Thursday, September 23, 2010

Early to Bed, Early to Rise, Work Like Hell and....Customize?

An invigorating article on Tuesday about Honda's decision to NOT STANDARDIZE components across global auto models. In a strategy guaranteed to drive procurement puritans to drink, Japan's No.2 automaker will develop unique specifications for each of the seven countries where the next generation of the Fit sub-compact will be built and sold. Honda's purchasing head Masaya Yamashita reveals the primary drivers of the bold new sourcing strategy to be country-specific requirements and new design ideas from local suppliers.

The concept of customizing product specifications to the requirements of unique market segments is not new. The issue has always been how to manage purchasing, manufacturing and supply chain costs while doing so. The argument is that unchecked growth in specification variation works against all the traditional drivers of supply chain cost reduction such as purchasing leverage, inventory investment and set-up cost. So is Honda out to lunch with its sourcing approach for the new Fit? No, the company is just adopting the broader view of total cost of ownership to include the benefits of better tailoring the product to end consumer requirements and also down-specifying certain requirements based on country-specific usage environments.

In addition to just making sense I find the Honda article extraordinarily refreshing. Having been around the supply chain block for a few years now I know only too well how easy it is to regard certain strategies and practices as a perpetually and universally applicable best practice. A paradigm. Like any paradigm it makes you feel safe and comfortable, like you'll always have the answer. Thank you Honda for reminding us that paradigms are there for one reason - to break.

Friday, September 17, 2010

Lessons from the Public Sector

I'd like to welcome back to 1 Procurement Place guest blogger Barnali Dasverma. Barnali is a Manager at Treya Partners and has an interesting point of view about where the private sector can look to learn some lessons about improving the effectiveness and efficiency of procurement processes. Some of you may be surprised by Barnali's viewpoint, but then others may not....

Structure & Discipline in Procurement: What the Private Sector Can Learn from the Public Sector

By Barnali Dasverma
Manager, Treya Partners

“Yikes, what a haphazard sourcing process! You would never see this in the public sector!” Believe it or not, this was an observation I made after beginning my first private sector consulting engagement following a series of public sector clients. I was startled to come to the realization that there’s quite a bit the private sector can learn from the public sector. I’ve subsequently had the opportunity to serve more private sector firms and additional state governments and have had this conclusion reaffirmed. Specifically, my experience suggests there is a remarkable amount of structure and discipline in public sector procurement that many mid-market firms can greatly benefit from.

Bureaucracy Has Its Benefits: Processes

Bureaucracy has its benefits (as a consultant frequently engaged to tackle bureaucratic inefficiency, am I even allowed to say that?) and process standardization is one of them. One key public sector procurement practice the private sector can benefit from is a standardized RFP process. Many mid-market firms with unsophisticated procurement departments have an inconsistent approach to RFPs – each procurement staff member has his or her own RFP style and each procurement is run differently based on who leads it. In contrast, state governments typically have a well-defined multi-step process that everyone must follow, newbies and old-timers alike. If you’re a mid-market CPO working to optimize your procurement operations, begin with putting in place a consistent, best-in-class RFP process. Conduct vendor and industry analysis as a critical first step, call for requirements gathering that includes the alignment of specs with needs, require that all high profile procurements have a pre-proposal conference to obtain supplier feedback early on, have cost and non-cost proposals be scored by different evaluators to facilitate unbiased decision-making, and require that the procurement lead serve as single point of contact to limit the flow of information to suppliers. By formally requiring that all RFPs include best-in-class steps like these, you will ensure that your procurements are consistently exceptional.

This Is How We’ve Always Done It: Templates

While “this is how we’ve always done it” is a frequent refrain in state government and rarely music to a consultant’s ears, there is something to be said for not always reinventing the proverbial wheel. Far too often, we come across fledgling procurement departments in the private sector that whip up a new RFP whenever a procurement need arises, patching together portions of old RFPs to the extent possible, with the end result being a messy, incoherent solicitation document. Significantly, state government procurement departments are quite different in this regard and typically have contract and RFP templates (“boilerplates,” as they are often called) that all contracting officers must use. A powerful way to increase the efficiency and consistency of an unseasoned procurement team is to invest the time and effort in developing best-in-class templates for RFPs, RFIs, contracts (including standard terms and conditions that have been approved by your legal department), negotiation materials, and the like. Design the templates with usability in mind, carefully noting which portions must be tailored for each new procurement and which ones can be leveraged with little to no tweaks.

You Can’t Break the Rules Without Having Any: Policies

While procurement rules and regulations are sometimes followed blindly in government when they should in fact be challenged, they serve a valuable purpose and many private sector entities can benefit from them. Specifically, well-defined, and clearly communicated (and needless to say, best-in-class) procurement policies help minimize the gap between the CFO/CPO-level vision and the operational reality. For example, procurement policies defining delegation thresholds ensure that procurement staff members’ limited time is not spent on low-dollar value procurements, while requirements that procurement be involved in all RFPs of a certain contract value make sure that an organization reaps the benefits of having a high level of spend under management (e.g. application of strategic sourcing techniques to a broad range of spend categories, monitoring of supplier performance and internal contract utilization, etc.)

Who Knew? The Public Sector Can Teach the Private Sector A Thing Or Two

Having served as a consultant to six different state governments, I can tell you there are numerous ways in which the public sector can learn from the private sector – but that said, my experiences as a procurement consultant have taught me that it’s a two way street. Without a doubt, the structure and discipline we find in state government procurement is most certainly something that many of our mid-market clients can use.

Saturday, August 21, 2010

Trial by Tabloid in Motor City

The Detroit News reported recently how the city's Chief Procurement Officer Andre DuPerry is looking to shake up Motown purchasing by re-examining the preferences Detroit businesses are given during the contract process. DuPerry, appointed by Mayor Dave Bing in December 2009, believes the city could save $22M a year by addressing Detroit's dependence on local third-party companies that charge inflated rates. Two small distributors, T&N Services and Hercules, receive particularly harsh treatment in the article for selling the city everything from office supplies to toilet paper to cleaning services at apparently outrageous markups. T&N CEO Tyrone Talifer understandably defends his company's position, citing as an example the taxes paid by his employees that flow back into the city's coffers.

I have to admit my very first take on reading this article was "go get 'em Andre!" but on reflection I would say T&N and Hercules get shabby treatment in the piece. Can they really be blamed for selling products and services at prices that the market will bear? Is it their fault they've been given the opportunity to operate in an industry structure with weaker competitive forces than those faced by my daughter's lemonade stand? Of course not. The primary driver of the margin extracted by both companies is the local vendor preference policy set in the city's purchasing ordinances. The "felon caught in the flashbulb glare" picture of Hercules President Belinda Jefferson is tawdry journalism, disrespectful of all small business owners who navigate the unpredictably contoured landscape of the monthly cash flow statement.

Now, do I have any problem with DuPerry seeking to drop strategic sourcing depth charges into the still, glassy waters of Detroit's overprotected contracting environment? Heck no! Go for it Andre! The sky high prices paid by Motor City's government typify public sector contracting policies where the protectionism dial's needle has swung way into the red. By all means, get some contracting best practices in place to make the government's scarce budget dollars go further. Leverage the total city spend with national suppliers, negotiate aggressive volume-based discounts & rebates, and implement compliance management measures to ensure government departments use the new agreements. Oh and guess what? It will actually be possible to maintain a targeted level of spend with your city's local suppliers by either setting aside a (sensible) portion of annual requirements for SWMBE vendors and/or requiring that the national providers subcontract a minimum percentage of annual requirements to SWMBE (I'd recommend a combination of both). And with the improved reporting available from today's electronic procurement and contract management systems it will be easy to validate that the big guys are actually fulfilling their contractually committed obligations to Detroit area businesses.

So to repeat, I have no beef with CPO DuPerry setting about his business as city procurement tsar and mending broken public sourcing practices. My only beef is with those who place blame at the feet of the benefactors of these broken sourcing practices.

So Motown, go get the savings dollars and squeeze those markups! Protect local area businesses through best practice strategies such as minimum SWMBE quotas and setting and enforcement of SWMBE subcontracting targets with national suppliers. And T&N and Hercules - get ready for real competition that will initially hit your bottom line but in the long run will transform the efficiency of your operations and create real value for you going forward. And to those media commentators looking for the easy sound bite, show a little respect for those industry participants making hay while the sun shines. As far as the economy is concerned it's like living in New England - enjoy the weather now but wait around another 15 minutes and you'll be scrambling for your coat and umbrella.

Monday, August 9, 2010

The Art of Clanger Avoidance

If you're a consultant - or you've hired consultants - you've probably heard the expression "nobody ever got fired for hiring the Big 6". The idea is that if a big name consulting firm drops a clanger on a client engagement then the person responsible for bringing them in can't really be blamed because I mean, how often do these guys screw up? We must just be unlucky! If a boutique is selected however and something blows up then the hiring individual is likely to be tarred and feathered for leaving the company's valuables in the care of a bunch of fly-by-nights who obviously didn't know their pivot tables from their pyramid principles. Interestingly I was speaking to a grad school buddy of mine just last week who recently left one of the big firms (to go open a beach bar, go figure...attaboy!). He was telling me how a few weeks before he left, he was part of a large team helping a software company shorten their product development cycle, respond quicker to changes in customer needs, and generally become more nimble in the marketplace . To cut a long story short the client ended up firing my friend's firm because they weren't able to respond quickly enough to issues that arose during the project and changes in direction the client wanted to make in scope and approach to address these issues. I thought this ironic (and not a little funny) since the firm had obviously sold itself as being able to help this client turn, spin and triple flip on every dime that came its way. Should they have considered a smaller consulting firm that was more likely to be eating its own dog food when it came to nimbleness and flexibility? Or did that seem too far to extend the neck when the comfy cushions of big firm security were within easy reach? Who knows, sometimes it's not that simple. There are certainly plenty of examples out there of big firms that have successfully oared their clients through rapidly changing currents. It does make me think though that companies looking to hire consultants for engagements that intrinsically are most likely to encounter unexpected pockets of mid-air turbulence should apply considerable weight to evaluating the candidates' abilities to guide their clients through a project's occasional bumpy moments to a smooth landing. Lengthy chain linked methodologies are the ones I've seen most often get wrapped around the axle of a less than smoothly unfolding project work plan. Look for pragmatism, flexibility, a willingness to reconsider the last few steps taken and adjust course if some new data suggests that might be the wisest move. Worried about that small firm risk? Ask for a few more references than you would the big guys to quiet your concerns. Unless of course those Big 6 cushions are looking too comfy....Hey, you want an easy life? I know a beach bar owner who needs a partner....

Tuesday, July 20, 2010

Plane Wrong

"You don't own that plane, the tax payers do!"
- Top Gun, 1986

In his Toronto Star piece $16 billion for the wrong planes Michael Byers writes how the Canadian government last week sole sourced 65 F-35 fighter jets from Lockheed Martin at $135 million per plane, avoiding a tender process that would have drawn bids from other domestic and foreign companies including Boeing, Eurofighter and Saab. The sole source decision was justified on the basis of what Byers describes as "ridiculously narrow operational requirements" based not on Canada's unique air defense procurement needs but on "...instructions from the Pentagon". In addition to his general argument that the sole source decision has resulted in Canada's taxpayers paying too much money for the wrong aircraft Byers also makes the point that some of the $16 billion could have been invested in other high need areas such high speed rail for the Toronto-Montreal-Ottawa corridor.

Michael obviously feels strongly about this issue and I can see why. It's a classic example of public sector procurement decisions being made wholly on political rather than technical or commercial considerations. But let's check our naivety at the door for a moment and smell the coffee while we're at it - the fact of the matter is that the US and Canadian aerospace industries are joined at the hip AND the wallet. The two countries represent over 50% of each other's aviation exports and imports so to all intents and purposes their aerospace companies conduct business and catch each other's colds as if under one flag. Consequently major equipment buying decisions are going to be inextricably linked to the impact of that decision on one or both of the two countries' aerospace industries. Were Canada to opt for Europe's Typhoon this would not only take a lead pipe to Lockheed Martin's knees but would severely wind a large number of the US defense contractor's Canadian supply base at the same time. So it's the F-35 boys! Even if it does mean running on fumes over the Arctic, tearfully fingering the family photo tucked into your cockpit windshield frame while a Hercules mid-air refueling tanker attempts to cover the 2000-odd miles from Vancouver before your nifty but short range jet runs out of gas over that rather uninviting ice flow below.

So what's a sourcing idealist to do? Well, start by realizing there are going to be times when political or other equally unsavory decision criteria trump your carefully constructed total cost of ownership evaluation model and MOVE ON. Next, introduce some best practice supply risk management principles to counter the impact of the award decision from hell. In the case of the F-35, for example, the Canadian Air Force could implement modified operating procedures to ensure that the shorter range aircraft always operates within a safe distance of mid-air refueling capability. Additionally the plane's range could be extended by retrofit mods such as external fuels tanks, lighter weapons packs, or other configuration modifications that in some cases will produce performance tradeoffs but that will ultimately serve to mitigate the negative impact of the original, technically flawed, sourcing decision.

Whether buying planes or pencils there will be times when the procurement professional's best laid sourcing plans run foul of political exigency or special interests. Don't cry over your spreadsheets at times like these but show the talking suits the right stuff you're made of. Whip out that risk mitigation plan. Look for ways to shield your internal customers from the potential fallout of a bad sourcing decision through outstanding supplier management.

And always carry an extra tank.

Monday, June 7, 2010

Relax? Don't Do It for Competitive Advantage

In the 1982 Boston Marathon, world record holder Alberto Salazar outsprinted fellow American Dick Beardsley to win the "Duel in the Sun", one of the most memorable races in marathon history. Interviewed years later Beardsley said his undoing had been "taking a breather" immediately after he and Salazar had negotiated notorious Heartbreak Hill, the last of the four Newton hills just four miles from the finish of the grueling Boston course. Beardsley recounted how he glanced to his side as the two men crested Heartbreak and saw his rival coasting down the hill, obviously recovering after the tortuous climb through Newton. Beardsley likewise "eased off the gas" in his words until the two men reached the bottom of the grade. At that point both runners kicked up the pace and began the frenetic two mile sprint through downtown Boston that culminated in Salazar pipping Beardsley at the tape in Copley Square. In his interview Beardsley told how in hindsight he should not have relaxed after scaling Heartbreak Hill but should have kept his "foot on the pedal". By doing this Beardsley believed he would have built an unassailable lead on Salazar and would have won the duel in the sun.

Would history have been different if Beardsley had kept his foot on the gas? We'll never know. It does however conjure up an interesting parallel with today's economic landscape and, specifically, the reactions of different business organizations to changes in this landscape. For example, throughout this most recent economic downturn supply chain executives in private sector companies have faced tremendous pressures to protect profits in the face of falling sales through the aggressive pursuit of reductions in all supply chain-related costs. In the public sector it has been a similar story as state governments, faced by steeply declining tax revenues, have needed to drastically curtail expenditures on many state programs. During this period numerous supply chain organizations have delivered outstanding cost savings results that have helped companies stay profitable and states avoid the need to eliminate many essential government services. These success stories have been due to the effective implementation of a broad range of supply chain best practices including strategic sourcing, demand management, and process improvement to name just a few.

As we emerge from this recession and rebounding customer demand eases margin concerns it would be natural to assume that organizations could safely "ease back" on the cost reduction pedal (just as Beardsley did after Heartbreak Hill) and redirect effort towards the customer-facing activities that impact quality and service. Companies making this assumption, however, may be missing a golden opportunity to achieve unassailable competitive advantage over their competitors. By continuing to apply cost management best practices during economic growth periods a company could potentially accelerate away from its competition in terms of operating margin performance. The company with superior operating margin will, through its increased contribution to retained earnings, be able to invest a greater proportion of its revenue in product development activities. Since product development dollars as a percent of sales is a metric that has been empirically associated with share and profitability growth, any strategy that accelerates a company's operating margin advantage relative to its competitors will also accelerate its overall competitive advantage in the marketplace. By keeping firm post-recession pressure on the cost management pedal an organization gives itself an excellent chance to build a healthy lead over its less enlightened competitors in all key areas of strategic, operational and financial performance.

Likewise, public sector entities can also enjoy the benefits afforded by a continued focus on cost management in the post-recessionary period. State governments with procurement departments that maintain a strong strategic sourcing focus, for example, will be able to do "more with less" and expand the reach and effectiveness of their current programs and services without the need to automatically increase tax revenues.

Just as Dick Beardsley can never be certain that doing things differently would have secured him the Boston Marathon in '82, no company can take any business strategy to the bank until events have played out. Numerous other bumps in the road can rise up and unseat the surest rider. But by placing bets on strategies that have empirically yielded superior returns - and those based on maximizing product development investment fall into this category - you will undeniably reduce the probability of ever having to look back and regret your own lost duel in the sun.

Sunday, May 23, 2010

No Baseline? The Joke's On You.

A consultant walks into a store and asks the clerk "I need to buy a sourcing project for my client please".

"Certainly sir" replies the clerk, "do you need a low, medium or high complexity project?"

"A medium one please" the consultant replies.

"You're in luck, we have one medium project left. It'll do most indirect categories plus a few direct ones as well. Includes a project manager with minimum five years experience plus all the usual tools, templates and work products. "

"Sounds perfect - how much?" the consultant asked.

"Fifty thousand plus tax" the clerk replied, "not including baseline."

"Baseline?" the consultant queried, looking puzzled, "what's that?"

"You'll need it to measure your savings" the clerk answered, "most customers are asking for that these days."

"Hmm, well how much extra is the baseline?

"Another eight thousand, sir"

The consultant thought about it a moment then shook his head. "No it's okay I'll pass. Just the project, please."

"Are you sure, sir?' the clerk challenged, "you won't know what your savings are".

"It's okay" the consultant smiled back, "when I've completed the sourcing I'll present a fact-based case to the client and we'll mutually agree on the savings that I've created."

"And that actually works does it, sir?"

"I'm sorry?" the consultant responded, affronted by the clerk's gall. "What do you mean?"

"Pardon me, sir" the clerk quickly replied, "no offense, but do you always end up capturing credit for exactly 100% of the savings you believe you have created?"

"Well of course not. As I said, I mutually agree on the savings with my client"

"I see. Do you mind if I ask you a question, sir?

"Sure, go ahead." The consultant could see where this was going. This kid was pulling out all the stops trying to sell him this baseline thing. He'd probably be telling him these sourcing projects weren't made like they used to be. That they'd fall apart in the first couple of months without a baseline. He decided to do the decent thing and let the clerk deliver his scripted lines.

"How much savings did you create in your last sourcing project?"

"That's easy. I saved 14% on ten million dollars of small parcel freight."

"And was this a benefits-funded engagement, sir?" the clerk asked further.

"Well yes it was, actually" the consultant answered, adding with pride, "I invoiced for 25% of the savings. A cool $350,000."

"Nice, sir." the clerk congratulated, "and the 14% was the mutually agreed savings amount was it?"

"Well yes, of course" the consultant confirmed, "like I said before, I presented a fact-based case at the end of the project and after going over the numbers we agreed on the 14%."

"If I may ask, sir" the clerk ventured, "what savings number did you originally present to you client prior to the, um, mutual agreement?"

The consultant fell silent a moment, surprised by the clerk's question. Where was he going with this? Deciding to go with the flow he replied truthfully "I originally presented 21% savings to the client. But that's irrelevant. I knew I'd have to negotiate a bit with him to settle on a number we both agreed on."

"Sir, would you mind if I asked you two more questions before you make a final decision on buying the baseline?" the clerk asked.

"Oh sure, go ahead" the consultantreplied. "What can it hurt?" He just wanted to get out of here with his sourcing project. This guy was starting to sound a bit too much like the Best Buy checkout clerk who holds you hostage until you agree to buy the extended warranty on your x-box.

"Firstly, would you consider a $175,000 return on a $8,000 investment a good ROI?"

"Well, of course!" the consultant answered easily, but somewhat warily. For some reason he suddenly felt like a helpless jungle-living insect about to get lured into a huge spiders web on one of those Sunday evening shows on Discovery Channel.

"Excellent. So my last question relates to the project you described, sir. Specifically to the original savings number you presented to your client."

"Okay - what is it? What's the last question?" Enough already, thought the consultant. I ain't no celebrity but get me out of here anyway.

"Do you think you were right?"

Sunday, May 9, 2010

Easy Answers R Us?

About the time Pearl Jam's Vitalogy was rocking my world, my first boss in consulting was telling me there were two things I should never be afraid of telling my client. The first was "I don't know" and the second was "It depends". When Mike gifted me this sage advice I could never have guessed how frequently these mini-mantras would be tripping off my tongue in the years ahead.

Most recently a company asked me to box up and tie a ribbon around the question of which spend categories are being outsourced today. It's a fair question, right? After all, if I could tell them the answer they could start outsourcing those very categories first thing on Monday morning couldn't they? Unfortunately I had to play party pooper, press the play button on "It Depends" and experience the palpable feeling of disappointment and frustration as eyes rolled upwards and exasperated sighs coursed through the conference room.

Why "It Depends" in this case? Well, I agree there are certainly some broad criteria regarding outsourcing decision making like whether or not a category is core to the business and whether or not an external provider can provide ready access to superior domain expertise or buying leverage. The complexity is that the answers to these questions tend to be very specific to a company's unique situation meaning that one generic sound bite of an answer is not available without understanding more about the company's procurement environment. Like what is your spend by category? Where are your pockets of sourcing excellence? Where are your gaps? For example, a VP of Indirect Procurement told me recently how he had hired a Director of Strategic Sourcing who had previously worked as a benefits consultant. This proved of high value when it came to sourcing health benefits, even though the new Director's responsibilities included a broad range of indirect categories. Would this VP have gone out to hire a full-time commodity manager to source only benefits? Unlikely. Would he have outsourced? More likely in this case. The correct decision for this VP really did depend on the unique skill set available in his current team, not on some industry trend or best practice.

So the next time you're called on to provide the easy answer for a grail-seeking customer in a data-poor setting take a deep breath and make absolutely sure you have all the needed facts at hand. If not, then it must be "It Depends". You might not make friends at that moment for sure. But in the long run you're more likely to earn an invitation to return at a later date and find the answers they really need.

Monday, March 22, 2010

Travel – Do I Have To??

This is nice...yet another guest blogger is about to make their debut on 1 Procurement Place! This time it's the turn of Lisa Hurst. Lisa has worked in the travel procurement field as both practitioner and consultant for quite a few years and, having worked with her personally, I can certainly say she knows her stuff. Lisa possesses an innovative, humorous and insightful take on this often challenging area for procurement professionals. I hope you'll enjoy the first of several posts from Lisa on this oh so sacred cow spend category....

Do you travel much? If you do, then you'd probably rather not. I used to love to travel. At the age of 5 I started flying from San Diego to Chicago every summer to visit my grandmother. I would get so excited as travel day approached and when the day of the trip arrived I would get dressed up in my Sunday best - hat, gloves, the whole enchilada. Now when I travel I have a special outfit made for comfort and minimal stripping - a sweat suit.

My grandmother was complaining recently that people don’t get dressed up any more to fly like they used to. Of course she hasn’t flown in over ten years so I had to explain the new landscape: first you book a trip online because if you want to speak with someone it will cost you at least $5; then you need to print your boarding pass at least two hours prior to your flight or the ticket you paid for will be sold again, with no refund to you; then when you get to the airport you have to wait in a mile-long line, unpack half your bag (you don’t dare check one as it adds another $50 to the trip), pack your toiletries into 4 ounce bottles and make sure it all fits into a quart bag, strip off half your clothes (for which I always felt I should get at least $1 per item), take your shoes off, then pray as you walk through the metal detector that you did not forget a quarter or learn the hard way that the silver bracelet you received as a gift is really plated. I could go on but you get the idea....

I’ve heard it over and over again that travel procurement is easy. Really? I’ve been doing it for years and have yet to find someone who understands all the intricacies and complexities. What I have learnt is that one of the best defenses in controlling travel expense is to have a policy in place that is mandated. If the policy is not enforced then you can kiss your opportunity for control and savings goodbye.

Another learning is that prior to creating your policy you first need to make hundreds of decisions! Starting with do you have the volume for an onsite agent? Should you use a brick and mortar agency or an online booking provider? Will the agency option you select allow your company the authority and ability to enforce travel policies for everyone?

When you've made your agency decision you have the complexity of selecting and negotiating with your preferred travel providers. Does your airline volume warrant a front end discount or a backend program? For hotels do you have enough volume to negotiate a chain wide discount or do you go with your agency’s discount options? Then it's on to the car rental companies and negotiating best possible rates for your company's main business travel locations. And this is just the top of the iceberg. You now need to deal with all the minutiae that can really escalate your costs if you do not address them and put all the necessary controls in place. With airlines you need to determine your stance on checked bags, pillows and blanket fees, eligible reasons for changing/cancelling a ticket, and dealing with business and personal air travel expenses. What standard of hotel will you allow your employees to stay in - Luxury/resort? High end? Mid/low? Will you require that the hotel needs to include free parking, breakfast and shuttle? And car rentals are really getting out of control with all the taxes imposed at airport pickups. Will you require off airport rentals to save costs? Can employees rent GPS? And what about those last minute dashes to the airport that result in refueling charges?

Oh and let's not forget the white elephant in the room….yes, many travelers have their own personal preferences for the airline, hotel and car rental agencies they use based on their status and the personal perks they receive from using those providers! So should you decide not to mandate travel policy and/or hold travelers accountable for complying with them then you can watch your company's travel costs sky rocket as employees make the rational choices that personally benefit them most.

Well…I’m off to find that sweat suit and my quart size toiletry bag! Wish me luck and safe travels to you!

Sunday, March 21, 2010

Letting Others Take Out the Trash: Punting the Small Stuff to Prioritize High Impact Sourcing Initiatives

Today it gives me great pleasure to welcome guest blogger Barnali Dasverma to 1 Procurement Place. Barnali is a Manager with Treya Partners and an acccomplished consultant and thought leader in the procurement field. She is also a candid and entertaining writer which is why I have been looking forward to her debut on 1PP for some time. Today Barnali delivers an insightful analysis of one of Procurement's greatest challenges in delivering value - how to avoid speading oneself so thin that one struggles to deliver value at all.....I'll let her explain....

Taking Out the Trash with a Smile

“If a business owner asks Procurement to take out the trash, we have to do it with a smile" were the words spoken by the CPO of a $3 billion national retailer and a past client of mine. This Procurement executive felt strongly that his department could not say “no” to stakeholders in his company. His organization gave a project with a $200K savings potential equal priority to another project capable of delivering $5 million, and staff were expected to dedicate similar levels of effort to both. In the quest to gain the trust, respect, and support of stakeholders - crucial for a procurement department to be effective - an overarching priority on customer service can sometimes compromise the pursuit of high-impact sourcing initiatives than could save millions for corporations and state governments. This needn’t be the case.

Learning How to Say No to the Small Stuff

In the six years I have spent as a spend management consultant, an inability to “say no to the small stuff” is something I have encountered repeatedly, both in the public and private sectors. Procurement organizations are often so dedicated to serving their internal customers that they spend far too much of their time and energy on low dollar value procurements and far too little time on high value, strategic sourcing initiatives with significant cost reduction potential. Unfortunately, there are only so many hours in the day, and if we don’t learn how to say no to the small stuff, we’ll never have enough time to dedicate to the "big stuff" projects that ultimately will have the most significant financial, operational, and strategic impact.

Punting Gently

So, am I advocating a war on drugs style “just say no” campaign? Of course not – I’ve been a sourcing geek far too long to promote such a simplistic, unrealistic solution. However, I do have a few ideas I’d like to share on how to punt the small stuff gently. First, begin by defining contract value thresholds at which your procurement department must get involved – delegate contracts below a defined dollar value, say $50K or less, to business owners in corporations or state agency personnel in the public sector. You’ll be surprised to find that in some cases, those internal customers are happy to handle the small stuff on their own – they may have been pulling in Procurement because they thought they were obligated to. In other cases, you may encounter some initial consternation that can be addressed by gradually weaning your internal customers off of Procurement.

Weaning Internal Customers off Procurement

Before embarking on the weaning process, create guidelines and templates to support your internal customers so they can get the guidance they need as they take ownership of low dollar value procurements. Develop a step-by-step guide to simple procurements that colleagues in other departments or agencies can use as a reference, and include basic advice like:

• “Request bids in the same format from at least 3 vendors”

• “Be sure to tie future price increases to the Consumer Price Index”

• “Include a travel expense cap on all professional services contracts”

• “Make sure the contract doesn’t include an automatic renewal clause”

In parallel, develop contract templates tailored to key purchasing areas (e.g. commodities, professional services, IT) and get these templates pre-approved by your legal department. Now consolidate your newly defined procurement policies, guides, and templates into an easy to understand toolkit that explains the rationale for the new approach - that procurement’s resources are limited and need to be prioritized on the highest value opportunities for the organization - but that clearly conveys Procurement will still be there to support business owners. Emphasize that while business owners will be expected to take ownership of low dollar value procurements going forward, procurement staff remain available for consultation and will be happy to provide coaching and guidance. Consider holding a “road show” within your company to personally communicate Procurement’s new approach and the reasons behind it.

Tracking Transformation & Focusing on Savings with a Smile

Ultimately, recognize that your procurement department can’t decline all the small stuff, but aim to have your staff spending at least 80% of their time working on high impact strategic sourcing initiatives – and most importantly, track this carefully to make sure it actually happens. Have each and every member of your team track their hours for the first six months after you implement your “punt the small stuff” efforts. Then, check in with each team member each month to understand what percentage of his or her hours is being spent on low and high value procurements, respectively. While you can’t get to your ideal 80/20 mix overnight, you should see consistent progress over time. By the time month six rolls around, any CPO who has embarked on this journey should be able to say, “Our procurement department has made it so easy for business owners to take out their own trash that they would never bother asking us to do it. Instead, we’re able to focus on creating substantial, hard-dollar savings - with a smile.”

Saturday, February 20, 2010

Strategy Matters - Sometimes

In one of his Friday Rants over on SpendMatters, Jason Busch talks to "What's Holding Ariba Back" in the area of sourcing services. Jason argues, supported by a number of current and past Ariba employees, that one of the most vexing challenges faced by the company as it seeks increased market penetration of its services offerings is a need for the company "to be more deliberate and explicit about what the (sourcing) services strategy is". Now, before ranting a little bit myself on this subject I would make the point that the challenges faced by Ariba in this regard are not unique to the Sunnyvale outfit. Whether you are an Ariba, an Accenture, an ICG or a boutique the sourcing services market (nay in fact most of the consulting services market) is a prickly beast to engage these days, a far cry from the fading light of the last century when a powerpoint and a smile would often have the buyer's pen gliding across your arrangement letter. A decade on we're all learning that not only will customers sometimes refuse to come to what you've built but when they do saunter over to take a look at the purty invention shining under your shingle they often as not want to dismantle it and take only the parts that catch their eye.

So to Ariba. Obviously I am not privy to Ariba's current internal methodologies for incorporating the voice of the customer but from my vantage point the core competency that served the company so well in the early Ariba Buyer days has been conspicuously absent in the go-to-market approach for their sourcing services. I remember being in the audience at the Fairmont Hotel in 1998 when Chevron spoke at one of Ariba's early customer summits about having selected Buyer based on its having been designed "from the ground up by the customer". Chevron talked about Ariba visiting their offices and listening intently to what they wanted from an automated purchasing system. They told of Ariba re-visiting them repeatedly to double-check what they heard. It was no surprise that in the ensuing bakeoffs with CommerceOne and others it was the Ariba product that looked closest to what Chevron actually needed. The rest is B2B history.

If they're not doing it already Ariba - no wait, Ariba and the rest of us PSPs - should sit our folks in front of the procurement practitioner community and, well, listen. We might find that procurement departments actually have an inconveniently messy patchwork of sourcing services support needs that are excitingly vast here ("please take on responsibility for sourcing all of my IT spend"), frustrating uneven there ("we have a few gaps you can fill"), and definitively unappealing in many other places ("we actually break out MRO into 17 sub-categories, perhaps you could take these 3"). We may also find that one procurement department's messy patchwork looks nothing like that of another. All this will likely mean that there is in fact no all-singing all-dancing sourcing services model that will fit a single customer living in the real world today. And perhaps that's the true crux of the matter, that the search for a deliberate and explicit strategy for meeting a customer's sourcing needs is fruitless. It turns out that customers aren't the least bit interested in your latest services delivery model, they just want value. And it's a pain in the royal neck I know, but the sourcing value needs of different companies are like cabbage patch dolls - there ain't a single one of them that looks the same. This means that a service provider's strategy must morph from customer to customer with the only important question being "do I have the right strategy for this particular customer?".

Until the day that Ariba and every other sourcing services provider can be content with not knowing the answer until the customer has provided it the sourcing services world will be a very frustrating place for those who build.

Friday, January 29, 2010

How to Get Away with Almost Anything, and While People are Looking Too - the Power of Brand Capital

This is a momentous occasion - my first blog post from the air. Taking advantage of VirginAmerica's inflight wi-fi I am penning this missive from seat 23C on Flight 411 from JFK to LAX. Why you might ask? Well for a start to take my mind off the non-stop turbulence we've been suffering since we left New York. (Ooops - upchuck). Secondly because this flight and this airline bring to mind a seldom discussed aspect of procurement, that of brand capital.

When I walk off this plane tonight at LAX (oh speed ye to me thy blessed moment! Ooops - upchuck) I will be one green and weary traveller but my love of flying VirginAmerica will be undiminished. Why? Because for me VirginAmerica possesses significant brand capital. Brand capital, that "feel good" factor for a company's products that allows buyers to forgive the occasional bad experience, causes me to ignore this isolated nightmare because of all of the other delightful experiences I've had flying this airline.

Brand capital is a powerful value lever both to suppliers and to the Procurement organizations that select them. If you are a supplier that consistently exceeds all your service level metrics then your resulting brand capital will prove invaluable when life's occasional slippery spot causes you, your coke and your large popcorn to careen headfirst into your customer's lap. They'll laugh, pick you up and dust you off because they know it's a very rare incident in a Titanic-length success story.

Similarly if you are a Procurement Department that proactively sets out to select and develop suppliers that consistently exceed internal customer expectations then you will develop brand capital with these same internal customers yourself. An example of this is a client of mine that places over 80% of its commercial print spend with one supplier. This supplier has consistently exceeded all minimum required performance metrics for quality, delivery and service since it was selected through strategic sourcing by my client's Procurement Department four years ago.

The one potential blight on this supplier's copybook during this run of excellence occurred during 2008 when prices of some paper grades rose by more than 30%. As you can imagine this printer had to pass on some fairly significant cost increases to my client during this period, even though my client's Procurement Department had negotiated best practice caps and collars on allowable percentage price increases. Despite the stinging blow to my client's print budget the print supplier was not tarred, feathered and duct taped to the front railings. No, the supplier enjoyed brand capital and thus was held blameless for market prices increases over which it had no control (and there lies another lesson - without brand capital you often will be blamed for events outside of your control).

Further, in addition to the print supplier enjoying brand capital directly from its performance my client's Procurement Department built its own brand capital (in this case with the Marketing Department, the main consumer of commercial print) by selecting the supplier in the first place and doing it in a way that clearly placed appropriately high weight on non-cost factors. This would make it considerably easier for Procurement to broach the subject of cost reductions with Marketing in the future because Marketing would know from experience that its quality and service needs would not be ignored in the quest for improved bottom line performance.

So whether you are a supplier or a buyer, I recommend that you proactively work on building the highest possible levels of brand capital with your respective customers. Come on - at least put as much effort into it as you do to maximize your frequent flyer miles or your Starwood points! Be warned - when your brand capital balance gets low and the sky falls you risk the buck not only stopping with you but it being super-glued to your desk.

And VirginAmerica Flight 411? No turbulence for an hour...but here come the Rockies. (Ooops - upchuck). No worries, Mr. Branson - you got brand!

Monday, January 4, 2010

A Penny Avoided Is A Penny.....Nah

There's been some good discussion over in the LinkedIn groups recently about the definitions of "Cost Savings" and "Cost Avoidance". Never one to shy from controversy I thought I'd throw my own ten pence in on this since this is an area where it seems very few parties see things exactly the same way.

In my wanderings through the procurement landscape over the years I've seen many tens of different definitions of cost savings and cost avoidance but if I had to choose the most USEFUL definitions (note, not necessarily the most popular) in my opinion they would be:

COST SAVINGS are achieved when the cost of purchasing the same quantity of a good or service falls, e.g. achieving a reduction in the dollar cost of procuring the same market basket of commercial print by leveraging spend with fewer suppliers (note: some definitions would allow specification optimization in addition to simple price reduction such as substituting a different substrate for a printed sign; the total quantity of items purchased however would however remain the same).

COST AVOIDANCE is achieved when an unavoidable increase in the cost of purchasing the same quantity of a good or service is not completely eliminated but is partially offset, e.g. in the period 2007-2008 when paper prices rose by more than 20-30% or more depending on the grade it was impossible to avoid an increase in the cost of most commercial print items but by employing the same procurement best practices as above the cost increase percentage could at least be kept in the low single digits.

My opinion is that these definitions are most useful because they allow the positive outcomes of best practice procurement strategies to be unambiguously and fairly evaluated in both deflationary and inflationary environments. They also allow the CFO and his team to quantify the budget impact in both cases.

But what about goods and services with no previous purchasing history (i.e. no baseline) that are often thrown automatically into the cost avoidance category? I would argue that for these situations it is COST SAVINGS that is most appropriate. Why? Well, in fact you actually CAN establish a baseline for a new purchase by issuing an RFI/test bid to a group of suppliers (making it clear to the suppliers that you are conducting an exploratory evaluation for the purchase in question). The preliminary pricing thus obtained from the RFI effectively forms a baseline (think of it as a "RFI Baseline" for products without a purchasing history) against which to measure the cost savings from the ensuing RFP process. Using the "RFI Baseline" approach for new products allows measurement of RFP-created savings and also (from the CFO point of view) allows aggressive budget targets to be set for products that would previously have been given more "fat" due to their lack of purchasing history.

Oh, and one more using the RFI Baseline approach for new purchases some end user departments that have historically been responsible for high volumes of "non-baselineable" spend (e.g. travel and meetings, some marketing areas) would be held to tighter criteria of effective buying. By having to conduct RFIs and/or test bids they would alert their vendor base to a forthcoming competitive process and the expectation that likely double digit cost reductions would be expected when the actual RFP hits the streets.

There, that feels better...nothing like starting off the New Year by upsetting multiple constituencies of purchasing terminology idealists, sacred cow internal departments and hitherto unchallenged suppliers of previously unsourced spend!