Procurement 2024 or Procurement’s Greatest Hits? McKinsey’s on the money, but … Part 2

… in some cases this is money you should have been on a decade ago!

Let’s backtrack. As we noted in Part 1, McKinsey ended Q1 by publishing a piece on Procurement 2024: The next ten CPO actions to meet today’s toughest challenges which had some great advice, but in some cases these were actions that your Procurement organization should have been taking five, if not ten years ago. And, if your organization was doing so in these cases, should be moving on to true next actions the article didn’t even address.

So, as you probably guessed, we’re in the midst of discussing each one, giving credit where credit is due (they are pretty good at strategy after all), and indicating where they missed a bit and tell you what to do next if you are already doing the actions you should have been doing years ago. And, just like we did to THE PROPHET‘s predictions, grade them. In this second instalment, we’ll tackle the next three actions, which they group under the heading of:


4. Manage Volatility. B+

If Procurement doesn’t manage volatility, those savings they project never materialize. Hence, this is something Procurement should be doing every single year, so this is not really a next step — it’s an ongoing action. However, macroeconomic drivers are in flux and need to be monitored, and planned for, more regularly this decade than in the 2000s and 2010s. The organization needs to have multiple sourcing strategies for each of its categories based on potential shifts in the market driven by these macro-economic drivers, and be ready to play offence instead of defence.

5. Optimize Operations End-to-End. A-

Procurement should be constantly optimizing its operations, so this is not something that should be new. However, it needs to take another step up the optimization ladder and go beyond Source-to-Pay+ and include supply chain operations in its planning and make sure everything is in synch in its planning. In addition, a deeper integration with finance and market monitoring, risk management and risk monitoring, and logistics and delivery monitoring is also required for better optimization of procurement operations.

6. Integrate ESG and optimize upstream Scope 3. A

While sustainability should have been a front-and-center concern since it became clear near the end of last decade if you didn’t get ahead of it, you’d be behind (and in trouble when the legislations rolled into effect). However, while sustainability was clear, and targets were clear, it wasn’t necessarily clear (without thinking about the issue) that you would have to focus on not only tacking upstream Scope 3, but on how you will need to help those suppliers, possibly a few tiers down in the supply chain, optimize Scope 3 as there is nothing significant you can do to control your carbon debt if you don’t minimize it before it gets to you.

Procurement 2024 or Procurement’s Greatest Hits? McKinsey’s on the money, but … Part 1

… in some cases this is money you should have been on a decade ago!

Let’s backtrack. McKinsey ended Q1 by publishing a piece on Procurement 2024: The next ten CPO actions to meet today’s toughest challenges which had some great advice, but in some cases these were actions that your Procurement organization should have been taking five, if not ten years ago. And, if your organization was doing so in these cases, should be moving on to true next actions the article didn’t even address.

So, as you probably guessed, we’re going to discuss each one, give credit where credit is due (they are pretty good at strategy after all), and indicate where they missed a bit and tell you what to do next if you are already doing the actions you should have been doing years ago. And, just like we did to THE PROPHET‘s predictions, grade them. In this first installment, we’ll tackle the first three actions, which they group under the heading of:

End-to-End Value Capture

1. Utilize New Frontier Analytics and AI. B

Even though you should have been doing this since the introduction of spend analysis over 20 years ago, the recommendation to employ advanced analytics to extract valuable insights from procurement data is definitely A+ because analytics gets better every year, knowledge of which analytics to apply to a vertical and category gets better every year, and the constant increases in computing power makes it an increasingly powerful tool at your disposal.

However, the “AI” part is a B- at best. Using predictive analytics for commodity and market forecasting, risk prediction, and performance optimization is good, but AI can’t predict talent and you definitely should NOT use a Gen-AI bot to develop strategic decisions! Remember Gen stands for Generative which is defined as “make sh!t up” and there is a strong likelihood that it will hallucinate and the hallucination will sound more reliable than the non-hallucinatory recommendation it gives in very similar situations. Properly used, traditional, predictable, and, most importantly, deterministic (or at least verifiable) techniques can provide great value … but new, generative, unproven AI technology (which could have embedded sleeper behaviour) is NOT the answer.

2. Create a Request for Proposal (RFP) Engine. B

The article notes that you should develop … an approach for prioritizing categories and suppliers based on market development, spend analysis, and supplier leverage. This is something you should have been doing since the day you first implemented a strategic sourcing program. And you definitely should have been prioritizing spending with the highest potential to drive value for the organization, while deprioritizing categories or suppliers where value will be more challenging to obtain. In 2024 what you should be doing as part of this RFP engine is prioritizing categories and suppliers based on potential return from the strategic effort at this time (not potential for future value, potential for immediate value to meet the organization’s #1 priority of cost control) and then shifting all of the other categories to semi-automated sourcing events most likely to generate the best return. (i.e. well designed events, not an event for every request, you don’t want the squirrels thinking you are nuts)

The organization should have a platform that supports multi-round RFX-based events and multiple templates, reverse auctions (of various types), and the intermixing thereof. It should also support supplier onboarding, API-based verification with third parties, business/insurance/certification verification where possible, and so on. A buyer should be able to select a template for a single or multi-round event, define a timeframe, define a volume, click go, and the platform should automate an entire sourcing event until it’s time to verify an award (as the the platform should also recommend the award based on the bids and RFP responses). That’s the key to cost control — everything is sourced, but the effort made is relative to the potential return on that effort. Small return potential, semi-automate everything using the right technologies and processes. Large return, put in full manual effort in to maximize the value.

3. Redesign Value Creation with Key Suppliers. A

While this is something that needs to be done on a regular basis, given that rapid inflation is back, logistics is still unstable (we went from COVID to disruptions in the red sea at the same time as Panamanian droughts, forcing a return to long, dangerous, ocean routes around the capes), consumer demand is down, relations with China are deteriorating, and so on. Furthermore, not only is cost control paramount, so is value creation to increase not only value capture, but to also maintain, and maybe even slightly increase, consumer share in a down economy.

Come back for Part 2!

Let’s Get One Thing Clear: Like All Financing, Supply Chain Financing Benefits the Lender, Not the Buyer or the Seller

While there might be arguments that some form of Supply Chain Financing (SCF) would benefit all parties in a fair world, it’s not a fair world, as it’s run by greedy capitalists, but that doesn’t mean we have to make it more unfair, or complain about laws being proposed to limit unfairness.

But that’s exactly what a recent article in the Global Trade Review on how the Supply Chain Finance Industry Hopeful EU will Soften Late Payment Rules is pointing out. The EU SCF industry is crying foul when there really is no foul.

The article, which notes that even though an EU Parliament committee is pushing for greater flexibility around the regulation on combating late payments that puts in place a stricter maximum payment term of 30 in both business-to-business (B2B) and government-to-business (G2B) transactions (versus the current 60 days), unless companies negotiate payment terms of up to 60 calendar days and both agree to those extended terms in a contract, there are some parties that are still not happy. (Even when the new regulation even allows for companies trading in “slow moving or seasonal goods” to collectively agree to extend terms up to 120 days in a contract.) (For completeness, we should also note that the forthcoming legislation will enforce accrued interest and compensation fees for all late payments.)

However, some parties believe that payment terms should be twice that as they risk restricting liquidity and interfering with companies’ contractual freedoms. The former statement (restricting liquidity) is complete and utter bullcr@p. The latter statement (restricting contractual freedoms) is a valid point if there are currently no restrictions on payment requirements in local laws, but, guess what, all contracts must adhere to the laws and directives of the countries in which the companies operate, and countries / unions have a right to modify those laws and directives over time to what they believe is in the best interest of the greater (not the lesser) good. And when a recent Taulia research report found that 51% of companies polled are typically paid late, something needs to be done.

The point being whined about … err … made is that shortening mandatory terms without agreement to 30 days and with agreement to 60 days would mean SCF lenders would see their returns slashed, and potentially remove any incentive to offer programmes in the first place. And while it’s true they would see their returns slashed from predatory lending, taking advantage of suppliers who need money now from buyers who want to keep their bank accounts as cash flush as possible (even when not necessary to meet internal operating costs), it doesn’t necessarily mean they have to see their returns slashed from a finance perspective. They could still provide suppliers with loans (at fair interest rates) secured by the equipment the supplier buys or the products produced (which they could seize if they feared lack of payment and then the buyer would have to pay the lender for the goods’ release). Or, if buyers liked unnecessarily fat bank accounts, they could lend the buyer cash with the buyer’s illiquid assets as collateral. And while this is more traditional finance, what’s wrong with that?

Allowing buyers to screw suppliers (when those buyers can afford not to) just hurts everyone in the long run. Suppliers have to borrow, usually at predatory interest rates, to make payroll, which increases their overall operating costs. In return, their costs go up on all future contracts. A buyer might squeeze out a slight gain (in its high interest investments vs. paying the supplier or in its stock price based on correlation that a higher than expected bank account is higher than expected growth), but the buyer will just end up paying more in the long term (and then passing that cost onto us consumers). And the only party winning in every transaction is the SCF vendor who gets 2% to 6% on all the short term cash it provides, which is very safe because someone’s going to take that product. And, FYI, even 2% on a 60 day term, works out to over 13% a year (because by the time the supplier submits, the SCF approves, and the money gets transferred, that’s usually at least 5 days). And the rates are only that good when the supplier has more than one SCF option. When the supplier doesn’t, it’s probably 4%, or 26%+ per year, which is likely 40% higher than the organizational credit card, and nearing predatory lending territory! And while it’s not as bad as the 40%+ some suppliers will be saddled with in hard times when all they can get is the local loan-sharks, it’s still not something we should accept.

So bravo to the EU Parliament and shame on anyone complaining about legislation mandating fair payment terms, especially to SMEs. After all, it’s not banning SCF vendors from helping them in other financing ways, or even negotiating an agreement to auto pay every 60 day invoice in 6 days (for 2% of the transaction value) when you know these suppliers are all going to have 60 days shoved down their throats by big businesses.

Procurement Leaders Listen to Roxette!

How do you do (do you do) the things that you do?
No one I know could ever keep up with you
How do you do?
Did it ever make sense to you …

A recent article over on Procurement Leaders asks CPOs why do you do and notes that a recent exercise they’ve been carrying out has been to ask CPOs to share the value propositions they have in place for their function.

Procurement Leaders’ goal was to force extremely busy people to take a step back and think deeply about why they do what they do. What are the ultimate goals of those negotiations with suppliers? Why are they spending time building relationships with certain suppliers and not others? Where should scarce resources and investment dollars be spent? This is because while a value proposition for a Procurement department is not an easy thing to produce and even more challenging to agree and implement, the provocation can allow a Procurement Department to get back to strategy, think about how our decisions affect our stakeholders, suppliers and the communities we do business in.

And while a Procurement department should understand its value proposition, because it helps it focus and relay its value, getting everyone in the organization to agree can be a very extensive effort and extremely time consuming. Furthermore, when you consider the possibility that the “value proposition” ultimately agreed on could be such a mish-mash of different viewpoints and demands to the point that it adds absolutely no value whatsoever, just like a corporate “mission statement” when everyone gets to add their bit to it (and the end result is no different than what the Dilbert Mission Statement Generator used to generate).

However, if you look at the example questions Procurement Leaders’ quoted, you realize that while a vision might be a good goal, a better effort, or at least a better way to start, is to ask the C-Suite to outline it’s top goals for the year, and then for the Procurement organization to identify the best ways they can meet those goals. From there they can identify: which categories should be strategically sourced, which products or services are critical for them, which suppliers are likely critical, and then, for each project, define the value and the goal and not spend effort building relationships with suppliers who are supplying tactical products or services that can be just as easily obtained from the next three lowest bid suppliers and instead spend time developing relationships with suppliers who are critical, even if the overall spend is low. For example, control chips in cars and power regulation systems are extremely critical and often only (capable of) being produced by a few suppliers due to highly specific requirements or proprietary natures. Compared to the costs of the steel, the transmission, the engine and/or the batteries, and even the tires, the total spend might not even register when the chips are only a couple of dollars each — but if a supplier failure, logistics delay, or raw material shortage shuts down your entire production line because you didn’t see a shortfall coming and either work with your supplier to build up an inventory or work with the backup supplier to allow production to be ramped up quickly, hundreds of millions of dollars in revenue could be at stake.

Furthermore, no effort should be spent “strategically” sourcing a product or category where the payback isn’t at least 3X the cost of the manpower required to do so. If an automated multi-round RFX with automated feedback or a reverse auction will get you 99% of the savings and the last 1% won’t even pay for 3X the salary and overhead of the buyer, it’s just not worth it if this prevents the organization from sourcing a lower cost category with a 5% savings potential through better analysis and negotiation. Know the value, define the value, and only put effort in where there is real value to be gained. Otherwise, use appropriate automation or redefine categories and projects. (Definitely don’t go nuts and RFQ everything, because even the squirrels will know you’re nuts if you do. But maybe do some overarching sourcing or negotiation that you can just cut POs or one-time orders against for a year. Sometimes just negotiating for 20% off of lowest list price in a 30 day window [and carefully tracking and documenting those prices to prevent invoice overcharges] is enough to automate catalog orders.)

And similar logic applies to all Procurement (related) activities. While machines can’t replace procurement professionals, they can take over the tasks where their intervention doesn’t add value. That’s the point. So think before you act, and act appropriately.

While Not a Significant Source, Some New Vendors are Contributing to the Procurement Stink!

There are many reasons that Procurement Stinks!

Some of them are due to the Marketplace Madness.

Some of the marketplace madness (a small amount, but non-zero), is aptly summarized as follows.

We’re pre-revenue, pre-product, and pre-idea.
So any help would NOT be appreciated!

(Which, to give credit where credit is due, is
a slight rewording of the tag-line to an Andertoon).

Those companies will likely be among the first companies to fail. When there is at least 50 companies that are offering every S2P module, and over 100 for most modules, there is only so much room for differentiation. This means that most of the new startups by the young 30-somethings that did NOT do their market research (but think they know it all because they are tech wizards who built a solution that did slightly more than the three inappropriate products they were stuck with at their last job) don’t really do anything different from a product perspective (and, in fact, usually do a heck-of-a-lot less — hence, “pre-product”). It might be a newer tech stack, it might look slicker, it might be a bit easier to use, but they all fail to understand that THIS IS PROCUREMENT.

This means that, at a minimum, any “product” they want to sell has to satisfy the following:

  • they have to demonstrate a significant ROI, within a decent return within the first 12 months before the CFO will even consider cutting a cheque
  • but before that, they have to show how they will generate long term value before they will even get budget (if the value is one-time like a spend analysis project, especially at Big X quotes of seven figures, not likely)
  • they have to show that it fits in with the current tech stack or IT will object
  • they have to show that it is compliant with regulations or Compliance will object
  • they have to show how it will also decrease overall procurement or supply chain risks, or risk management will steer the budget elsewhere
  • they have to demonstrate they will be able to do more and protect the brand or the CEO will object

Procurement tech is not about cool. That’s consumer tech. Procurement tech is not about the most modern stack to power the business. That’s IT tech. Procurement tech is about VALUE. Procurement is expected to cut costs, NOT increase them!

Until the new generation of founders learns that, and learns there is no way that Procurement will NOT be able to make a case for their 𝘯𝘦𝘸 𝘩𝘰𝘡𝘯𝘦𝘴𝘴 that literally does nothing different than the 𝘰𝘭π˜₯ 𝘣𝘢𝘴𝘡𝘦π˜₯ tech that came before, the old Procurement Pros aren’t going to buy it. And these start-ups won’t hit break-even as a company, and if they don’t get acquired, they will go belly up as the investors realize how over-crowded the space is and any further investment would be throwing good many after bad into the bottomless money pit.