Tag Archives: Strategic Sourcing

How Much and How Hard Can / Should We Squeeze?

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I admit this is a rant so please proceed with caution.   We, at TMG are busy – more than busy, which is great but for me it means that I have limited patience for anything that takes me away from doing what I need to do for my clients.  Every week we rotate who is responsible for writing this blog and today was NOT my turn, BUT yesterday I picked up my WSJ at the end of my driveway (yes I still like to read a “paper”) and saw a front page headline “Firms Pinch Payments to Supplier” and I went nuts.  I walked into the office and said. “I’ve got the blog this week”!  So here goes . . . .

I spent the last two days working with a F500 retail client on the long term strategy for their Strategic Sourcing organization.  We talked about what we, at TMG, have been advocating over the last two years – “old school” cost/price based Strategic Sourcing is DEAD and focusing on VALUE is a Next Practice.  I walked out earlier this week and said “YES” because I felt like I had convinced a room full of Supply Chain executives that key suppliers must be treated like assets NOT adversaries.  The day of beating down suppliers for every last nickel is over and yet numerous large, global consultancies (I refuse to name them but you are probably paying them $$$$$$$ – millions to give you old / lazy / bad advice) AND research firms continue to advocate a “cost focused” approach.

Here is where the rant comes in . . . the WSJ article talked about a global, Fortune 50 company moving to 75 day payment terms to their suppliers.  “ . . . could use that cash to fund investments in new factories overseas or to help pay for stock buybacks.”   This practice of squeezing even more out of an already lean supply base made the front page of the WSJ as a best practice???  By the way, there are several other large, global Fortune 50 Companies also named that have adopted that practice as well.  REALLY!!!  I’m not shocked, but I am mortified!!!   By the way, this company has been named to the TOP 25 (Top 5 to be exact) Supply Chain Leader list of a major research firm for at least the last three years.   I must ask myself, “what is the criteria to be considered a TOP 5 Supply Chain company when 75 day payment terms is being thrown around as a best practice?”   Perhaps it is the fees they are paying this research firm . . . .

Now, many of you are thinking, OK, The Mpower Group is a supplier and therefore the 75 day payment terms is hitting too close to home . . . . . Here is our current thinking AND the first question we ask ALL our client, “have you asked your suppliers what they could do for you if you GAVE  them $1,000,000?”    Our discipline has moved so far toward the cost continuum that we have forgotten the VALUE that is generated from relationships.  Come on everyone, how do you select a partner (any type of partner)?  Is it based on cost?  Or is it things like compatibility, shared values, trust, ability to expand “the size of the pie”, etc.?  I hope the aforementioned company is smart enough to realize that suppliers will eventually need to make themselves whole and that can happen in a variety of ways – higher future prices, shifting their capacity to competitors, reducing quality, etc.  This practice can also significantly increase their  supplier risk profile.   One safety / quality incident that adversely impacts consumers because a supplier is trying to make themselves whole from 75 day payment terms, can prove to be a legal / PR nightmare.

 I think this company has been given some bad advice . . . perhaps they need to be working with The Mpower Group.  The only thing is we won’t accept 75 day payment terms.  On the other hand, we will accept $1,000,000 and will promise an ROI of at least 10X . . . . . .

Sorry for the rant . . . . . join in the conversation.

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The New Role of Spend Analytics

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One of the key differentiators between Strategic Sourcing and Tactical Purchasing is the decision to invest up-front in spend analytics and opportunity profiling.  This crucial planning step provides a holistic snapshot of where money was spent and the results associated with that expenditure.  Done properly Spend Analysis (SA) focuses the organization and prioritizes scarce resources towards opportunities that best meet the future needs of the business.

While these goals are noble, we find that many companies view and approach spend analytics the wrong way.  As a result they end up destroying not creating value.

Over the next weeks, we will be sharing next practices gained from recent Spend Analysis (SA) engagements as well as explore the role of technology and other 3rd party enablers.

Focus on Value Creation vs. Value Destruction

Spend Analysis has greatly evolved over the last decade.  One key objective is increased visibility at the supplier, transaction, and commodity level.  Improving performance at these control points should be part of any Sourcing organization.  However enhanced visibility comes with the burden of responding to those findings.  In today’s competitive environment, many Supply Chain and Procurement organizations feel they simply cannot ignore any savings opportunities.  These groups pounce on purchase pricing differentials as a rationale to standardize on the lowest price.

I can count on one hand the number of companies that use SA to justify paying suppliers more.  As we’ve said before lower prices may be a destructive way to keep score.  Value added services, availability of supply, supplier performance under duress, quality, regional strengths, organizational familiarity, risk, health, decreased complexity, etc. usually get thrown under the bus for immediate price gains.

Establish the burning platform

The single most valuable activity in a spend analysis program is often the most neglected.  Many spend analysis programs are owned by the Supply Chain group.  And thus a crucial opportunity is lost.   Spend Analytics need to have visible executive sponsorship.

For a SA program to be transformational it needs to bring in perspectives from those affected by the product or services being evaluated.  If we go back to our earlier definition, SA is about understanding the results associated with spending money on goods and services.

C-Levels need to establish burning platforms that signal the necessity of the program, that every rock and stone will be looked at, and that participation is mandatory.  It needs to outline long-term company goals and address tough change management issues.  This communication should be customized to employees, investors, suppliers and customers.  It should especially encourage and reward opportunities that come from outside the Sourcing organization.

Forget about the data

Almost every SA process/project begins with the first step of data extraction.   This is costly.  Here are some tough facts:

  • Data is a perishable commodity.
  • If you extract it you have to clean it.
  • There is never enough data.
  • You will not use most of the data that is available.

We begin every engagement by asking the philosophical question “what if we didn’t have any data” to ourselves and our clients.  What information would we gather?  How would we convince the organization to share knowledge?  How long would the process take?  How do would we validate the opportunity?  Answering these questions get stakeholders involved and excited.

This week we talked about some of the shortcomings of traditional spend analysis.  Next week we’ll discuss the tools and resources that companies can use to enhance their analytic capability.

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Law Firms – Welcome to the World of Strategic Sourcing

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Often referred to as a “sacred cow” of Sourcing, law firms are finally feeling the squeeze felt by every other business that supplies goods or services to clients.  It took the recent recession for companies to realize that “everything is negotiable”, even the legal fees charged by their outside legal counsel.  According to an article by Jennifer Smith in the Wall Street Journal entitled “Companies Reset Legal Costs” now that the recession is over (is it??) . . . “clients who won concessions on their legal bills when law firms were scrambling for business still are calling the shots when it comes to paying by the hour”.   Finally!!  Welcome to the conversation!!  Could this mean that including legal fees as part of sourceable spend is finally happening?

I remember venturing into the world of Strategic Sourcing 15 years ago and being told that legal fees were out of scope.  We were able to get it done all those years ago BUT it took a lot of selling AND it was painful.  Still, today, as we work with client organizations, legal will end up in Wave 5 where all the most difficult categories are placed.  Not because it is so difficult to actually source legal spend but because the internal resistance is so great.  I believe this is primarily due to the fact that most Strategic Sourcing is cost focused and this particular category of spend really requires a Value-based approach.  In addition, most general counsel do not want any part of negotiating with their external partners even though they are supposed to be the “experts” at negotiating.  Talk to the Chief Legal Officer about outsourcing legal research to India and you can literally see the bow tie unravel.  If you look at legal services as being similar to other professional services such as accounting, finance, IT, HR, management consulting. etc., it’s a wonder that legal has been able to fly under the Sourcing radar for so long.  Or could it be that those well-honed negotiating skills have been used to justify why Sourcing is not applicable.

According to Ms. Smith  . . . “the number of companies seeking novel arrangements is on the rise and expected to grow further.  In 2011, 61% of U.S. general counsel in a Fulbright & Jaworski survey of 405 companies said they used alternative-fee arrangements, up from 48% in 2009.

So, it appears that the veil has been lifted.  When I read this article, I felt like I was in a time warp.  It addition to alternative billing structures, it discusses things like clients demanding visibility into what they are paying for, detail plans on how law firms will execute the work, questions around the number of partners required to sit through a deposition? Really, these are basic sourcing strategies that have been around for well over 20 years – they are not NEW, people!!

While companies are still trying to find ways to save money, now may be the time to jump on the bandwagon.  Legal departments may now be more amenable to exploring the Sourcing process, particularly now that it is becoming more mainstream.  Like every change though, develop your business case, brush off your selling document, let them know “what’s in it for them” and realize that it will not be easy.  Once the sourcing process is complete you need to ensure that the solutions are adopted (our AEIOU model) within the legal department or there will be no actual business benefit.  And if you are really brave and also want to have a little fun just mention outsourcing to India and watch the bow ties unravel . . . . . . . .

Join in the conversation and tell us about your experience in what appears to STILL be uncharted territory.

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Who is the First Person You Should Hire?

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If I had a dollar for every time I’ve been asked that question-well you know how that story goes?  At every single conference across the globe I’ve spoken at, that question has been asked in some way, shape or form.  Almost every single client has asked that question or some variation thereof.  And the ones that did not should have asked that question.  You can think about it in terms of what is a critical role that you must fill in your Sourcing/Supply Chain organization or any other internal “support” function (IT, Finance, legal) or shared service to confirm my contemporary bona fides.

Before I give you the answer, we need to make sure that we are asking the right questions.  And for those of you that have been through TMG’s decision making module, that refrain will sound very familiar.  Remember the New England Journal of Medicine exercise where physicians were asked to evaluate patients for toncillectomies and they were wrong 49% of the time ?  Otherwise, we can turn to what a couple of my friends said.  Pete says “The most common source of mistakes in management decisions is the emphasis on finding the right answer rather than the right question.” My friend Al goes on to say basically the same thing: “The formulation of a problem is far more essential than its solution, which may be merely a matter of mathematical or experimental skill.”

Typically, would you agree that in most cases (not including yours of course):

  • Organizations struggle with convincing their stakeholders of the value they create?
  • They face strong resistance in expanding their influence or footprint?
  • Budget wars are an annual and the quarterly norm?
  • Savings numbers are always questioned for validity?

If any of the above is true, then the answer to the title becomes self-evident.  A Marketing person!  I kid you not.  In the first Sourcing organization I set up in my career 16 years ago we had a full time marketing person (Peter).  His job was to constantly market our services and we took a marketing approach to it.  This wasn’t about creating some spreadsheets or graphs of generated savings.  He had to make sure that we continued to expand our footprint inside the company.  To sell our value to the stakeholders.  To keep in constant communication with them.  To make sure we were getting repeat business.  To ensure that we were getting referral to other stakeholders.

Now I’m sure that you are doing all of the above but I’m talking about most of the other organizations.  We have not seen  a true marketing focus being applied to this effort and I’m always surprised by that.  Especially given the tools available today.  It does not necessarily mean that you need to have a full time dedicated resource but you do need to fulfill that role.  So next time you are sitting in a budget meeting being asked one more time to take another haircut, you may want to think about your marketing effort.  Oh, Pete is Peter Drucker and Al is Albert Einstein.  Let me know if you would like more details.

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The Unintended Consequence of Efficiency

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The Internet along with our iPads, Kindles, Androids, iPhones, laptops, etc. have made our lives infinitely more efficient over the last several years.  Twitter and Facebook give us access to information we didn’t even know we needed.  And who needs an encyclopedia when we have Google search and Wikipedia. We can do almost EVERYTHING virtually through technology – communicate, shop, learn, bank, pay bills, manage investments, etc. and the list goes ON and ON.  Our lives have been made immeasurably easier by our access to technology, almost to the point that we cannot function without it.  Most would agree that this has been a positive step forward and the “intended consequence” of creating efficiency has been accomplished.  BUT I would argue that the unintended consequence of having our entire lives exposed to the world is one that is rarely discussed and can have some serious and even devastating implications.

In an article titled “Google Defends New Privacy Policy” by The Wall Street Journal, it is apparent that we are being constantly monitored and followed when we use any Google product (and don’t we all?).  According to Google, this is being done to make our lives easier, not to mention making Google infinitely richer through increased advertising dollars.  What many users translate this into is receiving targeted ads every time you go to the internet – annoying but not necessarily devastating.  Right?  Wrong!  You are clearly being followed just as if someone was stalking you in a shopping mall.  It is an invasion of privacy and is pretty darn scary.

An article came out yesterday in Business Week entitled “Microsoft Ads Bid to Capitalize on Google Privacy Backlash”.  In the article, Microsoft Corp. is aiming to take advantage of a backlash against Google’s privacy policy changes by rolling out new ads that say its rival is risking users’ privacy to squeeze more revenue out of them.  Will Microsoft really be any better?

Facebook, by the way, may soon be facing the same issue.  In an article in the Daily Caller entitled “Facebook Surrenders Its Privacy In IPO Documents”,  Facebook  openly admits that it has concerns that both the U.S.  and Europe may impose tougher privacy rules that would make it more difficult for the company to stockpile information about its users.  Everyone is doing it!!!

So what does all this mean for the user?  Be careful!!!  In our eagerness to share excessive amounts of personal information from our daily/hourly goings-on in Facebook to our everyday (don’t even think about it anymore) transactions, we are opening ourselves to Trouble (yes, with a capital T).   Many negative unintended consequences such as cyber bullying, robberies, cheating, identity theft, reputation bashing, etc. are all a result of making our lives more “efficient”.  As a recent victim of one of these unintended consequences, identity theft, I can tell you that trying to fix the problem FAR exceeds the efficiency that was initially created.  By the way, my problems were not caused by a local hooligan but by a VERY sharp hacker (most likely tens of thousands of miles away) that helped himself to ALL my personal information.  But for the internet, I would never have crossed paths with this individual (this is an assumption since this person will most likely never be caught).  As a result, I have fallen back to the good old U.S. mail, writing checks that actually require a signature and no longer do any “transactions” on-line.  Inefficient maybe, safer YES!

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