The Problem With Simplified Graphics 3: RFPs Ain’t Gonna Die!

Unlike rock and roll, RFPs are noise pollution, but RFPs ain’t gonna die.

Today we’re tackling a different type of graphic. In this case it’s not one that oversimplifies, but one that misses the core issue — an utter lack of Procurement maturity in the average organization.

This is a case where we don’t have any real problems with the graphic, it’s theoretically correct, but problems with the underlying assumptions, which ignore the fact that most Procurement departments are not ready.

In the graphic in question, Tanya Wade presents 8 valid alternatives to the RFP which all organizations should be aware of.

But here’s the thing, most Procurement departments, to this day, are immature and can barely do basic RFPs and e-Auctions. They have primitive, last generation (if not first generation) sourcing and procurement platforms, and their knowledge puts them on par with the Island of Misfit Toys. They aren’t ready for anything else.

Let’s take Tanya’s suggestions one-by-one.

  • Intake-Orchestration (I2O): few organizations have this, and those that claim to just have a software solution from a third party and accept the third party’s definition blindly don’t understand what true I2O really is — because intake isn’t just software, it’s process — and without a good understanding of the process the organization needs and an effort to incorporate that process into the acquired software, I20 doesn’t work (at all)
  • Guided Buying: you not only need solutions that support it, but the knowledge to configure them properly so that the end users can self-serve
  • Dynamic Markets and Frameworks: the majority of Procurement organizations are not sophisticated enough to handle dynamic markets and frameworks, this has to be done by a third party which requires the use of a Consortium, and while once popular, many of those have disappeared over the last two decades
  • Paid Proof of Value: this is great in theory, but not many vendors will do this in practice — they want a sale, not a cost-neutral pilot — and if you won’t guarantee a sale upon success, even those that will consider it won’t do it
  • Supplier Discovery Platforms: this is about the only platform the average organization is more-or-less able to use, and the -less part is that while they can use it, they can’t always do the verifications that the platform can’t and will sometimes invite inappropriate suppliers to the RFP and won’t realize it until they go through a full detailed RFP and a product verification, which could waste weeks or months of their time
  • Benchmark-Led Renewal: Procurement organizations need external data and external guidance to create benchmarks, and then need guidance on how to interpret them and negotiate on them; and they don’t know where to get this data and how to identify the experts to guide them or negotiate on their behalf (or even find potential help in the first place)
  • Problem Statements: i.e. CrowdSourcing — this was supposed to change Procurement two decades ago, and that was the last time we really heard of it …
  • AI-Assisted Market Scan: for most procurement departments, this is asking chat, j’ai pété or clod to identify products, services, and suppliers; match to requirements; and make a recommendation — which will result in the procurement regularly getting a quote for the perfect product from a fake supplier that doesn’t exist because these tools hallucinate regularly

In other words, even when the simplified graphic is right, it’s still wrong when the typical Procurement department is not mature enough to implement any of it. Without an understanding of readiness, even the right path is not one an organization can walk down.

Follow Tanya Wade over on The Procurement Blueprint.

The Problem With Simplified Graphics 2: All Funnels Have Holes!

Every consultancy and consultant has their own version of the Procurement funnel, and they all look great because they show you the shiny front side that they clean and rinse every day and not the rusted back side that is full of holes.

Today I’m going to pick on Joël Collin-Demers and his procurement funnel. Before we continue, we should admit that we like Joël’s funnel more than others, which is why we chose it to exemplify the problem with funnels.

Let’s take the levels one by one.

  • Total Company Spend: well, this is the same for every funnel and the only level that’s ever 100% right
  • Addressable Spend: this is defined differently by every consultancy and never matches reality — because, in theory ALL company spend is addressable spend if Procurement is allowed to have influence (even salaries — Procurement can help benchmark ranges and define what top talent looks like), but the reality is that addressable spend is ONLY what the C-Suite will allow Procurement to touch (or mandate they have access to such spend)
  • Spend Under Management: in theory this is what procurement “owns” but in reality, it is only what they are both allowed, and able, to manage
  • Spend Under Contract / Strategy: this is the one level Joel gets right that most get wrong — it’s not contract, it’s strategy … some spend should be contract, some should be spot-buy, etc. it all depends on the buy
  • Fully Governed Spend: this is the missing layer in most funnels — under contract is not enough, it has to be managed

It’s a good funnel, which is why it’s the one we like the most — but here’s the problems with all the funnels:

  • Addressable Spend: Procurement rarely looks beyond the spend they’ve been assigned to determine what might be addressable and how they should be advising the departments they are there to help
  • Spend Under Management: “owning” is meaningless if it’s not being actively managed; a policy is useless when the end users are allowed to buy whatever they want when Procurement is supposed to own the spend; putting a catalog in place is nothing if the employees still buy what they want with the P-card; having an RFQ for spot-buys is useless if the employees ask for e-mail quotes and select the first one they get or just ask their favourite vendor to send them what they want — this happens all the time in “tail spend”, including spend that should not be in the tail
  • Spend Under Strategy: a “contract” is useless if it’s not being adhered to; the classic example to this day is telco/cell phone — Procurement, with the help of an expert, negotiates a new national contract expected to save 30%, but a few departments refuse to switch, and keep paying the higher rates; since it doesn’t go through the P2P systems (as it’s a regularly recurring utility bill paid by finance), there’s no detection that 30% of spend hasn’t switched and the spend doesn’t get governed; and just following a strategy (contract, spot-buy, catalog, etc.) doesn’t mean the spend is being managed — who is contracting, spot-buying, cataloging and how are the policies being enforced
  • Fully Governed Spend: this is the ideal, but the reality is that this bucket is empty in the vast majority of organizations — even if an organization has sourcing and procurement systems, the reality is that they are usually not connected and not configured properly and the spend the organization thinks is governed actually isn’t

The reality is that when

  • organization’s don’t admit that what they are allowing to be “addressable” doesn’t address the problem
  • owning on (the policy) paper is meaningless if ownership is not taken
  • a contract or strategy is a foundation, but you still need to build upon it

The funnel gives them a false sense of security while performance continues to degrade.

That’s why you have to be careful when fancy graphics are involved. They can point to a path, but you need deeper insight to follow it.

Follow Joël Collin-Demers over on Pure Procurement.

The Problem With Simplified Graphics 1: Spend is Multi-Faceted

Just like every analyst firm wants to give you a 2 * 2 matrix (which is fundamentally broken, which is why the Busch-Lamoureux Exact Purchasing Model isn’t 2D — it’s a 3D pocket cube), every consultant wants to give you a simple table or chart to solve your spend.

Take this recent example from Tom Mills where he decides that all spend falls into four buckets.

At a high level, it sounds correct. You either have:

  • Direct Spend: Cost of Production
  • Indirect Spend: Cost of Operations
  • Services Spend: Cost of Expertise
  • CapEx Spend: Cost of Assets and Investment

Except:

  • cost of production can also include MRO (which is typically indirect spend in Procurement) as you have to keep the machines running, and you should also amortize the appropriate personnel spend (which is also cost of operations and maybe even cost of expertise)
  • cost of operations is broad, and can include external spend for products and services as well as internal spend for personnel
  • cost of expertise is not just services, it’s also hiring contractors direct, buying reports, and funding research
  • CapEx is not just assets and investments, but rental — and then there are blurs around assets that can be fully expenses vs depreciated even though they will be in use for multiple years

Now, to be fair, Tom does a great job of explaining his view on what each of these categories is, why to track them, when to track them, how they impact financials, and key (crystal clear cut) examples. And Tom does a decent job of covering best practices and common mistakes, but here’s where the issues start to show:

  • direct only requires strategic partnerships for custom manufactured products, materials or components in short supply;
  • category management isn’t just for indirect, it applies across the board; same goes for contract compliance — negotiated “savings” is BS — if it doesn’t materialize due to non-contract compliance, it’s not there; over-standardization increases cost, risk, and decreases innovation; and spend analytics has to be applied everywhere
  • cost of expertise isn’t just about day rates, it’s about return on investment — you need the right expertise, and that’s not just day rate
  • capex is the most accurate by far, but the analyses has to include supplier managed vs lease vs buy for more asset types than most organizations are used to in this changing economy

In every case, the magnitude, risk, and complexity of the spend determines the specific sourcing and procurement methodology as well as the degree of analysis and effort that is required.

In other words, a simple bucketing strategy can get you going, and this one will get you much further than the useless 2*2s from the big analyst firms, but just remember that it will only get you so far as the real world is a lot more complex than 2 * 2 buckets and once you have the basics down, you have to step up.

We know you like flashy graphics, and we especially know that LinkedIn likes serving them up (and is 10 times as likely to serve up a flashy graphics post than a plain text post), but the end result is that you don’t get the deep knowledge you need. So don’t stop with the flashy graphic and dig deeper if you want to truly solve all your problems.

And remember to follow Tom Mills and his Procure Bites for practical procurement proverbs (unless you prefer the pompous pontifications of LinkedIn).

Is it time for Supply Driven Demand Creation?

For the past two decades, the goal was JIT DDS — Just in Time Demand Driven Supply — and the ultimate in Sourcing and Procurement was sourcing and procuring to optimize that mode of operation as it minimized costs and maximized revenue. In theory at least. And for a while, more often than not, it did in practice.

When predictability and reliability is high on both the customer side and the supply side, JIT DDS is the ultimate source-to-supply goal. Optimizing delivery time (JIT) minimizes inventory cost and waste, allows shipments to be right sized, and makes cashflow more predictable as spend appropriately correlated to sales. Accurate forecasting (DDS) optimizes sourcing events, minimizes stock-outs, and minimizes waste.

But what happens when:

  • customer demand is unpredictable due to rapid changes in inflation, employment, tarrifs, and other factors
  • supply lines get caught off with little to no warning thanks to strikes, pandemics, wars, and droughts
  • raw materials get scarce or suddenly become unavailable

Supply Stops. Then sales stop. Everything breaks. And there’s no quick fix.

Now, that’s why you have visibility, monitoring, multiple sources of supply, mitigation plans, etc. That works when there are alternate sources, alternate routes, and enough time to react — but when the sources depend on the same raw material or rare component, and that becomes unavailable, one or more of your product lines are brought to a halt. And there’s nothing you can do.

Except for preventing that situation from ever happening in the first place.

The only way to do that is to ensure you are not dependent on raw materials or rare components that could disappear literally overnight.

Which means that if you revenue is heavily dependent on products (and categories) that rely on these raw materials, you need to do your best to identify alternates wherever possible and if those alternates don’t allow you to make roughly the same product, you’ll have to work with marketing and sales to shift demand based on available supply.

In some categories, that won’t be possible — you can’t make certain electronics without rare earths, but you can shift to product designs that minimize them. Depending on the rare earth in question, any change in quantity will affect the design options — not just in material composition, but in size, performance, and cost. If the cost goes up, or performance goes down, it could be difficult to convince the market an alternate design or product is better, but if there are no other real options, that’s what has to happen.

Which is why success in turbulent times is dependent on supply driven demand — and, more importantly, an abandonment of JIT to balanced inventory where enough supply is kept on hand to survive the average delay expected by an interruption, with a buffer.