Exact Purchasing Requires Category Intelligence

Now, if you’ve been listening to the thought leaders, like The Mpower Group, you’d know that good sourcing requires category management because one size does not fit all from a sourcing perspective, and, even if you didn’t know why, you’ve seen it during the auction craze (which seems to resurface every decade or so) where you auction everything you can that hasn’t been sourced before and get good savings, try it on categories sourced every 3 years, get none, and then try again on the first set of categories in 3 years, and see prices rise (because you can only take supplier margin out once, and then you have inflation), during a marketplace craze (where you just order from distributors who suddenly can’t supply when their primary suppliers or supply lines go down), and during overly drawn out strategic sourcing events (where, by the time you’re done, scarce supply has been locked up).

However, category management alone is not enough. Up until 2020, it was since global trade flowed freely, inflation was low, disruptive events were typically limited to natural disasters, logistics slowdowns (due to strikes that shut down ports) could be predicted by anyone following the contract expiry dates and current negotiation states, and black swans were rarely seen. In this environment, you simply needed to devise a good category strategy for sourcing, procurement, and supplier management and all was well (and ended well).

The time of smooth sailing in global supply chains is long gone! You now need multiple sourcing, procurement, and supplier management strategies for overall supply assurance that take into account the various risks, disruptions, and shortages you could face on a semi-regular basis. And you need to identify which of these strategies you need to employ on every regularly scheduled event (sourcing exercise, PO/reorder point, logistics (re)contract, and supplier review/development meeting) and unexpected real world event that could/will impact your supply chain to some degree (from delay to complete closure). This requires category intelligence, sometimes near real-time.

Category intelligence is the one thing pretty much every Source-to-Pay/Source-to-Settle (S2P/S2S) is missing. A few support elementary category management, but even that doesn’t go beyond product groupings and default sourcing workflows and RFX templates, contracts, and re-order schedules. There are a number of best-of-breed risk monitoring applications, but at most they are tied to the supplier and you have little to no idea of the potential impact since most applications only tie suppliers to currently supplied products, and you don’t fully understand what bill of materials (BoMs) they appear in, product lines they impact, customers who rely on them (and whom you are contractually obligated to serve), overall revenue stream, and profit margins. In other words, you get supplier insight, but not category intelligence. And category intelligence is what you need to make all of your Procurement decisions on.

This is the beauty of Busch-Lamoureux Exact Purchasing. When you separate out the three critical factors of complexity, risk, and impact, you understand not only that each of the eight category types needs to be managed differently (since complexity limits supply base, risk limits supply assurance, and impact determines criticality of ensuring supply and maintaining a sufficiently large and risk mitigating supply base), but that each category type requires differing intelligence to properly manage, that the intelligence required across the categories differs in types and depth, and that some of the intelligence has to be near real-time (with updates/alerts required hourly). The days of the annual spend analysis exercise to (re)classify categories and sequence sourcing and supplier development events are long gone. If a mine collapses, a fire destroys a production plant, a port shuts down, or a carrier goes out of business, you need to know that day and start executing mitigation plans on those complex and high-impact categories immediately, because by the time the (advance) shipment (notice) doesn’t arrive, it’s too late.

Vendors Steal Crappy Ideas — Please Don’t Encourage Them

Last year Joël Collin-Demers, The Channel Master, wrote a post encouraging vendors to steal his ProcureTech startup idea. Unfortunately, that idea involved the proliferation of sh!tty LLM technology and way too many vendors took him up on it.

I’m sorry to say that it was the one post I wish he hadn’t written!

Too many vendors decided to steal his idea, as evidenced by the constant proliferation of “AI” vendors believing they can wrap, or cr@p, an LLM better than the giants who have collectively spent trillions and actually deliver value.

They can’t. That’s because LLMs are fundamentally flawed. Hallucinations are core, consistency is a pipe dream (and those pipes are so dirty even Mario can’t clean them out), and you still need a considerable amount of exceptional data to get anything remotely useful out of them.

All Deepseek proved was that you don’t need to spend millions (or billions) to build an LLM — open source code and your own rack in a data center will allow you to get the same quality of results (i.e. garbage) as a mega-model if you focus it to a particular task in a particular problem domain.

The models would be small, fast, and cheap, but, just like the big models, won’t work out of the box because they are not intelligent, aren’t deterministic, and aren’t even consistent. (And let’s not overlook the fact that a subsequent iteration on a task or document might undo something they got correct in the last iteration that you approved.)

As for his examples:

  • No RFX execution — draft creation, sure, but accuracy varies
  • They’re more likely to enable fraud than stop it (see many SI posts)
  • The contract insights they return may not be the most relevant ones (and leave you blind to million dollar risks)
  • They are just as likely to make up risks as detect actual risks with new suppliers … and accuracy will vary greatly based on the data available and what you plan to use the supplier for
  • Given that they can’t think, don’t understand logic, and can’t even do basic math (it has been proven, see Apple studies for e.g.), you should never use them for benchmarks (just for data extraction from hard to digest sources, providing Intern Indy reviews the data first)

Now, if you insist on riding the hype wave, knowing that failure is likely inevitable (with only 6% of companies seeing a return from AI investments), then this is the way to do it as you’ll waste the least money proving classic tech with augmented intelligence is the way to go (while doing the least harm to the environment).

Conclusion: it’s the brilliant way to go bust! 🤣 😭

8 Signs You Were Forced Into Purchasing

Tom Mills, author of Procure Bites, recently gave us 8 signs you were meant for Procurement, which left some of you, in organizations where Purchasing is still treated as an old school function, and run by old-school die-hards who still think its the (19)80s, wondering where it came from because that’s NOT the personality profile you’re used to seeing.

Although Tom’s profile is the profile you want to see in Procurement, if your Procurement organization is still the Island of Misfit Toys, that’s not the profile you have. This post is for you and describes your Purchasing department where everyone there was put there because they didn’t belong (or want to be) anywhere else, and for one reason or another the organization can’t (or won’t) get rid of them just yet.

Enjoy!


 

When you remember Kraljic, don’t forget Coase!

Coase laid the original foundations … Kraljic gave us fundamentals … and now the Busch-Lamoureux Exact Purchasing Framework is building on that to give you a guide to modern Procurement!

The Kraljic matrix is broken. A big problem, as we have regularly explained, is that you can’t compress two independent dimensions (risk and complexity) into one. A little problem is people don’t understand how to qualify the importance of a purchase. It has nothing to do with cost or volume but everything to do with the organizational impact if the product or service being purchased suddenly becomes unavailable. Similarly, it has nothing to do with how much you buy from the supplier, but how critical it is they don’t go out of business. It might be a critical component, but if there are ten other suppliers who can meet that demand for you tomorrow, the supplier is not critical to your organization.

But the biggest problem is that people regularly misunderstand the purpose of the matrix — it was a tool, and the first of it’s kind, designed to get us thinking critically about purchasing and point us in the right direction. It wasn’t the be-all and end-all. It was the first formal methodology an organization had to segment purchases and suppliers, think about them critically, and approach sourcing and supply assurance methodologically. And it was created in a time when global sourcing was more predictable (because natural disasters were a fifth of what they are today, war’s didn’t breakout overnight without warning on the whims of a mad man stuck in a macho cold war colonial mindset), risk was primarily complexity, and if you used the methodology, you probably had a success rate of 90%, which was phenomenal.

Kraljic gave us a way to structure our critical thinking and improve the profession, and all most consultants did was water it down, create a one-size-fits-none methodology, and sell it like it was the next panacea, creating a consulting snake oil from a masterpiece of thought.

A masterpiece of thought you only understand if you understand the framework in which it was built, and those were foundations laid four and a half decades earlier by Ronald Coase in his 1937 essay “The Nature of the Firm“.

The framework was that of organizing the supply management operations of a firm, where the definition of the firm was the one put forward by Coase, which is essentially that the firm was the mechanism by which transaction costs were minimized. (Otherwise, there would be no need for a firm!)

Transaction costs are the result of the price mechanism of the open market, and include:

  • the cost of the negotiation and contract
  • the cost of the individual transactions the contract covers
  • the costs associated with production

and include all of the factors (people, equipment, technology, etc.) included in these prices.

This tells us that the fundamental purpose of a firm is … PURCHASING! And the only way a firm can grow is if it can continue to PURCHASE cost effectively (because as soon as the cost of subsequent transactions and / or production exceed the market costs, the firm is dead).

However, as most firms grew, they reached a point of inefficiency (due to management overhead, process inefficiency, and/or paperwork and/or communication point overload), and growth stopped. Also, as they grew, they became more brittle and sensitive to even tiny disruptions.

Kraljic recognized this and introduced the matrix so that firms could approach their purchasing in a more structured manner that would reduce the brittleness, simplify the management, and allow for additional growth and resiliency. And it was a great start.

But simply classifying items into non-critical, leverage, bottleneck, and strategic misses they key point of the firm’s existence. And that’s to ensure that the costs related to the category are not only always lower than the market cost, but remain low as the company scales.

When you classify an item as non-critical, it becomes ignored tail spend, and we’ve seen time and time again that the average overspend in this category is at least 15% in most companies, with many products and services being bought 30% more over market price.

When you classify an item as bottleneck, you focus on assurance of supply, and don’t dive into determining whether an item is a bottleneck because it can only be supplied by a rather limited supply base or because absence would shut down a production line. (Just because only a few suppliers produce the item to your specs doesn’t mean that only a few can, there might be a few dozen that could, and would, produce it to your specs [at a higher quality at the same price] for a guaranteed mid-to-long contractual commitment.)

When you classify an item as leverage, you double down on price (and exploitation of the price mechanism), and this can often come at the expense of quality and dependability, which can result in higher costs later if warranties come into effect or you have to replace products faster than normal (which always incurs a replacement cost in manpower and opportunity that is never factored into the “we can afford 4 of these per decade vs 3” equation).

When you classify an item as strategic, you triple (or more) the amount of effort you put into the management of that item (or category), and there is a point where the excess time investment not only fails to keep to the associated contract and transaction costs below market, but leads to no additional return on cost investment.

This is because the profiles don’t take into account the separate dimensions of risk and complexity or ensure that “importance” is defined as true “impact”, or provide any mechanisms for determining the impact (or risk or complexity).

This is why you need to go back to the foundations and build up a framework that is capable of capturing what the firm really needs!

That’s what the Busch-Lamoureux framework is intending to do.

By organizing categories based on complexity, risk, and impact

  • the cost of the negotiation and contract is based on the complexity, risk, and impact — where all are low, the whole process can be automated and costs minimized
  • the cost of the individual transactions the contract covers are minimized to verification of only what is important, and humans are only involved when automation can’t do that or finds a discrepancy
  • the costs associated with production are minimized as you are selecting a supplier that meets all of the necessary requirements at the minimum cost subject to an acceptable risk factor!

Furthermore, you’re making your contracts for durations appropriate to the category such that you’re adequately accounting for complexity and risk without locking yourself into long term deals that are not beneficial to your organization!

But most important, because the categorization helps you determine how much manpower you actually need to spend on each sourcing event, contract, and transaction, your organization is much less likely to experience decreasing returns as it grows, allowing it the funds it needs to ensure Procurement is appropriately staffed and resourced with the right systems.

Coase gave us the definition of a firm (PURCHASING)! Kraljic helped us understand the fundamentals we need to consider in our modern world. Now we’re giving you a framework to apply those fundamentals in a manner that will let you scale without fear of unnecessary waste. Go forth and transact! (The market depends on it!)