1 Procurement Place

Calling Time on Freight Pass-Through Profits: How to Unlock Savings from Inbound Shipping Costs

2012-01-15T14:13:00.000-08:00

by Barnali Dasverma, Director, Treya Partners

“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 inbound 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.

How much visibility do you 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.

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!

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.

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!

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.

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.

Four years between friends?

2011-12-01T09:34:00.001-08:00

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 recent Supply Management survey 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 - here.

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....

Can a Spend Analysis Have an ROI?

(originally published in 1Procurement Place on August 25, 2008)

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!”

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.

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.

So Mark, I hear you all saying exasperatingly, what the Sam Hill does all this have to do with spend analysis? 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. That piece of information would be about SPEND. 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? 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.

How does an organization get these answers? By conducting aSPEND ANALYSIS, 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.

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.

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.

The Magic of BBP

2011-01-07T16:32:00.000-08:00

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 NHS procurement waste “costs £1 billion a year” 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 identified up to 19 different prices for the same pacemaker, and 22 different prices for a surgical tool. 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.

What jumped out at me from this article was the basic question: did anyone even know the NHS was paying all these different prices for the same product? 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.

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 - find out who in your organization is buying this product at the lowest price today and get everyone buying at that price, or "Buying at BBP (Best Buyer's Price)" as some purchasing veterans call the practice.

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 because 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.

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.

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."

Except BBP.

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

2010-09-23T09:31:00.000-07:00

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

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

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

Lessons from the Public Sector

2010-09-17T15:10:00.000-07:00

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

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

By Barnali Dasverma
Manager, Treya Partners

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

Bureaucracy Has Its Benefits: Processes

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

This Is How We’ve Always Done It: Templates

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

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

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

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

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

Trial by Tabloid in Motor City

2010-08-21T19:48:00.000-07:00

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

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

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

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

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

The Art of Clanger Avoidance

2010-08-09T19:05:00.000-07:00

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

Plane Wrong

2010-07-20T11:51:00.000-07:00

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

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

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

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

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

And always carry an extra tank.

Relax? Don't Do It for Competitive Advantage

2010-06-07T07:47:00.000-07:00

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

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

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

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

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

No Baseline? The Joke's On You.

2010-05-23T12:35:00.000-07:00

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

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

"A medium one please" the consultant replies.

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

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

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

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

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

"Hmm, well how much extra is the baseline?

"Another eight thousand, sir"

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

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

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

"And that actually works does it, sir?"

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"Do you think you were right?"

Phew, at Last! Treya Partners Makes the Hot 100!

2010-05-17T20:51:00.000-07:00

Congratulations to us!

Supply & Demand Chain Executive Announces Its Supply & Demand Chain Executive 100

Easy Answers R Us?

2010-05-09T15:50:00.000-07:00

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

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

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

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

Travel – Do I Have To??

2010-03-22T17:56:00.000-07:00

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

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

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

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

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

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

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

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

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

2010-03-21T12:17:00.000-07:00

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

Taking Out the Trash with a Smile

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

Learning How to Say No to the Small Stuff

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

Punting Gently

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

Weaning Internal Customers off Procurement

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

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

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

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

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

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

Tracking Transformation & Focusing on Savings with a Smile

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

Strategy Matters - Sometimes

2010-02-20T23:15:00.000-08:00

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

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

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

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

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

2010-01-29T19:12:00.000-08:00

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

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

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

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

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

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

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

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

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

2010-01-04T16:40:00.000-08:00

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

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

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

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

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

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

Oh, and one more 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.

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!

To Source Or Not To Source...That Really Is The Question

2009-11-28T14:22:00.000-08:00

I 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.

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.

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.

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, not source those categories where the dollar savings does not justify the investment of dollar talent.

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.

Procurement Service Providers - Better Go Get Your Armor

2009-10-25T10:37:00.000-07:00

The 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.

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-

DEMAND ONE – I want big cost savings that I can measure

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. Look for PSPs who will guarantee cost savings or offer benefits-funded fee arrangements. Avoid PSPs who mention "process" or "efficiency" savings or who ask to be paid like it’s 1999.

DEMAND TWO – I want a fast ramp-up of the cost savings during the first year

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. Avoid PSPs whose proposals feature pages of “sourcing wave strategies” and “commodity work teams”. Look for PSPs who offer flexible rapid sourcing approaches, incumbent renegotiations and pre-negotiated contracts.

DEMAND THREE – I want suppliers that meet or exceed the service levels of incumbents so that I face minimum resistance from internal department stakeholders

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. Avoid PSPs who talk only about “mandating compliance”. Look for PSPs who talk about how they will work in an integrated fashion with internal stakeholders during the sourcing process.

DEMAND FOUR – 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

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. Avoid PSPs who won’t consider this. Look for PSPs who will.

DEMAND FIVE – I’d like to pay the minimum possible fees for your services. In fact, where practical, I would like to pay nothing at all

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. Avoid PSPs who persist with ridiculous seven-figure spend management outsourcing pitches. Look for PSPs 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).

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.

Let Me Be Direct

2009-10-04T10:37:00.000-07:00

Procurement 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.

THE DIRECT MATERIALS GAME CHANGING PROCUREMENT INITIATIVE

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.

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!

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.

What role can Procurement play in this? 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.

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. 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.

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.

Who said procurement was all about buying pens and pencils?

Vivian and the Barbarians

2009-08-15T09:33:00.000-07:00

"Mr. Lewis and I are going to build ships together, great big ships"
- Pretty Woman, 1990

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".

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.

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.

I guess it wasn't just Edward that Vivian saved.

Hires That Make You Go Hmmmm....

2009-08-10T09:22:00.000-07:00

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 Category vs Procurement Experience: Which matters more? 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.

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.

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:

Reason 10. 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.

Reason 9. 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.

Reason 8. 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.

Reason 7. 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.

Reason 6. 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.

Reason 5. 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.

Reason 4. 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.

Reason 3. 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.

Reason 2. 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.

And now....The Top Reason For NOT Utilizing Internal Transfers as a Formal Strategy for Building World Class Procurement Organizations.....

Reason 1. Building a World Class Procurement Organization that is respected and held in the highest esteem by internal departments is hard work.........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 BUILD IT!

Bo Knew

2009-06-15T08:23:00.001-07:00

Bo 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:

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:

Cost of Goods = $150.6B, so assuming about 70% purchased content this corresponds to a direct materials spend of about $106B

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

So let's say total spend under Andersson's management would have been in the range of $110B. 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 total of $9B savings.

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.

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, 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.

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.

If there's a motto here (and of course there is) it's that.....ultimately.....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. 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.

Pick Your Battles, My Young Sourcerer!

2009-06-13T10:06:00.000-07:00

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.

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.

Let's Get Critical

2009-06-08T08:11:00.000-07:00

Hundreds perhaps thousands of auto suppliers are right now hoping they are going to make it on to GM and Chrysler's list of critical suppliers. These are suppliers deemed by the auto manufacturers as "critical" to their continuing operations as they continue through and eventually exit Chapter 11. Any company entering Chapter 11 is of course provided protection from its creditors. Most of these creditors are suppliers of goods and services, everything from major subassemblies to office supplies. How it usually goes down is that the biggest suppliers who are owed the most dollars are assigned "critical" status and get paid most of their outstanding invoices at the originally presented payment terms. For GM and Chrysler this means the Tier One suppliers. Lower tier suppliers who don't make it on to the the OEM's list of critical suppliers will not be so lucky. Their payment will generally be extended 30 days or more beyond their originally presented terms or in many cases will be told their payment is "pending". The other shoe to drop for these lower tier suppliers is that their lines of credit will immediately be frozen, meaning that they are unable to make payroll or buy parts from their own vendors.

Hmmm. Those supply risk management gurus among you are already sensing where I am going here aren't you? It will not at all surprise this blogger if we hear about supply outages and quality problems in the months ahead from the new, "streamlined" post-Chapter 11 GM and Chrysler organizations. In protecting the "critical list" suppliers it's very likely that many of the lower tier suppliers will themselves have flatlined and left gaps in the auto supplier chain that will need to be backstopped by alternative sources that will take time to identify and qualify. And even then there may be teething problems in quality and service levels as the new lower tier vendors (many of whom I suspect will be offshore) are onboarded.

So as not to seem totally doom and gloom, this can all be managed. But there will need to be a plan. A plan that starts up front with a holistic set of criteria for defining what a "critical" supplier is over and above it's status as a tier one and it's annual revenues from Hoovers. Factors such as a lower tier supplier's impact on upper tier supply chain performance. Secondly a plan for recognizing that many lower tier domestic auto suppliers will unfortunately fail and that there will need to be early and proactive planning for replacing many of these with new (and in many cases offshore ) vendors. This means sourcing new vendors able to meet product and process specifications, and implementing global supply chain strategies capable of delivering required service levels at lowest total cost of ownership.

Are You Crazy? The Stock-Out Will Probably Kill You!

2009-03-20T06:34:00.000-07:00

"Jimmy, what's the markup on that Belgian Ale anyway?" Colin Davies, an affable Scot, mischievously inquired of the bartender. Jimmy fake squirmed at the question as he placed a second martini in front of Davies' drinking partner, a weary-looking businessman who had been a frequent visitor to the brew pub this week. Bill Pike, CFO of a locally based supermarket retailer, smiled at the banter between the two men, grateful for a brief respite from his day job woes.

"Not enough obviously" replied Jimmy with a chuckle, tucking Bill's bar tab into a glass in front of him . "I'm still working here aren't I?"

"Anyway it's not like the price puts the punters off" Jimmy continued. "I can't keep it in stock. That why you're drinking Bud - I never run out of that." Jimmy winked conspiratorially at Bill, moving away to tend to another customer.

"You see, it's like I was saying" Colin said, turning to face Bill. "Jimmy's situation's no different to what I see with many of my customers. Even with the economy falling down around their ears I have clients who repeatedly run out of the very products that their customers most want. And on top of that, many of those same products are their most profitable as well. There are literally thousands of companies in the United States today that could go out of business because their supply chains are unable to deliver products that their customers are ready and willing to buy."

"Reminds me of our Operations meeting this past Monday" remarked Bill. "Same store sales down 12% last quarter and we still had stockouts for six of our top ten products."

"Top ten products in what?" asked Colin.

"Well, top ten in sales of course" replied Bill.

"Ah, of course" Colin said in a mock-knowing tone. "Tell me - did you have any stockouts for your top ten most popular and most profitable products as well?"

"Well I don't know. I'm not even sure we know what those are" admitted Bill.

Colin inched his barstool closer to the CFO, looked around and leaned in as if about to impart critical information to a fellow undercover operative. Bill smiled at the Scot's melodramatics but bought in to the role-play, cocking his head slightly toward Colin to receive the incoming intelligence.

"What were your net sales and gross profit last quarter?" Colin asked, almost in a whisper.

"Four hundred million sales" Bill replied. "Gross profit a hundred million, give or take a buck."

"Okay, so 25% gross margin. And you've already told me you made a ten million operating loss so your operating expenses were about $110 million. I can give you some ideas for attacking the operating expenses later, but let's focus on the gross margin first. What if I said you could increase your gross margin from 25% to 30% in six months and generate an additional twenty million dollars in operating income on the same quarterly sales? And what if all you had to do to achieve that was avoid Jimmy's mistake?"

"You mean buy more Belgian Ale?"

"Exactly!" Colin laughed. "In your case it would mean ensuring that your most popular and most profitable products are always on your store shelves for customers to purchase. I guarantee if you achieve this you will be in the top quartile of your industry for gross margin. You'll regain profitability and stay profitable even if your sales were to drop a bit further, too. And one more thing - if you address this by transforming your supply chain today you'll remain several steps ahead of your competitors long after this recession has ended. Your above average profitability for your industry will enable you to make heavier investments than your competitors in all aspects of your business, thereby allowing you to maintain a permanent competitive advantage."

"It sounds so obvious - getting customers the products they need. Why aren't more companies doing this today?" asked Bill.

"I'd say one reason is because when the economy was good a company could hide a poorly performing supply chain with sheer volume throughput of products. 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, all that time leaving millions of customers wanting stuff you've run out of and with millions of dollars of stuff they don't want sitting on store shelves or in the warehouse. The problem comes when the downturn hits, your sales nosedive and your 20% gross margin is now trying to satisfy pretty much the same operating expense base. Hello red ink."

"Okay, so I'm biting. How do I achieve 30% gross margin?". The CFO took a furtive, hurried sip from his cocktail, fidgeting a little on his barstool as the other man continued.

"Well, it's not easy but it is straightforward" the Scot started. "First you ask your merchandise operations group to provide you with a report showing stock turnover and profit contribution for each merchandise stock keeping unit - or "SKU" for short - over the last twelve months. What are those? Well, think of stock turnover for a SKU as the number of times that SKU gets replenished in inventory during a year as a result of customer sales. Quite simply, think of a SKU with a high stock turnover as being in frequent demand. And that's completely irrespective of how much this SKU sells for or how profitable it is. It's just a popular SKU, the lucky chappy.

As for the profit contribution of a SKU, this is equal to the dollar profit that an individual SKU makes to a company's total gross profit. To a first approximation it is simply the difference between the wholesale price your company pays the manufacturer and the retail price paid by the customer in a store. A detailed calculation would take into account several other factors such as volume discounts and process costs but for our purposes the simple definition is perfectly adequate."

Bill paused here to sip on his beer, the CFO regarding him somewhat impatiently. Grimacing obvious disapproval at the blandness of his beverage, the Scot continued.

"Now at this point you will need the services of a management consultant" Colin stated in a serious tone.

"A consultant? Why?" asked Bill, suddenly confused.

"To draw a two by two graph" Colin replied. Poker-faced for a couple of seconds, a teasing grin then broke across his features. "Just joking - you will need to draw a two by two but internal resources should suffice." Bill rolled his eyes at the Scot's witticism.

"Funny. Anyway I was Big 6 consultant myself a few years back. I'm a two by two Subject Matter Expert" Bill jested back. "And like any SME I always bring the right toolkit. Here - have a napkin!" The CFO grabbed a paper napkin from a pile on the bar and proffered it towards his drinking partner who received it gratefully, laughing.

"Funny yourself" said Colin, pulling a pen from his jacket pocket and starting to draw on the napkin. "Okay, so here you go.... this two by two has stock turnover by SKU on the y-axis and profit contribution by SKU on the x-axis. Each axis is simply low/high. Using the report from your merchandise group you plot all the SKUs on this graph - it's the top right quadrant we're most interested in. The SKUs in this quadrant are the most frequently demanded and they are also contributing the greatest amount of dollar profits to gross margin."

Colin then peppered the graph's top right quadrant with about half a dozen rapidly penned crosses, each of them representing data points from the merchandise group's report. He then fenced all the crosses with a heavily drawn circle.

"Read my lips" Colin stated, point of his pen in the center of the circle - "MAXIMIZE LINE ITEM FILL RATE FOR THESE SKU's IN YOUR STORES."

"Line item fill rate?" questioned Bill.

"The line item fill rate for a SKU in your store is the percentage of times over some period - usually a year but it can be any time period, say a quarter - that a customer can walk in and purchase that SKU from your store shelf." Colin replied. "For all the SKU's in the top right quadrant of our two by two here you need the line item fill rate to be a close to 100% as possible. If you do this you will be ensuring that those products that contribute the most dollar profits to your gross margin - and operating income as well - are always available to, well, do just that. By actually being there for a customer to buy."

"This is all sounds so simple" said Bill.

"Well, there are a few devils in the detail like deciding exactly how many SKUs should be in the top right quadrant" replied Colin. "And after that, setting a realistic percentage for the line item fill rate target for each SKU that balances the cost of a stockout against the increased inventory holding costs. Plus there are strategies for the other three quadrants that we should also talk about some time that will lower your overall cost of doing business even further. But conceptually, yes it's simple. It will certainly need some dedicated effort from some of your best and brightest folks in your merchandise operations and inventory management areas but the return will be worth it."

"I agree, and quite frankly I've got nothing to lose. If I can't pull things around this quarter I'm probably history."

"Look at it like this, Bill. This recession may be a positive thing for your company. Today, like most of your retail competitors, you've got an underachieving 25% gross margin supply chain that's served you adequately in good times. Now the recession has exposed your supply chain's limitations and you need a 30% gross margin supply chain to get you out of trouble. Move smartly to put the new supply chain in place and you may never be in trouble again. In fact, if as I suspect you end up being one of the first companies to move on this you will end up being one of your industry's highest performers both financially and operationally on an ongoing basis."

"Well I'm intrigued enough to put this to my COO" said Bill, settling his tab and rising to leave. Perhaps I could even loop you in for a conference call if Sarah wants to dive into any of the detail?"

"Sure, I'd be happy to. You've got my card." Colin replied. He stayed seated, obviously settling in for the long haul. The two men shook hands. Bill turned to leave but stopped suddenly and looked back at the still seated Scot."Colin...you mentioned giving me some ideas about attacking operating expenses as well? I'd be interested in hearing about that as well sometime."

"No problem. Just over a hundred million dollars of operating expenses last quarter, right? That's an even easier area to find rapid savings, even though an English buddy of mine treats it like rocket science. If you're around next week I'll tell you how to get another ten million cost savings out of indirect procurement. Oh, and without any seven-step strategic sourcing methodologies or transition management programs either."

"Excellent" said Bill with a slightly puzzled expression. "Without those. Look forward to it!" Shaking Colin's hand again he turned and exited the bar, decidedly more spring in his step than when he had entered two hours before.

"Hey, Jimmy!" Colin called, dismissively pushing his unfinished Bud away from him. The bartender broke away from conversation with another customer, turning towards the Scot. "When you get a moment, let's discuss supply chain strategy for your Belgian Ale."

I'm Mr. Brightside

2009-03-16T09:25:00.000-07:00

CFO walks into a bar, drops tiredly down on a barstool. "Jimmy!" he rasps urgently to the barman, "Get me a gimlet! And get me another while I'm waiting!"

"Tough week?" sympathizes Jimmy as he starts to mix the man's cocktail.

"Tough quarter" the CFO moaned. "The worst. Lost ten million. Next quarter will be even worse. No end to this recession in sight. Could be in Chapter 11 before the end of the year. Where's your roof access Jimmy?"

"Whoah, hold on there fella!" said Jimmy. "Haven't you heard of looking on the bright side?"

"The bright side? How can there possibly be a bright side in all this??" retorted the CFO in wide-eyed dismay.

"Well..." said Jimmy, placing the CFO's cocktail in front of him, "it's funny, but there was this guy in here last night saying how you could keep almost any business profitable by doing only two things. Even in a recession. And in fact, he said, businesses who carry on doing these two things when the recession has ended stay ahead of their competition. Forever. So I said to him that's kind of like a bright side of a recession, isn't it? He laughed and said to me, "I guess it is". "

"Really" drawled the CFO sarcastically, "and what would those two things be?"

"Let me see" said Jimmy, wiping a glass and looking ceilingwards as he worked to recall the man's words from the previous evening, "the first thing was about, um...wait a minute...maximizing high margin life rate and the second was, um, something about realizing rapid indirect fruit...."

"What the...??" said the bewildered CFO, "how much had he been drinking?"

"You can ask him yourself" laughed Jimmy. "He said he'd be in here again on Friday."

Will This Bailout End in Tiers?

2008-12-28T14:44:00.000-08:00

Many of you will have learnt from the auto bailout news coverage that GM, Chrysler and Ford between them owe about $10B to their suppliers. You may also have learnt if you did not know already facts such as the following:

-Parts and components provided by auto suppliers (car seats, dashboard consoles, doors, windows, axles, wheels, brakes, etc.) constitute over 70% of the cost of a vehicle rolling off the production line in Detroit.

-While GM, Ford and Chrysler employ 239,000 people in the United States, the country’s 3,000 or so auto suppliers employ more than 600,000 workers

The "so what" about the above two nuggets is that the "auto industry" DOES NOT EQUAL GM + Chrysler + Ford although you would never have thought so from either the news coverage or the way that the recent $17.4B emergency bailout package was doled out. The Big 3 comprise CONSIDERABLY LESS THAN ONE HALF of the auto industry by either of the two measures above. And yet there is absolutely no guarantee that those auto suppliers in the greatest financial distress and/or those that are most critical to the auto industry supply chain will receive one penny of the initial $13.4B to be distributed to GM and Chrysler. Them two's got their own executive salaries and UAW wages to pay first. Auto suppliers will be paid strictly on a "what's left over" basis.

By way of an additional industry insight, I was speaking to a friend of mine who works at one of the auto industry's major tier one suppliers (i.e. one that sells auto assemblies and components directly to one of the Big 3) who told me that of the $10B owed to the auto suppliers over 50% consists of payables that are aged over 90 days. He also told me that many of the industry's lower tier suppliers (those that sell to the tier ones) are facing payment terms of net 120 days or worse (payment term lengths magnify as you go further down the supply chain). In other words they just don't get paid. It's not surprising then that hundreds of these lower tier suppliers have either gone out of business or will be out of business in the early part of 2009. To make matters worse many of these suppliers produce critical parts and/or tooling that could bring the entire auto supply chain to a halt if they are delivered late (or worse, not delivered at all) to a tier one vendor.

Okay so I'm being long winded again, what is my point here? My point is that surely there should be some type of strategy in place to guide the bailout funds to those parts of the auto industry supply chain that are most critical to driving higher levels of financial and operating performance for the industry as a whole. Sure, a substantial part of this should go to GM and Chrysler. But from my argument above, less than half. When President Elect Obama takes office he should form a Bailout Funds Distribution Team of auto industry experts to define a financial rescue package that ensures money is distributed among the Big 3, key tier one suppliers and supply chain-critical lower tier suppliers in a way that positively impacts holistic demand/supply chain performance metrics. Leave the distribution of bailout money up to the executive suites of GM and Chrysler and with what's left for auto suppliers you'd be lucky to be able to afford a year's subscription to the Jelly of the Month club.

A Lesson in Sourcing from Hugh Grant

2008-12-21T11:58:00.000-08:00

Last night I was watching one of my favorite holiday season movies "Love Actually" and was watching the part where Hugh Grant (playing the British Prime Minister) is giving a press conference following meetings with the U.S. President (played excellently by Billy Bob Thornton). In these meetings the President has said that he will give the Prime Minister anything he wants unless "it is something he doesn't want to give". In the press conference Grant's character calls the President on his bullying tactics saying that the formerly special relationship between their countries has become a bad relationship for Britain. From now on the Prime Minister will make his own demands clear and stand firm on issues that are important to Britain. Go Hugh!

I was reminded while watching this scene of my time as a procurement practitioner in one particular company when I was often invited by user departments to provide assistance with sourcing activities. My relationship with this department was considered "special" from the department's point of view so long as my involvement was limited to providing general guidance on procurement best practices such as RFP procedures, contract templates and the like. On those occasions, however, where I challenged the rationale behind a supplier selection decision (especially when it involved an incumbent vendor) it was made clear that I was going outside of my area of responsibility. So, in effect, the relationship with procurement was only special from the department's point of view if I did not ask for something that they would not give.

What had happened in this instance was that the relationship was not "special" at all but had become a bad relationship for everyone - the user department, procurement, and the company. The user department was making supplier selection decisions based on entrenched histories with certain suppliers rather than an objective evaluation of total cost of ownership. Procurement (in this case, me) was not being assertive enough in challenging user departments with data-driven arguments for considering alternative supply options. And the company was suffering from the relationship because ultimately there were sourcing decisions being made that were not necessarily in the best interests of the organization or its shareholders.

So if you are a procurement practitioner facing the same issues I did how can you turn the relationship you have with your user departments from bad to truly special? Take a leaf out of Hugh's book and hold a press conference. Step out into the spotlight and tell your user departments and your company's senior management that the relationship you have with your internal customers is currently dysfunctional. Tell them that for your company to realize maximum value from its supply relationships there must be open and honest evaluations and communications about the relative merits of alternative vendors. There must be crucial conversations about whether incumbents still offer the most compelling value propositions for total cost of ownership, quality, service and supply risk. There must be a global recognition among internal customers, procurement, senior management and suppliers that the correct sourcing decision is not necessarily the most popular.

For sourcing insights that can be gleaned from "National Lampoon's Christmas Vacation", stay tuned for my next post.

e-RFx: It's Not Just About the TCO

2008-10-25T09:15:00.000-07:00

The most generally accepted value proposition for e-RFx solutions (whether reverse auction, optimization, or online RFP) is their ability to rapidly and effectively drive lowest total cost sourcing decisions through whizz-bangs such as “competition-inducing online bidding environments”, “optimization tools facilitating real-time multi-attribute evaluation”, or one of my personal favorites “a geography-negating virtual collaboration medium where buyers and suppliers can participatively create value-maximizing supply solutions”. Phew, I’d buy it.

The above is all true of course; e-RFx solutions really do help procurement organizations identify and implement lower TCO sourcing strategies than they could before and in less time. One of the oft-overlooked additional advantages of e-RFx technology however is that it also supports the implementation and consistent use of a single, consistent, best practice strategic sourcing process. As an example I have been working recently with a company that decided to transform its procurement department from a tactically focused buying function to a best-in-class strategic sourcing organization. One of the problems that this customer faced was that the quality of the contracts developed by its procurement department varied tremendously depending upon who was doing the contracting. This was because each buyer followed a different sourcing process. One buyer would gather detailed usage and requirements information, develop a structured RFP document, and then follow a formal process to issue the RFP, evaluate responses and make the contract award. Another buyer, for the same or a similar commodity, would follow a far more informal process involving only very rudimentary requirements gathering, issuance of a short bid document to suppliers via email, and a rapid award of business to the successful vendor. The point is not that either sourcing approach is necessarily wrong but that there had been no attempt at this company to define and implement a single process that was agreed to be the best practice sourcing method for that commodity.

The beauty of today’s leading e-RFx tools is that they provide functionality that effectively guides (one could even whisper softly “force”) the buyer through each step of a sourcing process that has been pre-defined as being “best practice” for that commodity. So for a price focused commodity like office supplies a leading e-RFx tool will “guide” the buyer through a sequence of steps including completion of a requirements template that provides suppliers with key data such as projected usage and delivery locations, execution of a reverse auction to set core list prices and off-core discounts, collection of key supplier information, and post-auction evaluation of price and non-price factors. For a more complex commodity such as print, the set of steps could include optimizing the award of business by print sub-category to take into account the fact that one printer can be more cost effective in certain types of print processes than another. For an organization that currently has fragmented and inconsistent approaches to sourcing, e-RFx tools provide an excellent way to define and formalize standard processes for these and other types of commodities.

Of course, e-RFx technology alone will not drive the creation of best-in-class contract and supplier relationships. In many cases there will also need to be a step change increase in buyer skills sets to enable effective management of the underlying sourcing process. That being said, I would recommend that any organization currently seeking to implement strategic sourcing best practices consider the role that today’s e-RFX tools (and also e-RFx’s “sister” e-tools of spend analysis, e-procurement and contract management) can play in helping to support the roll-out and consistent use of a standardized, high quality procurement process. Don’t get me wrong, TCO is clearly king when it comes to the business case for these tools. But the comfort of knowing that everyone in the company responsible for making major supply decisions is using the same high quality process is surely a BIG bonus. Remember...as dear ole Ted Turner would say, or sort of....."Early to bed, early to rise, work like hell and standardize!"

Sourcing Innovation Cross-Blog Series: Seven Grand Challenges for Supply and Spend Management

2008-09-27T12:32:00.000-07:00

Michael Lamoureux, the "Doctor of Sourcing Innovation", is currently sponsoring a cross-blog series on the Seven Grand Challenges of Supply and Spend Management. It is with great humility and not a little London pride that I submit the United Kingdom's entry to this esteemed competition.

1 PROCUREMENT PLACE'S SEVEN GRAND CHALLENGES FOR SUPPLY AND SPEND MANAGEMENT

1. Continue the Strategic Elevation of Procurement

Although much progress has been made in this area there is a lot more to do, particularly in the mid-market and in the public sector. The motherhood and apple pie statement here is “procurement strategy must be an integral component of corporate strategy” or something similar. This is the truism but the hard fact of life is that procurement must do the work internally to make itself worthy of such a lofty positioning. Technical and leadership skill levels must dramatically improve in many procurement departments, salaries must be raised to attract talent, and ultimately the procurement function must be respected and held in awe by internal stakeholders and suppliers alike as a focal point of bleeding edge sourcing practices.

2. Achieve a Truly Seamless Cross-Functional Strategic Sourcing Process

What I DO NOT mean here is inventing another seven-step consulting methodology. What I do mean is reaching a state where the right organizational players are facilitated smoothly into the strategic sourcing process at the exact time that their respective value-adds are required. This could be Engineering during specification rationalization, Manufacturing during supplier capability assessments, or Legal during contract development just to give a few examples. Procurement with its overall end to end responsibility for the sourcing process is in the perfect position to perform this facilitation activity, provided of course it possesses the skills and organizational credibility to perform this task effectively.

3. Optimize the Outsourcing of Indirect Materials

Enterprises will continue to evaluate their investments in the indirect procurement area. Some of the decisions they will ponder include which spend categories to outsource, which processes to outsource for these categories (sourcing? spot buying? purchase order processing? category management?) and whether to utilize “semi-outsourcing” strategies such as Group Purchasing Organizations. My personal belief is that very few organizations will outsource procurement “lock, stock and barrel” but that many will outsource selective processes for selective categories on an as-needed basis, sometimes utilizing more of a staff augmentation model than true outsourcing (“hiring commodity mercenaries” as one of my customers termed it). I also predict more use of accelerated, quasi- outsourcing techniques such as pre-negotiated contracts, particularly in the mid-market and private equity sectors.

4. Pursue Enterprise-Wide Spend Visibility

Organizations will continue to struggle in their quest to obtain visibility of who buys what from whom at what price across the enterprise. Without this knowledge they will be unable to effectively leverage their total spend with suppliers. Some enterprises will continue to believe mistakenly that they will be able to drive all spend through a single e-procurement system and achieve global visibility that way. The leaders in this area will realize that they need a tool to consolidate and analyze data from all systems that could potentially contain valuable spend information whether they be e-procurement systems, accounts payable, p-card or other sources. Oh, and the smart organizations will also realize that you don’t pre-select spend data for analysis based on accounting codes (see A Cautionary Tale of Zero Investment )!

5. Pragmatically Manage All Elements of Supply Risk

Talk about buzz. This one has rattle & hum. Personally, I see a little too much talk of virtual reality dashboards and not enough about what is really important. This means identifying the 20% of uncertainties in the supply chain that drive 80% of service and cost performance and figuring out how to provide accurate and timely information on these uncertainties to commodity managers to guide them in their supply management decisions. I would be ecstatic if organizations would simply improve internal reporting of incumbent performance, routinely subscribe to third party supply risk data sources, and implement formal methodologies for assessing the total cost impact of alternative global sourcing strategies that holistically consider all financial, quality and physical supply chain variables. I agree that the sky is the limit in this area, but let’s get the basics nailed down first.

6. Maximize the ROI of Sourcing and Procurement Technology

Oh so much to relate, so little space. The ongoing headaches here will include answering such questions as “Why do I need an e-sourcing tool if I always get good results with a traditional RFP?” or “Do I really need a spend analysis tool if I have an analyst who’s a wizard with pivot tables?” or “should I buy e-procurement or use my ERP purchasing module?” Those organizations that realize the greatest ROI from their procurement technology investments will be those that ground their decision-making in good old Procurement 101 fundamentals. If your solicitation meets the criteria for a low risk, competitive bid commodity like office supplies then try out a price-focused reverse auction. If you are preparing for a complex RFP such as LTL freight then ask an e-sourcing provider to demo an e-sourcing optimization event. Take stock of where the tool adds value over your standard approach and where it doesn’t. If it doesn’t, stay with what works (though you may be surprised). As for e-procurement, stay grounded in what will ultimately drive most spend through your preferred supplier contracts. Compliance is all about users finding what they want quickly and easily, not about the color of the swoosh or the sound of the bells and whistles. If you are in a state of paralysis by analysis, consider a hybrid approach that utilizes the best of the ERP and the e-procurement worlds (see The Age of e-PERP ).

7. Make Procurement “Chill” or “Tight”

The supply management profession must make itself attractive to young, degreed job seekers who would typically shun a career in Procurement for something more Generation X/Y such as, well, almost anything really. This challenge will revolve around positioning Procurement as a business function that someone can use as a launching pad to progress to the highest echelons of an organization, even the top job itself. This is still a far cry from how “Purchasing” is viewed today, with the exception of a few leading “Medal of Excellence” companies such as United Technologies, Proctor & Gamble and Hewlett Packard. I won’t be satisfied with our progression in this area until the day my college-bound daughter comes home excitedly babbling to me about how she is so, like, awesomely looking forward to embarking upon her Ivy League college experience in the field of Strategic Supply Management.

The Age of e-PERP: ERP and E-Procurement - Can't We Just Get Along?

2008-09-15T09:10:00.000-07:00

One of the most common misconceptions since "eggs are bad for you" or "England can win the next World Cup" is that, when it comes to selecting an automated purchasing system, an organization must choose between ERP and e-Procurement. A large number of Fortune 500 companies that have implemented best-of-breed e-Procurement systems over the last few years have shelved or are considering shelving their software due to problems pushing enough spend through the system. On the flip side, a considerable number of mid-sized companies (and state governments, who often track the mid-market sector in technology adoption) are, like their Fortune 500 counterparts did in the late 90s/early 2000s, considering the switch to e-Procurement due to its perceived functionality superiority over ERP purchasing applications.

What many Fortune 500 enterprises, mid-market companies and state governments fail to realize (with the exception of a few progressive organizations that I will case study in the weeks ahead) is that your e-Procurement system can peacefully (nay, productively!) co-exist with your ERP purchasing module. The secret lies in what each player brings to the table. Your ERP purchasing application brings purchasing transaction workflow that is, by definition, integrated seamlessly with your accounts payable, general ledger, and inventory systems. Your e-Procurement system on the other hand delivers the best-in-breed catalog and content management capability that ultimately represents the secret sauce for driving maximum potential spend through your preferred supplier contracts.

After making a presentation at my local ISM chapter recently I was talking to a VP of Procurement of a local Fortune 500 company who was relating their use of a "hybrid" e-Procurement/ERP approach (let's call it e-PERP, shall we?) that they had been using successfully for nearly a year. In this company's model, users select the products and services they need from multiple online catalogs all hosted in one consolidated "common look and feel" environment by a best-in-breed e-Procurement provider (at least a provider you would think of as an e-Procurement provider although in this model it is their catalog functionality, not their workflow functionality, that is being taken advantage of). But what is key is that once they have made their selection, the complete requisition through payment workflow is conducted within the ERP application. Sounds a bit like the old e-Procurement punch-out, right? Well it does a bit but with e-PERP there are two critical differences, these being:

1. Punch-out (or "round trip" for those of us who remember CommerceOne!) has historically been a method for bringing catalog item data from a supplier's web site into e-Procurement for PO creation purposes. An organization would then need e-Procurement/ERP integration to bring the item data into ERP for reconciliation, payment, posting and inventory purposes. The e-PERP model brings item data directly into ERP, bypassing e-Procurement workflow which is not being utilized. This accomplished by the best-of-breed e-Procurement/catalog provider implementing XML integration directly with the ERP application (Oracle/PeopleSoft and SciQuest do this today as part of their partnership).

2. Whereas punch-out only worked (effectively) for the larger vendors like Grainger and Corporate Express who had the resources to build punch-out compatible web sites, the e-PERP model works even for "Mom and Pop" vendors. This is because the best-in-breed catalog providers have built core competencies for creating and maintaining web catalogs for any supplier (even small local vendors that have never had a web presence before). This means that by using e-PERP an organization - with the help of its best-in-breed provider - can upload all of its preferred supplier contract content to the web catalogs in as little as 2-3 weeks, leading to rapid and effective utilization of its agreements by users and very high levels of contract compliance. This is in contrast to the ERP-only approach where an organization would have to build and maintain supplier catalogs behind its firewall, a far more lengthy and costly endeavor. And the e-Procurement-only approach? Well here you have the integration issue and the need to explain to your CEO why you are not using the ERP system you spent millions of dollars implementing!

Over the next few weeks I will be researching additional case studies of e-PERP in practice. I will be reaching out to companies, public sector entities, e-Procurement and ERP vendors to validate that I am not "smoking something" in thinking that such historically fierce adversaries can co-exist in value-added harmony. I will be looking for further examples of organizations who have realized that you really can have your ERP Purchasing cake, eat it, and enjoy lashings of e-Procurement ROI for dessert.

Oh, and England's chances in the 2010 World Cup? Not a hope.

Surefire Strategy #8 For Producing a Consulting Train Wreck: “Just Focus on What You Can Control, You Can’t be Blamed for the Actions of Others”

2008-09-08T16:31:00.000-07:00

The next of my guaranteed approaches for driving the 4:55 to Deliverable City off the tracks at Milestone Curve is “Just Focus on What You Can Control, You Can’t be Blamed for the Actions of Others”. Strategy #8 typically unfolds something like this –

During the development of your strategic sourcing consulting proposal you include a section, usually somewhere near the back, called “Project Assumptions and Risks” (or something similar) where you lay out all the things that could possibly go wrong on the project and define all the assumptions that must be true for these things not to happen (e.g. business unit buy-in to ensure adequate spend is available to negotiate best possible pricing with suppliers, availability of client resources to support collection of all required data, etc.). You might even define a proactive risk management plan describing actions that can be taken to doubly ensure that the dark events do not occur. This could include steps such as forming executive steering committees, cross-functional project work teams and stakeholder focus groups. You submit your proposal, win the work, and arrive at the client site. You engage first gear and start rolling down the work plan track, confident that (i) you have every possible eventuality covered and (ii) that if something does go wrong it must be some force majeure, the fault for which cannot possibly be laid at your door…..

About six weeks into the project disaster strikes. One of the client’s largest business units decides it will withdraw from the project and instead renegotiate with its incumbent supplier (who had declined to respond to the RFP), effectively removing over 40% of your spend base. Within 48 hours, five of your shortlisted supplier candidates have got wind of the spend that has “left the table” and not surprisingly become much less willing to extend the type of pricing you were hoping for. At a hastily convened executive steering committee meeting, some key of the key dialogue includes:

CLIENT CFO: Quite frankly I was concerned about something like this happening. The complete value proposition of the sourcing exercise was always questionable if we lost business unit support.

YOU: I have to admit I’m very surprised. Sarah seemed completely on board at the kick-off meeting. I guess their supplier decided to do what it took to keep the business.

CLIENT VP PROCUREMENT: Colin tells me that our five shortlisted suppliers from the RFP first round have rescinded their pricing based upon the lower spend. The average contract savings is now only 3% - hardly the solid business case for persuading the other business units to switch….

CLIENT CFO (turning to you): I thought your risk management plan was designed to address every contingency. Don’t we have a plan B? I put my neck out for this project – really hyped it to the business units and the board.

YOU: Well, we did specify that a major assumption was having full business unit support, and like I said Sarah was saying all the right words at the kick-off. I don’t know what else we could have done...

(CLIENT CFO shakes his head in frustration).

Shortly after this meeting takes place the client cancels the sourcing project, pays your firm for services rendered to date and you are left scratching your head about whether you could have done anything differently. Well, could you have? Sarah turning to the Dark Side was outside of your control wasn’t it? Well, it turns out that you could have done something different and you might even have been able to prevent Sarah succumbing to the siren call of her incumbent’s bargain basement pricing. What? You could (in fact, should) have implemented a Stakeholder Management Plan.

A stakeholder management plan is the only way to deal with those pesky client folks who sneak up on you and drop grenades into your project team’s bunker just as you are all enjoying the idyllic peacefulness of a smoothly unfolding work plan. A stakeholder management plan is an approach to unmask these individuals in the earliest stages of project planning so that you can understand their motivations, their objectives and – most importantly - their ability to derail your engagement. A best practice stakeholder management plan should be incorporated into any consulting project that requires the involvement and support of influential individuals that are not members of the core project team. This will certainly be the case in the majority of strategic sourcing projects, particularly those addressing categories where procurement has not historically enjoyed a strong decision-making role. In these cases the following steps should be taken:

Step 1: Immediately post-sale, work with your client’s project sponsor to map key stakeholders on a matrix of “Influence (low or high)” against “Support (low or high)”. Utilize your sponsor’s knowledge of his/her organization to surface issues that may not be instantly apparent such as Sarah’s long term relationship with her business unit’s largest incumbent supplier and the ease with which her support might crumble if the supplier moved to aggressively protect its business.

Step 2: For stakeholders like Sarah you should work with your sponsor to secure her support by suggesting ways that her objectives could be met by supporting the project. For example this could involve asking her to persuade her incumbent to participate in the RFP, or perhaps to more aggressively market the impact that the sourcing project’s savings will have on her business unit’s P&L.

Step 3: Enlist the help of high influence/high support stakeholders to market the positive aspects of the project to the “Sarahs” of the organization, particularly those in similar situations, e.g. ones that have their own incumbent suppliers who stand to be impacted by the sourcing project. Ask these stakeholders to explain why they are supporting the project – task them to bring Sarah into the “high support” camp.

Step 4: Monitor stakeholders like Sarah closely during the project to make sure they stay committed. If they waver, do the work to understand their concerns and leverage your supportive stakeholders as needed to help her maintain her resolve.

Follow the steps above and you will avoid the derailing of your project by client stakeholders over whom you have no control. In fact, by following the steps above – by proactively identifying and managing these stakeholders – you will in fact have a large measure of control over any individual who could foil the success of your project.

In other words – yes, AVOID AT ALL COSTS Surefire Strategy #8 for Producing a Consulting Project Train Wreck “Just Focus on what You Can Control, You Can’t be Blamed for the Actions of Others”!! Implement the antithesis of Strategy #8 instead! Always include Stakeholder Assessment & Management as a formal, integrated component of your project work plan.

A Cautionary Tale of Zero Investment (Originally Released in England Under the Title: "I Didn't Do a Spend Analysis But I Sourced Anyway")

2008-08-31T18:22:00.000-07:00

(Note: the names, client details and even spend categories in this post have been changed to protect the “not so innocent”!)

Following on the heels of my posting “Can a Spend Analysis Have an ROI?” I feel obligated to provide a living breathing example of a situation where someone – in this case a consulting firm - decided NOT to do a spend analysis but plow ahead with sourcing. Okay, it wasn’t just any consulting firm – it was the firm that yours truly was working for at the time (but I’ve worked for so many you’ll never guess which one). And okay, it wasn’t just any project at this consulting firm but it was the project that I was working on at the time. Shame on you, Mark. But hey - I was young and I definitely needed the money!

Anyway here’s the back-story. Our firm had just won a major strategic sourcing project for a $5B consumer products company. Big – about $1.5M in total fees for sourcing of seven spend categories including office supplies, MRO, temps, janitorial services, PCs, corrugated packaging, and travel. How do you think we picked the Magnificent Seven? They sound the typical band of villains, right? Well, it was a very scientific process that unfolded late one Thursday afternoon in the middle of a mid-west summer. I know it was a Thursday afternoon because we would fly in to the client on Monday mornings and fly home Thursday night, and I remember the meeting where the Seven were picked took place just before we all grabbed our taxis for the airport. My Partner and I were sitting with the client’s VP Procurement and a snippet of the conversation went something like this:

CONSULTING FIRM PARTNER: Well Chris, looking at the GL numbers from Charlie (Charlie was a Financial Analyst in Accounting) I’d say we have seven candidates that look perfect for strategic sourcing.

CLIENT VP OF PROCUREMENT: What’s the rationale, Brian?

CONSULTING FIRM PARTNER: Well we usually find that the best categories to pursue are the ones with reasonable spend that haven’t been sourced – that means higher savings – and ones that also don’t present too much of a challenge from a complexity or stakeholder resistance point of view. That way you stand the best chance of capturing some decent benefits while also building the skills and confidence in your organization for taking on more challenging categories later.

CLIENT VP OF PROCUREMENT: Makes sense. So these are the categories? (Looks at the list of the Magnificent Seven). Total spend about $100 million…….that would net us about $10-15 million savings from your estimates, right? I like it. What’s next? Your team will create the detailed work plan?

CONSULTING FIRM PARTNER: Mark’s on it.

What happened next? Well it turned out that three of the categories proved to be massive disappointments after we found that the spend available for sourcing in each of these categories was much less than what had originally been thought. Embarrassingly less, in fact. The reason for this was very simple – the accounting data used to make the sourcing decisions (spend by general ledger code with a few cuts of spend by supplier) had failed to provide the necessary detail and accuracy to make an informed decision. What should have happened? We should have conducted a spend analysis to cleanse the accounting data and classify it into commodity groups based on all the clues available such as vendor name, GL code and cost center. Where we didn’t have enough clues in the data to break out a commodity we should have asked the using departments to help clarify what had been spent with whom. Oh, and we should also have asked whether there were any planned reductions in usage in any of the categories. If we’d done that we would never have picked three of the Magnificent Seven, would never have wasted months of our time and the client’s time chasing minuscule benefits (one category was canned early on, but the other two were continued largely to save face) and – most important – would not have disappointed our client.

What really happened in this case? We believed Charlie from Accounting! Now Charlie is a good guy and does good work. His accounting data works fine for financial reporting and budget planning. But in its raw form it just doesn’t cut it for making effective major resource deployment decisions during the planning of a strategic sourcing program. To accomplish this you need to invest in a spend analysis to transform Charlie’s numbers into meaningful purchasing intelligence. Ignore this advice while recruiting your next “Magnificent Seven” and you may find yourself riding into Sourcingville firing blanks with Charlie watching safely from the saloon.

Can a Spend Analysis Have an ROI?

2008-08-25T08:20:00.000-07:00

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.

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!”

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.

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.

So Mark, I hear you all saying exasperatingly, what the Sam Hill does all this have to do with spend analysis? 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. That piece of information would be about SPEND. 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? 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.

How does an organization get these answers? By conducting a SPEND ANALYSIS, 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.

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.

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.

A State Gets Smart

2008-07-31T12:06:00.000-07:00

Those of you who follow the public sector space may know that the State of Georgia recently selected SciQuest's e-procurement tool. State agency employees in Georgia who need to buy anything from pens to asphalt will shop in SciQuest's web-hosted electronic catalogs which will be populated with pre-priced goods and services from the State's existing supplier agreements. This decision by the State of Georgia is notable for two reasons - (i) it is another example of an organization electing to carry out its purchasing transactions in a best-of-breed e-procurement tool as opposed to the purchasing module its existing ERP system (numerous Fortune 500 companies have gone the EP route following sunk ERP investments and the State of Georgia already has PeopleSoft) and (ii) it is also an example of another state government that is moving ahead strongly with a strategic procurement initiative (other states moving to transform their procurement function include Virginia and Indiana to name just two).

The shunning of ERP's historically much-maligned inbuilt purchasing functionality in favor of e-procurement is a trend that I would expect to continue both in the private and public sectors. Not so much due to application functionality (a gap that that I would say doesn't really exist anymore since the ERP vendors have refined the workflow in their own e-procurement modules) but due to the fundamentally different way that the best-in-breed providers and ERP vendors handle catalog content. All of the e-procurement providers utilize web-hosted catalogs pre-populated with many of the vendors and products that most buying organization will need (and with the capability to have the organization's specific contract pricing built in). And if a customer has vendors that are not already in the pre-populated catalog it is a simple task for the e-procurement provider to request product and pricing from those vendors and load them into their web catalog. With an ERP provider's e-procurement solution, however, you are most likely going to have to build your catalogs behind your firewall, involving considerably much more time and expense. And now that the best-in-breed e-procurement providers all integrate so perfectly with ERP (e.g. with accounts payable to enable payment reconciliation), why would you ever go the ERP purchasing route? I wouldn't.

As regards Georgia's general procurement transformation initiative, expect to see a lot more of this from state governments in the next 2-5 years. State governments have long presented a massive challenge for creating value from procurement due to their extreme decentralization. Often hundreds of state agencies within a state making their own procurement decisions and developing their own price agreements with suppliers. To complicate matters even more, agencies usually have their own financial and purchasing systems meaning there is no centralized store of data from which to build a consolidated picture of total state spend by category, supplier and agency - key information for identifying and developing aggressively discounted price agreements with suppliers. Rounding out the challenges for states in the this area are a lack of a strong mission/vision/strategy for a center-led approach to procurement and a shortage of strategic sourcing skills among current state procurement staff.

As regards my state procurement crystal ball I would expect to see (or would HOPE to see) state governments address the following five areas:

- Develop and broadly communicate a center-led strategy for procurement in the state with the centerpiece being a strategically focused, "center of excellence"-based central procurement group

- Conducting a best practice spend analysis to develop a consolidated cross-state picture of spend by agency, supplier and agency

- Based on the spend analysis, develop and implement a sourcing roadmap with the objective of maximizing the amount of state spend under cross-agency ("state-wide") leveraged price agreements

- Upskill the central procurement group with the required training in best practice strategic sourcing methods (or hire where needed)

- Implement a state e-procurement system with web-hosted electronic catalogs to drive maximum spend through the new price agreements

Guest Starring on E-Sourcing Forum

2008-07-17T23:48:00.000-07:00

Just a heads up to my global audience that for a while I will be guest blogging regularly on E-Sourcing Forum, one of the most widely read blogs on procurement and spend management. E-Sourcing Forum is written by my friend David Bush, CEO of Iasta. Iasta is one of the leading providers of e-sourcing software and services, providing solutions for spend analysis, strategic sourcing and contract management. I'm not sure that Dave knows what he's letting himself in for, and I fully expect to be fired when Dave realizes how much my posts are lowering the tone of the place. Nevertheless, ESF will be where you can find me. Some of my upcoming posts will include:

Can Spend Analysis Have an ROI?

".....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....."

A Cautionary Tale of Zero Investment (Released in the UK under the title "I Didn't Do a Spend Analysis but I Sourced Anyway")

A tale of dry holes and those who drilled them.

Surefire Strategy #8 For Producing a Consulting Train Wreck: "Just Focus on what You Can Control, You Can't be Blamed for Someone Else's Actions"

The pitfalls of assuming that you will not be held accountable for the mis-deeds of those over which you hold no sway.

Can a Spend Analysis Have an ROI?

2008-07-06T10:16:00.000-07:00

First of all I hope everyone had a great 4th of July holiday! To those of you who spend much of your work week waiting in airport security lines I also hope you were able to take valuable time out to spend with your loved ones.

This is a just a quick line to give some some early warning that one of the subjects I will be diatribing about next week will be the oft-asked question "how do I quantify the ROI of a spend analysis?". Now come on, admit it, you've asked this question at least as many times as "what happened to the equity in my home?" or "how do I get hold of a Prius?".

See you in the week...

Surefire Strategy #9 For Producing A Consulting Train Wreck - "Sub Out the Work, Go Do Something Else, then Check in with the Contractor at the End"

2008-06-30T14:53:00.001-07:00

Welcome to my next surefire strategy for bewildering your customer with your ability to snatch defeat from the jaws of consulting project victory. Strategy #9 is an oft-followed approach that goes something like this

1. Prime contractor wins a major piece of business following an RFP process

2. Prime contractor now realizes that he won't be able to do all (or in some cases ANY) of the work that he so creatively described himself as being able to do in his RFP response. This could be for a number of reasons including but not limited to:

- he doesn't have the expertise required
- he doesn't have the bandwidth or the staff to do the work himself
- he would rather spend time selling the next piece of work rather than deliver this one

3. Prime contractor rapidly finds and hires a subcontractor (who is generally an expert in the work that has been sold) to do the work. Prime contractor reviews proposal with subcontractor, provides cursory explanation of promised deliverables, and negotiates hourly rate for subcontractor to complete the work while still leaving a fairly attractive profit margin for himself.

4. Prime contractor leaves subcontractor to do the work while he, well, does something else.

............................TWELVE WEEKS LATER............................

5. Prime contractor returns from Maui and drives directly from LAX to client site to meet with subcontractor for review of final deliverables. On arrival at client, prime contractor is horrified to learn that:

- Project is four weeks behind schedule
- Subcontractor has already billed an amount equal to your budget and is demanding additional payment to complete the project
- Subcontractor's travel expenses are equal to 40% of project fees
- Customer is withholding your final payment pending delivery and acceptance of the final deliverable, still four weeks away

6. Prime contractor fires subcontractor and completes the work himself. In some cases the prime contractor will even need to hire another sub if the work requires expertise completely outside of his comfort zone, making the project economics even worse. Results? Late and sub-par deliverables, miserable profit margin, and - perhaps worst of all - a very unimpressed client who will likely hire their mother-in-law rather than you the next time they need a consultant.

What went wrong? Well, by following "Surefire Strategy #9 for Producing a Consulting Train Wreck" the prime contractor above completely failed to adhere to some of the cardinal rules of SUBCONTRACTOR MANAGEMENT, namely:

Rule 1: Clearly identify subcontractor requirements for your project DURING THE SALES PROCESS and identify and shortlist subcontractor candidates well in advance of you winning the work and certainly well before kicking the project off.

Rule 2: Should you win the work, interview your shortlisted subcontractor candidates. Evaluate them based on their understanding of the project's deliverables (which you will VERY clearly define for them) and their ability to persuade you of their expertise and capability to deliver.

Rule 3: Negotiate compensation with your selected subcontractor whereby payment is tied to the SUBCONTRACTOR COMPLETING DELIVERABLES THAT ARE ACCEPTED BY THE CUSTOMER. That way, even if you are indeed in Maui, the sub has an incentive to produce high quality and timely deliverables.

Rule 4: For goodness sake, demand at least twice-weekly status reports from your subcontractor during the project. Preferably, visit the project site at least every other week.

Rule 5: STAY IN TOUCH WITH THE CUSTOMER. Although you are outsourcing the delivery of the work, NEVER OUTSOURCE THE CUSTOMER RELATIONSHIP. Put in at least a weekly call to your main client sponsor to make sure that she is happy with the progress of the project. Remember, the customer doesn't necessarily need to know that your subcontractor is actually a subcontractor (unless, of course, you are bound by the terms of your contract with the customer to disclose this) - for all they know the subcontractor is one of your employees. And you would always keep on top of the work of one of your employees, wouldn't you?

In other words, AVOID AT ALL COSTS Surefire Strategy #9 for Producing a Consulting Project Train Wreck – “Sub Out Major Parts of the Work, Go Do Something Else, and then Check in With the Contractor at the End”!! Implement the antithesis of Strategy #9 instead! In this particular case, this means following the CARDINAL RULES OF SUBCONTRACTOR MANAGEMENT above.

Are you getting into the swing of this "Implement the Antithesis" thing yet? Good!!

Next week, visit 1Procurement Place for Surefire Strategy #8 for Producing a Consulting Train Wreck - "Just Focus on Things You Can Control - You Can't Be Blamed for the Actions of Others".

Is There Such a Thing as Knowledge Transfer?

2008-06-27T16:48:00.000-07:00

This consultant was talking with one of his clients this week about knowledge transfer on consulting projects. Specifically, does it ever actually happen? The standard vanilla consultant script on this subject (which I have personally delivered OH so many times) is something like:

"Well, there are a three main ways we could make knowledge transfer happen for you, Steve. One approach is for us to lead the engagement and for one of your guys to shadow the consultant lead on each category team. That way, your people will pick up the skills as they watch our consultants do the work. A second way is formal classroom training courses which we would deliver to your folks. At the completion of the training your staff would have the skills to execute the work themselves. A third way is to use a combination of the two". (Have you noticed how the third way is always a combination of the first two? Hmm.)

What do you all think? Which is the best way to transfer knowledge to client staff on consulting projects? Do any of them really work? I have my views. I want to know yours. Let's discuss next week.

Also next week - a little late I know, but what's new (Hey! I'm Working Here!) - Surefire Strategy #9 for Producing a Consulting Project Trainwreck - "Sub Out Major Parts of the Work, Go Do Other Stuff, then Check in with the Contractor at the End".

Surefire Strategy #10 For Producing A Consulting Project Train Wreck - "Have Faith That Everyone Will Know What This Project Was All About At The End"

2008-06-20T23:14:00.000-07:00

So here we are folks, the first of my proven strategies for ensuring that your consulting project never actually delivers a single ounce of value for your client. And remember, the key is to ultimately identify the antithesis of this strategy and implement THAT instead! Surreal I know but then the writer of this blog is British and very much a fan of all things Monty Python.

The "Have Faith That Everyone Will Know What This Project Was All About At The End" strategy refers to the approach of never actually letting the client in on the secret of what you are planning to deliver by the project's end. These projects generally start out well enough but invariably reach a point where client and consultant have a conversation something like the one below:

CLIENT PROJECT SPONSOR: Thanks for meeting with me at short notice, Jim, but I have a concern about something. I’m sure it’ll only take a minute to clear up.

CONSULTANT PROJECT MANAGER: Sure, Susan. What’s the problem?

CLIENT PROJECT SPONSOR: Well, I dropped in on Rob this morning to get an update on the project and he showed me the Phase 1 deliverable document you guys have just finished. I was a bit confused. It wasn’t quite what I expected.

CONSULTANT PROJECT MANAGER: Really? In what way?

CLIENT PROJECT SPONSOR: Well quite frankly I’d been expecting more from eight weeks of work than a PowerPoint document with a few tables on observations and issues. Didn’t we talk about “as is” process flows? And what about the item level savings analysis? All I saw were some industry average percentages applied to the same numbers our accounts payable group gave you in June. There’s more detail behind what Rob showed me, right?

CONSULTANT PROJECT MANAGER: Hmmm, well not really Susan. I think we talked about process flows being something that could be done in some situations but that what made more sense here was working with stakeholders to get to key issues. We’d then structure the to-be vision to directly address these issues. As for the savings analysis, well we always said that the ability to go the item level would hinge on being able to collect the data. Unfortunately we just couldn’t get the data from the field so we had to use the accounts payable numbers.

CLIENT PROJECT SPONSOR: I have to admit, Jim, I’m not happy about this. I had a very different picture of where we would be at this stage of the project. Until I feel expectations have been better met I’m going to delay signing off on the Phase 1 deliverable. Let’s pull the project team together at 2 o’ clock and figure out how to fill in the missing pieces.

What eventually transpired in the project above? Susan found out in the meeting that the field had indeed been unable to provide the required data and that the smartest and most resourceful consultant in the world would never have been able to generate the “promised” item level savings analysis. And the as-is process flows? If producing these flows had been expressed as a must-have requirement at the beginning of the project it had never been documented. Susan ultimately became resigned to the fact that she had no clear grounds to deny payment to the consultants for the Phase 1 work. What she did do, however, was to exercise her right to terminate the project before embarking upon Phase 2. Losers all round – the client received no value from its perspective and the consultant lost the remaining revenue as well as the chance to ever do business with that particular client again.

What went wrong? First, it is clear that the major work products and deliverables for this project were not clearly defined up front. It was the responsibility of Jim to provide clear and unambiguous definitions of these to Susan before the start of the project. It would then have been clear whether or not process flows were to be produced or not. Secondly, expectations were not set with the client about potential project risks and the impact of these risks on project deliverables. If Jim had explained to Susan up front about the risk and impact of not being able to collect the item data then Susan could have made an informed decision about whether to move forward with the project or not. But because the risks were never explained she never had the chance to make that decision.

The takeaway from the above is:

Always define clear and unambiguous work products and deliverables for your project and, in addition, set clear expectations about potential project risks and the impact of these risks upon the work products and deliverables.

In other words, AVOID AT ALL COSTS Surefire Strategy #10 for Producing a Consulting Project Train Wreck – “Have Faith That Everyone Will Know What This Project Is All About At The End”!! Implement the antithesis of Strategy #10 instead! Get the idea? Good!

Coming next week – Surefire Strategy #9 for Producing a Consulting Project Train Wreck:

“Sub Out Major Parts of the Work, Get On With Other Stuff Then Check In With The Contractor At The End”

Coming Soon - TOP TEN SUREFIRE STRATEGIES FOR PRODUCING A CONSULTING PROJECT TRAIN WRECK!

2008-06-16T23:11:00.000-07:00

So I'll admit this has been a very inauspicious start for the 1 Procurement Place blog. Nearly two weeks late for our own opening! To the millions of you worldwide in sourcing & procurement land who were awaiting the inaugural post there are no grand excuses except.........we were busy. Busy selling and delivering, selling and delivering...or perhaps I should say....selling and wondering how to deliver? No just joking. But my colleagues and I have indeed been doing what we all love to do which is spending time with our customers, potential customers, alliance partners, and other members of our industry peer network. Which is to say that we - or rather I (as I was the original instigator in our firm of the "non-traditional and controversial procurement blog" idea) have not been able to light the blue touch paper on this thing. That is about to change however......I promise! For this week, 1 Procurement Place will unveil the first of its TOP TEN SUREFIRE STRATEGIES FOR PRODUCING A CONSULTING PROJECT TRAIN WRECK. Any one of these strategies, if implemented by a consultant, will guarantee the unequivocal and stunningly visual failure of your consulting project and in the process also ensure that zero value is created for your client. Conversely, and infinitely more sensibly, recognizing and implementing the antithesis of these strategies will delight your customers and elevate your standing to that of "Value Creator"! Can't wait? You'll have to, but only a little longer.........

Welcome to 1 Procurement Place!

2008-05-01T09:04:00.000-07:00

Welcome to 1 Procurement Place. Beginning on Monday June 2nd 2008 this will be your stop for a refreshingly different take on the worlds of procurement and consulting. Join us for controversial opinions, insights and actionable takeaways in subject areas where the founders of this firm have spent way too much of their lives! We will deliver our points of view on subjects such as:

What is this spend analysis thing anyway? Will it increase my bonus?

What the Sam Hill is leveraged procurement and what does it have to do with private equity?

Okay, I've strategically sourced - where did my freaking savings go?

You want me to use a GPO? Do I look like I need a doctor or something?

It's going to be fun. And we may even help you identify, capture and sustain some greenbacks while we're at it. Or was that find, get and keep? I can never remember....

Mark Usher
Co-Founder and Partner
Treya Partners