything.

5) These models are not secure … the AI can leak any training data at any time without warning. Your vendor can have every security certification under the sun, and all will be for naught if they use LLMs.

So, JUST SAY NO!

A Circular Battery Economy is Necessary For Green Vehicles

Regulation (EU) 2023/1542 of the European Parliament and of the Council concerning batteries and waste batteries took effect this summer (on 12 July 2023 to be precise) and it’s a good first step towards a sustainable battery economy that will, hopefully, reduce carbon in the long-term.

When you consider that all of the zero emission claims for battery-powered vehicles are complete bullcr@p when you consider the carbon emissions to produce the vehicle, the carbon emissions required to produce the battery (which, in an inefficient process, can be more than 2X the emissions to produce the rest of the vehicle), and then the emissions to charge the battery from what is usually an oil or coal power plant, you might have to drive as much as 1,000,000 kms just to reach carbon neutrality! (And while the linked article doesn’t work out the best case scenario, it’s likely you’re driving the full warranty, or about 200,000 kms, to reach carbon neutrality when you’re charging the batteries burning oil or dirty coal.)

And even if the vehicle production is optimized, the battery production is optimized, and the power grid is primarily powered by pure renewable energy, it’s still not zero emission. The production of solar panels emit carbon, the production of windmills produce carbon, the building of dams and the generators that run them produce carbon, so you have to amortize that over the expected lifetime every time you charge that battery. So even a green vehicle will produce thousands of kilograms of carbon in its production, thousands of kilograms of carbon in its battery production, and hundreds to thousands of kilograms of carbon during its recharging. If you’re lucky enough to have the best case scenario with access to high efficiency solar, then you can get your carbon footprint down to about 10g per kwH over its expected lifetime, or a mere kg of carbon per full charge (or 400 kg over the first 200,000 km), and you approach carbon neutrality not long after you negate the production costs (which you might never do today as some methods to produce new batteries are so dirty). (But most of us do not have access to clean solar grids.)

This means that most first time produced vehicles with first time produced batteries are actually quite dirty. Very, very dirty. And the only way we’re ever going to get greener vehicles is to 1) cut down the carbon on vehicle production and 2) cut down the carbon in our power generation. Now, until we ban power production from oil, coal, and natural gas for fixed location power production (and build enough renewable power plants or start building micro modular reactor grids [where you could literally keep enough concrete on site to safely bury one in the case of a pending meltdown] and take advantage of the Onkalo spent nuclear fuel repository), there’s not much we can do about 2), but there are lots of things we can do about 1). First of all, we can make vehicles with more longevity (better part quality, more rustproof materials, easy part replacement, design for recycling, etc.). Secondly, we can design our batteries for reconditioning and recycling, to minimize the carbon production in the creation of future batteries, to make the next generation of vehicles greener.

But history has taught us no one does the up front research to design for recycling, or invests in recycling without regulation, so any regulation that forces companies to make more sustainable, circular, and safe batteries is not only a good thing, but the necessary first step on the road to truly getting green(er) vehicles.

A Slow Cautious Approach to Pulling Out of China May Be Justified …

… but the justification has NOTHING to do with geopolitical events or economic factors, as suggested by this recent SCMR article. First of all, those are always in flux. Secondly, neither of these factors are the ones that could be limiting your ability to peel out.

There are two primary factors that could be limiting your ability to peel out of China:

  1. available production capability
  2. source material availability

And these are the only factors you should be considering when you are considering how [do] you reconfigure the global supply chain. Because, unless you are selling in Asia, you HAVE to get out of China if you want stable supply streams.

Available Production Capability

First of all, are there alternative near-shore plants? If not, you’re stuck until you (co-)invest in one, get it built, get it up and running, and verify the quality is acceptable. If there are, can they produce the products you need in the quantities you need, or at least a reasonable percentage? If so, are the quality and service levels sufficient. If there are three or more near-shore suppliers that can collectively meet your needs, you shift a considerable amount of your award to them immediately (depending on existing contracts, the time-frames for the suppliers to fully ramp up to support your business, and the time-frames your organization needs to get ready to support the shift) and start the process of shifting all of your award to them.

Source Material Capability

You also have to consider where the raw materials are coming from, and how easy it will be for your suppliers to get sufficient stacks of the materials you need in steady supply. For example, if you need lithium-ion batteries produced by current processes, you need cobalt. 73% of today’s cobalt comes from the Democratic Republic of Cobalt (DRC). The DRC has considerable trade agreements with Qatar. So while the country has bilateral trade agreements with over 50 countries, its relationship with Qatar could cause you problems if you want to use a producer in the middle east NOT in Qatar if another diplomatic crisis (like the one in 2017) arises.

Also, China is the largest producer of grains, gold, coal, rare earth minerals, and two hundred (200) plus other materials, components, and products, so if your production depends on any of these materials, components, or products, you need to make sure your suppliers are located in countries who have good relations with China or have already locked up enough secondary sources to guarantee your product production will be uninterrupted.

That’s it. Yes, you have to consider the economics, because you can’t pay 50% more and not seriously upset (and lose) your (current and potential) customers with the price increase that will result, but with proper investments in new processes, equipment, and talent, costs can be reduced anywhere in the world, and all it will take for the potential supplier to make these investments is enough guaranteed business from you. (So make it so!)