Organic, original, challenging and aspirational – is this what procurement means to you? Maybe it should.
In a recent conversation with a business partner where we discussed all-things procurement, a new notion came to mind. The more we talked about it, the more it resonated and the more tangible it became. The concept, as simple as it sounds, embodies a holistic vision of what procurement professionals must strive for. We called it “Procurement 100%”.
“Procurement 100%”, is not the same as “100% procurement”. It’s a concept that recognises everything an organisation does is not purely focused on procurement, but that procurement must operate at 100% to enable the organisation to achieve its goals.
Procurement is 100% Organic
Procurement 100% implies that procurement is alive and complex, and that significant effort is required to achieve it. All the moving pieces of an organisation will influence procurement and we must be forever diligent to maintain performance.
Procurement 100% is a moving target, is a relative concept that needs to be assessed and gauged within its ecosystem, as it is no stranger to everything else within a company. It is a set of goals that defines and redefines itself constantly as risks become real and resilience is challenged everyday.
Procurement 100% is both the exemplification of sustainability, and its susceptibility to external variables.
Procurement is 100% Original
The most appealing thing about this concept is that the definition of Procurement 100% will be unique and different for every organisation. Each company must think about what 100% means to the broader vision of the organisation and devise a path and a plan against it to achieve it.
Only one rule applies. Procurement 100% is about achieving full operational transparency, enabling process compliance and capturing value at all times, no compromise.
A procurement function that operates at 100% would be world class – a function that balances process, people and technology in just the right way to enable the most ambitious goals of an organisation without wasting energy. It’s about making the right way to buy the easiest way of buying.
No procurement function is the same, or requires the same energy and resources to reach its full potential. Not every organisation will need the same set of tools, people and expertise in house in order to perform at a high level.
Procurement is 100% Challenging
Procurement 100% is an exclusive club, because it demands mastery of the competing forces of strategic vision and operational functionality. Many companies have great vision, but lack the on-the-ground resources to execute their plan. Others have strong apparatus, tools and operatives, but fail because there is no strategic direction. Everything gets tactical, too granular, and they are unable to change mindsets.
To me, the greatest ideas come from defining, embracing and deploying out-of-the-box approaches that make us a little nervous, where failing is done quickly and learnings are applied before the fear of losing again, anchors us more to our comfort zone where all is safe, where procurement is still tactical at best.
Procurement is 100% Aspirational
Procurement 100% gives everyone a goal, a vision and mission to attain. It speaks about something that must, and can be, measured. Anything under 100% means there’s work to do, everything at a 100% means it needs to be monitored.
I cannot define what Procurement 100% looks like for your organisation, but I can tell you that I don’t know a single entity who has Procurement 100%. It’s not that they don’t strive for excellence and having a high performance procurement function. Those who acknowledge the value of 100% Procurement are the same visionaries who keep raising the bar just before its reached.
What I can tell you is that in the holy trinity of procurement – people, process, and technology – each make up for exactly 33% of your winning formula. Achieving the right balance is the secret ingredient for you to figure out to unlock the full potential of your procurement function.
Technology will only make a difference in supply chain management if it’s tailored directly to your company’s needs.
Let’s get this straight: technology can’t fix everything. There’s no magic wand to solve every supply chain problem.
But technology can make your processes better. That means more time, money, efficiency, happy customers, and happy bosses.
And who doesn’t want that?
I’ve seen companies of all sizes improve their process flow with technology and make huge savings.
But that only happens when two conditions are met:
1) They choose the right technology. What does “right” mean? It depends on a host of factors, but in essence it’s solving a need or filling a major gap. Understand the business need first, then find the tech that fits – not the other way around.
2) The system is used the right way. That means getting full use out of it without exceeding the intended purpose. You get the maximum benefit without depleting other resources.
Don’t get wet
Consider this analogy: you need to go from one side of town to the other in the middle of a storm without getting wet. You know a motorcycle and a car can both get you there in time, but only the car would get you there dry.
This is what selecting the right technology is about. To borrow another vehicle metaphor, don’t use a Ferrari when a Ford will do. An all-singing, all-dancing system might look flashy, but it might be way too much for what your company actually needs.
Procurement and Supply Chain work the same way; getting to the other side of town means nothing more than sustainable profitability, competitive edge and market share. And the storm? Well, that’s just risk mitigation in the business world.
Getting the job done
Here’s a look at how real companies are using the right tech to save money and be more resilient.
Look no further than a global distributor of chemicals who recently chose a full guided-buying suite. They took away the manual labour by processing POs automatically. The result? Increased supplier payment compliance, reduced tail spend, and more resources for tactical and strategic decision making.
The right technology enables and accelerates communication. Your ability to react effectively to market conditions relies heavily on promptness and clarity. Technology can link your business operations to your supply base so you never miss a beat.
Suppliers need to know where things are at any given point. And equally, you need to know what is going on with your supplies, assessing all potential risks. That way, you can mitigate disruption in real-time.
Take a US leader in food distribution for example. We recently led them through a full spend analytics effort to identify cost savings opportunities. The result? They saved USD $10M in one year.
Interpret and analyse data
Data analytics is no longer a competitive advantage; it’s a core necessity. Even something as simple as spend analytics is a powerful tool that can inform strategic decisions at the top level.
Break down silos and bridge functions
From Procurement to Accounts Payable to Operations, technology can provide a collaborative platform that everyone can access and understand. Everyone has access to the full information across the board, taking what they need and staying aligned.
That level of visibility across different functions can showcase how valuable you are to the company. Like a global leader of consumer products who recently leveraged a mix of eSourcing technology and advisory services.
They were able to demonstrate savings on a multitude of sourcing and category events while tying them to the financial goals of the organisation, effectively impacting the EBITDA and Cash metrics.
What CEO wouldn’t love to hear that?
Decrease redundancy, increase efficiency
Technology provides a platform for businesses to digest more, process more and err less. This alone saves significant resources, making the organisation and its suppliers more productive.
Within the supply chain commitments, adequate performance and managed expectations are as critical as regulatory compliance. Technology can provide a platform for managing relationships, honouring commitments, and upholding agreements. All of that leads to better relationships.
Just look at a global pharmaceutical leader who implemented a supplier management module across the board. As a result, it can now classify its entire supply chain based on critical risk metrics.
That means the global operations are adequately diversified and critical suppliers are handling processes and data with the highest security compliance, privacy, and environmental sensitivity.
The smooth road to resilience
All of the companies I mentioned had different priorities. That’s why you need to choose technology that meets your specific needs.
And as you can tell, there are infinite combinations of tools and applications that can be used to “get to the other side of town”. But the idea is to get to the other side not just in one piece, but also in sturdier conditions. It’s about learning in the way, enduring and increasing resilience.
The key to come up with a combination that balances needs with budgets and aligns with your strategic vision, starts with defining what success looks like for your supply chain and those entities who manage it.
Modular, cloud based, and service driven technologies provide the needed flexibility toward the easiest and most yielding path to success.
How do you set a strategy for your procurement function? Discover what to actually do.
How many times have you heard the word ‘procurement strategy’ throughout your career? Hundreds, if not thousands? And how many times have you seen one created and executed brilliantly?
In 2020, especially after this year’s crisis, we all know that a procurement and supply chain strategy is more important than ever. But it’s also more challenging than ever to create the right one, as we posited in our last article Procurement Strategy: What You’re Currently Doing Wrong.
So with all the challenges and complexities that a procurement strategy brings, is it possible to create an ideal one? One that goes beyond a ‘your wish is my command’ strategy, yet doesn’t make the mistakes inherent in a ‘market leader’ strategy?
It most certainly is. And here is how you do it.
Step 1: Assess and define
The first step in setting a strategy is assessing the one that you already have. Think you don’t have one? Think again. As we showed in our last article, all procurement functions have a strategy – whether they like it or not.
If you’re struggling to define your strategy, or it seems like it’s nonexistent, have a look at the choices and activities you undertake every single day. Are you constantly behind, putting out fires left, right and centre and at the mercy of your stakeholders? If so, you’re probably pursuing a ‘your wish is my command’ strategy. Or alternatively, are you rocketing towards an idyllic vision of ‘procurement best practice,’ focusing more on the doing side rather than consultation with your stakeholders? If this is the case, you’re pursuing a market leader strategy which, although it may seem ideal now, will soon lead you astray.
Assessing your current strategy will force you to confront the truth about what you’re doing but more importantly, what is and isn’t working. Understanding your mistakes here will help set you up to create a strategy that does work.
After you’ve discovered your strategy, the next critical step is understanding the strategic priorities of the organisation. For example, perhaps you’ve always been focused on costs, yet your business is more focused on quality? When undertaking this step, as procurement professionals, it’s tempting to pour our everything into it, meticulously researching our business, their competitors, and so on and so forth. Yet with all things strategy, the solution is more important than the problem, so ensure that you spend no longer than a few hours figuring out both your own strategy and that of your business.
Step 2: Identify stakeholders and laser-focus
From a stakeholder analysis perspective, the problem with the ‘market leader’ strategy is that, quite simply, the firm’s internal stakeholders aren’t consulted in its creation. Conversely, the problem with the ‘your wish is my command’ strategy is that stakeholders aren’t consulted here either – they are just left to make demands.
The obvious solution for procurement, then, is to identify your primary stakeholders within the firm, figure out your core offering to them, and define what you will be able to deliver, and what may need to be outsourced.
Dave Pastore, Senior Director, Sourcing Operations, at Corcentric, believes that identifying key stakeholders is absolutely essential to secure buy-in across the organisation:
‘You’ll find that some stakeholders are more inclined champions of procurement than others, identifying them early and collaborating with them will lead to a snowball effect on procurement’s successful collaboration across the organisation.’
To give an example of, let’s say that a business has recognised that their rate of returning customers is low, due to substandard product quality. The primary stakeholders who are concerned by this trend are the executive, customer service team and marketing team – and they are exactly who, from a strategic perspective, you’d need to prioritise. As a procurement function, then, your focus may be on sourcing new, higher-quality suppliers, while also carefully balancing cost considerations, as undoubtedly the finance team would still be a key stakeholder for you. With the focus on product quality, you may then choose to outsource quality assurance or administrative tasks, so you can laser-focus on what will add the most strategic value.
When considering the overall corporate strategy, and which stakeholders to prioritise, you’ll inevitably need to choose the parts of the strategy that you can influence the most.
Step 3: Consider your competitive advantage
When it comes time to decide which strategy to pursue, your decision-making process should be similar to the way that any business decides their own strategy: by figuring out your competitive advantage.
Think about it. How does Starbucks get ahead? By providing better value coffee than Dunkin’ Donuts. And McDonalds? They need to find their unique value proposition and deliver on it, vis-a-vis Burger King. As strange as it may seem, this is no different from you and your procurement strategy.
Diego De la Garza, Senior Director, Global Services, at Corcentric, believes that your competitive advantage may not be just one thing, but rather it should evolve over time:
‘Your competitive advantage should evolve as the environment of the organisation changes, one day the organisation is ripe to capture savings and the next is prioritising process automation.
‘Procurement competitive advantage is predicated on its ability to deliver value to what the organisation needs most.’
Even if your competitive advantage is something that evolves, it still can be challenging to discover. For example, it clearly doesn’t make sense for procurement as a function to compare themselves against other internal functions, such as finance. It also doesn’t make sense for procurement to compare their own function to procurement in another organisation, as that business may have a totally different strategy. Procurement, as with all other internal functions, has an effective monopoly within each individual organisation, so comparison is hard. Often, the most effective comparison is an outsourced provider.
This can often be a useful starting point to define your competitive advantage, though. All things considered, what value can you deliver that an outsourced provider cannot?
Step 4: Play to win
Once you start to understand what value you might be able to offer your organisation, and your stakeholders in particular, create several different strategies with different focuses, and then decide on the one you believe will have the highest chance of success. For example, with the situation described above, you may decide to focus on procuring higher-quality suppliers, or alternatively, technology that can guarantee better quality assurance.
You won’t know which strategy will be the most successful, of course, but ensure that you’ve comprehensively consulted your stakeholders to maximise the best outcome. Then, throughout your implementation, make sure everyone is continually consulted, and informed, especially if requests akin to the ‘your wish is my command’ strategy start creeping in.
Stakeholders are well and truly key to a successful strategy, says Dave Pastore:
‘A key to ensuring the successful adoption of your procurement strategy is to collaborate with those who will be most impacted by it: your stakeholders.’
We all know that strategy is important – but equally, that it’s hard. But by understanding your company’s strategy, then figuring out your competitive advantage as a function and, finally, consulting with your stakeholders, you’ll have the best chance of creating and implementing a strategy that will add the value you know you can bring.
What challenges have you had in setting your procurement strategy? Let us know in the comments below.
How do you set a strategy for your procurement function? Discover what not to do.
In 2020, we’re all au fait with the word ‘strategic.’ Procurement needs to be strategic, metaphorically yells every advice piece we read. What’s the strategy behind that, what’s your function’s strategy, what’s the strategy this year? Exclaim C-suite executives we run into; or perhaps a strategy consultant they’ve engaged.
But when it comes to procurement – what does a strategy even mean?
As an internal function, a procurement strategy is a complex idea. As procurement’s purpose is inherently to serve our stakeholders, should our strategy simply be to do just that? Or should we set a separate procurement strategy, based on best practice we observe in our particular function, elsewhere? Both approaches have their benefits, but also significant downsides. So which one is it, or is it neither? Here’s a detailed explanation of the two different ‘strategies’ that most procurement teams execute, and exactly why they may not be the best choice going forward:
Bad strategy #1 – The ‘Your Wish is My Command’ Strategy
What is the ‘Your Wish is My Command’ strategy?
Ken had not long been in his role as CPO at a utilities company when a meeting entitled ‘Procurement Strategy’ appeared in his diary. He hoped – and assumed – that the meeting would be about the business’s long-term strategy, which he would then translate into a roadmap for his team.
But he was wrong.
Alison, the company’s CEO, told him that he need not bother himself with strategy, because ‘that’s what I’m here for.’ She said, unapologetically, that the job of internal functions like procurement was to ‘keep all internal stakeholders happy’ and that she expected his team to ‘do whatever was required’ to do just that.
‘That was the problem with the last CPO,’ she told Ken, ominously. ‘She was always on a different wavelength, always chasing her own version of success. But while she did that, no one here was happy. Don’t repeat that same mistake.’
Why is the ‘Your Wish is My Command’ strategy so appealing?
The ‘Your Wish is My Command’ strategy, or the idea a procurement function exists to simply do whatever is required by stakeholders within the business, is frighteningly common. This is because the basic premise of this strategy – the idea that internal functions are created to serve the wider corporation – is in fact correct. Many CEOs believe that the business units that create products or support customers should be supported by internal functions. While this is true, it can also be deeply frustrating for functions that need – and deserve – to create their own strategy.
But the problem with the ‘Your Wish is My Command’ strategy runs much deeper than just frustration.
What’s the problem with the ‘Your Wish is My Command’ strategy?
The ‘Your Wish is My Command’ strategy works in theory only; as many CPOs will have now no doubt learnt. By granting ‘wishes’ – so to speak – to a multitude of different commanders, without any regard for what to prioritise or how to allocate resources, staff quickly become overworked, resources get spread too thin, and stakeholders are often underwhelmed. All decisions become reactive and nothing is done well, meaning that the all-important procurement influence is lost, with little room to show value added. Business units start ‘insourcing’ – either doing part of procurement’s job themselves, or looking for cheaper, external resources to do it for them.
Overworked staff, insourcing and little value perceived to be added leads the C-suite to fundamentally question whether procurement is ‘worth it,’ meaning ever-more pressure on cost savings, and eventually, redundancies.
The ‘My Wish is Your Command’ strategy is something that Dave Pastore, Senior Director, Sourcing Operations at Corcentric, has seen too many times – but, in his opinion, it never works:
‘Any strategy that reduces the procurement function to a shared service without providing it with the ability to challenge the organisation is a squandered opportunity at best, and a self-inflicted wound at worst.’
On the surface, the ‘Your Wish is My Command’ strategy seems to make sense. But dig deeper, and it’s a deeply fraught concept that deprives procurement as a function of fundamentally doing what they need to do – adding value.
Bad strategy #2 – ‘Market Leader’ Strategy
It’s clear that the ‘Your Wish is My Command’ strategy is no way forward. So is the opposite strategy, one whereby procurement makes clear choices that set the company apart vis-a-vis other procurement functions externally, the better choice then?
What is the ‘Market Leader’ strategy?
As a new CPO in one of the world’s fastest growing tech companies, Karen thought she’d secured her dream role. And in her first few months on the job, that seemed to be the truth.
As someone who was quite entrepreneurial and strategic herself, Karen knew that to become a ‘market leader’ in procurement, the company needed to invest heavily in tech. The CEO, himself a young entrepreneur, gave Karen the green light to do whatever she needed. ‘Just make sure we’re the best,’ he said, while signing off on a budget that made Karen’s eyes water.
But as time passed by, problems materialised for Karen. It turned out that being ‘the best’ wasn’t as easy as emulating best practice in the marketplace, for a number of reasons.
Why is the ‘Market Leader’ strategy so appealing?
For ambitious CPOs, the chance to implement the ‘Market Leader’ strategy can feel like a career-defining moment. Firstly, it treats procurement with the respect it deserves, and places it equally with the rest of the business in terms of power and importance. Secondly, it just seems like the right thing to do. If you’re trying to be ‘the best,’ why not look for an example of that and then try and do the same?
Creating a ‘market leading’ procurement function may well look good on your CV. It may be the case study that nets you media coverage; that amplifies your personal brand and that makes you an authority in the space. But at the same time, there’s every chance it will fail within your organisation.
What is the problem with the ‘Market Leader’ strategy?
The ‘Market Leader’ strategy seems perfect until you consider one thing: context. And given that procurement is not separate to an organisation, but an integral part of it, context is hugely important.
Take the example of Karen detailed above. What evidence did she have, beyond the fact that she was working for a tech company, that investing heavily in tech was what was needed for her function? Precisely none. Many procurement leaders have chased ‘best practice’ before, only to discover that what might be best in the marketplace may not suit their organisation for a number of reasons.
Jennifer Ulrich, Senior Directory, Advisory, at Corcentric, believes that the idea that you have to be a ‘market leader’ in all aspects of procurement is misguided:
‘You don’t have to be a market leader on every aspect of procurement in order to generate a competitive advantage to the organisation.
‘Doing what is right for the business will put you in a winning position more often.’
While market-leading strategies look externally focused, they actually function more like internal monopolies, where procurement serves themselves, rather than the needs of the business leaders around them. As a result, the function falls victim to the typical problems experienced by monopolies, including arrogance and overresoucring. Managers within the business complain that resources are being used for ‘show’ as opposed to invested in things that would actually give the company a competitive advantage.
As a result, backlash ensues. The ‘value’ added by procurement is again called into question, and the function is seen as the exact thing it is trying to rebel against: burdensome cost.
So how should you set a procurement strategy?
If a ‘Your Wish is My Command’ strategy doesn’t work, and neither does a ‘Market Leader’ strategy, then how should procurement create a meaningful, long-term and effective strategy?
‘Start with defining what success should look like for procurement in your organisation, finding those answers early is a relatively easy way to build a strategy that will drive healthy support across the organisation.’
Want more detail? Discover exactly what to do in our next article: How to Set a Procurement Strategy Part 2: What to do. Join Procurious now to be notified immediately when it’s published.
What does best practice supplier relationship management look like? Not like this…
With sales at her company in freefall due to the Covid-19 crisis, the pressure was on for Sally’s* procurement team to reduce costs. In a desperate pitch to do what she could, Sally decided to issue a letter to all suppliers, asking for an overall price reduction of 5%. In exchange, Sally dangled the carrot of ‘to-be-determined’ commitments that the business would fulfill post-Covid. These could include, she thought, accelerated payment terms, additional volumes, or contract extensions.
What could possibly go wrong, she thought, as she hastily finalised the letters and forwarded them on. Even if most say no, some might say yes and procurement will be lauded as heroes.
We’ve all been in Sally’s position – or if we haven’t, we certainly can imagine being put in it. When faced with the pressure that a crisis brings, isn’t it always the best idea to at least try to reduce costs by asking for a discount? On the surface, it seems like a logical approach – all you need is for one supplier to agree and your effort pays off. But is it possible that taking such a black-and-white approach can end up costing you more than it saves you?
Issue 1: Vague notions of success can’t be measured
In Sally’s situation above, you could argue that ‘success’ looked like one supplier agreeing to discount. But what if they agreed to a 1% discount, would that suffice? Or if they agreed to a 5% discount without complaint, would you ask if you had done more?
The problem with a strategy of ‘doing something and hoping for the best’ is that there really is no benchmark for what ‘the best’ is and whether it has been achieved. This leads to issues with measuring success internally, and naturally, the same question is always asked: how has procurement added value here?
Issue 2: No discount is as simple as asking – negotiation will be required
If achieving a 5% discount was as easy as sending a letter, then procurement would likely be out of a job. Herein lies another problem with Sally’s strategy – it’s unlikely that vendors would respond with a simple ‘yes’ or ‘no,’ leaving her to need to negotiate for whatever she could get.
And these negotiations would not be simple. Those suppliers who may be inclined to agree would expect more clarity and certainty on any future commitments from the company, which could turn discussions sour, quickly.
Those on the other end of the spectrum, however, may feel the need to explain why they can’t offer a discount, and may enter the conversation feeling defeated or exposed.
Whichever way these discussions transpired, they would certainly be time-consuming. In an environment where time is money, you have to ask yourself what the small percentage gains you might secure are really worth. .
Issue 3: Your supplier is in a crisis, too
Supplier Management 101 tells us that we should treat our suppliers like we’d like to be treated. But is sending out a generic request the way we’d like to be treated, especially if we’re in crisis too?
The answer is a resounding and obvious no. Any suppliers that Sally is dealing with would also be deep within this crisis, and may in fact be considering a price increase to save themselves. On top of this, a lack of personalised correspondence could be perceived as insulting to the relationship. The request might net a discount, but it would cost far more than that in future relationship capital.
If Sally’s plan wouldn’t work, then what would?
Step 1: Shore up your fundamentals
In times of crisis, and indeed, in ordinary time procurement must have a clear goal and an execution plan for what is needed for the business operations to continue undisrupted (or minimally impacted) and more importantly, for creatively increasing value to the organisation.
These are essentially the fundamentals required to maintain a strong supplier base and elevate procurement. From a pure supplier relationship perspective, engaging strategic suppliers to assess their crisis preparedness and ability to continue to serve the organisation is the first step.
Step 2: Creatively and empathetically engage your suppliers
Once you’ve got your fundamentals organised, you need to engage your suppliers in strategic conversations about how to creatively increase efficiency, optimize processes quickly, reduce waste (of time, resources and costs), and where possible, decrease costs and deliver additional value.
Beyond this, you also need to discuss with them what value is added, how much, for how long, what are the contingencies. This will help you establish a win-win approach with short and long term impact.
The idea is that a continuation of a growing partnership will drive the right behaviours, not just during this crisis but in the future. Supplier-driven innovation should always be a top priority to both procurement and the entire organisation.
After you’ve finished your initial discussions (and note, these type of discussions should always be ongoing) use learnings from them across all other supplier segments. The behavior you want to drive here is ensuring suppliers not only want to continue doing business with you but are eager to strategize with each other during the crisis.
Going back to Sally’s situation, this approach works for a number of reasons. Even if suppliers couldn’t immediately offer reductions they will be clear on expectations and will be committed to perform at a high level and produce ideas for the company, while increasing supplier engagement and value as a byproduct. Suppliers will be willing to explore solutions to avoid disruption, which is exactly what the business needs. In addition to this, the effort expended is targeted so no time will be wasted and in fact, the time spent may even produce market intelligence that can be brought back to the business to refine their own mitigation strategies.
Also, finally and perhaps most importantly, the role of the procurement will be elevated to a truly strategic function (with lasting impact) to the organisation.
Continue supplier relationship best practice?
For procurement professionals that realised early that Sally’s approach wouldn’t work, none of the advice here on how to rectify it should come as surprise: it is, quite simply, supplier relationship best practice to treat your suppliers in this way.
In fact, for organisations that already implement supplier relationship best practice, they may not even need to take these steps – throughout this crisis, their suppliers may already be knocking on their door with creative mitigation strategies. They may even be using this crisis to bring the relationship to the next level.
But for those who are yet to establish supplier management best practice, this example provides the perfect reason why you need to. Supplier relationships are a key enabler to business success, and when they are strong, the risk of business disruption is greatly reduced.
What have you done to strengthen supplier relationships throughout this crisis? Let us know in the comments below.
Spend Analysis can help build a roadmap on category sourcing and capture savings.
I firmly believe that spend analysis is probably the simplest yet smartest exercise a procurement department can conduct. And I’m not talking about leveraging a spend cube technology and running a GL file to get some rapid classification, albeit, that is the first step many of us take. But how about those of us who don’t have a robust spend technology deployed yet? Well, good news is that the value of analyzing spend is not in the complexity of the tool, or the visualizations that it produces, or even how quick they are produced; but it lies in the power of understanding spend patterns and asking the right questions behind those visuals and tables.
For many years my team and myself have conducted spend analysis exercises in MS Excel or Access and things have worked out very well, and we’ve learned a fair share of valuable lessons in terms of both effective spend classification, as well as result interpretation. This last one critical in operationalizing and mobilizing procurement teams. Unquestionably, these lessons when applied together can become a secret weapon to an organization, and even if every company applies them, the “secret” part of it remains true as every spend profile is different to each company as well as the strategies employed to develop a competitive edge. Here are some of the things, I’ve learned from analysis dozens of spend profiles over the years:
Spend Analysis can help build a roadmap on category sourcing and capture savings. This is no secret, as it is the primary reason why anyone would run a spend analysis. The mechanisms by which spend is classified and categorized help organizations understand where money is going, to which vendors, in which regions, on which categories and how diluted or dispersed spend might be across these areas. Accurately classifying spend is the first step in identifying levers across spend categories, where aggregated volumes might drive value or how “quick-and-easy” it might be for the organization to identify and drive savings to the organization.
Spend Analysis is key to identifying tail spend, even more so, in defining it. Which seems to be almost a bi-product of the spend analysis exercise itself. Because Spend Analysis relies in tying suppliers to categories, irrespective of the taxonomy used, thresholds are typically set based on spend levels, which ultimately will put all the “unclassified” spend in one large bucket conventionally (but not conveniently) addressed as “tail”. Let me tell you a secret, Tail Spend is a big problem for a lot of organizations because that’s where a lot of unmanaged, unsupervised spend goes, this is where procurement policies and procedures die and all controls are lost, but inherently, where a lot opportunity resides. Controlling tail spend is a major priority for organization, especially those who have already executed on a sourcing roadmap and deployed (some) category management.
Spend Analysis helps – very accurately – identify procurement behaviors. Remember that tail spend conversation we just had? Well, analyzing tail spend can help us determine when buyers across the organization are buying from suppliers who are part of managed categories but who are not part of the negotiated deals the organization has in place, repeatability of this pattern with the same “unmanaged” vendor may mean the buyer has a preference towards that vendor, for whichever reason (e.g. buying from Lowes where a contract with Grainger exists); conversely, finding many “unmanaged” suppliers under the same category may mean the buyer isn’t aware of the deals that might be in place with a preferred vendor (i.e. buying from Fastenal, Lowes, Amazon, and McMaster Carr instead of simply Grainger), doesn’t know how to follow a process to purchase from that vendor, or more interestingly, the buyer may have a preferred payment mechanism or process to use, which by the way, it typically defaults to the one that’s easiest. A good rule to follow is that the easiest procurement process should also be the right process, needless to say organically decreasing rogue spend.
Spend Analysis enables compliance by driving visibility into all the things above, and helps us start asking ourselves questions about why we see purchasing patterns that should not exist, define how prevalent they are, what regions or departments are reoccurring offenders or even understand how some of those vendors are being paid. I’ve seen a lot of customers who prefer one payment method over others, some like the P-Card approach as they benefit from the rebates, some others prefer limiting their P-Card spend as much as possible in order to drive technology efficiencies into the payment process – think of dynamic discounting and supply chain financing methods, as some of these benefits.
Last but not least, spend analysis is a tool to mitigate risk across supply base and enhance supplier relationship management best practices. Think about it, knowing how much you spend with a certain supplier can tell you how much leverage you really have to negotiate pricing, but it can also tell you how much you rely on a given supplier to enable the continuous operations of your organization. If a stationery supplier goes bankrupt overnight, your business may be able to stomach that. But what happens when a supplier in a more critical category is badly exposed to risk, perhaps a supplier who produces a patented part to your broader supply chain process across the world? Knowing how much the business relies on its extended supplier network, with a high confidence level, is critical in managing inherent risk and adapt quickly when needed.
The value of ongoing and disciplined spend analysis can offer many insights into how the organisation operates. It provides windows into efficiencies and opportunities that may be captured by the business. Moreover, spend analysis is not a “one-and-done” thing, the more frequently it is done, the clearer the trends and patterns become. If you are able to integrate spend analysis into other valuable source-to-pay tools and technologies, the company can really benefit from quick improvements and a sustainable procurement function. Spend analysis can enable a competitive advantage, you may even want to see it as the most exclusive secret weapon at your disposal.
It might have started with dollars and cents, but what should procurement really be saving now? It’s time to shift the dial.
For years, procurement was stuck in the old ways of doing business. It was the role of the profession to beat down suppliers and the only consideration was cost, but the proponents of this methodology are fast becoming extinct as procurement undergoes a new evolution. While savings will always be an important element in what we do, the important question we now need to address is: what are really trying to save?
I’ve previously spoken about how strategic sourcing in procurement can help us to change the world, but it’s easy to believe that issues like modern slavery and environmental pollution are still beyond our reach. They’re buzz words or problems too big to solve, they’re issues that are unlikely to find a solution within a single career.
But that’s not true. Every day we’re seeing political mandates, new regulations and social pressures that are driving change at an unprecedented pace. However, the window for change to actually solve environmental issues is closing just as fast – meaning we can’t sit back and focus on cost alone if we’re really committed to making change.
Saving vs the Social Good
When we talk about optimising our supply chains, there will never be a time where cost doesn’t form part of the conversation. Even if you’re not solely focussed on cost-cutting measures, there needs to be the ability to invest in solutions that will drive positive outcomes in the years that follow – and that can’t come without the budget to back it up.
In fact, when we look at how much money we’re able to save through strategic sourcing for large multi-million dollar companies, compared with how much their net value can fluctuate on the stock market from day to day, the savings are actually negligible.
What we’re really able to do when
we’re effectively reducing costs within our supply chain is reinvest that money
back into the organisation. This macro-level approach to cost-saving lets you
support the needs, beliefs or even employees of your company to help bring
about changes that will actually have an impact. Whether you’re looking for
widespread industry reform or to bolster your own company initiatives, cost
will always join the conversation.
Saving and the Successful Supply Chain
At Source One, a Corcentric company, we counsel our customers to constantly be improving and optimising the way their companies develop relationship with suppliers. To get the best results and a positive, long-lasting supplier relationship, there needs to be an element of a partnership between procurement professionals and their supply chain.
Good supplier relationships help to create value for both sides of the agreement – whether it’s a new product, process or an improvement that can make everything more efficient. The key piece of supplier and vendor management that is often overlooked is the ability to be creative and innovative to help challenge the status quo.
We’ve seen that by following and developing procurement best practice, and encouraging our suppliers to think about the problem we’re trying to solve together, we can enable these things to have a bigger impact in a tangible and evident way.
What changes the way a company acts?
Not all companies are started with a social responsibility guidebook in place. The organisational stance on environmental, social or political issues usually develops with time and as such, there is rarely a budget set aside for supporting global issues. New regulations or social pressure can both have an impact on the way a company acts.
Its reaction to these pressures is either going to change the way the company is perceived – in market share or reputation – or it will change how the company will need to do business going forward.
For example, a new worldwide mandate will come into effect on 1 January 2020, where all ships and vessels operating anywhere in the world will be required to use fuel with a sulphur content of less than 0.5 per cent, compared with the current regulation of 3.5 per cent.
While those operating in the shipping industry can change to a cleaner type of fuel, they’ll now find these are more expensive due to increased worldwide demand, likewise they could utilise ‘scrubbers’ to essentially clean their current fuel source, but this will come with its own ongoing investment.
Those who don’t comply with these new regulations will face hefty fines – so no matter which solution each company implements we’re looking at $30 billion dollars worth of investment across the industry.
What We’re Really Saving
This type of regulation will fundamentally change how that company does business as they’ll now have to factor in the increased cost of fuel to operate once it comes into effect. This also presents an opportunity for procurement to support the ability for shipping companies to comply, which will present its own positive solutions to environmental issues, while also absorbing some of the cost or finding other ways to mitigate, diversity or reduce their exposure and help lead the way to a more sustainable future.
Procurement really can make a difference, but these outcomes are best achieved when they’re working with and are supported by our cost saving measures rather than being seen as the antithesis to an optimised supply chain. Sure, you can have one without the other, but by reinvesting in the future of the world around us we’ll find the best way forward.
Procurement can do much more than it’s already doing when it comes to sustainability. And together we really can save the world…
Historically, Procurement’s mandate has involved cutting costs and little else. The reputation for barking orders and slashing spend has led to more than a little resentment within certain organisations. Business units are often hesitant to engage with the function. When they do, they’re typically gritting their teeth and counting down the seconds until they can go back to focusing on their own key objectives.
Reducing costs is a noble cause – and Procurement’s top priority. But it’s just the beginning of what Procurement can offer the business and its customers. With its cross-functional position and unique insights into the supply chain, Procurement has the capacity to fundamentally change the way an organisation operates.
In Part 1 of this blog series, I examined some of the life-saving initiatives that Procurement teams across the globe are supporting. Cracking down on modern slavery and optimising disaster response plans, they’re evolving in their role and making it possible for corporate leaders to serve a higher purpose.
This time around, I want to look into Procurement’s efforts to address even broader issues. In addition to saving individual lives, great Procurement teams can potentially save entire species by working to identify and address worldwide environmental concerns.
Procurement Can . . . Save the Planet
Addressing Climate Change
The most pressing environmental crisis of our time, climate change, has dominated conversations among politicians, business leaders, and consumers for more than a decade. While forecasts vary from source to source, it’s clear that rising temperatures and sea levels present nothing short of an existential threat. From a business perspective, the myriad effects of a changing climate could mean a 10 per cent reduction in profits for American businesses. The planet and its people could suffer even more dire consequences.
The global economy simply cannot continue along the path that’s gotten it to this troubling position. For Procurement, the looming threat of climate change should provide the quintessential burning platform. It’s an opportunity for the function to distinguish itself as the value-added entity and to take the lead in designing a totally new worldwide supply chain.
When most of us think of climate change, we think of greenhouse gas emissions. While it’s somewhat reductive to describe such a broad issue through these narrow terms, addressing emissions is certainly a high-impact way to begin promoting responsibility. It’s not nearly enough to clean things up internally. Even organisations that don’t personally burn coal and oil often rely on supplier networks that make an outsize contribution to climate change.
The Carbon Disclosure
The Carbon Disclosure has found that suppliers often account for four times as many carbon emissions as an organisation’s direct operations. This eye-opening fact has inspired a number of businesses to broaden their approach to sustainable business. As organisations gain additional visibility into their supply chains, they have more and more power to enforce a higher standard of responsibility.
Target, for example, has made supplier-generated emissions an important part of its climate goals. In addition to establishing objectives of its own (including a 30 per cent reduction in emissions by 2030), the retailer is asking nearly every one of its suppliers to begin working toward similar goals by 2023.
One of Target’s direct competitors, Walmart is taking a similar approach. The world’s largest retailer is not merely holding its suppliers accountable for cutting down emissions, but offering additional incentives for those who successfully do so. They’ve partnered with HSBC Bank to introduce a new program that will provide better loan terms to organisations who make demonstrable progress.
Data, visibility, and consistent communication will only become more important as Procurement teams work toward cutting down emission and addressing their contributions to climate change. Still CDP reports that just 35 per cent of organisations are tracking emissions throughout their supplier networks. With the wealth of information at Procurement’s disposal growing in scope and the conversations around our climate growing in intensity, there’s no longer any excuse for inaction.
Fighting Ocean Pollution
Paper straws aren’t especially popular, but they’ve already served a valuable purpose. In addition to getting plastic out of the restaurant supply chain, they’ve forced consumers to confront their own reliance on plastic-based products and materials. Simply put, businesses and their customers buy a lot of plastic and Mother Nature is typically the one stuck footing the bill.
Eight million tons of plastic wind up in world’s oceans every year. With consumption expected to surge, experts predict we could see more plastic than fish by 2050. In certain regions, plastic particles are already outnumbering plankton 26 to 1.
With its central role in material purchasing, Procurement enjoys an obvious opportunity to take the lead in identifying and introducing sustainable alternatives to plastics. In 2017, Dell Technologies announced that it would take an especially creative approach to amending its supply chain. The organisation elected to create an entirely new supply chain dedicated to collecting and re-purposing ocean-bound plastics. This initiative provides a perfect example of the wide-reaching effects an environmental initiative can have.
Providing access to near-endless supply of affordable materials, Dell’s new reclamation supply chain helps the organisation cut down on its material spending, create a slew of new jobs for collectors and recyclers, and (most crucially) provide an example for other business leaders to follow.
They’re already partnering with likeminded organisations through their Next Wave program to build a collaborative supply chain for collecting and reusing ocean waste. They expect to reclaim more than three million pounds of it within the next five years.
Dell’s not the only organisation cleaning up its act to clean up our oceans. Businesses throughout the retail and restaurant sector have also taken swift action to address the question of waste. Walmart, Aldi, and Trader Joe’s are just three of the retailers looking forward to a post-plastic world.
Starbucks and Dunkin’ Donuts, for their part, have made headlines by pledging to provide sustainable alternatives to their single-use cups. Each of these projects, regardless of scope or industry, will rely on strong Supply Management minds to steer the ship.
Procurement Can . . . Do More
It’s an unfortunate reality, but time is running out for businesses to take action and pursue environmental initiatives. In the past, organizations might have hemmed and hawed on the subject of sustainability. Fearing higher costs or the hard work of transitioning to new suppliers, they might have looked for excuses to forget about the environment and focus on something more directly relevant. There’s no forgetting about the environment anymore. Reports from organisations like the Intergovernmental Panel on Climate Change suggest that while businesses and consumers have done a great deal of damage, they still possess a valuable opportunity.
Back in 2015, Nielsen confirmed that more than half of consumers will pay more to do business with environmentally responsible organizations. They want to purchase natural, sustainable products from companies that have made green practices a central component of their missions. The conversations around pollution, deforestation, climate change, and other environmental concerns have only grown more intense in the intervening years. Companies that continue to avoid pursuing the “triple bottom line” (people, profit, planet) will soon find themselves growing more irrelevant, unsuccessful, and even controversial throughout the next few.
I look forward to addressing Procurement’s environmental imperative at the Big Ideas Summit. Last year saw thought leaders describe their efforts to identify alternate materials, repurpose recycling, and make Procurement a more purposeful function. This year, I’ll join the conversation by sharing some of the green initiatives my team has spearheaded throughout the last several years. Want to listen in? Make sure to register as a Digital Delegate today.
Do you want a steer from Diego on what your organisation can do with your triple bottom line? You can access this and much more by registering as a Digital Delegate for the Big Ideas Summit Chicago 2019 next week. Even if you can’t be there in person, you can still be in the room. Find out more and sign up today here!
To focus on savings alone is to sell procurement short and miss out on its potentially game-changing capabilities.
A good procurement team can save your business money. This goes without saying. Savings are for procurement what risk mitigation is for legal, innovation is for R&D, and new business is for sales. They’re table stakes, just the very beginning of what a well-equipped and well-staffed function should offer the organisation. To focus on savings alone is to sell procurement short and miss out on its potentially game-changing capabilities.
While reducing costs remains the top priority for today’s procurement teams, it’s high time for the function to evolve its objectives and diversify its value proposition. With visibility across the global supply chain, procurement is perfectly equipped to address the monumental concerns that plague the business world. Labour violations, pollution, animal rights, and ethics – they’re all issues as relevant to procurement as cycle times and pricing.
Simply put, procurement is capable of more than saving money. It’s capable of saving lives and it might just help us save the planet.
Procurement Can . . .
Stopping Forced Labor
It’s appalling that, in 2019, forced labor is still endemic
across various global supply chains. What’s worse is that the United States
imports more “at risk” products than any other country in the world. According
to the Global Slavery Index, the U.S. brought in more than $144 billion of
these products and commodities. They report that electronics, fish, cocoa,
garments, and natural resources like gold and timber present an especially high
On a more hopeful note, the nation’s score on the Government
Response Index ranks behind just the Netherlands. Still, with as many as
400,000 modern slavery victims within its borders, it’s clear the United States
must do more. The scope of the forced labor crisis is such that companies in
nearly every industry are touched by it in some capacity. Due diligence has
grown both increasingly imperative and increasingly challenging. Organizations
like Rip Curl and Badger Sportswear present recent examples of what can happen
when an American business fails to gain and sustain visibility across the
Methods for assessing suppliers, monitoring their behavior, and addressing violations must all evolve. It’s more dangerous than ever to settle for a low price or select a provider based on an incomplete set of considerations. Supplier capacity, for example, is a more nuanced issue than Procurement may have previously considered it. Under-resourced suppliers might partner with unscrupulous organizations if they’re faced with demand that outstrips expectations. The onus also falls on procurement to provide better, more accurate forecasts to avoid such a situation. Data won’t just provide the means to secure better pricing and anticipate consumer tastes, but to eliminate human rights violations.
Forced labor is a shared issue that requires a shared response. It’s up to organisations who purchase high-risk commodities or operate in high-risk regions to collaborate with their competitors. Joining groups like the garment industry’s Fair Labor Association or the Electronic Industry Citizenship Coalition, they can elevate industry wide standards and recognize organizations for setting particularly excellent (or particularly poor) examples.
Supporting Disaster Relief
Few things keep supply chain managers up at night like the specter of extreme weather. As an increasingly volatile climate threatens shipping lanes, roads, and storage facilities, disaster preparedness has become a year-round concern – even for organizations that do not operate in “high risk” areas. In 2018, hurricanes alone caused more than $50 billion in damages throughout the Americas.
Crucially, it’s not just the business world that suffers when hurricanes, earthquakes, and other natural disasters strike. Damaged roads and lost power leave consumers without access to necessities like clean drinking water and medications. Sometimes they’re without these essentials for months at a time. Beyond repairing their own supply chains, well-prepared procurement teams can participate in a broader, more socially responsible form of disaster relief.
Accurate, proactive forecasting makes it possible for
businesses to continue serving their communities even in the wake of natural
disasters. In addition to avoiding disruptions of their own, they’ll ensure
consumers experience minimal disruption. Remember, supply chain hiccups are
often more deadly than natural disasters themselves. This was the case when
Hurricane Maria struck Puerto Rico back in 2017. Experts estimate the vast
majority of deaths were caused by interruptions to the supply chain for health care
and life-saving medicines. In a sense, disaster relief efforts failed because
of “final mile” complications.
Evolving technologies will prove essential for extending
these supply chains and mitigating the human cost of extreme weather. Unmanned
aerial vehicles (drones) promise to play an especially active role. While
drone-based deliveries for food or Amazon packages tend to dominate the
headlines, recent pilot tests suggests they may soon serve a higher purpose. In
the aftermath of Maria, non-profit Direct Relief partnered with Merck,
AT&T, and other providers to test the viability of medication delivery
drones. The drones provide temperature-controlled storage for sensitive
materials and come equipped with real-time monitoring to adjust their flight
paths as necessary. With each party providing their
own expertise and resources, the pilot tests provide a case study in
socially responsible collaboration.
Procurement Can . . . Do More
In the past, organisations may have neglected to invest in sustainable and responsible initiatives. The fear of higher costs and harder work likely stayed their hands. Businesses need to stop asking whether or not they can afford to behave ethically. They should ask, instead, how much longer they can afford not to. More and more, consumers are growing tired of inaction. They’ve also grown increasingly wary of inauthenticity. Where simple greenwashing might have sufficed in the past, new generations of consumer are increasingly skeptical and unforgiving when it comes to corporate behavior. The most recent Deloitte Millennial survey found that a quarter of young consumers don’t consider business leaders trustworthy, less than half consider them ethical. They’re not the only ones. Across every generation, the desire for ethical, responsible business practices has evolved into a demand.
In my next blog, I’ll look at how procurement teams across the globe can (and already do) lead the way on sustainability. Eliminating plastic, identifying sustainable alternatives, and reducing emissions, the function is equipped to set and enforce a new environmental standard.