Over the years, I have made note of the change in focus expressed by procurement professionals attending my conferences. Unlike years past, where attention was predominantly centered on learning more about new and emerging technologies, today’s procurement professionals are seeking insights into the actual processes that drive their enterprises. In essence, they are now looking at technology as a means of accelerating their processes versus defining them. In his book Good to Great, Jim Collins even talked about the “Myth of Technology Driven Change” in which an organization believes that a “breakthrough can be achieved by using technology to leapfrog the competition.”

And while Collins’ findings acknowledged the fact that technology does have an important role to play, he emphasized that in and of itself technology is not the reason behind an organization’s success.

 

Process, not technology

Between 2001 and 2005 75 percent to 85 percent of all e-procurement initiatives failed to achieve the promised results in terms of savings. Accentuated by high profile misses such as the automotive industry’s Covisint marketplace and the Veterans Health Administration’s 7 year, $650 million JD Edwards-Oracle misadventure, a dramatic change in thinking was bound to occur.

At the heart of this change is a growing realization of a fundamental truth that process and not technology is the driving force behind a successful e-procurement initiative. Specifically, it is through process understanding and refinement combined with the ability for technology to adapt to the way in which the real world operates that credible targets are established and ultimately met.

However, before you can understand and refine your organization’s procurement process, you must first understand the characteristics of your spend. This is the first and most important step in a three-step process.

 

Analyse your commodity

Over a period of 14 years I have monitored commodity characteristics in an effort to properly align the purchasing processes organizations’ use to procure goods (and services).

Through this exhaustive exercise we have discovered that all commodities consistently fall into one of two categories – Flat Line and Dynamic Flux.

A Flat Line commodity is characterized by a static price performance where there are minimal cost fluctuations over an extended period of time. It is further accentuated by a “narrow” floor to ceiling price chasm. Direct materials as well as specialty products such as scientific and medical equipment commonly exhibit Flat Line characteristics. (Note: I want to emphasize that there are no absolutes and therefore temporary exceptions do occur. For example, you may recall the impact that China’s missile practice over Taiwan in the mid-nineties had on memory prices – they went through the roof, albeit for a short time period. The findings to which I am referring are based on averages over an extended period of time.) Flat Line commodities usually account for 80 percent of an organization’s overall spend and 10 percent of its procurement cycle time.

A Flux commodity is characterized by a dramatic and consistent fluctuation in cost that is mirrored by a steady downward price performance over an extended period of time. It is further accentuated by a wide (usually significant) floor to ceiling price chasm. Indirect materials and in particular MRO commodities commonly exhibit Flux characteristics. Flux commodities on average account for 15 to 20 percent of an organization’s overall spend, and 90 percent of its procurement cycle time.

Individual commodities within the indirect material MRO classification tend to exhibit both Flat Line and

Flux characteristics.

The reason that commodity characteristics are important is that the absence of this knowledge has been

a major contributor to both process and technological misalignment.

 

Beware of “Pull-through”

The majority of e-procurement initiatives initially tend to focus on the high-dollar, low transactional volume spend within an enterprise. As a result most vendors have developed their solutions to manage centrally negotiated contracts that are combined with an aggressive

supplier compression strategy.

However after lengthy implementation periods (usually involving a change management program), the anticipated and sustainable savings have rarely materialized to the point of justifying the original and ongoing technological investment. It is at this point that both process and technological misalignment occurs.

One example of process and technological misalignment is actually indirectly supported by a 2003 CAPS study on reverse auctions. The report’s findings stated that the organizations that had utilized a reverse auction tool indicated that their cost of goods savings diminished with each event so that by the third or fourth auction there were no longer any appreciable gains in this area. The study did suggest that there would be potential process-related savings.

 

One size does not fit all

However, based on our findings that the procurement cycle time for direct material acquisition only accounts for approximately 10 percent of a purchasing department’s time, the ongoing savings were ultimately disproportionate to the software vendor’s licensing and maintenance fees. Therefore, and as a means of justifying the technological investment, most organizations tended to employ a transactional “pull-through” strategy whereby the entire enterprise’s spend (both Flat Line and Flux commodities) fall under one umbrella. Unfortunately the purchasing processes that apply to one type of commodity characteristic do not apply to the other – hence misalignment. This ultimately leads to the compliance and change management problems experienced by most organizations. By applying the same purchasing process used for direct material (Flat Line) procurement to indirect material (Flux) commodities, the perceived volume discount savings are virtually negated within a very short period of time (in some cases almost immediately). This is one of the factors that fuel the buyer’s claim that they can usually beat the centrally negotiated contract pricing with a single phone call to a local supplier.

 

Effective process alignment

Once a commodity characteristic analysis has been completed, you are in a much stronger position to review, understand and refine your current processes to maximize efficiency and savings. This second step is what I refer to as the process alignment phase.

This is the point where stakeholder input (especially from your purchasing department and supply base) will enable you to lay a solid foundation to evaluate both current and proposed technologies. Besides eliminating compliance associated challenges, you will be able to know exactly where and how technology can be utilized to deliver savings. Of equal importance is that you will also be able to accurately project realistic savings and therefore gain an important edge in negotiating licensing fees that will be commensurate with the expected results. Direct material (Flat Line) commodities are best procured utilizing a centrally negotiated contract whereby volume discounts can be leveraged and strategic supplier relationships established and monitored. Conversely, with indirect material (Flux) MRO commodities, the best method for procurement is through reliable, real-time access to a dynamic market in which the largest number of potential suppliers is engaged.

Through a cross-verification mechanism, buyers can simultaneously access data from both spend categories to confirm that best value decisions are made for each and every purchase.

As indicated earlier, the key here is that once your organization’s processes are understood, refined and aligned you will be able to evaluate technologies that will accelerate the procurement process rather than define it.

 

Effective technological alignment

In their 2001 book, The Seven Steps to Nirvana: Strategic Insights into eBusiness Transformation, authors Mohanbir Sawhney and Jeff Zabin discussed the emergence of the Metaprise and in particular its impact on enterprise application development. Sawney and Zabin referred to it as meta-enterprise software development. I would strongly recommend that you read the book as it provides a useful hindsight perspective that is both interesting and informative.

In short a Metaprise is a synchronized versus sequential architecture (private hub) that simultaneously links or incorporates the unique operating attributes of all transactional stakeholders on a real-world, real-time basis. This is a far cry from the “near” real-time capabilities of the much touted Service Oriented Architecture (SOA) which links disparate systems or processes often referred to as the “loose coupling of services.”

 

Forethought pays off

Motivated by the identification of the two commodity characteristics (in particular the Flux findings), I began to investigate the potential to utilize advanced algorithms in 1998 as a means to both accelerate and increase purchasing autonomy on the front lines while still adhering to centrally established objectives. In short, although I did not know it at the time I was working to develop a meta-enterprise application.

Throughout the research period (which was partly funded by the Government of Canada’s Scientific

Research and Experimental Development – SR&ED program), we consistently looked for ways in which a buyer could reliably procure commodities on a real-time basis outside of the confines of a centrally negotiated contract. To do this effectively, the buyer would have to simultaneously engage key stakeholders such as suppliers, courier companies and customs brokers – enter the Metaprise. Given the fact that off-contract procurement was at epidemic levels (which negatively impacted both the buying organization as well as an increasingly skeptical supply base) it was essential to lessen rather than increase the purchasing cycle time. This was a critical component in that we wanted to eliminate the compliance issues that had plagued so many initiatives (as it still does today). By 2003 a full production program was introduced and successfully tested. (In the test case, a major public sector organization realized a 23percent cost of goods savings annually over a period of several years, while simultaneously reducing the number of buyers required to manage the contract to 3 from an original 23. Delivery performance and product quality also improved dramatically.)

What is important here is not the software (although it is now available through a variety of resellers), but the fact that unlike traditional applications, which have origins in either a finance (ERP)-centric or IT-centric initiative, the technology was introduced after the commodity characteristic analysis step and process alignment step were successfully completed. This meant that the technology was the final step in the process. As a result, it adapted to the real-world processes of the client eliminating the need for an overarching, long-term implementation period. It also cost a fraction of the price of traditional applications, thereby producing a realistic ROI. This is enablement in its truest form.