It’s nearly impossible — that is, if done right — to separate out direct materials procurement strategy from commodity management (inclusive of commodity, raw material and ingredient sourcing). Yet far too many procurement and supply chain organizations we see take a less-than-scientific approach to commodity buying strategies. (And no, for those technology-centric organizations, simply buying a commodity management solution to manage exposure and positions is not a strategy — it’s merely a tool.) This two-part Spend Matters Plus series takes aim at a lack of standardization in strategy development for commodity buying by urging procurement organizations to ask — and answer — four core questions necessary to develop a commodity buying strategy.
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4 Questions Every Commodity Buyer Needs To Ask: Direct Materials Procurement Strategy (Part 1) [Plus +]
When it comes to indirect and services procurement strategy, we would argue that that the “gospels according to savings,” as we might describe cost reduction strategies, are largely standard. In each of these areas, and even subcategories within them, there are specific processes and technologies that can guide the way to putting organizations deeper into the black while also reducing all sorts of organizational and third-party risk and compliance concerns. Yet the world of direct materials is different — very different. There is no one strategy or technology solution to follow. Here at Spend Matters, we’re hoping to change this with four key questions that we believe every direct materials buyer and commodity manager should ask. This two-part research brief shares these four questions and explains why they matter when it comes to setting strategy, building organizational alignment, putting in place the right short and long-term strategy and managing suppliers who buy commodities, raw materials and ingredients on your behalf.
Procurement organizations often put inordinate amounts of time into defining and implementing strategic sourcing and category management processes that typically work well for indirect materials, services (even complex services) and some finished parts/products/SKUs on the direct side. But for a range of raw, base or semi-finished commodities and materials, strategic sourcing – as we think about it today – simply doesn’t work as well as it could. Based on case study data, this Spend Matters Plus post provides a refreshed approach to both commodity and direct materials sourcing and supplier management beyond simply wrapping a process around haggling with producers/manufacturers, distributors and/or hedging prices and demand.
We came to the end of our 2014 Spend Matters Stock Portfolio analysis and competition with the year proving a little disappointing for stock market quoted firms in our industry. It was also a disappointment for Jason Busch whose personal “virtual portfolio” lost 5% of its value compared to mine, which gained13%. But we started 2015 with a clean slate and a new basket of companies including 3 new faces in quoted firms Selectica, which bought Iasta last year, Rosslyn Analytics, a London-based spend analysis firm, and EU Supply, a largely European provider of P2P products mainly serving the government sector. As you may have noticed, we are already at the start of month 2 in the New Year, so it is time to take our first look at the performance to date.
With 2014 almost over, we give you the latest on the Spend Matters Portfolio and how our stocks performed over the year. We will report again at the start of the year and cover the final results of 2014 in terms of overall performance and any big moves in December. We will also see if there was a miracle recovery in December for the portfolio selected by Jason Busch, which was running well behind my selection at the end of November.
Of all the things procurement buys, nothing is more critical to business operations than energy – both price and availability. The US Energy Information Administration (USEIA) has just published their most recent numbers for the nation’s electricity generation, capacities, and prices. The administration defines net summer capacity thus: "the maximum output, commonly expressed in megawatts (MW), that generating equipment can supply to system load, as demonstrated by a multi-hour test, at the time of summer peak demand (period of June 1 through September 30.) This output reflects a reduction in capacity due to electricity use for station service or auxiliaries.”
However, the USEIA provides no summer/winter comparisons in their numbers, nor do they provide a comparison between existing and projected capacities with consideration given to both new and retiring plants. So are we gaining or losing power generation ground? Since the USEIA also does not provide us with a report on the realistic future power generation capacity, Thomas Kase (VP of research, Spend Matters) ran the numbers himself. This Spend Matters PRO research brief is accompanied by two downloadable detailed spreadsheets.
The typical business challenge when you go to market with an RFP centers on getting ideas for what is possible, and identifying suppliers that either already have these ideas or are willing to work with you toward that end. Targeted activities are often services or complex products where quality, service, or the engineered final product will be different from each vendor responding. We've put together some fresh ideas to an old challenge: conveying your needs in ways that a supplier can relate to and that encourages them to put their best foot forward, with a proposal that goes beyond your wants, and addresses your needs as well.
An n-step chevron process is a siloed procurement-centered sourcing methodology geared towards supplier rationalization. It’s a fine start for procurement hitting cost savings goals, but it’s not a great way to align to the broader organization as procurement evolves. So, we’re proposing DMAIC as an emerging, superior approach, but it’s far beyond the DMAIC that you usually think of. The n-step sourcing process has had a good run, but let’s not try to make it do unholy things. Read on to see how other companies have used DMAIC.
In the world of procurement technology (and technology in general for that matter – think the original iPhone and IOs) there are certain solutions that have brought umami qualities and truly helped them stand out from the crowd. Like in cooking, it's a "wow" factor that separates out certain approaches and capabilities from the pack without ever being directly comparable in a feature/function manner to others. We could name names, but it's better to know in the buying process whether the procurement technology has umami. So here's a checklist of questions to ask yourself. And we can't hesitate to also toss in a list of providers we think have the umami qualities -- as well as a couple of solutions that do not (hint: does "15 clicks to buy" ring a bell?) Spend Matters PRO subscribers can click through to read the full text.
In the never-ending quest to deliver more value, procurement organizations are trying to squeeze more savings and innovation out of spend categories. But, eventually the well starts to run dry, and when that happens, you need to either get more out of that well (fracking for spend savings, perhaps?), dig a deeper well, find another place to dig, or find another way to get the water. My point? To improve category management, you sometimes have to expand it or blow it up completely. Here are some ideas that I’ve seen work elsewhere that can hopefully give you some inspiration and raise your category management game.
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 cut off 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 Krajlic 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.
If it wasn’t clear before now, Zycus’ CEO Aatish Dedhia is playing for keeps in attempting to become the top independent source-to-pay suite “alternative” in the procurement technology sector left by the void when SAP acquired Ariba. Of course, Ariba has not technically disappeared, but it’s certainly distracted as it works the reverse assimilation of the SAP Borg. During this morning’s session at Zycus’ Horizon customer conference in San Antonio, Texas, Aatish shared his perspective on the evolution of the procurement market, including an increase in demand for integrated solution suites from best of breed providers (rather than customers buying single, modular procurement technology products alone) or from suite providers who have acquired and “loosely coupled” some of their modules (IBM/Emptoris, SciQuest/AECSoft/CombineNet/Upside, etc.).