tag:blogger.com,1999:blog-54310453197500711482024-02-08T10:15:31.298-08:001 Procurement PlaceMark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.comBlogger44125tag:blogger.com,1999:blog-5431045319750071148.post-54911586837301708862012-02-05T11:58:00.000-08:002012-02-05T21:21:35.723-08:00These Are Not The Fees You're Looking Forby Mark Usher, Partner, Treya Partners<br />
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There's been a joke going around for a while now that some of you may have heard already. It goes:<br />
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Question: "When are consultants not consultants?"<br />
Answer: "When they're hired by Thames Water."<br />
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Referring to the <a href="http://www.supplymanagement.com/news/2011/efficio-wins-five-year-procurement-deal-at-thames-water/">outsourcing deal won by Efficio last year to manage $500M of the British water utility's procurement spend</a> the joke is at the expense of Thames procurement head Simon Rutter. Rutter's detractors - and there's been a few of them - criticize him for not knowing the difference between outsourcing and a 5-year consulting engagement. Hmm, now I don't know the specifics of the Efficio agreement but neither does anyone except Thames and Efficio (Thames Water is a private sector company so doesn't have to make it's vendor contracts public) and that's why I think Rutter's critics are at best presumptuous and at worst disrespectful to assume he's been Jedi mind-tricked into gifting the procurement consultancy with a multi-year time and materials goldmine. Having structured some (admittedly smaller scale!) projects in the last few years existing in that neutral zone between outsourcing and consulting I and the customers in question have come to realize that several approaches are available to ensure such arrangements are genuinely mutually beneficial. For example it clearly doesn't make sense to pay a consultant $200/hour for 40 hours a week for five years to do the job a company employee would have done for $100K/year no matter how skilled the consultant. It doesn't compute. What you have to do is pay the consultant a significantly lower rate but top it up with bonus compensation tied to some form of created value that can be measured, like perhaps contract price reduction through sourcing. Smart customers will also cap the bonus pay at levels that provide incentive but don't end up paying the consultant five times what you would have paid them under a fixed cost structure. <br />
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And what about the seemingly interminable length of some of these deals? From the press release soundbites it would seem an Alpha Centauri round-trip could be completed before Efficio and others relinquished their sweaty grips on the procurement throttle of those who would outsource it all. Well even here there's a route to sanity. It comes by way of a telling little term spilled by Simon Rutter but ignored by those who assume the man with responsibility for leading the procurement function of the UK's largest water utility knows only how to throw a heavy set of keys over a high wall. In Supply Management this week <a href="http://www.supplymanagement.com/news/2011/efficio-wins-five-year-procurement-deal-at-thames-water/">Rutter spoke of having consultancy capability on tap</a>. What he probably meant was that one condition of the deal with Efficio was that he have the flexibility to turn that tap off if and when the situation warranted. This is another lesson I've learned working with companies looking to augment their organizations with external resources, that is that they want to take advantage of the variable cost feature of outsourcing. What's the point of having experts on tap if you can't turn the tap off? <i>I'm flooded with consultants here people!</i> Of course you should give the provider a fair notice period that you intend to downsize (or even terminate) the support - say at least 90 days if the services firm has to restaff 15-20 consultants - but at the end of the day the customer must have the flexibility to offload cost structure in response to the market. <br />
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So, again, I know no details of the deal in question other than what has been released into the public domain but I would be most surprised had Mr. Rutter not built some common sense language into his outsourcing contract to prevent it becoming the gift that keeps on giving for Efficio. If not then I suspect the time may come at some point in the future when it'll be all hands on deck trying to turn off those taps at Clearwater Court.Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0tag:blogger.com,1999:blog-5431045319750071148.post-26921479179536552752012-01-15T14:13:00.000-08:002012-01-16T09:42:15.605-08:00Calling Time on Freight Pass-Through Profits: How to Unlock Savings from Inbound Shipping Costs<div class="MsoNormal" style="text-align: justify;"></div><div class="MsoNormal"><span style="line-height: 18px;">by Barnali Dasverma, Director, Treya Partners</span></div><div class="MsoNormal"><span style="line-height: 18px;"><br />
</span></div><div class="MsoNormal"><span style="line-height: 18px;">“Express Mail…Small Parcel…LTL...” What immediately comes to mind when you hear these words? If you’re a Chief Procurement Officer, you probably think of services that meet your organization’s outbound transportation needs. There’s likely a member of your procurement staff responsible for negotiating and managing contracts for these services, and getting the very best rates on outbound shipping is probably a priority for you. If you’re at all similar to some of the organizations I consult to, however, you may not be paying as much attention to your <i>inbound</i> transportation costs. If this is the case then the chances are you are leaving significant dollars on the table. How much, you ask? Well, on a recent engagement for a manufacturing client my team helped to deliver over 16% savings on the inbound shipping costs of materials and supplies procured from the company's vendors.</span><br />
<span style="line-height: 18px;"></br>How much visibility do </span><i style="line-height: 18px;">you</i><span style="line-height: 18px;"> have into your inbound shipping costs? Do you have a good understanding of the freight costs you’re incurring for the items your organization is purchasing? In many instances transportation charges are passed through by suppliers to their customers as an invoice line item. The truth is that these pass-through costs are not always as pass-though as you might think and in fact can represent a not insignificant source of profit for many suppliers. A somewhat startling but fairly common practice employed by some vendors is to charge retail shipping rates (or at best minimally discounted retail rates) in an effort to offset profits lost through the price discounts and volume rebates that their customers' procurement staff have negotiated. In some cases the absurdly high outbound rates will only be applied to expedited shipping. At first glance this may seem understandable but a recent benchmarking of our customers' transportation practices revealed that expedited shipping often takes place much more frequently than assumed. The bottom line? Pass through shipping costs may very well be an area where your company is overpaying and if you haven't yet done so it would be a smart move to find out if this is the case.</span><span style="line-height: 18px;"></br><br />
Where to start? In my experience many organizations do a poor job of tracking inbound transportation expenditures and shipment-level transparency into freight patterns is often non-existent. Job number one is to obtain the data you need to close this information gap. A good first move is to collect inbound freight expenditure data from your accounts payable system. Use this data to identify those suppliers with the highest inbound freight pass through costs. Next, request shipping data from these suppliers. Ask for total annual inbound transportation charges, and compare the total charges reported by the suppliers against your internal accounts payable data. One of your first learnings might be that you are spending considerably more than you previously thought on inbound freight!</span><span style="line-height: 18px;"></br><br />
Be sure to also ask the suppliers for spend data by shipment type (e.g. ground, overnight, etc.) in order to understand if an excessive number of shipments are being expedited. This can help uncover poor internal planning processes and identify opportunities to develop internal purchasing practices for transportation that more optimally balance customer requirements and cost.</span><span style="line-height: 18px;"></br><br />
Most importantly, ask your top suppliers for the shipping rates your company is charged when costs are passed through. Request the detailed fee schedules that the supplier used to calculate your freight charges and conduct shipment-level comparisons between the supplier's pass-through rates and your company's own contracted rates for your outbound shipping. Ensure that your rate comparison takes into account your actual usage patterns, and compare each supplier's pass-though transportation charge with what you would have paid had your purchased products been shipped at your own negotiated rates. It is at this point that some companies learn they are paying FedEx or UPS list prices!</span><span style="line-height: 18px;"></br><br />
Finally, armed with the results of your data analysis, ask your highest freight cost suppliers to utilize your company’s own negotiated shipping rates when they are more competitive than the supplier's rates (this recommendation of course assumes that you’ve already negotiated best-in-class outbound shipping rates – if you haven’t yet done this, do it now!). Although some suppliers will be amenable to using your freight contracts others may not be, particularly if your company represents a substantial portion of their total shipping volume. In these cases your fallback position should be to negotiate deep discounts off the shipping rates you’re currently being charged. Be sure to demand savings in the 15-25% range or even more if your rate comparisons indicate you have been significantly overcharged in the past.</span><span style="line-height: 18px;"></br><br />
My experience helping my customers in this area has shown time and again that it pays to be proactive and data-driven when it comes to inbound transportation costs. Do the due diligence, track the freight spend and mine the shipment-level data to keep your suppliers honest. By successfully addressing this often overlooked spend area you'll unlock surprisingly significant savings that will meaningfully impact your company’s bottom line. So stay on top of your inbound transportation costs - your CFO will thank you for it.</span></div><div style="line-height: 18px;"><br />
</div>Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0tag:blogger.com,1999:blog-5431045319750071148.post-31880028289193747952011-12-01T09:34:00.001-08:002011-12-01T09:45:29.976-08:00Four years between friends?<span class="Apple-style-span" style="font-family: Verdana, sans-serif;"><span class="Apple-style-span" style="background-color: white; color: #626262; font-size: 13px; line-height: 22px;">Former British Prime Minister Harold Wilson once famously said "a week is a long time in politics". That may be true but when it comes to spend analysis it seems that four years is, well, nothing. Back in 2008 this blogger had a little more hair and a few less wrinkles but a bucketful of optimism about the likelihood that business enterprises and public sector organizations alike would embrace spend analysis as a "must-do" cost management capability. Based upon the results of a </span><a href="http://www.supplymanagement.com/news/2011/poor-data-hinders-buyers-performance/" style="background-color: white; color: #cc0000; font-size: 13px; line-height: 22px; text-align: justify; text-decoration: none;" target="_blank" title="">recent Supply Management survey</a><span class="Apple-style-span" style="background-color: white; color: #626262; font-size: 13px; line-height: 22px; text-align: justify;"> however it appears that the majority of procurement professionals - some 68% in fact -must still clamber over the prehistoric landscape of disparate legacy systems, throwing their best-guess bones of fragmented spend data high into the air in the hope that they spin and fall miraculously into some understandable pattern of sourcing decision support. Read Supply Management's survey findings and weep - weep hard, mind - </span><a href="http://www.supplymanagement.com/news/2011/poor-data-hinders-buyers-performance/" style="background-color: white; color: #cc0000; font-size: 13px; line-height: 22px; text-align: justify; text-decoration: none;" target="_blank" title="">here</a><span class="Apple-style-span" style="background-color: white; color: #626262; font-size: 13px; line-height: 22px; text-align: justify;">. </span></span><br />
<span class="Apple-style-span" style="font-family: Verdana, sans-serif;"><br style="background-color: white; color: #626262; font-size: 13px; line-height: 22px; text-align: justify;" /></span><br />
<span class="Apple-style-span" style="background-color: white; color: #626262; font-family: Verdana, sans-serif; font-size: 13px; line-height: 22px; text-align: justify;">In the hope that perhaps the majority of the planet did not read the first publishing of my 2008 blog post "Can spend analysis have an ROI" - the only happening that would feasibly explain the unforgivable findings of the the SM survey - I am re-publishing said post below. Earth take heed - if I have to return in another four years to berate your refusal to understand and act upon the value of spend visibility I may not be so understanding....</span><br />
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<div style="text-align: justify;"></div><h3 class="post-title entry-title" style="background-color: white; color: #333333; font-family: Verdana, Arial, sans-serif; font-size: 16px; line-height: 1.1em; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: left;">Can a Spend Analysis Have an ROI?</h3><div><br />
</div><div><span class="Apple-style-span" style="font-family: Verdana, sans-serif;">(originally published in 1Procurement Place on August 25, 2008)</span></div><div><span class="Apple-style-span" style="font-family: Verdana, sans-serif; font-size: x-small;"><br />
</span></div><div class="post-header" style="background-color: white; color: #333333; font-family: Verdana, Arial, sans-serif; font-size: 13px; line-height: 1.3em; margin-bottom: 0.75em; margin-left: 0px; margin-right: 0px; margin-top: 0px; text-align: left;"><div class="post-header-line-1" style="line-height: 1.3em; margin-bottom: 0.75em; margin-left: 0px; margin-right: 0px; margin-top: 0px;"></div></div><div class="post-body entry-content" id="post-body-7231802411621932956" style="background-color: white; color: #333333; font-size: 13px; line-height: 1.3em; margin-bottom: 0.75em; margin-left: 0px; margin-right: 0px; margin-top: 0px; text-align: left;"><span class="Apple-style-span" style="font-family: Verdana, sans-serif;">Would a private equity firm ever think about investing in a company without conducting a comprehensive analysis of its ability to generate an attractive future return? Of course not! A friend of mine in private equity once told me that for every one hundred million dollars a PE firm invests it has spent a million dollars in internal salaries and due diligence consulting fees analyzing the deal prior to pulling the trigger.</span><br />
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</div><div style="font-family: Verdana, Arial, sans-serif;">In a somewhat similar vein, would you ever think about buying a new or used car without carrying out at least a rudimentary analysis of the comparative reliability and performance of the various models? I didn’t think so. If you’re like me, in addition to burying yourself in Consumer Reports you also spend all the weekends between February and July test driving every vehicle under the sun until your significant other finally explodes “enough already – make up your mind!”</div><div style="font-family: Verdana, Arial, sans-serif;"><br />
</div><div style="font-family: Verdana, Arial, sans-serif;">What about hiring someone for your company? You wouldn’t make an offer to a person without a rigorous evaluation of their capability to perform the job would you? You pick apart resumes, fly candidates in for interviews, give them case studies, call their references, and conduct drug screens and background checks before extending an offer.</div><div style="font-family: Verdana, Arial, sans-serif;"><br />
</div><div style="font-family: Verdana, Arial, sans-serif;">What’s the common theme in each of the above examples? It’s that in each case someone is making an investment of money (the due diligence consulting fees, the job candidate travel expenses) or time (lost family time at weekends doing test drives, lost work time interviewing candidates) to gather information critical to a particular decision making process. The return on the investment is an increased probability of a favorable outcome from the decision – a higher profit when the PE firm sells the company three years later, a pleasurable ownership experience for the car buyer, and a high performing employee for the hiring company.</div><div style="font-family: Verdana, Arial, sans-serif;"><br />
</div><div style="font-family: Verdana, Arial, sans-serif;">So Mark, I hear you all saying exasperatingly, what the Sam Hill does all this have to do with spend analysis? <strong><em>Quite simply, numerous companies of all sizes across many industries are making high dollar resource deployment decisions in procurement while having little or no access to a piece of information that is critical to the procurement decision making process.</em></strong> That piece of information would be about <strong>SPEND</strong>. Information providing answers to massively important questions such as: What is total spend? What is spend by commodity, supplier, and department? How much spend is currently under contract, in total and within each commodity? How many suppliers account for the top 80% of spend in each commodity? With how many different departments are your highest spend suppliers doing business? How much spend in each commodity is with non-approved suppliers? Which departments are responsible for the non-approved spend? <strong>Only by having answers to these type of questions will an organization be able to identify those commodities, suppliers and departments where the application of scarce procurement resources will yield the highest return.</strong></div><div style="font-family: Verdana, Arial, sans-serif;"><br />
</div><div style="font-family: Verdana, Arial, sans-serif;">How does an organization get these answers? By conducting a<strong>SPEND ANALYSIS</strong>, a process for producing a consolidated and accurate view of an organization’s purchasing expenditures by commodity, supplier and department. I won’t go into the intricate details of the spend analysis process here or the various tools available in the market to conduct one but, yes, to perform a spend analysis you will need to….make an investment! Depending on the approach you take the investment will take the form of people cost to conduct an internal analysis, software license fees for a tool, consultant fees, or a combination of all of these. The key is to perform an effective spend analysis that allows your procurement organization to focus its people, processes and technologies in the areas that will yield the greatest benefits. Examples of such areas are commodities with the highest total spend across the enterprise, commodities with too many suppliers, suppliers doing high volumes of business with different departments, and departments spending large amounts with non-approved vendors.</div><div style="font-family: Verdana, Arial, sans-serif;"><br />
</div><div style="font-family: Verdana, Arial, sans-serif;">One of my clients with $500M of total spend recently conducted a spend analysis that identified just over $100M of spend with opportunities for sourcing, incumbent renegotiation and maverick spend reduction. Following the spend analysis this company focused its best and brightest commodity managers exclusively on this $100M and realized $28M of annualized cost savings. Without the spend analysis the same talent would have been wandering blind amongst the $500M and would have been very lucky to have found half of the $28M. Let’s say they were very lucky and found over half, say $18M. That would still mean that conducting the spend analysis had led to an additional $10M of savings. And what did the spend analysis cost? Less than $100K in software and services. Guess what, there’s a spend analysis ROI. And an attractive one at that.</div><div style="font-family: Verdana, Arial, sans-serif;"><br />
</div><div style="font-family: Verdana, Arial, sans-serif;">You would be surprised (unless you get to see as many procurement departments as I do) just how many companies today are not able to identify the opportunity areas described above, and by inference are not able to prioritize the deployment of their procurement resources. Many of these companies will tell you they know where the cost savings are. They’ll tell you they know their business and that they know where to look. But they don’t really. They guess where to focus their people. They roll the dice on where to conduct a reverse auction. And they come up with dry holes again and again. Why? Because they haven’t invested. They haven’t done the due diligence. They haven’t test driven the commodities. They haven’t fully evaluated the candidates. They haven’t done a spend analysis.</div></div>Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0tag:blogger.com,1999:blog-5431045319750071148.post-18493275251934446602011-01-07T16:32:00.000-08:002011-01-07T16:32:32.280-08:00The Magic of BBP<div style="text-align: justify;">Interesting piece in the Pharma Times this week about how the UK's National Health Service (NHS) recently discovered it was paying widely varying prices for the same equipment and supplies. In <a href="http://www.pharmatimes.com/Article/11-01-06/NHS_procurement_waste_%E2%80%9Ccosts_%C2%A31_billion_a_year%E2%80%9D.aspx">NHS procurement waste “costs £1 billion a year”</a> John Neilson of NHS Shared Business Services (NHS SBS), an alliance between the NHS and IT services firm Steria, reveals that a new NHS SBS database <a href="http://www.pharmatimes.com/Article/11-01-06/NHS_procurement_waste_%E2%80%9Ccosts_%C2%A31_billion_a_year%E2%80%9D.aspx">identified up to 19 different prices for the same pacemaker, and 22 different prices for a surgical tool.</a> The article goes on to suggest that one of the biggest barriers to the NHS achieving significant cost savings in medical equipment & supplies procurement is that physicians are reluctant to participate in initiatives such as strategic sourcing because they fear they will have to compromise on quality and performance.</div><br />
<div style="text-align: justify;">What jumped out at me from this article was the basic question: <em><strong>did anyone even know the NHS was paying all these different prices for the same product?</strong></em> To be fair, the article does not make it 100% clear whether the different prices being paid are for products with identical manufacturer brand names and specifications or only equivalent specifications from different OEMs. I read it as the former, for example the cardiology department in an NHS hospital in London might be buying a Boston Scientific Altrua Model # S404 Pacemaker for one price while another NHS hospital in Manchester could be buying the same S404 pacemaker for 10% less. This would be a totally believable situation with all the hundreds of NHS locations in the UK that could be buying this and other products with no coordination or communication between them.</div><br />
<div style="text-align: justify;">If it is indeed the case that the new NHS SBS database has unearthed the previously unknown fact of multiple NHS buyers purchasing identical products at widely varying prices (and often I'd bet from the same supplier) then questioning the willingness of physicians to embrace the principles of strategic sourcing best practices is premature. What has been stumbled upon is actually one of Procurement 101's most basic but also most productive source of quick win cost savings - <em><strong>find out who in your organization is buying this product at the lowest price today and get everyone buying at that price</strong></em>, or "Buying at BBP (Best Buyer's Price)" as some purchasing veterans call the practice.</div><br />
<div style="text-align: justify;">Buying at BBP is completely non-strategic but in some cases can deliver levels of early savings sufficient to fund the truly strategic investments required to create and sustain value over time such as strategic sourcing, supply chain optimization and demand management. In my opinion it's overlooked in many cases <em><strong>because</strong></em> it's so simple and, well, because let's face it we didn't go to business school to create value for our customers with such trivial solutions.</div><br />
<div style="text-align: justify;">In the case of the NHS (and the same could apply to any mid or large-sized organization with multiple decentralized buying locations) I would be concerned that nobody is considering the Buy at BBP approach. Someone should be getting hold of those new database reports and identifying the name, rank and serial numbers of the buyers that secured the lowest pricing for those items with the highest annual combined usage across all NHS locations. Two things should then happen. First, these buyers should all be sent generous denomination Marks & Spencers Gift Cards. Second, someone should be assigned responsibility and authority to negotiate with the BBP suppliers to have the lowest price extended to all other NHS buying locations that are buying these same items. Suddenly, simply, almost magically a windfall of hard savings will have showered down upon the NHS without a single physician being asked to consider another brand or back down on a specification.</div><br />
<div style="text-align: justify;">And one last thing. A new enterprise-wide database is not necessary to identify BBP opportunities. The same outcome can be achieved by pulling accounts payable vendor disbursement data from different locations and consolidating the data into one file. Look for those vendors being used by the most locations within your organization - these will likely be the vendors selling the same products to different buyers at different prices. You can then go the locations those vendors are selling to and pull item level usage and pricing data to identify specific pricing discrepancies and the savings available from buying at your organization's BBP. Sure, this approach requires a bit more manual effort and legwork but do you really want to wait around for one of those enterprise data warehouses to be built before you can create the cost savings? Besides, to quote Booker T. Washington: "Nothing ever comes to one, that is worth having, except as a result of hard work."</div><br />
<div style="text-align: justify;">Except BBP.</div>Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0tag:blogger.com,1999:blog-5431045319750071148.post-52276398421492002282010-09-23T09:31:00.000-07:002010-09-23T09:31:17.387-07:00Early to Bed, Early to Rise, Work Like Hell and....Customize?An invigorating article on <a href="http://www.reuters.com/article/idUSTRE68K0OT20100921?pageNumber=1">Reuters.com</a> 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.<br />
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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.<br />
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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.Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0tag:blogger.com,1999:blog-5431045319750071148.post-32880981074019978462010-09-17T15:10:00.000-07:002010-09-17T15:11:52.914-07:00Lessons from the Public SectorI'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....<br />
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<strong>Structure & Discipline in Procurement: What the Private Sector Can Learn from the Public Sector</strong><br />
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By Barnali Dasverma<br />
Manager, Treya Partners<br />
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“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. <br />
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<strong>Bureaucracy Has Its Benefits: Processes</strong><br />
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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. <br />
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<strong>This Is How We’ve Always Done It: Templates</strong><br />
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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.<br />
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<strong>You Can’t Break the Rules Without Having Any: Policies</strong><br />
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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.)<br />
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<strong>Who Knew? The Public Sector Can Teach the Private Sector A Thing Or Two</strong><br />
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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.Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0tag:blogger.com,1999:blog-5431045319750071148.post-88320009338165616192010-08-21T19:48:00.000-07:002010-08-21T19:53:03.701-07:00Trial by Tabloid in Motor CityThe Detroit News reported recently how the city's Chief Procurement Officer Andre DuPerry is looking to shake up Motown purchasing by <a href="http://www.detnews.com/article/20100811/METRO01/8110367/Detroit-tries-to-reduce-purchasing-costs">re-examining the preferences Detroit businesses are given during the contract process</a>. DuPerry, appointed by Mayor Dave Bing in December 2009, believes the city could save $22M a year by addressing Detroit's dependence on local <a href="http://www.detnews.com/article/20100811/METRO01/8110367/Detroit-tries-to-reduce-purchasing-costs">third-party companies that charge inflated rates</a>. 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.<br />
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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.<br />
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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.<br />
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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.<br />
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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.Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0tag:blogger.com,1999:blog-5431045319750071148.post-67056888730227517912010-08-09T19:05:00.000-07:002010-08-09T19:05:23.581-07:00The Art of Clanger AvoidanceIf 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....Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0tag:blogger.com,1999:blog-5431045319750071148.post-90695733069904186032010-07-20T11:51:00.000-07:002010-07-20T11:51:40.869-07:00Plane Wrong<em>"You don't own that plane, the tax payers do!"</em><br />
- Top Gun, 1986<br />
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In his Toronto Star piece <a href="http://www.thestar.com/opinion/editorialopinion/article/836959--16-billion-for-the-wrong-planes">$16 billion for the wrong planes</a> 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.<br />
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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.<br />
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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.<br />
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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.<br />
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And always carry an extra tank.Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0tag:blogger.com,1999:blog-5431045319750071148.post-36588696191233613952010-06-07T07:47:00.000-07:002010-06-07T07:47:42.099-07:00Relax? Don't Do It for Competitive AdvantageIn 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.<br />
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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.<br />
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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.<br />
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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. <br />
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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.Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com2tag:blogger.com,1999:blog-5431045319750071148.post-35183481398110090542010-05-23T12:35:00.000-07:002010-05-23T23:46:48.189-07:00No 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".<br />
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"Certainly sir" replies the clerk, "do you need a low, medium or high complexity project?"<br />
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"A medium one please" the consultant replies. <br />
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"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. "<br />
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"Sounds perfect - how much?" the consultant asked.<br />
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"Fifty thousand plus tax" the clerk replied, "not including baseline."<br />
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"Baseline?" the consultant queried, looking puzzled, "what's that?"<br />
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"You'll need it to measure your savings" the clerk answered, "most customers are asking for that these days."<br />
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"Hmm, well how much extra is the baseline?<br />
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"Another eight thousand, sir"<br />
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The consultant thought about it a moment then shook his head. "No it's okay I'll pass. Just the project, please."<br />
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"Are you sure, sir?' the clerk challenged, "you won't know what your savings are".<br />
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"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."<br />
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"And that actually works does it, sir?" <br />
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"I'm sorry?" the consultant responded, affronted by the clerk's gall. "What do you mean?"<br />
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"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?"<br />
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"Well of course not. As I said, I mutually agree on the savings with my client"<br />
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"I see. Do you mind if I ask you a question, sir?<br />
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"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.<br />
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"How much savings did you create in your last sourcing project?"<br />
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"That's easy. I saved 14% on ten million dollars of small parcel freight."<br />
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"And was this a benefits-funded engagement, sir?" the clerk asked further.<br />
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"Well yes it was, actually" the consultant answered, adding with pride, "I invoiced for 25% of the savings. A cool $350,000."<br />
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"Nice, sir." the clerk congratulated, "and the 14% was the mutually agreed savings amount was it?"<br />
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"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%."<br />
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"If I may ask, sir" the clerk ventured, "what savings number did you originally present to you client prior to the, um, mutual agreement?"<br />
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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."<br />
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"Sir, would you mind if I asked you two more questions before you make a final decision on buying the baseline?" the clerk asked.<br />
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"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.<br />
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"Firstly, would you consider a $175,000 return on a $8,000 investment a good ROI?"<br />
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"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. <br />
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"Excellent. So my last question relates to the project you described, sir. Specifically to the original savings number you presented to your client."<br />
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"Okay - what is it? What's the last question?" Enough already, thought the consultant. I ain't no celebrity but <em>get me out of here</em> anyway.<br />
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"Do you think you were right?"Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com1tag:blogger.com,1999:blog-5431045319750071148.post-3356287336771886772010-05-17T20:51:00.000-07:002010-05-23T12:40:09.422-07:00Phew, at Last! Treya Partners Makes the Hot 100!Congratulations to us! <br />
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<a href="http://www.sdcexec.com/web/online/Decision-Support-News/Supply-and-Demand-Chain-Executive-Announces-Its-2010-Supply-and-Demand-Chain-Executive-100/37$12393">Supply & Demand Chain Executive Announces Its Supply & Demand Chain Executive 100</a>Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0tag:blogger.com,1999:blog-5431045319750071148.post-77237958550152255852010-05-09T15:50:00.000-07:002010-05-09T15:56:05.570-07:00Easy 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.<br />
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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.<br />
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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.<br />
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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.Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0tag:blogger.com,1999:blog-5431045319750071148.post-55930549848510596442010-03-22T17:56:00.000-07:002010-03-22T18:00:51.447-07:00Travel – Do I Have To??<em>This is nice...yet another guest blogger is about to make their debut on 1 Procurement Place! This time it's the turn of <strong>Lisa Hurst</strong>. 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....</em><br />
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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. <br />
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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....<br />
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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. <br />
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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? <br />
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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?<br />
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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.<br />
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Well…I’m off to find that sweat suit and my quart size toiletry bag! Wish me luck and safe travels to you!Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com1tag:blogger.com,1999:blog-5431045319750071148.post-3941030890649552502010-03-21T12:17:00.000-07:002010-03-21T12:22:45.509-07:00Letting Others Take Out the Trash: Punting the Small Stuff to Prioritize High Impact Sourcing InitiativesToday it gives me great pleasure to welcome guest blogger <strong>Barnali Dasverma</strong> 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....<br />
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<strong>Taking Out the Trash with a Smile</strong><br />
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“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.<br />
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<strong>Learning How to Say No to the Small Stuff</strong><br />
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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.<br />
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<strong>Punting Gently</strong><br />
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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 <em>punt the small stuff gently</em>. 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. <br />
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<strong>Weaning Internal Customers off Procurement</strong><br />
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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:<br />
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• “Request bids in the same format from at least 3 vendors”<br />
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• “Be sure to tie future price increases to the Consumer Price Index”<br />
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• “Include a travel expense cap on all professional services contracts”<br />
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• “Make sure the contract doesn’t include an automatic renewal clause”<br />
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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.<br />
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<strong>Tracking Transformation & Focusing on Savings with a Smile</strong><br />
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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 - <strong><em>with a smile</em></strong>.”Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0tag:blogger.com,1999:blog-5431045319750071148.post-62470136145185597762010-02-20T23:15:00.000-08:002010-02-21T09:19:14.075-08:00Strategy Matters - SometimesIn one of his <a href="http://www.spendmatters.com/index.cfm/2010/2/19/Friday-Rant-Whats-Holding-Ariba-Back-Part-3">Friday Rants</a> over on <a href="http://www.spendmatters.com/index.cfm/2010/2/19/Friday-Rant-Whats-Holding-Ariba-Back-Part-3">SpendMatters</a>, 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.<br /><br />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.<br /><br />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?".<br /><br />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.Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com1tag:blogger.com,1999:blog-5431045319750071148.post-24254135184245288832010-01-29T19:12:00.000-08:002010-01-30T12:55:24.580-08:00How to Get Away with Almost Anything, and While People are Looking Too - the Power of Brand CapitalThis 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. (<em>Ooops - upchuck)</em><upchuck>. Secondly because this flight and this airline bring to mind a seldom discussed aspect of procurement, that of <strong><em>brand capital</em></strong>.<br /><br />When I walk off this plane tonight at LAX (oh speed ye to me thy blessed moment! <em>Ooops - upchuck) </em><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.<br /><br />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.<br /><br />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.<br /><br />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 <em>will be blamed</em> for events outside of your control).<br /><br />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.<br /><br /><em><strong>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</strong></em>. 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.<br /><br />And VirginAmerica Flight 411? No turbulence for an hour...but here come the Rockies. (<em>Ooops - upchuck)</em><upchuck>. No worries, Mr. Branson - you got brand!Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0tag:blogger.com,1999:blog-5431045319750071148.post-52054552457279382232010-01-04T16:40:00.000-08:002010-01-05T08:36:42.206-08:00A Penny Avoided Is A Penny.....Nah<p>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.</p><p>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:</p><p><br />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).</p><p><br />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.</p><p><br />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.</p><p><br />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.</p><p><br />Oh, and one more thing...by 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.</p><p><br />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!</p>Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0tag:blogger.com,1999:blog-5431045319750071148.post-70623909291769635262009-11-28T14:22:00.000-08:002009-11-29T10:51:41.687-08:00To Source Or Not To Source...That Really Is The QuestionI met up recently with my ex-boss from my days as a sourcing practitioner at GE. During our reminiscing of times gone by we chatted about the current state of procurement and how things had changed since our time under "Neutron Jack". One thing we both agreed was that when you strip away all the e-glitz & e-glamour, nothing has changed when it comes to fundamental procurement decision-making. All Purchasing 101 rules apply just as much in 2009 as they did in 1989 when you are making key decisons such whether to do an RFQ, an RFP, a multi-round negotiation, or even whether to do a competitive sourcing event at all.<br /><br />Take that last one, about whether to even conduct a sourcing event. Back in the early nineties our GE division spent about eight million dollars annually on various facilities maintenance services such as general R&M, cleaning, lawn & grounds and security. Despite this level of spend number we never ran an RFP for our facilities maintenance services. Instead we participated in a regional purchasing cooperative that included, amongst others, Proctor & Gamble. This co-op secured us about 12% savings on our facilities spend, or $960K annually. Could we have secured another 5% or more savings by going to RFP? Probably. What we did instead was direct the commodity manager who would have run the facilities RFP to a direct materials category, specifically fuel manifolds & piping. How much do you think our division spent on manifolds & piping every year? You guessed it, about eight million dollars, the same as our facilities maintenance spend. The difference was that purchase price represented less than 20%of the total cost of ownership of manifolds & piping, a cost that included impacts on fuel efficiency, maintenance & inspection cost, repair cost, assembly cost and overall engine system performance. The point is that for us the forgone savings on $8M of facilities spend by not going to RFP was far exceeded by the total cost savings on the direct materials spend category.<br /><br />Flash forward to today and it still surprises me when I encounter companies that focus some of their their best sourcing professionals on time-consuming RFPs for office supplies, MRO and other simple cross-industry indirect spend categories. Ironically these same companies are often failing to direct adequate (or any) resources towards the implementation of a competitive procurement process for categories such as commercial print, advertising or transportation. The end result is often impressive savings numbers for categories like office supplies and MRO at the expense of significant missed savings opportunities for the higher impact spend areas. To make matters worse, e-sourcing software providers are (quite rationally) selling their reverse auction solutions into procurement departments with a primary focus on the simpler spend areas, marketing their case studies of 30% savings from auctions on pens, pencils, nuts, and bolts.<br /><br />To be fair to procurement organizations it is often the path of least resistance to focus on the simpler indirect spend categories. High levels of stakeholder pushback are often encountered for the more strategic and higher impact categories. Having said this, it is the responsibility of C-level management to demand that procurement be invited into all stakeholder departments. With high levels of executive sponsorship, procurement leaders would be free to focus their best sourcing resources on the categories of highest return and, effectively, <em><strong>not source</strong></em> those categories where the dollar savings does not justify the investment of dollar talent.<br /><br />In my ideal sourcing world far far away, companies would never run RFPs or reverse auctions for simple indirects like office supplies and MRO. Sourcing events for these types of categories would only ever be conducted by Group Purchasing Organizations who would use them to drive down prices for all buyers. In this same world, procurement's best and brightest would always be invited into stakeholder departments under the umbrella of senior executive sponsorship. These individuals would drive competitive procurement processes in the company's highest impact spend categories through utilization of best practice sourcing processes and technologies (reverse auctions, online RFPs and optimization tools are being used regularly by today's leading players for categories like advertising spend and transportation). In this world scarce procurement resources - both people and technology - would truly be focused in the areas of highest return. After all, a sourcing mind is a terrible thing to waste.Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0tag:blogger.com,1999:blog-5431045319750071148.post-86439669758847787292009-10-25T10:37:00.000-07:002009-10-25T10:59:09.186-07:00Procurement Service Providers - Better Go Get Your ArmorThe market for procurement service providers (PSPs), a sector that includes everything from strategic sourcing consulting to GPO contracts to full blown procurement outsourcing, is shaping up to be quite a battlefield over the next 12-18 months. From personal observations of recent trends I predict there will be spectacular confrontations between the industry's major players as they seek to capture and protect market share, particularly in the eagerly desired upper mid-market segment of companies between $500M and $5B annual sales. And it won’t just be the E-Sourcing Suite Giants and Consulting Firm Goliaths fighting for the business of a customer base considerably more PSP-educated than in the heady pre-B2B bubble days. There will be a myriad of PSP boutiques and GPOs joined in the battle, many of these smaller and more nimble players able to offer flexible and customized solutions at significantly lower cost. To make matters particularly feisty, many of these PSP boutiques will be led onto the field of play by the very same consultants who helped to shape and form the procurement consulting practices of their larger opponents in the late nineties and early 2000’s.
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<br />If you are the CFO or CPO of a mid-market company today, you stand to benefit handsomely from the upcoming smackdown in the PSP market. You will be able to categorically demand the highest levels of tangible and lasting value from the various players, large and small, who will parade their wares in front of you over the coming year. You will be able to insist that this value be delivered at the lowest possible cost and with the lowest possible operational risk. Specifically, you will be able to stridently and confidently voice the following demands to the massed ranks of Davids and Goliaths standing in front of you ready to fight for your PSP budget dollars-
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<br /><strong>DEMAND ONE</strong> – <strong><em>I want big cost savings that I can measure</em></strong>
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<br />You should demand at least 5-12% savings on direct materials and 15-25% or more on indirect. You should demand that these savings be measurable and budget-impacting based on either lower prices or reduced usage through demand management. <strong>Look for PSPs</strong> who will guarantee cost savings or offer benefits-funded fee arrangements. <strong>Avoid PSPs</strong> who mention "process" or "efficiency" savings or who ask to be paid like it’s 1999.
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<br /><strong>DEMAND TWO – <em>I want a fast ramp-up of the cost savings during the first year</em></strong>
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<br /></strong>You should demand that at least 80% of annualized cost savings be realizable in the first year. You should ask for specifics about how they will bring forward cost savings and avoid multi-month sourcing projects that take a year or more to throw dollars to the bottom line. <strong>Avoid PSPs</strong> whose proposals feature pages of “sourcing wave strategies” and “commodity work teams”. <strong>Look for PSPs</strong> who offer flexible rapid sourcing approaches, incumbent renegotiations and pre-negotiated contracts.
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<br /><strong>DEMAND THREE – <em>I want suppliers that meet or exceed the service levels of incumbents so that I face minimum resistance from internal department stakeholders</em></strong>
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<br />You should demand that whatever techniques are used to create savings, internal departments receive equal or better levels of quality and service. You should demand that any new suppliers selected will sign up for service level guarantees in the areas of quality, delivery lead times, customer service and other key category-specific metrics. <strong>Avoid PSPs</strong> who talk only about “mandating compliance”. <strong>Look for PSPs</strong> who talk about how they will work in an integrated fashion with internal stakeholders during the sourcing process.
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<br /><strong>DEMAND FOUR – <em>In exchange for me providing you with a multi-year spend commitment, I would like some of my savings paid up front in the form of a prebate or signing bonus</em></strong>
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<br />Depending upon the categories in scope, you should demand that providers work with suppliers to provide upfront savings in the form of cash prebates on contract signing. This technique, used mainly with pre-negotiated contracts, serves as a compliance enabling tool since such arrangements require the customer to pay back some or all of the prebate if a pre-set spend dollar commitment is not met. <strong>Avoid PSPs</strong> who won’t consider this. <strong>Look for PSPs</strong> who will.
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<br /><strong>DEMAND FIVE – <em>I’d like to pay the minimum possible fees for your services. In fact, where practical, I would like to pay nothing at all</em></strong>
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<br />Particularly for indirect categories, paying little or nothing for a PSP’s services is not at all far-fetched. Whether through benefits funded approaches or pre-negotiated contracts you should press on providers’ willingness to dig deep and dramatically reduce your investment requirements. <strong>Avoid PSPs</strong> who persist with ridiculous seven-figure spend management outsourcing pitches. <strong>Look for PSPs</strong> who offer procurement savings programs where their revenue models are either supplier-funded (e.g. pre-negotiated contracts) or benefits funded (e.g. sourcing fees based upon savings from an RFP).
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<br />The above demands are fair, reasonable and – more importantly – will result in your organization being able to maximize the return on its investment in PSP services. Don’t listen to the whines of those who long for a return to the days of multi-million dollar cost structure-feeding “house accounts”. Listen to your business. Listen to your internal stakeholders. Then seek out those PSPs who fight to win the battles in their market place but who do so with a clear focus on what it will take to be successful – putting their customers’ demands above their own.
<br />Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0tag:blogger.com,1999:blog-5431045319750071148.post-22244321095829868932009-10-04T10:37:00.000-07:002009-10-04T11:05:17.692-07:00Let Me Be DirectProcurement service providers can create game-changing value for their customers in the current economic climate through high impact sourcing initiatives in both DIRECT and INDIRECT spend areas. Since indirect procurement has been well covered in the blogosphere recently (and one can only keep readers interested for so long about how to design the perfect office supplies core list) I'm going to to focus here on how procurement can not only protect profit margins but create sustainable competitive advantage through world class direct materials sourcing. Whether your customers are in manufacturing, retail, food, or consumer packaged goods these procurement strategies will keep your clients afloat through the perfect economic storm and excellently equipped to maintain a healthy lead over their competition when balmy financial weather returns.<br /><br />THE DIRECT MATERIALS GAME CHANGING PROCUREMENT INITIATIVE<br /><br /><em><strong>Increase Gross Margins by developing a supply base that enables an organization to minimize cost and maximize customer service for its most highly demanded products.</strong></em><br /><br />Thousands of companies go out of business in recessionary economic environments because their supply chains are unable to deliver the very products that their customers are ready and willing to buy. It turns out that many of these same products are also their most profitable. In good economic times, a poorly performing supply chain like this doesn't present too many obvious problems. If you're selling a billion dollars of product at 20% gross margin you can swan along quite happily feeding an operating expense base of nearly $200 million, leaving millions of customers wanting stuff you've run out of and millions of dollars of stuff they don't want sitting on store shelves or in the warehouse. However, when the downturn hits and your sales nosedive, your 20% gross margin is now trying to satisfy the same operating expense base. Hello negative operating income!<br /><br />Procurement service providers can help companies maintain positive operating margins in recessionary or slow growth environments by helping them select suppliers that can deliver the lowest total cost inputs to production (or resale merchandise for retailers and distributors) while also supporting the highest levels of customer service for the end products that are in highest demand from customers. Low cost inputs result in a profitable product while high customer service results in an available product. Making a profitable and highly demanded product available is the greatest lever a company has to increase gross margin.<br /><br /><em>What role can Procurement play in this?</em> First, analyze historical order history by product (making sure to include backorders) and identify the 20% of products comprising the top 80% of customer demand. Then calculate profit contribution for each of these high demand products, where profit contribution is the difference between a product's selling price and its total cost including procurement cost, transportation cost, and any internal manufacturing costs. Now identify the 20% of the high demand products that comprise 80% of total profit contribution. These are your company's most profitable and highly demanded products! If an organization can ensure that these products are always available for their customers to buy, it will be fully realizing maximum potential gross margin for its industry sector.<br /><br /><em>Procurement's role in helping an organization maximize gross margin should be to facilitate a cross-functional strategic sourcing process that identifies, evaluates and selects suppliers based on their ability to meet exacting criteria for total cost management and customer service.</em> Specifically, Procurement should work with stakeholders in marketing, manufacturing, distribution and other departments to develop weighted, metric-based criteria in areas such as a supplier's capability to strategically source their own raw materials, implement lean manufacturing processes, deploy logistics strategies capable of consistently achieving 99% line item fill rates at their customers' point of sale, and manage indirect operating expenses to maintain financial health while delivering low prices to their customers. The outcome of the strategic sourcing process should be a set of closely integrated supply relationships with a small number of supply partners that between them satisfy the ultimate goal of lowest total cost of ownership and highest customer service for the company's highest demand products.<br /><br />If you are a service provider with a competency for developing low cost/high service level supply bases, you can ensure that your customers will always enjoy gross margins in the top quartile for their industry. Particularly in recessionary or slow growth periods, a laser-like focus on service levels and availability for high profit/high demand products will guarantee financial health until the recovery is in full swing. And by helping your customers optimize their supply chains today, you will help them remain strides ahead of their competitors long after the recessionary period has ended. By maintaining above average profitability for their industry they will be able to make heavier investments than competitors in all aspects of their business, allowing them to maintain a perpetual competitive advantage.<br /><br />Who said procurement was all about buying pens and pencils?Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0tag:blogger.com,1999:blog-5431045319750071148.post-21569417091509680552009-08-15T09:33:00.000-07:002009-08-15T11:03:52.501-07:00Vivian and the Barbarians<em>"Mr. Lewis and I are going to build ships together, great big ships"</em><br />- Pretty Woman, 1990<br /><br />Flying home recently I was talking with the guy next to me and the subject got around to my company. When I happened to mention that a major market focus for us was private equity his immediate comment was "ah, financial wheeling and dealing, huh?" His reaction was natural since many people today still associate private equity with KKR, LBOs and - yes - Richard Gere's ruthless "buy 'em and scrap 'em" millionaire businessman character Edward Lewis from the movie "Pretty Woman".<br /><br />The fact is the vast majority of private equity firms in the last 2-3 years have introduced a far more operational aspect to the acquisition, management and eventual sale of the companies in their investment portfolios. Major players like TPG, Blackstone and Carlyle all have all built in-house operations groups with a focus on driving bottom line cost savings in portfolio companies through initiatives such as cross-portfolio leveraged procurement. The realization is that these operationally focused programs will ultimately drive more tangible and sustainable EBITDA increases (you knew I'd pull that term out, didn't you?) than any financial wizardry and sleight of hand manipulation of debt to equity ratios and derivative utilization. Smaller, mid-market PE firms are also making strides by appointing "operations czars" to coordinate cross-portfolio cost savings programs and in many cases hiring PE-focused consulting firms to help plan and manage these programs.<br /><br />Over the next few weeks I will be featuring guest commentaries from several PE firm operations executives who have been given the responsibility of spearheading various types of cross-portfolio cost reduction initiatives in their organizations. They'll give a fresh take on how more and more PE firms today are driving genuine value creation and leaving firms in a measurably better state post-divestiture than before they acquired them.<br /><br />I guess it wasn't just Edward that Vivian saved.Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com1tag:blogger.com,1999:blog-5431045319750071148.post-73863994266434363592009-08-10T09:22:00.000-07:002009-08-14T11:19:55.194-07:00Hires That Make You Go Hmmmm....Lot of banter on the blogs recently about the pros and cons of hiring staff from internal departments to fill positions on indirect procurement teams. Over on Supply Excellence, Justin Fogarty in his piece <a href="http://www.supplyexcellence.com/blog/2009/06/22/category-vs-procurement-experience-which-matters-more/">Category vs Procurement Experience: Which matters more?</a> talks about several presentations he has seen from senior procurement executives who in each case saw "great results by actively recruiting for new procurement headcount from other functional areas of the company". Justin specifically mentions AXA CPO Dr. Heinz Schaeffer and Heinz VP Procurement Chris Stockwell, both of whom achieved significant headcount increases in their organizations by transferring in people from Marketing, IT and other departments.<br /><br />The most common argument in support of hiring internal stakeholders into procurement is that the new recruits bring deep category expertise and ready-made stakeholder relationships that could only be acquired by hiring directly from the area in question. By providing crash courses in purchasing and contracting practices these individuals will immediately become "uber-buyers" capable of creating value even in "sacred cow" categories. They will mesh their newly acquired sourcing capabilities with pre-existing domain knowledge and work seamlessly with their ex-colleague stakeholders to implement bleeding edge sourcing strategies that simultaneously drive innovation, quality, service and lowest total cost of ownership.<br /><br />And all this time I thought that building a world class procurement organization and was such hard work! All that search for procurement talent, all that investment in strategic sourcing best practices , and all that relationship building with internal stakeholders. And all I had to do was......HIRE FROM OTHER DEPARTMENTS???? Oh dear, something don't smell right and it ain't the burgers. First of all, are there cases where internal transfers into Procurement have worked out excellently? Of course! Very many. But does that mean it should be utilized as a formal strategy for building a procurement team? Nah, and here's why.... My Top Ten Reasons For NOT Utilizing Internal Transfers as a Formal Strategy for Building World Class Procurement Organizations:<br /><br /><strong>Reason 10.</strong> As a formal organization building strategy it won't always be available anyway - hiring from within is almost always driven by budget pressure and the need to shuffle people internally rather than hire from the outside. When times are good again the source of internal hires will dry up.<br /><br /><strong>Reason 9.</strong> Internal customers usually leave their departments for a reason. Either because they had no option (as in #10 above) or because they are bored or disenchanted with their current work. They are very unlikely to be people who have "always wanted to be in procurement". Consequently they will not necessarily be enthusiastic about their new role which is something a Chief Procurement Officer would presumably want to be the case.<br /><br /><strong>Reason 8.</strong> Closely linked to #10 above, a Chief Procurement Officer needs to be very careful that he/she doesn't set a trend of being prepared to forego hiring from the outside. Regardless of whether it makes sense on some occasions to hire from internal departments, there will come times when the correct decision is most certainly to hire from the outside. If you've convinced yourself and your CEO/CFO that hiring from within can always be the right decision then your chances of bringing on board that stellar external candidate when they become available is very slim.<br /><br /><strong>Reason 7.</strong> The influence that internal hires into procurement will have in helping garner stakeholder support from their ex-colleagues is usually overstated. Again, people who leave departments to join procurement will not usually be the movers and shakers and will usually have cast small shadows among their peer groups.<br /><br /><strong>Reason 6.</strong> Paradigms and mindsets can be hard to break. In my aerospace industry days we hired an extremely capable design engineer into our sub-assembly procurement group and one of the main reasons he struggled was his tunnel vision about specs and unwillingness to consider new supply sources for critical components. Just one example I know but nevertheless one to bear in mind when beaming someone in to fill a supply management slot.<br /><br /><strong>Reason 5.</strong> Crash Training Don't Work. Never Has. Never Will. The thought that you can take an internal customer and over the course of a few weeks "brain helmet" into this person all of the thought capital that has been developed in the field of strategic sourcing and procurement these last 10-15 years is quite frankly insulting to, well, all of those who developed this thought capital.<br /><br /><strong>Reason 4.</strong> Bringing someone into procurement to leverage their expertise in one category seems a bit inefficient doesn't it? Top notch sourcing professionals in most best practice procurement organizations are perfectly able to leverage their expertise across several category areas. Even if a company has a very high spend in say, advertising, parachuting someone in from marketing to talek advantage of their media buying expertise will mean that individual will either have to take on other categories as well (negating the stakeholder expertise argument) or you've just tied up a whole FTE on one category.<br /><br /><strong>Reason 3.</strong> The hire from within strategy makes the basic assumption that differing viewpoints, disagreements and even a measure of conflict are bad things. I question that assumption. Conflict can be good. It airs opposing points of view. It throws out alternative solutions that can be kicked around and evaluated a bit. One of the highest value adds that procurement brings to the table is to challenge stakeholder specifications and requirements. Not to call them wrong, just to push back a bit, engage in some give and take. By simply rebranding stakeholders as procurement folks we're saying that this particular role holds no value. That's plain wrong.<br /><br /><strong>Reason 2.</strong> World class procurement organizations from HP to P&G to Disney have achieved high performing supply management processes by leveraging in an integrated end-to-end fashion the unique capabilities of all stakeholders, including procurement. One of procurement's key roles is orchestrating the interaction of suppliers and various internal customers to maximize service and quality at lowest total cost. If an internal hire truly sees this a role they wish to aspire to through rigorous professional development and job experience in the procurement field then that's wonderful. But again, if it's a Hobson's Choice, then procurement, the individual in question and the whole organization have created negative value.<br /><br />And now....The Top Reason For NOT Utilizing Internal Transfers as a Formal Strategy for Building World Class Procurement Organizations.....<br /><br /><strong>Reason 1.</strong> Building a World Class Procurement Organization that is respected and held in the highest esteem by internal departments <strong>is hard work</strong>.........BUT ISN'T ANYTHING WORTH HAVING HARD WORK? Don't compromise. If you're a CPO looking to create game-changing bottom line savings for your company then market the business case for a world-class procurement organization to your CEO and then <strong>BUILD IT!</strong>Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com2tag:blogger.com,1999:blog-5431045319750071148.post-27006027006672650902009-06-15T08:23:00.001-07:002009-06-16T08:47:36.005-07:00Bo KnewBo Andersson's departure from GM last Friday may have had more to do with a shortage of what we procurement nerds call "addressable spend" than a shortage of bright ideas. The auto maker's former procurement head would have shouldered much of the responsibility for turning GM into a profitable operation post-Chapter 11 and with fewer tools at his disposal than MacGyver on a bad day Bo may have realized the impossibility of his task. Let's look at the numbers based on GM's 2008 financials and you'll feel Bo's pain:<br /><br />Firstly, Andersson would have had two spend bases to work with to create the savings necessary to return GM's operating income to positive territory - purchased content in Cost of Goods Sold and indirect spend in SG&A. Let's do some super-rough calcs to figure out how much Bo would have had to work his magic on:<br /><br />Cost of Goods = $150.6B, so assuming about 70% purchased content this corresponds to a direct materials spend of about $106B<br /><br />SG&A = $14.2B, and assuming about 70% of the SG&A is indirect spend with only half of this being addressable results in an addressable indirect spend of about $5B<br /><br /><p>So let's say total spend under Andersson's management would have been in the range of <strong>$110B</strong>. How much savings could he have theoretically extracted from this total spend base? Well if he did really well and got 8% in direct and 15% in indirect that would be a total savings of $8B in direct and $1B for a <strong>total of $9B savings</strong>.</p><p>Well that's pretty good, right? The $8B savings in direct would wipe out GM's 2008 negative gross profit of $1.4B and contribute greatly towards reducing SG&A (together with non-purchasing savings) and helping achieve at least positive EBITDA if not quite positive net income.</p><p>Ah, but wait..... there's just one little matter. In reality Andersson would NOT have had the full $106B of direct materials to work with. Why? Because the restrictions placed on him under the Chapter 11 operating model now agreed between the UAW and the Obama Administration would have prevented Andersson from being able to execute the full range of potential sourcing strategies he would need to capture 8% savings over the complete direct spend base. This operating model requires UAW approval of sourcing decisions that would impact %outsourced assembly, %domestic vs. %off-shore content, and other various criteria. Net net, <strong>a whole range of world-class sourcing strategies that would have given Bo a fair shot at delivering game-changing cost savings to GM were stolen from his toolkit.</strong></p><p>In reality the genuinely addressable direct spend base that Andersson would have had to work with would have been, oh, maybe 25% of the $106B. I'm just guessing here, and might still be on the high side. This is the part of GM's direct materials spend that for whatever reason has been able to enjoy the benefits of global sourcing, major sub-assembly outsourcing and other best practice supply strategies. And guess what, his ability to extract incremental savings in this spend areas would almost certainly be LESS since, by definition, many best practices are already in place. Realistically he would have achieved a maximum of about 5% further savings on this 25% of the total spend, or only about $1B. Hardly enough to erase GM's 2008 negative gross profit.</p><p>If there's a motto here (and of course there is) it's that.....ultimately.....<strong>a procurement team can only be as good as the addressable spend they are allowed to have and the levers they are allowed to pull</strong>. Otherwise even the world's most talented sourcing and procurement professionals will feel like white water rafters approaching the falls with only teaspoons in their hands for paddles.</p>Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0tag:blogger.com,1999:blog-5431045319750071148.post-12977407027415837962009-06-13T10:06:00.000-07:002009-06-13T10:28:26.022-07:00Pick Your Battles, My Young Sourcerer!Andrew Tsang recently started an excellent discussion "Aligning Ad Agency and Procurement Incentives" over on LinkedIn in the Strategic Sourcing & Procurement Group. Andrew proposes that advertising is a high potential area for creating value through strategic sourcing if marketing and procurement could find a way to reconcile their apparently opposing objectives around cost reduction and revenue enhancement. I absolutely agree with Andrew.<br /><br />Having provided strategic sourcing services to several clients in the marketing category I'd say one of my personal lessons learned is that there are good places and bad places to start when approaching this particular area. For example, striding into the creative area armed with a fistful of RFP templates and value-based SLA metrics is an experience that usually does not end well. One area I have found in my experience to be a sensible starting point, however, is the media buy - particularly print ads in newspapers and magazines. And I'm talking the media BUY, not the planning. Tell a marketing department that you can take their existing media buy plan for the next quarter (down to the geographic markets, specific newspaper vendors, ad specs and quantities) and help them execute that media buy at 15-20% lower cost (this is actually very possible with the state of the ad market today) then you have a chance to deliver an early win that will allow you to build a long term relationship. You haven't challenged marketing's territory around creative strategy or even advertising planning - you've helped them do what they want to do at a lower cost. Now, you may have to play hardball with an incumbent media buying agency or even bring another agency or two into the mix for the client to consider but this is nothing compared to the vertical uphill battle of even suggesting that you may be trying to tinker with the creative process.Mark Usherhttp://www.blogger.com/profile/06444588194810525806noreply@blogger.com0