Companies putting time and money into supplier diversity programs experience no loss in efficiency, according to new research from The Hackett Group. Hackett’s 2017 Supplier Diversity Study found that nearly all diverse suppliers meet or exceed expectations and in fact bring additional benefits such as new revenue opportunities. These new findings dispute executive assumptions that pursuing supplier diversity initiatives will divert attention from other strategic activities.
The Procurement Strategy & Planning Category
The idea of “tail spend” doesn’t seem very complicated at first.
Run a Pareto analysis on your spend categories and suppliers to make a cutoff at, say, the 80% that represent only 20% of your spend. Your numbers will, of course, vary, but the idea is to find a way to better manage such “nuisance” low-dollar spend that doesn’t detract from your efficiency, or worse yet, from spending time managing the truly strategic spend categories more deeply.
You might think of this as the spend in the lower-left quadrant of the famous Kraljic 2x2 matrix, which describes a strategy of “purchasing management” to manage non-critical, abundant supply that can be sourced locally in a de-centralized manner for maximum efficiency. And, maybe, if you manage this nuisance spend properly, you can even extract some value from it (e.g., a “quick source” process to gain some speedy spend savings).
Sounds straightforward, right?
Well, it’s not, and I have purposefully led you astray to prove a point.
The problem is that I never really defined tail spend in the first place – and if you can’t define it or see/measure it, you can’t manage it. And herein lies the rub (and the opportunity):
Tail spend could better be described as “nuisance spend” or “tactical spend,” and is comprised of many sub-segments — not just one or two.
Let’s return to our examples above. Segmenting on a spend-per-supplier basis, like in our Pareto diagram, is by no means perfect. What about low-spend, sole-source suppliers tied to large revenue or profit? OK, well, you might then refer to the Krajlic matrix as the solution. It’s better, because it helps profile the categories into complexity vs. impact (or risk vs. reward if you view it as such), but again, these are only two variables, and do not factor in any others.
Which ones? Let’s list six of them and ask whether you’d consider the resulting spend segments as ‘tail spend,’ or at least ‘nuisance spend.'
Beyond the Traditional SRM Scorecard: Supplier Management Metrics to Diagnose Your Supplier Management Operations (Part 1: Search and Enablement) [PRO]
In recent years, prominent procure-to-pay (P2P) providers have increasingly offered opt-in peer benchmarking capabilities. This newly available data has changed the way consultants and advisors evaluate procurement performance. Benchmarks and key performance indicators (KPIs) once analyzed on a periodic basis, for instance, are now becoming embedded into procurement processes and continuously updated with new information as it becomes available.
Because of this, procurement organizations are becoming increasingly aware of the benefits measuring performance based on a standard set of benchmarks and KPIs can bring to overall P2P performance. Yet the same cannot be said of supplier management activities, despite the significant cost and risk they pose to procurement. In fact, Spend Matters has found that most procurement organizations are not yet measuring a complete set of KPIs to manage the lifecycle of supplier activities and associated supplier information. Solution providers have not helped this situation, either, instead glossing over supplier management in favor of KPIs and peer benchmarking services in core transactional procurement areas.
It’s time to change this. To give procurement organizations operational metrics that mirror the KPIs available in P2P, this multipart Spend Matters PRO series provides an action guide for measuring and quantifying some of the benefits of "day in the life" operational supplier management activities. It also provides a roadmap and foundational input for building a business case to support these initiatives, including investments in dedicated technology solutions and tactical KPIs for managing them.
Part 1 of this series offers diagnostic KPIs for self-assessing supplier search and enablement performance. For each metric, we include commentary and insight on why it matters to procurement, guidance on enablement and measurement, suggestions for procurement technology systems that can be used for support and variable inputs for tracking.
We also encourage all Spend Matters readers, including non-Spend Matters PRO subscribers, to download our recent 2017 landscape definition and overview on supplier management and supply risk management, which provide details on the different technical components of these solution areas.
While the area of supply risk management is attracting growing interest and investment from procurement organizations, organizations typically deal with risk on a piece-part basis. That is exactly the wrong strategy, argue Spend Matters analysts Jason Busch, Pierre Mitchell and Michael Lamoureux in their latest report, Spend Matters Landscape Definition and Overview: Supply Risk Management and Compliance. One of their core aims in publishing this analysis, they write, is “to change this perspective and help organizations integrate these supply risk management initiatives more effectively.”
Preparing for disruptive technologies and closing the talent gap are on many CPOs’ minds, as findings from Deloitte’s 2017 CPO Survey show. Among procurement executives, 75% of respondents in this year’s CPO Survey said that procurement’s role in delivering digital strategy will increase in the future. Talent shortages are also a big concern, with 60% of respondents saying that they do not think their teams have the skills necessary for their procurement strategy.
This month’s installment of Accenture’s category insights may just to be the best yet in terms of rigor and practicality. The specific spend category in question is airlines, but there are also broader issues here surrounding travel management in general. Although consumerized airline shopping can make this category seemed commoditized, it is anything but. You have an extremely diverse set of stakeholders with different business objectives surrounding the airline travel, and a supply market that looks like a supply chain transportation market, which in a sense it is, if you think about air freight — except the freight is a business traveller.
The 10 strategies outlined are a perfect example of how to manage a complex category. Understanding the demand side of Airline sourcing, for example, is essential, especially related to stakeholder management. Corporate “road warriors” are usually critical talent to be empowered and supported. Loyalty programs are key enablers (and barriers) to success, and the change management and time involved for sourcing require strong planning and commitment. The article gives some excellent guidance on negotiation tactics, but also on some of the “softer” strategies that are no less critical to this fast changing category.
In the beginning of this Rapid Ratings Vendor Snapshot, the initial framework we incorporated showed how a supplier’s financial health was the keystone of broader risks in the supply chain. In other words, assurance of a supplier’s ability to deliver with consistency and quality requires assurance of a healthy supplier. To ascertain the financial health of the supplier, you can monitor its public financial data from Bloomberg or other external sources. This can be valuable if you know how to operationalize the information and can do it in a scalable and replicable way for many suppliers, over time.
But this doesn’t account for financial data from privately held companies that, for most corporations, account for 70%–80% of their strategic/critical suppliers. Such data on this group of suppliers is generally sparse, sometimes difficult to interpret, often unreliable for prediction and challenging to benchmark against peer firms. This is why Rapid Ratings’ approach to assessing supplier financial health (especially for this group) is attractive and unique. RapidRating’s FHR® (Financial Health Rating) is a focused and cost-effective supply risk monitoring solution that creates a forward-looking assessment of financial viability for the dozens or hundreds of key suppliers an organization may have — privately held or otherwise.
This Spend Matters PRO Vendor Snapshot explores Rapid Ratings’ strengths and weaknesses, providing facts and expert analysis to help procurement organizations decide whether they should consider the provider. The first installment of our analysis provided a company and solution overview and a recommend fit list of criteria for firms considering it. Part 3 will offer a SWOT analysis, user selection guide, competitive alternatives, and additional evaluation and selection considerations.
Worldwide Business Research and ProcureCon released their Annual CPO Study Wednesday, a survey of chief procurement officers and what they see as their challenges or priorities for this year. The report, titled “Exploring the Role of Technology in Procurement’s Strategic Transformation,” tackled topics ranging from the structure of the procurement department to the potential of automation to innovative sourcing techniques. In addition to data, the report includes excerpts from interviews with several senior procurement officers. Let’s take a look at some of the interesting findings.
Ask any procurement organization what area of risk is most pertinent to them and supplier financial risk will usually rise to the top. In particular, suppliers that are classified as strategic or critical based on business impact (not just annual spend) need to be monitored more closely and regularly to maintain operational resilience, ensure business continuity and minimize business risk — and this monitoring obviously must include evaluating financial viability. This is a core aspect of broader supply risk..
Predictive analytics are key to getting early insight (especially relative to your competitors) on suppliers whose financial health is starting to waver. Getting such intelligence via predictive analytics requires basically two things: strong analytic models and good data.
For publicly traded suppliers, you can get financial statements, but you still have to extrapolate from the historical financials to gain actionable insight or develop some sort of predictive statistic. Some companies have used the Altman Z empirical scoring model, but not only is Altman Z an outdated algorithm that has been shown to be inferior to more updated ones (to be discussed later), but you also have to spend the time compiling and interpreting the data, which tends to fall outside the usual purview of the procurement professional.
The bigger problem, though, is the lack of financial data readily available for private firms — especially in the U.S. For most corporations, up to 80% of their strategic/critical suppliers are private and don’t typically share their financial statements with customers for various reasons. One of those reasons may be that they’re highly profitable and don’t want procurement to see this information, although this is certainly not always the case. In other circumstances, a supplier might feel that being private exempts them from disclosure. Or in the worst of cases (from a supply risk perspective), a vendor might not be doing well financially and is worried about losing additional business. Yet, a customer still wants to be sure that a supplier is not in financial distress — or moving in that direction. So, what the buyer would really like is a scalable managed service with a service provider that can help predict supplier financial health, including bankruptcies.
But this won’t happen unless such a provider can address the supplier concerns of protecting the confidentiality of their raw financials.
This is where Rapid Ratings comes in. Rapid Ratings is a provider of empirically driven financial health scoring of businesses — including private suppliers. The firm’s Financial Health System uses financial data as inputs and then utilizes them within 25 industry-specific, integrated analytic models that calculate a normalized financial rating (0-100 scale) designed to help predict future corporate defaults and identify companies’ inherent strengths. Think of it as a “FICO score for corporations.”
Rapid Ratings claims to have predicted 94% of bankruptcies at least six months in advance, and that the FHR provides predictive capabilities out to 12–18 months. The firm also specializes in working with private suppliers to obtain the necessary financial data to produce their FHR. In fact, nearly two-thirds of the more than 40,000 rating events performed by Rapid Ratings are of private companies. Most impressively, the firm claims a greater than 85% success in getting private suppliers to submit their data.
This Spend Matters PRO Vendor Snapshot provides facts and expert analysis to help procurement organizations make informed decisions about Rapid Ratings' solution offering. Part 1 of our analysis provides a company background and detailed solution overview, as well as a summary recommended fit suggestion for when organizations should consider Rapid Ratings in the procurement technology area. The rest of this Spend Matters PRO Vendor Snapshot research brief covers product strengths and weaknesses, competitor and SWOT analysis, and insider evaluation and selection considerations.
President Donald Trump followed through on one of his central campaign promises Monday by officially withdrawing from the Trans-Pacific Partnership (TPP). And while trade with China, Vietnam and other Asian countries is certainly of concern to most procurement groups, our neighbor to the south also needs to be on your radar for 2017.
Nearly all progressive organizations have some sort of Procurement Center of Excellence (CoE). A Procurement CoE is an internal entity that performs internally facing knowledge-based services on a one-to-many basis to procurement (and to broader stakeholders) in order to drive scale, repeatability, and best practice. What we’re talking about is the industrialization of the Procurement portfolio of services. In this Spend Matters Plus article, we will investigate 14 procurement competencies that are being enabled and improved in a Procurement CoE. We will evaluate the relative priorities across these based on some key research and provide insight on how a Procurement CoE can not only make procurement processes more effective, but also align with broader enterprise services delivered in a “Global Business Services (GBS)” environment.
Spend Matters welcomes this guest post from Eric Christopher, CEO of Zylo.
While “setting and forgetting” may be a concept that works in some areas of business, the world of cloud applications is certainly not one of those. In fact, it’s critical that those who are in the thick of tech advancements for their organizations, such as IT procurement, constantly evaluate the cloud applications utilized across the enterprise. Due to this team’s unique access and insight into their organization’s technology infrastructure, conducting a monthly evaluation is a best practice.