Exact Purchasing Helps You Survive the AI Era

In the ERP era, it was typically 60 months (i.e. 5 years) to project failure.

By then, you were (long) gone (from the role, if not the company) before the project was done. If it failed, you didn’t even know.

In the SaaS era, it was typically 18 months to failure.

In the SaaS era, you were in a different budget position in a different budget cycle and no longer responsible for the project by the time the project was done. If it failed, it wasn’t you. It was the person who replaced you.

In the AI era, it’s 1 month to failure! (And you’re going to fail. Project success rates are 6%, compared to the overall success rates of 12%.)

In the AI era, you make the decision, and before you know it, the system fails and you’re being held accountable because you’re still there, still in the role, and the project team hasn’t changed on either side of the equation.

You f6ck up, everyone knows its you, and only you (because you were in charge end-to-end), and you’re blamed for the loss.

The CFO hates you because you wasted money. The COO hates you because operations are worse than before. The CEO hates you because you made his favourite consultancy/provider partner (whose CEO plays golf with him on the golf course) look bad. And, worst of all, your team hates you as they have yet another system that doesn’t work, that they have to work around, on top of having to clean up the huge pile of sh!t it made when it was implemented. (To be expected. It’s probably just a reskin of the A.S.S.H.O.L.E. anyway.) Because there is no money left to fix it, and won’t be for three years because you overpaid through the nose to get it.

That’s your reality, unless you take extra, extra steps to make sure it doesn’t happen. Steps you don’t know to take because you don’t understand what you need, why you probably don’t need AI, and if you actually do, what (limited) AI you actually need and how to make it work in general, not just in a glorified demo based on buying butt wipes for your elderly care division.

The only way you’re going to know what steps to take is if you understand what you need.

The only way you’re going to understand what you need is to work through the Busch-Lamoureux Exact Purchasing framework category by category and outline what is required for each step of the source-to-pay+ process, then work through the (assisted) software selection process (with an expert advisor) to identify what types of solution you need, and then work through each of those solution types to determine if, and where, AI should be used, what kind of AI, and how to verify it in scripted demos (on data sets and requirements you provide and control) before you select any solution. Without going through all these steps, you’re guessing what you need, being blinded by the hype, and getting diverted to the new hotness when we both know it’s always the old busted hotness that saves the day. ALWAYS!

Exact Purchasing Helps You Assess Your Reality

In our last post we explained that the Busch-Lamoureux Exact Purchasing Model not only puts you on the path to Category Intelligence (which it requires, and which you need to get to, even though you likely haven’t even adopted Category Management), but it helps you define what you need in your technology platforms so that you can go to market knowing what you need and not get sucked into vendor BS.

But it goes beyond just laying out the path to category intelligence and platform selection, it helps you understand the real Procurement reality that faces your organization, which is not only different by category, but vastly different by product and supplier once you dig into your high complexity, high risk, and high impact categories.

Let’s start with the low complexity, low risk, high impact continual transaction monitoring category where energy, RAM, and custom FPGAs will live for engineering firms and where fertilizer, tractor parts, and greenhouse panels will live for agricultural operations. Most of the time, this category is quickly and easily sourced since you bid out the contract in a deregulated energy market and the energy keeps flowing, DRAM is DRAM is DRAM, a number of suppliers exist that make customized FPGAs, greenhouse panels are pretty interchangeable, you don’t care who supplies your fertilizer (as long as it doesn’t sale on the Saskatchewan River, and tractor parts are made in bulk and almost always in the local shop.

But, sometimes, an energy production plant fails and then your energy provider files chapter 11, the once-a-decade plant fire happens and takes one of the few large RAM production factories offline (causing major RAM shortages), or your factory gets cut off by a border or port closure and then you need a replacement – fast. Similarly, global supply chain disruptions can cause tractor part shortages (as the major US manufacturers offshored production of some parts to China and Mexico — COVID proved this), you need your greenhouse panel replacements to be the right size and thickness (among other things), and you need that fertilizer (which all of a sudden becomes scarce, if not unavailable, if the shipping lane that sees up to half of the global supply of key chemical components cut off.

As you explore this category in detail you note that, most of the time, you can just send out an RFQ, get the bids, award the lowest bidder, and keep on truckin’ without a second thought. It’s only when an event happens that will lead to cut off supply from your current source do you need to do anything. But since there is usually other supply from other sources, even if more expensive, you realize that you don’t need to think about every possible risk or disruption — you just need to detect when one has occurred and go back to market right away.

All you need to do is monitor the transactions and make sure they occur on the required schedule, at the expected unit count, and at the expected price. Should a transaction not occur when expected, and for something with a lead time of more than 7 days, should a ASN not appear when expected, then alternate supply needs to be secured. The program should automatically place an order to the backup supplier (or the #2 supplier on the last event) and alert a buyer to investigate what happened. Should the buyer investigate and determine the delay is just due to a carrier f*ck up, you take solace in the fact an extra replacement order is on the way, and comfort in the fact that everything should be fine starting with the next order. Should the buyer determine it’s because of a border/port closing that could go on a while, she orders a new RFP (and uses Force Majeure to cancel any remaining commitment to the current supplier), invokes the (agentic) automation, and goes back to work. And should the buyer determine it’s because of a plant fire or plant damage from a natural supplier that’s going to go a while AND create a global supply shortage, she buys up all the supply she can as fast as she can before supply becomes very scarce and prices go through the roof. And then, knowing the only extra costs are inventory, she goes back to work knowing that the annoyance her organization is feeling due to a temporary sharp rise in inventory costs and a rapid reduction in cash flow, is nothing compared to the pain the organization would feel if all of a sudden there was no supply, they couldn’t produce their products in their biggest product lines, and defaulted on contracts and had to pay an extended legal team to defend lawsuits on Force Majeure claims while the organization sees a substantial drop in revenue.

Now let’s consider the high complexity, low risk, low impact spend governance category where you’d likely see BPO, facility management, and installation projects. Here you’re spending a lot of time on your vendor identification, vendor qualification, RFP, vendor selection, contracting with obligations, milestones, and risk management, and spend schedules and when you’re done, you think you’re done. But when you understand the sheer complexity, you know you’re just getting started. First of all, the vendor doesn’t know your processes or expectations as well as you think. Secondly, their improvements are theirs and theirs alone (and they’ll lock you in for life) unless you ensure, and capture, knowledge transfer. Third, once you become dependent you become damned if you continue and damned if you don’t. They’ll know the precise moment you can’t live without them and then prices will skyrocket on the next renewal. And even worse will be if they get into financial trouble and can no longer support you to the degree you expect.

This means that you not only need to capture as much knowledge as possible on the improved processes they deliver, but also the technologies they use and the providers who provide them. And then you have to, before each renewal, determine who the other providers are who could also deliver an equivalent solution based on your current process and technology requirements, and ensure you could contact them quickly if needed. The switching costs will be high, so unless you don’t have a choice, it’s not a trigger you’ll want to pull, but if you aren’t ready when you need to, you’ll be in deep trouble.

You realize you not only need to go through a very involved selection project when you need the BPO, regular engineering, or facility management service, but due all the market research to kick off another one on a (bi) annual basis to ensure that you are not caught in a very bad situation on the once-a-decade black swan event when the provider all of a sudden becomes unavailable or (possibly as a result of a merge or acquisition) raises prices so high you can’t afford to continue, even though you desperately need the service.

Finally, when you dive into each of the other six categories you realize that your reality is a lot more fragmented and diverse than you would otherwise expect in a Procurement organization and until you accept that, and start dealing with the different fragments differently, success will always be just beyond your reach.

Exact Purchasing Helps You Define Your Tech Needs

In our last post we illuminated how Busch-Lamoureux Exact Purchasing required Category Intelligence (not just the Category Management most Procurement organizations aren’t yet doing) and, thus, ups your Procurement game in more ways than one. Many more ways than one, actually.

Only with Exact Purchasing can you figure out what you actually need from your Procurement technology, If you go back to our piece on assisted solution selection is a seven stair methodology, step 1 is understanding your needs. By breaking your procurement needs into categories you can specify to a high degree of detail, you get an understanding of what you really need to do in your Procurement organization.

In the seven stair methodology, step 2 is the holistic solution requirement — and this is what is embodied in Exact Purchasing! With exact purchasing, you are holistically evaluating a category from all key perspectives — complexity, risk, and organizational impact — and creating sourcing, procurement, supplier, and supply management plans that balance the requirements from a holistic requirement.

Step 3 is organizational maturity, and here’s what most Procurement organizations miss — the lack of a proper, formal, category management strategy that allows them to start on the journey to Procurement excellence through better processes, risk management, and intelligence is what holds them back. Exact Purchasing gives them a foundation to not only figure out where they are on their Procurement journey but where they need to go and what process improvements might get them there.

Step 4 is vendor pool selection, and here’s where exact purchasing really starts to help as it helps you identify what the tech has to do, which helps you (possibly with help from an expert analyst or consultant) identify what type of Procurement tech you really need, and then you can use an independent analyst or consultant (who doesn’t have to sycophantically cater to the bejeweled emerald software partner in order to maintain that bejeweled emerald status that sees a lot of integration work thrown his way as long as he maintains it) to identify the vendors most likely to be a great fit for you.

Step 5 is the vendor assessment process, which is itself a 7 step process — and Exact Purchasing helps you out end-to-end here.

Step 5a is RFI creation. With Exact Purchasing, you know what the critical functionality is, you can easily specify what it is, and then quickly eliminate any vendor that can’t meet 100% of the critical must-have for your organization before wasting any significant time on them.

Step 5b is collaborative RFI review. Once you’ve eliminated those that you’re certain won’t fit, if too many vendors survive the cut, the team is educated on both what is needed and what will make their lives easier and can holistically assess initial responses to narrow down to the providers that go beyond the basics in ways that might be helpful.

Step 5c is the qualifying demo. You can create a script that not only covers all the essentials, but should haves that will help illuminate where the key strengths and weaknesses are likely to be both in the given vendor’s application but the vendor pool over all and get the insight you need to ensure that you’re both on the right path and that the vendors you select for the RFP will be worth the next stage review.

Step 5d is the RFP creation. From here you can elaborate all the should have and nice to have functionality, double down on your key pain points that you would like solved (potentially in innovative ways), note what intelligence is critical, identify where you’d like services and support, and identify any must-have organizational requirements beyond Procurement that would be a deal-breaker. You’re able to focus on the what, instead of the typical 500 point feature list where half the features you might never use.

Step 5e is the RFP review, where again the team has the understanding on what to look for and can ensure that any vendor who wouldn’t make the cut doesn’t get invited to the full demo stage.

Step 6 is the full demo where each vendor provides a two-part demo against the basic deep dive should have script the RFP was based on and detailed requests based upon claims they made in the RFP against nice-to-haves, uniqueness, process improvements that will save you time and money beyond what peers can do, etc.

Step 7 is the decision, and you can make that against what the vendors offer relative to your category needs and organizational goals, not just a feature list you don’t understand (but copied from a Free RFP anyway because you needed to look competent).

In other words, Exact Purchasing gives you the understanding you need to go to market, and the understanding that not every solution may be appropriate for every category — and that’s okay. Sometimes two or three targeted BoB solutions are still less than half of the cost of a mega-suite that still only solves half of your problems.

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.