Archive for the ‘Procurement’ Category

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President Obama Pinpoints the Keys to Procurement Success

January 28, 2009

In his rather low-key (on the Obama-meter) inauguration address, President Obama was spot on when it comes down to procurement practices.

“…those of us who manage the public’s dollars will be held to account, to spend wisely, reform bad habits, and do our business in the light of day, because only then can we restore the vital trust between a people and their government…”

Taking out the fluff, President Obama is demanding that his government’s procurement practice is guided by three principles:

  • Spend wisely
  • Reform bad habits
  • Do our business in the light of day

Or in the words of a purchaser:

  • Do your spend analysis and act accordingly
  • Implement best practice processes
  • Increase spend transparency

Seems simple enough, yet in many areas of purchasing, much spend still flies under the radar. According to A.T. Kearney’s 2008 Assessment of Excellence in Procurement the top 5 percent (aka the Leaders) boast that they have 72 percent of their indirect spend under management, for the followers this number was a disappointing 42 percent. Since the leaders in this study are yielding overall spend related savings that are 2,3 times greater than their followers, not only are they outperforming their peers in the purchasing department, they are delivering a huge advantage in earnings per share versus their competitors, all accounting to getting more spend under management.

Growing up as a strong believer in smart suits, Vespa’s and the power of the crash chord I would offer this piece of advice to those that struggle with getting their spend under management (courtesy of UK mod revivalists The Secret Affair): “This is the time, this is the time for action”. Unfortunalty rock rarely speaks eloquently enough to be fitting in the board rooms, so one can borrow another of President Obama’s inaugural catch phrases:

All of this we can do. All of this we must do.

Posted in Business, Change Management, Procurement, Public procurement, Supply Chain Management | 1 Comment »

How the Irish dioxin scandal exposes some of the difficulties of public procurement

December 18, 2008

In Sweden, traditional Christmas ham is one of the main dishes on the Swedish Christmas table; approximately 7 000 tons of Christmas ham is sold in Sweden each Christmas. Yet recently, the Irish dioxin scandal – which resulted in nearly 100 000 Irish pigs to be culled due to farmers using cheap animal feed – almost upset this tradition.

In Sweden, the dioxin scare was very real and very close to home since food produced with the polluted meat was sold to municipal operations such as schools and elderly care.

Seen from a procurement angle this significantly exposes one of the key challenges for public procurement: what is really the total cost?

Municipal governments in Sweden span over a large range of public offices, where procurement is one, another is health. In this case, the procurement functions had sourced food for municipal operations from large well known firms, yet their eyes were probably firmly locked on the cost per meal. On the other side of the hall (in our factual municipality building) sits the health inspectors, they spend some of their time banning practices which they see as unhealthy, unethical and plain wrong. Sweden has rather strict laws when it comes to keeping animals – whether this is good or bad is another question, for now this is the playing field – resulting in banning standard practices of foreign farmers for the sake of animal safety.

Simply put; procurement has bought goods – perfectly legal – from sources (further down the supply chain) which the health inspectors would have closed down. And these are people that probably know each other quite well; and they are both just trying to do their jobs best they can.

When we say that public procurement is lagging behind procurement practices in general, we often fail to see the vast differences in responsibility between the public and private sector.

Posted in Business, Organization, Procurement, Public procurement, Supply Chain Management | Leave a Comment »

The Right to Choose – Why Pooling IM&S Doesn’t Work

October 27, 2008

Last Friday I was in a meeting with several senior managers at IBX when the question of IM&S pooling came up. As pros and cons were discussed from both strategic and pragmatic angles one of the participants finally blurted out:

The only (IM&S) commodities for which pooling works are those which are so standardized that specifications have become obsolete (such as gasoline), for all other commodities, specifications quickly become so essential (and diverse) that trying to pool even within your own company quickly becomes overwhelming. Pooling across company borders is simply not doable.

As usual I was taking notes of the discussion and as I let my eyes wander across the table I started to realize that maybe he was right, because in front of me were four purchasing professionals who preach the gospel of standardization and consolidation on a daily basis; yet all were taking notes in different notebooks. And if there ever was a commodity that should be seen as a poster child of standardization it is office supplies – after all; we’re mostly talking about pens and paper here; it’s so non-core that even the most liberally minded purchaser could think of it as potentially “five-year-plan:able”.

As the discussion continued I used the notebook example to illustrate the complexity of the issue; when asked all of us had different reasons for choosing our notebook of choice ranging from “it was in the office storage” (which I suppose was the most correct answer from a purchasers point of view) to “I got it for free at a conference” (a good answer from a cost perspective) to my defence of my Moleskine; “I honestly believe that I take better notes in this notebook than in any other” and then I added “and it makes a statement”.

I suppose the quality of the notes taken in the notebooks are only vital to those that assume their notes are core-business; a group of people that are (and should be) quite small to be honest.

Walking away from the meeting one question was lingering in my mind: why is it so hard to standardize IM&S?

Could it be that the same libertarian philosophy that has enabled global trade at the same time work against procurement by emphasising people’s right to choose?

Posted in Business, Procurement, Supply Chain Management | 2 Comments »

Trust matters

October 13, 2008

In these times of turmoil; many cite the lack of trust as one of the key factors in the appearant crash of the financial markets. It goes without saying; the foundation of any business agreement needs to be based on trust; or at least a common understanding; between the different parties.

And this needs to be remembered in the world of purchasing as well. Ponder the following scenario:

Company A is sourcing for suppliers for a certain product. The contract is awarded to Supplier C, and the price is based on a number of different parameters such as volume etc. Yet Company A is experiencing a 50 percent rate of maverick buying for the contracted category (and this is not a very unusual number for many IM&S categories). A well informed supplier knows this; and they will exploit this fact; as a buyer you are not going to get the best possible price because the supplier does not trust you to deliver on your promise (i.e. the predicted volume).

This is where the trust-based e-procurment pitch comes in handy; many purchasing functions experience supplier resistance to e-procurement implementation – and suppliers do this more on instinct than anything else – due to the fact that suppliers rarely see an upside to the initiative; suppliers are still used to being promised one thing and then experiencing something completely different.

When selling e-procurement to suppliers, the purchasing organization needs to stress that they are doing this in order to ensure that suppliers get what they were promised in the negotiations. Once this value is delivered and real trust is restored in the relationship purchasing functions should start to see improved results in their sourcing efforts by becoming a valued buyer/partner; one that delivers on their part of the bargain.

Posted in eprocurement, Negotiation, Procurement, Supplier Management | Leave a Comment »

A Pragmatic Approach to Spend Analysis

August 21, 2008

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:

  1. Agree on a spend tree
  2. Pull supplier data
  3. Pull chart of accounts
  4. Categorize supplier data
  5. Make the data actionable

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.

Posted in Business, eprocurement, Governance, Organization, Procurement, Sourcing, Strategy, Supply Chain Management | 2 Comments »

1st CPOs Economist Forum – Sourcing is the focus in Milano this week

June 10, 2008

June 12-13 see the 1st CPOs Economist Forum; subtitled “Innovative Technologies and Strategies to reduce purchasing costs, improve processes and add value”; take place at the Westin Palace in Milano.

To me, this is of interest in a number of ways:

  • The Economist is acting as organizer and media partner; pushing purchasing and supply chain even more into the limelight.
  • Aberdeen analyst Andrew Bartolini  is making a European appearance. My hopes is that he will share some of the insights that Aberdeen has found in their upcoming Strategic Sourcing in EMEA report. I’ve been lucky enough to partake in a draft version of this report and it includes som rather stunning highlights that expose the different approaches to strategic souring in the EMEA (Europe, Middle East and Africa) region as opposed to the rest of the world. 
  • In the preliminary program, speakers come from two corners: Emptoris and Bravosolutions. Now, that’s a matchup that I’d love to hear more about.

Posted in Best Cost Country Sourcing, Conference, Procurement, Sourcing, Supply Chain Management | Leave a Comment »

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