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Procurement Strategy

The 12 Supply Risk Management Disconnects that Destroy Value (Part 1) [PRO]

risk

“Risk” and “risk management” are terms that are like the ultimate Rorschach test in business: they mean many different things to many people. The same applies to the term “value” — and don’t even bring up “supply management.” Even a specific term like “supply risk” has many interpretations (e.g., it’s much more than supplier risk). The problem with this is that if people within a company define various terms differently, then how well will they be collectively managing those areas? Likely not well at all.

Risk management is a strange animal. On one hand, it focuses on “things gone wrong” and hones in on defining and mitigating various external risks that create adverse events in a value chain. On the other hand, those adverse events affect stakeholder-relevant performance (i.e., measurable value). Such performance and value delivery is focused on “things gone right” and reward rather than risk.

The key, therefore, is to realize that risk and reward are inextricably linked. If ensuring delivered value (and improving it over time) from the supply chain and from suppliers is what supply management is all about, then that supply value should not only be expected (i.e., expected value like discussed above) but also protected (i.e., protected value ensured through supply risk management). As a side note, have you ever considered that the concept of “expected value” uses the term “value” even though it is applied heavily to the world of risk management (i.e., calculating the expected probabilities and impacts of various risks)?

Anyway, the imperative becomes ensuring that the most important performance metrics (i.e., KPIs) are protected from risk. Yet these individual KPIs are rarely individually and systematically managed for risk, and the lack of risk-adjusted performance management means that you’re going to be exposed and it will catch up with you eventually. The problem isn’t just bouncing around and applying risk management technique X via tool Y to address risk type Z. There are a dozen fundamental disconnects in most firms that prevent risk management being properly resourced, aligned, managed and improved. Only by unpacking them and addressing them through focused practical interventions can you really get to the root cause issues that are likely keeping your supply risk management efforts suboptimized.

In this Spend Matter PRO series, we will explore 12 critical supply risk management disconnects. This brief, Part 1, focuses on the following four areas:

  1. Risk Scope and Stakeholders
  2. Performance vs. Risk
  3. Risk Type vs. Impact
  4. Risk vs. Cost (e.g., “cost of risk”)
If you’re a practitioner, you should be able to see which disconnects are the biggest issues for you and make yourself more resilient (i.e., ability to mitigate and recover from risks) and predictably high performing. If you’re a consulting organization, you’ll probably find some pointers to improve any methodologies that you have here. And if you’re solution provider, whether in the supply risk management area, or more broadly, you’ll hopefully get some ideas on how to address more strategic pain points.

Economic and Policy Supply Chain: The Non-Invisible Hand [Plus +]

Adam Smith is famous for coining the phrase the “invisible hand” to suggest the collective transparent forces of a market that work together as a whole based on the self-interest of participating members. While Smith used the phrase only a handful of times in his writing, the term has become synonymous with the famous theorist. We can leave the economic theory and philosophizing for another day. The concept itself, however, is clearly valuable: much of what occupies the daily toils of the typical procurement or supply chain manager is directly tied to the broader trade of goods, services and ideas, and ultimately, the pursuit of profit and returns based on the collective set of activities. But what's also equally important to consider is the “non-invisible hand” and how it affects our priorities and overall goals.

Program Management: The Missing Link in Procurement Technology Modules and Suites (Part 2 — Functional Building Blocks) [PRO]

Program management is an integral component of source-to-pay (S2P) activities that is no longer optional for high-performing procurement organizations. In short, program management is a set of processes that manage specific projects and broader project portfolios that focus on higher-level processes and composite processes that cross the traditional linear flow of sourcing, contracting, purchasing and payments. These programs can be ancillary to core processes (e.g., M&A-related activities or globalization efforts) or transformational in nature to implement enterprise-level programs (e.g., working capital programs, risk programs, sustainability programs, digital programs, ERP upgrade programs, Lean/Six Sigma programs).

The problem is that, generally, program management is poorly automated and stovepiped within functions or subfunctions. Within procurement, there may be savings tracking for strategic sourcing processes displayed in a "CPO dashboard” but not much visibility and collaboration beyond that. This is a problem because as procurement is collaborating with stakeholders on ever broader processes and reaching deeper into stakeholder processes, supplier processes and external customer processes, there needs to be a cross-functional management capability. The emergence of collaboration tools like Slack and others have shown the enterprise desire to manage fast-paced mobile communication on the ground that is tied back to strategic objectives.

This Spend Matters PRO series defines what effective program management capabilities are from a design, platform and functional perspective that puts the user first. We explore both what represents best-in-class program management components today, what users should expect tomorrow and what we hope technology providers have on their roadmaps to build. We also explore some solution building blocks for effective program management, including best-of-breed project management, goal management, program auditing/audit trails and prepackaged initiative enablement. (Don’t forget to read Part 1 of this series to first understand the design principles on which effective program management technology is based.)

Unlocking Deeper Value in the Procurement and Finance Relationship (Part 1) [Plus +]

finance

Much has been written about the need for procurement and finance organizations to better align with each other, in particular how the two functions can best integrate purchasing and payables into an end-to-end purchase-to-pay (P2P) process. The opportunity for aligning these two functions, however, is much greater than simply improving transaction efficiency. Unfortunately, the various sources of misalignment that plague procurement and finance prevent many businesses from identifying these opportunities in the first place.

The sad part of this story is that the two functions share many common traits. Both seek to:

  • Elevate their value propositions as enabling business partners by providing compelling service offerings — and overcome their perception as bureaucratic corporate overlords
  • Maximize enterprise value and profitable growth through disciplined spend management
  • Spend not just less but better in terms of process efficiency and process effectiveness
  • Use new techniques and technologies to help the business make better decisions that support the above goals
Additionally, these functions should in theory strive to serve each other as internal customers while also enabling the other to deliver higher value to their own internal (and external) customers. Unfortunately, theory has rarely translated into reality, and the result is that each function is leaving money (and risk) on the table.

Procurement can certainly help finance get more value from its suppliers, but it can also help finance improve service delivery in areas such as FP&A, treasury, tax, financial accounting, risk and compliance, commodity management and even accounts payable.

On the flipside, finance can help procurement in multiple ways, namely to help procurement on value-adding activities — including helping finance. This is a classic “help me, help you” moment. If procurement can help finance help procurement (and help finance help itself), then procurement’s value potential can be truly unlocked.

Extending Procurement Information Architecture to Provider Ecosystems (Part 2) [Plus +]

Let’s recap where we ended up with conclusion of the first installment in this series. A range of application vendors are trying to build out native platforms or sit on top of others flexibly. For example, Coupa hedges its bets by building on top of AWS, but also partnering with IBM (on SmartCloud) and showing up on SuiteApp.com. Providers are also trying to develop healthy B2B ecosystems that are creating B2B activity and, as a result, “liquidity.” There’s no way to better monetize that liquidity than from B2B e-commerce networks for source-to-pay (S2P) on the buy side and both attract-to-order and order-to-cash on the sell side. All this talk of liquidity reminds us of a different time and place in the procurement and supply chain world: the “marketplace era” from the late 1990s and early 2000s. This time, however, there are many technology differences that will make the vision of liquidity a reality faster than many will imagine. But not without a key application rub that should be top of mind for all procurement and IT organizations.

Extending Procurement Information Architecture to Provider Ecosystems (Part 1) [Plus +]

In our previous series on procurement services provision and information architectures (here, here, here, here, here, here and here) we discussed the importance of thoughtfully designing various architecture elements such as MDM, analytics, workflow, portal infrastructure, etc. to re-frame overall information capabilities beyond the traditional provider-led “module-menu” approach. Simply put, the idea is to loosely couple these capabilities so that they can be iteratively improved (and switched out as needed) while they squeeze more value out of the fragmented information topologies that litter the enterprise landscape. The coupling of these capabilities can – and should – create situations where the sum of a set of assets greatly exceeds their individual contribution elements.

Designing a Spend Category Taxonomy Properly is Harder Than You Think (Part 2: Go Deep) [Plus +]

category management

We recently had a client ask us if we could offer specific guidelines or methodologies for creating a spend category taxonomy within the automotive and industrial markets. The question resulted in a discussion among a number of us with industry experience. And since we didn’t have any research already published on the topic, we thought we’d invest the time to document our findings. In this second installment of a two-part Spend Matters Plus research series, Chief Research Officer Pierre Mitchell explores how granular procurement should go in creating a spend taxonomy and concludes with practical tips for implementing a program.

Business Process Management for Procurement: A Spectrum of Choices [Plus +]

category management

BPM stands for business process management. If the business process is procurement (i.e., a collection of processes), then the concept is about managing procurement processes — including process design/definition, performance management (e.g., process outputs/KPIs, monitoring) and resource management. Of course, in the IT world, BPM has its own body of knowledge regarding the topic, focused mostly on “process workflow/integration on steroids.” This is the “system of process/interaction/engagement” that may sit on top of multiple systems of record (e.g., ERP, source-to-pay suites).

In this Spend Matters Plus article, we define BPM components and offer practical ways for applying BPM to procurement, keeping the topic on a business level and issuing both warnings and best practice tips for companies deploying or considering BPM technology adoption within the function. But how can you approach this topic without your eyes glazing over? Wikipedia does a good job explaining the concept, but we will try to define an evolution that procurement organizations can use to start doing IT-enabled BPM in a simple way, and then get more sophisticated.

Mega Spend Aggregation: 10 Ways to Supersize your Market Basket (Part 2) [Plus +]

category management

In Part 1 of our coverage on this topic, we started our discussion of various techniques to “supersize” your market basket, with an eye toward indirect spend. In this second half, we will now turn our attention to the supply chain for the remainder of the techniques.

Mega Spend Aggregation: 10 Ways to Supersize your Market Basket (Part 1) [Plus +]

category management

Most procurement organizations complain about diminishing savings on re-sourced categories – and rightly so. But rather than beating the same horse, why not hitch up more than one, and in new ways that you may not have considered? In this Plus piece, we’ll outline five of them, with the first one being "expand the 'lots' in your current market basket."

How to Justify Spend Analysis to Finance/IT When There’s No Clear ROI (Part 2) [Plus +]

funding

Yesterday, we discussed the first five of 10 possible strategies to justify a spend analysis initiative to finance/IT despite the catch-22 that comes from not knowing the potential value that may come from the initial investment. Today we pick up with recommendations six through 10 and close with some final remarks and recommendations.

ADKAR: Procurement Change Management in 5 Letters [Plus +]

Change management is a seemingly "soft" topic that can have a highly adverse impact on hard ROI. If you need a practical framework for change management, Pierre Mitchell highly recommends ADKAR as a good default approach. In this post, he evaluates ADKAR in a procurement context and show it can be applied in a few different scenarios. The acronym stands for awareness of the need to change; desire to participate and support the change; knowledge of how to change (and what the change looks like); ability to implement the change on a day-to-day basis; and reinforcement to keep the change in place. Read on to see how ADKAR can be applied in a few example procurement scenarios.