Aligning Procurement Strategies to Business Goals, Part I

Today’s guest post is from Torey Guingrich, a Project Manager at Source One Management Services, who focuses on helping global companies drive greater value from their expenditures.

Part of good category management is ensuring that the sourcing strategy in place for the products/services is intentional and logical based on the market and commercial aspects of your company. Consider how you are determining sourcing, contract management, and vendor management strategies for different categories of spend: what are the guiding factors that push you towards a long term versus a short term contract, or a consolidated versus a segmented supply base? If you are applying the same strategy for every category, e.g. consolidate suppliers and sign a three-year contract, you may need to reconsider the variances in the categories and how these differences should affect the chosen strategy.

In 1983, Peter Kraljic published his ideas around how Procurement can transition from purchasing to supply management in a still-relevant 1983 article. These ideas were introduced to me when I first began my career in Procurement. I’ve kept these ideas in mind throughout my career to understand at a high-level how the inputs being sourced relate to the business at hand and how to best position a category management strategy given the market conditions associated. We’ll walk through a simplified version of Kraljic’s original ideas and how they can be applied to Procurement at any company.

Complexity of Supply Market/Supply Availability:

To simplify the original idea around “Complexity of the Supply Market” that Kraljic introduced, I want to focus on the availability of supply within the market. Across categories, there are certainly areas where suppliers or additional production are more available than others. In the manufacturing world, I’ve worked with companies that pursued long-term contracts with key suppliers, e.g. over 10 years, and even shared in the capital investment of building plants or production facilities in order to secure supply. Certainly a decision that large would be made with many stakeholders and C-suite folks involved, but it serves as an example of understanding the availability of supply in a given market and strategically responding to scarcity.

Scarce goods or services have rigid supply curves; there are limitations that prevent supply from meeting demand by simply increasing production/output. I use availability to mean more than just physically scarce resources; low availability can be brought on by high barriers to entry, complexity in extracting or moving the materials, a rapid increase in demand, or a rapid decrease in supply. Consider a manufacturing company; an example of a relatively scarce service in that market would be railroad transportation. For railroad capacity, we see high barriers to entry (e.g. we don’t see new railroad companies popping up every year) and an inability to ramp up to changes in demand (e.g. new railroad lines can’t be quickly added). When in Procurement, it is crucial need to look at the supply markets of different categories related to your business – are you being approached by suppliers frequently; are you able to easily find new suppliers to include in sourcing events; have there been any large-scale events that impact supply? Additionally, you can research the number of suppliers in the market, limitations on delivering the product/service, alternatives/substitutions available, and any other limiting factors that can affect supply to determine the relative scale of availability.

Importance of Purchasing/Criticality to the Business:

Availability of supply works hand-in-hand with criticality of that category to the business. Kraljic calls this component “Importance of Purchasing;” I position this aspect as “Criticality to the Business” to refer to the level of spend for a category and the overall impact on profit or production. To be able to measure this, Procurement needs to understand the business perspective and what drives production (either physical production of goods or sale of services). When I was taught these concepts at a steel company, one of the key materials to production was coke to fuel the furnace to smelt iron ore. Consider the core elements of your business and the drivers of production/sales as well as high volume/high price goods; this will help to gauge how critical a given product/service is your business. It should be noted that when looking at criticality, that the quality of that supply can be just as important as actually guaranteeing the volume needed. If key quality specs do not meet acceptable levels for production, there is the risk that the material may not be usable at all.

Based on availability and criticality, you can begin fitting Procurement’s spend categories into different quadrants to develop a sourcing strategy around each.

We will dive into details in Part II.

Thanks, Torey.

One Hundred and Thirty Years Ago Today

This appeared in the Atlanta Journal for the first time:

And it wasn’t long after that (about 30 years) that it was being bottled in a standard process using a standard (and distinctive) package (bottle). While often known for its marketing, Coca Cola was an early pioneer in bottling and distribution — which should be obvious from the fact that it in the last 130 years the enterprise grew from a business with a single production plant limited to servings at local soda fountains to a global enterprise that serves up almost 2 Billion beverages (across all its brand lines) daily. And its continued ability to innovate is what keeps it a market leader.

How Do You Find the Right Platform for You?

In our last two-part series that asked “what is a platform”, we noted that whereas “suite” was pretty easy to define, as it is just a collection of related, and hopefully tightly integrated, modules that address the key steps of a process such as sourcing (or S2C, source-to-contract) or procurement (or P2P, procure-to-pay), platform is hard to define because you have to consider the competing definitions (development framework, enterprise application framework, hardware configuration, etc.) and delivery models (on-premise, hosted ASP, SaaS) and how they can be bundled and/or used to frame a solution space.

We also noted that in order to select the right platform, you needed to define what you needed the platform to do. And to add more confusion, you also need to define any constraints on how you need the platform to do it. Two tasks that are not easy to accomplish. But we can give you some advice on how you can get started.

First, define the problem you are trying to solve.

Not simply the business process at a high level, such as sourcing, procurement, or logistics, but the problems you are experiencing that need to be solved. Is it a paperwork nightmare in procurement, an inability to source efficiently, an inability to track organizational assets and services once requisitioned, an issue with inventory management on the sales side, etc. You can’t even select the right solution unless you know your major pain points, so how could you expect to select the right platform?

Next, outline the preferred process you would like to solve it.

In particular, how should the process work. For example, does all procurement have to begin with a requisition, or is a purchase order from an approved individual enough? How is it flipped to an invoice, and how are the costs verified? In addition, how do invoices come in, how are they matched, and how is this process automated, especially if the organization receives tens of thousands of invoice a month? Does the comparison happen before or after goods receipt? And what is the process if a goods receipt doesn’t materialize x days before the invoice is due? And if the number of invoices are large, with an average error and incompletion rate of 15%, how are the gaps filled in and the errors identified for flip back to supplier with an explanation?

Then document all of the data inputs you need, the artifacts that you need generated, and the data outputs that are required by affected parties.

If you are primarily sourcing direct materials, you will need a bill of materials from engineering along with the cost breakdown that is required, the inspections and certifications that need to be captured, and the timelines that need to be met. If you are sourcing services, you need position descriptions, certification requirements, other validations that must be performed, on so on. Reports will need to be generated, audit trails maintained, and so on.

Follow this with discussions with IT, Finance, Engineering, or any other department that needs to support Procurement in the process.

You will need to find out if there are any restrictions or constraints on an adopted solution dictated by current technology, processes, or third party support … such as systems that need to be integrated with, data that needs to be collected, audit trails that need to be logged, and reports that need to be generated for compliance. Systems can be a big problem — do certain APIs need to be supported, are you restricted to certain technology stack, or do you need certain hardware?

Then go beyond the immediate problem and process to identify other processes and problems that could be impacted by any solution to the problem.

For example, where Procurement is involved, inventory, assets, and accounts payable are clearly impacted. These use different processes and systems which may or may not have been identified in previous steps.

While these steps on their own may not necessarily help you identify the right platform, it will definitely help you identify which platforms are not appropriate to the need at hand and zero in on those that need a closer look.

Driverless Delivery? Tantalizing Theft Target!

With the emergence of drones and, now, self driving cars, a number of delivery companies are promoting these as low cost delivery options to companies that want to reduce delivery costs, especially for small businesses shipping low volumes (that fit in a large van or small truck) or retailers doing B2C delivery. But are they really low cost?

Yes, drivers cost money because, like all workers, they expect to be paid. And if you could obtain a driverless vehicle for the same price of a driver-required vehicle, you would save. But driverless vehicles come with a higher price tag. Now, the argument is that over the lifetime, the savings from a reduced driver workforce will cancel out the increased up from cost, and this would be true if the driverless option were as reliable as the driver-required options.

Now at this point, you’re probably asking what madness has the doctor contracted because, unlike humans that get sick, get lazy, make mistakes, and need rest — as long as the equipment gets the fuel and proper service, the software can drive it 24/7 — and this is true. The equipment can run 24/7, but this doesn’t mean you’ll get your stuff.

First of all, if there’s a programming error, or GPS error, there is no one there to detect and correct it. If GPS steers an Uber off course (and it does regularly in big cities with lots of tall buildings … sending multiple Ubers in a row a block away from where I was in Chicago recently despite the fact I was very sure to provide the address and not accept the default GPS location), the driver can say “there’s no one here”, call, and figure out where to go. If GPS steers a delivery drone off course, the customer’s neighbour gets a free gift and you get to eat the replacement cost as the credit card company is not going to rule in your favour in a dispute where the customer provided correct shipping information but you delivered to the wrong address. And the cost multiplies if an entire truck is shipped to the warehouse next door and you can’t prove it. (Even if you can, it does not mean you will get your goods or money back.)

But the biggest problem is that there is no guarantee that the goods will even make it to the destination. Goods being delivered driverlessly are very tantalizing theft targets. Not only is there no security to worry about, but there is no driver to even notice a theft as it is happening, report it, and get descriptions of the perpetrator — which means 0 chance of recovery. And do not think for a second that insurance is going to cover it in a cost effective manner. As claims start rising, and investigations into reasons continue, rates are going to either become unaffordable for driverless delivery options or become nonexistent options for the average business.

The argument that the drone is not interceptable until it drops low enough to deliver the package is not going to hold because signals can be hijacked and they can be hacked. (If top of the line cars can be hacked, how hard do you think it is to hack a bottom of the line drone?). And the argument that the delivery vehicle is secure until it reaches its destination is not going to hold either because if thieves can bust open a lock and rob a moving delivery truck with a driver unnoticed, how hard is it going to be to do the same to a driverless one. (Answer, even easier — no one to see the theft. Cameras do not count. They are easily hacked if they are digital and easily blinded by LED lights.)

Driverless trucks are already becoming theft ring targets, and delivery drones will soon be the target of bored hackers everywhere who will be able to get stuff en-route and not have to wonder if the order on the stolen credit card number will go through before the theft is detected and reported.

Driverless delivery is a tech-dream, but, for the time being, is not a Procurement one. You have been warned.