The one good thing about the fact that Spend Matters editor Jason Busch is on vacation is the fact that he’s prepared a series of best-of-posts to fill the void. The best-of-posts are published almost daily and yesterday’s package was dubbed Best of Sustainability. So, if you want to catch up with green procurement and supply chain sustainability; this is as great a place to start as any:
http://www.spendmatters.com/index.cfm/2008/8/27/Best-of-Sustainability
Earlier this week, Purchasing.com published a short but worthwile interview with Martin Garvin; the former CPO of Dell (Garvin stepped down earlier this year). One of his key messages was the need for procurement to take a step upstream into the business value chain and proactively work with product development.
If someone hired me to go in and in 90 days analyze a company and design an affordable and high-impact procurement organization, the analysis should focus on three areas. First, you have to establish where the money’s going. Secondly, you need to establish what are the most critical technologies to the company—sometimes that means cultivating new suppliers for a critical component. And then you need to establish which suppliers are most strategic—either because of their relationship or they’re most closely connected to your company. Beyond those three key areas, having organization leaders that can work cross-functionally is critical. If you can’t work with the product development organization, for example, then it’s a weakness.
Unfortunatly, many procurement organizations are still seen as a police force who spend their days telling the organization what they can’t do instead of proactively participating in the value generation of the business.
Hopefully, with the help of seniors such as Mr. Garvin speaking out on the subject, this will change for the better.
The green agenda is clearly on the rising. More and more huge corporations are launching “green” initiatives within their organizations. One of these companies is Deutsche Post World Net (DPWN) – one of the largest companies in the world if you look on the number of employees.
DPWN has set-up an initiative called “GoGreen” to reduce the amount of carbon emmissions by 30% until 2020. That sounds like a long-term committment. But in a first step DPWN is starting with improving the carbon efficiency within their own organization by 10% until 2012. If you keep in mind that DPWN (including DHL and Postbank) employs nearly half a million people this will for sure have quite a significant impact on the environment.
But an impact is not only to be expected on the environment. The impact on purchasing will be quite dramatic too. To reach 30% by 2020 it will not be enough to look on the own operations. Basically DPWN will have to take a look on their suppliers and subcontractors also. If they want to achieve this goal they will have to reduce the carbon footprint of every letter or parcel they ship, and every square meter they use and everything they buy. So they will have to ask their suppliers to change and improve their carbon emmissions also. And this will definetely be a big task for the DPWN purchasing organization worldwide.
Lets hope in the names of our children and grandchildren that they will achieve this goal and that other corporations will follow them on this path.
Social networks are definitely the hottest topic of the web 2.0 era. What works in the private consumer market usually comes to the enterprise market with a three to five year delay – the adoption of Web 2.0 to the enterprise is called Enterprise 2.0. But unfortunately it’s not just copy and paste.
If you look at the nature of private social networks four main characteristics drive the offerings and their success:
But looking at the nature of professional work-life in today’s enterprises it’s the exact opposite.
I guess bringing more fun into everyday work-life will not be the showstopper but secrecy, structure and control rules are the holy cows of today’s enterprises. The power and the benefits of social networking within the enterprise can only be unleashed if the organization is open for a change. Companies with an open communication and knowledge sharing culture will be the first to harvest the fruits of the Enterprise 2.0 era.
So do the reality check if you and your purchasing organization is ready for Enterprise 2.0.
… are you ready for social networking?
I think all purchasing professionals agree that spend analysis is the key to successful purchasing and there are numerous schools of thoughts in this area, not to mention the variety of tools that are used for performing the analysis.
The fact is that a pragmatic approach to spend analysis does not necessarily include the use of a dedicated spend analysis solution. Great results can come to those who focus on the big picture; the spend volume and the number of transactions.
In brief, a spend analysis can be described as a five step process:
While the first four phases are pretty straight forward and self-explanatory the really interesting bit is when you analyze the data and plan for future actions.
So, where does one start once you are done with the data gathering, cleansing and categorization? The pragmatic in me likes this five phase approach.
Classify your suppliers
A simple yet effective method is to classify your suppliers into “Good”, “Satisfactory” and “Poor/Lacking Contract”. This gives you a first indication where there is a sourcing potential.
Classify your supplier spend
This can be done using two categories; “Contract spend” and “Open for sourcing”. The suppliers with which you have long term contracts must be omitted when you’re doing the sourcing planning.
Calculate your supply base consolidation
For each sourcing group, count the number of suppliers that account for 80 percent of your spend. A low number means that you’re doing just fine; a higher number indicates sourcing potential.
Classify your sourcing groups according to market segments
Try to use simple and clear categorization; “Commodities”, “High competition” and “Low Competition” works just fine. This allows you to further see where you have sourcing potential, commodities such as raw material often have open markets which publish spot prices (for instance; the DILF driven Kairos Commodities publishes price analysis on many raw material groups); hence the sourcing potential is limited. What you should be looking for in this stage is sourcing groups that are not commodities but still have highly competitive markets, this is where you can find the highest savings potentials. It’s also important to have a look at the length of your supplier relationships (or when you last sourced the category), this can open up even more possibilities.
Decide on appropriate call-off methods to ensure spend capture
Finally, classify your sourcing groups into “goods” and “services”, by adding this parameter to the spend analysis containing transaction volume and total spend, this enables you to assign appropriate call-off methods to the sourcing groups, raising the potential spend capture.
Following these simple yet effective steps allows you to perform a spend analysis that supports your sourcing planning for the coming year, as well as providing valuable insight into roll-out and enhancement of your procure to pay initiative.
Alan Buxton recently posted a novelty bit on his e-Sourcing Place describing how Takashi Hashiyama, president of Maspro Denkoh Corporation, decided how to sell his company’s art collection. In the end he chose the classic children decision-maker paper, rocks and scissors and let the two competing suppliers duke it out playground style.
In the latest issue of Efficient Purchasing, IBX Andreas Bernhard recalled a similar historic moment; Johan Goethe using a second price auction to establish the value of his work:
An auction is basically motivated when you suspect lack of transparency. One of the most famous examples of getting more transparency by using an auction is the German author Goethe, who used a second price auction to establish his market value. In 1797 he wrote to his publisher Vieweg: “I propose to offer Mr. Vieweg an epic poem, Hermann and Dorothea, which will have approximately 2000 hexameters. (…) Concerning the royalty we will proceed as follows: I will hand Mr. Böttiger a sealed note which contains my demand, and wait for what Mr. Vieweg will suggest to offer for my work. If his offer is lower than my demand, then I take my note back, unopened, and the negotiation is broken. If, however, his offer is higher, then I will not ask for more than what is written in the note to be opened by Mr. Böttiger.”
The complete setting of this auction has been analyzed by the game theory experts Benny Moldovanu and Manfred Tietzel in “Goethe’s Second-Price Auction”. Pressure pays off, even in the eighteenth century!
Andreas full article describing different e-auction scenarios can be downloaded from the Efficient Purchasing website.
Recently, Sourcing Innovation published their first white paper in a five part series meant to open the eyes of purchasers to the opportunities that arise as web 2.0 makes its way into B2B. Entitled “Introducing B2B 3.0 and Simplicity for All” it provides backgrounds and details the development of e-procurement and e-sourcing from the early rough stages until today, and starts to point out a direction for where these technologies will go in the future.
We’ve touched upon this subject several times in the past few months (On the Way to Enterprise 2.0 and What SRM Can Gain From Social Networking) so hopefully you’re already aware of the power that the so-called web 2.0 technologies unleash (be it web services, intelligent agents, mash-ups, blogs, RSS etc).
Sourcing Innovation promises that this series of white papers will be published on a monthly basis until the end of the year, with “Simplyfying B2B for Suppliers Enables Buyers” being the title of the september edition.
Most people will say that Spend Under Management is THE most important metric when it comes to procurement KPIs, and I am not one to argue with that fact. But for most companies, and especially those who are still in the early stages of e-procurement adoption or roll-out, Spend under management is too rough to actually track the development of the program.
For the purchasing functions in the early stages of e-procurement adoption, I would propose that they track these three KPIs in order to monitor their progress:
The charm of this pragmatic approach is that these three KPIs can easily be monitored using a seven point scorecard (easily fitting on a single A4 spread sheet), giving management and steering committees a clear and transparent picture of the program development; ensuring managementorial buy-in and increasing risk awareness all whilst keeping purchasing in the driving seat.
After 6 years at IBX and numerous eProcurement implementations, here is my 8 point list of advice on how to make eProcurement a success. Pls add what is missing! Another one can be found here: http://www.spendmatters.com/index.cfm/2008/8/11/Your-eProcurement-Implementation-Sucks-and-What-You-Can-Do-About-It
1. Base the implementation on a detailed spend analysis
As in any larger sourcing intiative, a proper eProcurement implementation has to start with a detailed spend analysis. Through this you are able to define which suppliers to prioritize and call-off methods to use.
2. Vacuum the organization on agreements
To build up good content, you need to vacuum the organization for agreements. My experience is that purchasing seldom has them all. Especially all types of service agreements are scattered around the organization. Try to get a grip of them all and, based on the prioritization from the spend analysis, transform the agreements into a easy to understand content for the eProcurement solution.
3. Implement the entire end to end P2P process
Most eProcurement implementations leave out the eInvoice and Matching part. By that you loose a lot of the potential process saving and even more importantly, you loose an important adviocate for your initiative –the Finance department.
4. Establish or buy an Operational procurement function
The early adopters of eProcurement hoped that the self-service model would make it possible to take away the entire function of operational purchasing. But as things have matured, I think most organizations have realized that employees that do not buy too often, need someone to call to get assistance. Also, for more tactical purchases, i.e. where there is no frame agreement in place but the spend value is high anyway, purchasing should get involved. Hence an operational purchasing function or Service desk is needed.
5. Use a category based approach
All categories are different and are bought and paid for using dirrerent processes. Temporary labour has a different process and a different set of content than for example IT hardware. Therefore, to be sucessful you need to run each category as a small sub project and build up its new process and content. When mapping the current processes and suppliers, you get the advantage of talking to and involving the key buyers/stakeholders in the categoty. That improves the compliance. Most of the marketing job is done before the shop opens.
6. Go beyond catalogue buying
Early implementations had a heavy focus on catalogue products. Unfortunately only a small share of the spend is suitable for catalogue buying. Large categories such as Professional services, Facility Management and Telecom are less suited for catalogues. To get a good coverage, 4 types of channels are needed:
7. Sell and enforce
Sell the new way of working and implement a policy stating 100% usage. Follow up through standardized emails if invoices lack a PO.
8. Measure success and take corrective actions
Establish a set of KPIs to follow the progress on category and org unit level. Improve content and communication in problem areas.
Following up on the latest press release – the half year result of BMW dropped by 35% compared to last year – this was announced 1st of August by Dr. Norbert Reithofer Chairman of the Board at BMW. The announcement resulted in a 10% drop of BMW stocks. Yes, even an apparently safe bank like BMW is struggling with the current market developments (rising prices for raw materials, dropping sales in US and Asia).
It seems that the ambitious savings program “BMW Number One” (see my previous posts) has been started for a good reason. Reithofer also gave a quick status update on the progress of the savings program pointing out that the long term strategy will remain unchanged and that a first impact on results is expected in 2010. The pressure for success is high - or should we hope for a rising dollar?
