5 milestones to Sourcing Excellence

“Sourcing excellence = professional knowledge + market knowledge + product knowledge” Jonathan Dutton

As per a recent study conducted by IACCM, 88% of Contract Management professionals indicate that improvement of the quality of the Requirements was the number one factor to improve contract performance in their organisations (IACCM – Contract and Commercial Management – A Operational Guide).

I have discussed the importance of understanding and clarifying the scope with your vendor as part of the Iron Triangle (here).

As we all know, having incomplete, erroneous or unexamined specifications for a product or service category lead to confusion, rework or simply sub-optimum  results.

To be successful, you first need to fully understand the scope and alternatives yourself i.e. what the business really needs and different possible ways to achieve it.

Let’s see some practical tips on how to do so.

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The 5 milestone Road to successful Requirements’ Identification and Sourcing Excellence

1) Know your stakeholders

First of all, you need to know your own stakeholders.

Anyone, the project affects directly and indirectly is a stakeholder.

Some of them are affected more than others and some of them will have a greater influence in determining the success of the project. So, if during the procurement process, you miss out on engaging with a stakeholder, you then risk project failure.

HOW to: Brainstorming and looking at the process and usage of the product and service should reveal who you need to approach.

2) Know you business objectives

You also need to know your business objectives.

You should embrace a different approach if the business objective is a strategic one e.g. entering a different market, rather than a tactical or an operational e.g. improving a process or removing cost.

Moreover, different stakeholders will have different motives and will probably target different outcomes in order to consider the project outcome successful. These need to be identified and defined.

Hence, the stakeholders need to know and sign off on the final defined business objectives.

HOW TO: Use interviews and questionnaires to define the requirements, needs and expectations from each one. Then ask them to review and sign off on the final result.

3) Understand the Specification

This is self evident. If you cannot articulate the functional and technical specifications then you probably do not have a good grasp of the project and would not know how to evaluate the suppliers.

Try defining this using AMPP technique (Ask, Mirror, Paraphase and Prime) and see that you have a good understanding of it and its implications.

Moreover, check that the functional and technical requirement are aligned with the business objectives and that at the end of the process all stakeholders have a high level of confidence of the final defined results.

HOW TO: A number of effective communication techniques can be found in the book Crucial Conversations by Kerry Patterson et al.

Phrases like e.g. “Please let me know if you see this differently….. If I understand correctly……. Is this what you mean…… In my mind this means that ……..” can help.

Moreover, make use of a requirements checklist, questionnaires, interviews, roundtable discussions and brainstorming sessions. Research and benchmarking are tools you can also employ.

4) Agree the acceptance criteria

After the 1-3 steps are complete you can crystallise from the feedback provided the acceptance criteria. These can be categorised in three categories:

i) Hurdles (the Must Have criteria) e.g. ISO certification, Insurances’ cover, No accident record.

ii) The Essential Requirements (for which the vendors can be graded on a scale) e.g. quality, price level…

iii) The Good to Have (additional attributes that may not be immediately required but an extension of the service) e.g. operations in another state or territory that may be a target for your company in the future.

Moreover, the project team needs to have a clear idea of

A) What is the procedure of picking a bid
B) What are the quantifiable, measurable criteria and
C) How assessment and grading will be made.

5) Change Management Process

Scope creep, the process of evolving and ever-changing requirements, is a major cause that many projects fail e.g. run over-budget, over-time.

However, ignoring that there may be changes is not an option.

So, especially for complex and longer on duration projects, a clearly defined practical change management process needs to be defined in order  to have a good chance of been successful.

Based on mutual trust a clearly defined process for approaching changes identified (which can be clearly linked to the business objectives) is key.

HOW TO: An effective way to do this is to agree to change control documentation and a sign off process.

Moreover, great tips on the 5 levels of building trust can be found in the book The Speed of Trust by Stephen M.R. Covey

 

The Speed of Trust - 5 Waves

The Speed of Trust – 5 Waves

 

In essence, working on your internal and external relationships is the only way that will provide the necessary trust that is the bedrock on which any change management process can be based on.

 

RELATIONSHIP MANAGEMENT

The Requirements specification  as well as the overall Procurement and Contract Management process are heavily reliant on good relationship management skills.

Ron Larimer in his article My three issues with the Seven Step Model has made this very lucid in the Procurement model he supports:

The Sourcing Wheel

The Sourcing Wheel

 

So, in thinking about Sourcing Excellence I suggest that Jonathan’s quote needs to be modified a little to include the key element of trusting relationships.

Sourcing excellence = professional knowledge + market knowledge + product knowledge + well established trusting relationships

 

What are the successful ways you use to define requirements in your Procurement process?

 

How to perform a mid-year Procurement review!

Constant reviews are part of every effective system. As Peter Drucker mentioned, every so often, it is crucial to do the “Feedback Analysis” in three steps:

1. Whenever you take a key decision or action, write down what you expect to happen.
2. Review results at regular intervals and compare them with expectations.
3. Use this feedback as a guide and road to reinforce strengths and eliminate weaknesses.

                                                                                                                         Peter Drucker

The end of the Financial year (in Australia) and reaching the mid-calendar year point in other parts of the world, makes for a great opportunity to review the progress made so far, look afresh at your personal, team and/or departmental KPIs and goals for the year and review any new opportunities that may have come up.

Having an appraisal review once a year may have been effective in previous generations but not in the modern post-GFC fast paced marketspace.

Read on if you want to learn about a scheme for performing a General review and a comprehensive checklist to go through during a Procurement specific one.

 

Alexander Knight

GENERAL REVIEW

So, utilise the One-on-One meetings (or other frameworks, some of which I mentioned here and here) sit down with your staff and/or book a meeting room for a space free of distractions and revisit:

  1. Your KPIs
  2. Your team’s or department’s KPIs
  3. Opportunities that may have come up
  4. Challenges that have occurred
  5. Projects in development that may need your contribution or that you can contribute to.

 

PROCUREMENT REVIEW

Especially, for Procurement, there is a more specific list of things to do.

As Richard Waugh, VP of Corporate Development at Zycus, mentioned in his recent post titled “Spring Cleaning time in the Procurement household:A Checklist” in spendmatters.com below are some key areas every Procurement professional should look into.

Based on the article I put together a checklist which I thought I’d share. For more information please refer to Richard’s article which makes a compelling read:

CHECKLIST for EFFECTIVE PROCUREMENT REVIEWS:

Contracts

  1. Look for contracts that have expired or are due to do so soon. Update your Contract calendar.
  2. Review at least one auto-renewal of an evergreen agreement.
  3. Look for maintenance agreements on long discarded assets or not used software licenses. 
  4. Review that rebate provisions are up to date.

Spend Analysis

  1. Refresh your spend data to evaluate changes in spending patterns.
  2. Analyze for purchase price variance i.e. paying different prices for the same item.
  3. Analyze for Payment Term Rationalization – standardizing on contracted payment terms with preferred vendors.
  4. Look for Supplier Rationalization opportunities i.e. root out “supplier creep”

Supplier Management

  1. Look for duplicate and inactive vendors in your vendor database.
  2. Ensure that insurance, quality, diversity, or other certifications are up-to-date.
  3. Update the Supplier segmentation matrix (categories: strategic, critical, important or tactical).
  4. Ensure Supplier Managers are allocated to strategic, critical and important suppliers.

Category Management/Sourcing

  1. Review category strategies taking into account commodity price trends and forecasts.
  2. Look for opportunities of hedging through longer term contracts where price increases are projected.

Performance Management

  1. Refresh your scorecard including value offered by Procurement and Contract Management in recent gains in “spend under management, realized cost savings, increased user adoption, cycle time reduction, contract compliance, supplier enablement” etc.
  2. Benchmark your performance against the market. 

 

Image courtesy of Alexander Kaiser, pooliestudios.com / www.flickr.com

Procurement as a differentiator – Part 3 (what kind of differentiation?)

In a previous post (Part 1) I explored an expanded definition of what Procurement is becoming and then how it can become the link between Customer Demand and Supplier Innovation.

Then (Part 2), how Procurement’s potential could reinforce the basic Strategies of Organizational differentiation.

In this post I will explore in more detail what this differentiation could look like.

Innovation Anna betts

C. PROCUREMENT AND DIFFERENTIATION

The argument that Procurement can become a key Differentiator is supported by the fact that Innovation is a key contributor of business growth and that Procurement can be a great curator and creator of Innovation.

Jimmy Anklesaria in his great book “Supply Chain Cost Management” posits that Procurement should:

“leverage [the] collective intelligence of the extended enterprise (your customers and their customers, your suppliers and their suppliers), and generate substantial results”.

and also that

the next generation of cost management is: “breakthrough solutions”.

C1. COST LEADERSHIP AS A DIFFERENTIATOR

Jimmy Anklesaria also highlights the fact that genuine cost management is different from cost cutting.

Indeed, genuine Cost Management does look at the business as a whole and asks questions like:

-Do we really need this service?

-What is the value this service provides to the business?

-Is there a better way of doing this?

Moreover, he stresses the importance for Procurement to move towards embracing a Strategic perspective as, according to him, successful Cost Management will be the key differentiator in the future:

“So, here we are in the twenty-first century. What will differentiate your firm from its competition? Will it be technology? Or maybe it’ll be quality and reliability? Perhaps speed of delivery? Or excellent customer service? Or do you think your firm is the onoly one in the industry doing e-business? The answer,…, is that nowadays, frequent technological breakthroughs, high quality, reliability, on time delivery, top customer service, and e-business are merely the prerequisites for being in the global race for market share. Today’s customer expects this from a supplier; rather, demands it. And there are enough firms around the world that have overcome the “preliminary rounds” of technology, quality, reliability, delivery, service and e-business.

So, why should they choose your firm?

In a few years the only differentiation will be cost. Companies that best manage their costs through the entire supply chain to bring you the latest technology, best quality with on-time delivery at a price lower than the others will take home the prize-your check. There is no prize for coming second”.

C2. INNOVATION AS A DIFFERENTIATOR

Now, reflecting on the power of Innovation to drive growth we find evidence in Kate Vitasek’s reminder of Solow’s Law that states that business growth is driven by innovation.

Specifically,

“The population and the labour supply grow at a constant rate and capital intensity (or capital per employee) can be regulated. But without technological progress, Solow continued, growth rates for capital, labour and total production would all be about the same. As a result, technological development would be the motor for economic growth over the long haul. In Solow’s model, if continuous technological progress can be assumed, growth in real incomes will be determined by technological progress”. (Kate Vitasek, outsourcemagazine)

But probably the most important contribution Solow demonstrated was that only a small proportion of annual growth could be explained by increased inputs of labour and capital. Just how small? Thirteen percent.

In other words technological growth makes the crucial difference when it comes to economic growth – a whopping 87 percent. Now keep in mind technological growth happens in two ways: product and process improvements.

For both these ways, Procurement can play a pivotal role.

This notion is also reinforced by the view of Cavinato and Kauffman when they detail Technology Advancement (e.g. Product and/or Process Improvement) and Supply Chain Synchronization (e.g. Process Improvement) among the four key trends that will most likely fundamentally shape tomorrow’s procurement practices (here). The other two key trends being Globalisation and Industry Consolidation.

 

CONCLUSION

I think that the above amounts to a strong argument for Procurement to be one of the primary differentiators for the organisations of tomorrow. Utilizing the Procurement function towards clever Cost Management and stimulating Innovation will mean that organizations will empower a yet not fully explored source of creativity and immense potential.

 

Where do you think Procurement will be and should be by 2020?

 

 

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Image courtesy of Anna Betts/ www.flickr.com

 

Procurement as a differentiator – Part 2

In the previous post (here) I explored an expanded definition of what Procurement is and how it can evolve into becoming the link between Customer Demand and Supplier Innovation.

It is important though to also explore the Procurement potential through the lens of Michael Porter’s model of Organisational Success in an effort to understand how the basic Strategies of differentiation could be reinforced through the Procurement profession.

Michael Porter

Michael Porter

B) PORTER AND COUSINS MODEL FOR ORGANISATIONAL SUCCESS

Michael Porter in his seminal book “Competitive Advantage: Creating and Sustaining Superior Performance” describes three generic strategies for businesses.

These are:

“”Cost Leadership” (no frills), “Differentiation” (creating uniquely desirable products and services) and “Focus” (offering a specialized service in a niche market)”. (mindtools)

The above easily brings to mind the airline Tigerair reputed for low cost, 3M reputed for innovation and Qantas which with the formation of Jetstar pursued the “Focus” strategy (niche market differentiation).

Reflecting on this model it is evident that Procurement can clearly respond to 2 out of 3 of Porter’s differentiation strategies i.e. Cost Leadership and Differentiation and can affect the 3rd one.

B1. COST LEADERSHIP

Cost management and cost cutting has been an archetypal quality for Procurement.

 

B2. DIFFERENTIATION

I believe that the second differentiator i.e. Innovation, is the next frontier. Procurement can and is slowly moving

from

“purchasing goods and services at competitive prices”

to

also focusing on cost reduction techniques, improving cycle times, reducing time-to-market, and constantly seeking to exploit actual and potential innovations from within the supply market. 

Moreover, in the current environment, and considering Strategic Supply Management, the Organization should constantly re-evaluate what is core and what could be outsourced. So, Make or Buy decisions will become more common.

As Cousins et al, highlights:

“Supply strategy is increasingly a factor in identifying the organization’s boundaries. Supply management assumes responsibility for developing and implementing supply structures that will sustain the competitive position of the firm” (Cousins P. et al, 2008, Strategic Supply Management)

B3. CAVEAT

The necessary caveat of course is that the Organization views and enables Procurement to function in a strategic and collaborative way, internally and externally, and that the Organization has and is clearly communicating the preferred differentiation strategy it has chosen to all, so, that alignment of goals and business unit strategies is ensured.

 

In the next and final post of this three-part series, I will explore this differentiation could look like.

 

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Image courtesy of Wikipedia / www.wikipedia.com