Last week, I got the heads up from my colleague, Andrew Bartolini, that he was going to leave the Aberdeen family to pursue other opportunities. To me, this seems like a very newsworthy event, as Andrew was the face of Supply Management for Aberdeen and will not be easily replaced. I also do not think that Abderdeen was expecting this, so there will likely be some large gaps they need to fill quickly. Knowing Andrew, I am sure he will be involved in some type of cordial transition.
From a personal perspective, I could not be more happy for him. I have to believe that he is making this move to redefine his role in the supply management industry. He is not going to a vendor, so I would put the money down that he will be launching his own vision of how analyst content should be generated and distributed. It would be a bold move, and one that I think the market would embrace.
From a professional perspective, I think it could usher a new era in analyst coverage for sourcing and procurement. Andrew has a deep network and strong knowledge base. By creating his own model, it might generate interest in a new way for analysts, vendors and practitioners to collaborate and improve. With the recent market consolidation around Gartner/AMR, there is certainly an opportunity for a start up to succeed in this area.
I truly look forward to seeing what Andrew ends up doing. It might end up being a big win for everyone.
The Administration has proposed a set of new rules to increase regulation of the banking industry. While we don’t know what the final outcome will look like, we do know that changes will be focused on lending, bank structure, and the separation of investment banking from retail banking. None of these changes will minimize the need to reduce expenses.
In the spirit of proposed changes, banks are already taking a hard look at their businesses and looking to redefine what is core as a recent article from American Banker explains. The key for companies will be to find the right outsourcing partner to help them address whatever regulations do emerge. We believe that banks of all sizes will look to both domestic and offshore outsourcing solutions such as Knowledge Processing Outsourcing (KPO) to help them deal with new reporting requirements.
Essentially banks will further lean on sourcing solutions to manage these changes and keep their expenses in line.
Supply & Demand Chain Executive Magazine, the executive’s user manual for successful supply and demand chain transformation, this week announced the tenth annual listing of Pros to Know in the Supply Chain Industry.
The Pros to Know is a listing of individuals from a software firm or service provider, consultancy, or analyst or research firm who have personally helped clients address the challenges of the recession and prepare for the recovery ahead. This year’s list included more than 130 Provider Pros to Know.
Four “Pros to Know” from Iasta were honored for 2010 including David Bush (CEO), a fifth year honoree, Jason Treida (COO), a third year honoree, Sean Delaney (Managing Director – UK), a second year honoree and Mireia Brancos (Managing Director – Northeast US), first year honoree. Iasta would also like to congratulate Juan Molina (VP Supply Chain Management of Westinghouse Electric Company), an Iasta customer, for his well-deserved inclusion as a first year “Pro to Know” Practitioner.
“What a great honor it is to be named among the ‘Pros to Know,’ especially with the tough year our customers faced,” says Delaney. As a Managing Director and second time “Pro to Know” honoree, Delaney has contributed to Iasta’s record growth, including the expansion of Iasta’s presence in Europe to serve the sourcing and related needs of procurement organizations. “Not only have we been extremely successful in helping our customers improve their bottom-line with our SmartSource SRM® technology, but we also recognized and responded to their emergent need for a spend analysis and visibility solution using SmartAnalytics®.”
Beginning in January, the magazine’s editorial selection committee culled through more than 400 submissions to find the applicants that best fit the criteria. Selection criteria Pros to Know included the programs/initiatives the Provider work on with their clients last year address the challenges of the recession, and what were the benefits of those projects/initiatives and lessons learned from the recession.
“This year’s Provider Pros to Know have shown themselves to be thought-leaders in the Supply Chain industry,” said Reese. “Highlighting the learning’s that the Provider ‘Pros to Know’ have taken out of the Great Recession provides our readers with a wealth of best practices that they can apply in their own supply chains, as well as insights into how leading organizations are positioning themselves for competitive advantage in the Great Recovery ahead.”
The full listing of the 2010 Pros to Know will be available in the February/March 2010 issue of Supply & Demand Chain Executive magazine and e-book beginning in the third week of March and on the Supply & Demand Chain Executive Web site at SDCExec.com/2010Prostoknow.
Iasta, a leading provider of eSourcing software and solutions, today announced that Gartner, Inc., a leading independent provider of research and analysis on the global information technology industry, has positioned Iasta in the “Challengers” quadrant of the “Strategic Sourcing Application Suites.” (i) The report assesses the top software providers by a list of criteria that comprise their “Ability to Execute” and “Completeness of Vision.” Iasta’s suite of products which cover the sourcing lifecycle from spend analysis, vendor management, sourcing, optimization and contract management perspectives have gained significant global traction, and now recognition, with this analyst announcement.
“We are proud to be included in the Magic Quadrant report,” says David Bush, CEO of Iasta. “It validates the immense value and that our SmartSource SRM suite has brought to our customers for the past decade, proven year-after-year by our vast worldwide growth and continuous innovation in eSourcing technology.”
The Gartner Report, “Magic Quadrant for Strategic Sourcing Application Suites,” gives Iasta high reference marks for technical support, ease of use, and overall cost of ownership and return on investment. Iasta is also noted as having “strong supply base management support in self-registration, RFI and supplier credential management” and “very good marks on system performance.”
In the services category, Iasta received “very high reference marks for business consulting services and training.” Deborah Wilson, Research Director with Gartner, notes in the report that “Business services play an important role in an organization’s ability to drive adoption of strategic sourcing technology. Full adoption requires procurement professionals to think in new ways and to make decisions that they never had to consider before when using manual sourcing methods.”
About Iasta
Iasta® is a proven leader of Enterprise Spend Management through SRM Best Practices. Founded in 2000, Iasta helps organizations solve traditional business problems in new ways by providing its customers with cutting-edge tools for making strategic decisions on how to save and spend their valuable resources. Iasta’s flagship products, SmartAnalytics® and SmartSource SRM®, are cornerstones to any effective supplier relationship management strategy as they enable companies to analyze, source and optimize business decisions. SmartAnalytics provides users with comprehensive and detailed access to the entire organization’s purchasing data while SmartSource SRM combines best-of-breed functionality that includes sourcing (auction, RFx), award analysis, contract management and supplier management.
About the Magic Quadrant
The Magic Quadrant is copyrighted 2010 by Gartner, Inc. and is reused with permission. The Magic Quadrant is a graphical representation of a marketplace at and for a specific time period. It depicts Gartner’s analysis of how certain vendors measure against criteria for that marketplace, as defined by Gartner. Gartner does not endorse any vendor, product or service depicted in the Magic Quadrant, and does not advise technology users to select only those vendors placed in the “Leaders” quadrant. The Magic Quadrant is intended solely as a research tool, and is not meant to be a specific guide to action. Gartner disclaims all warranties, express or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.
i) “Magic Quadrant for Strategic Sourcing Application Suites” by Debbie Wilson, February 23, 2010
ERP systems have been historically good at processing and recording transactions, but mining data for spend visibility was not one of them. Spend Analysis started in the early 1990’s at progressive companies like GE and at consulting firms like McKinsey. The idea was to mine existing spend data to identify areas where sourcing effort would be most profitable.
The idea in theory in the early days was cutting edge; however the methods to mine the data in an ERP system came with numerous problems including:
• ERP data is usually incomplete
• Contained duplicate vendors
• Poor commodity information
• Data is unchanging
Let’s dig deeper into these problems to better understand them.
ERP Data is Generally Incomplete: ERP systems record transactions which they are designed to do. However, they only record transactions that are made in that system and do not account for other systems that process transactions including P-cards. ERP’s also do not contain important SA information about supplier diversity, risk and scorecard metrics.
ERP Systems Contain Duplicate Vendors: An ERP system records the data that is entered in the transaction. It doesn’t consolidate their transactions into one supplier entity. For example, you could have 16 different transactions, with 16 different versions of Federal Express. Your transactions are just with FedEx, but it looks like you have 16 different suppliers. So you really have no idea how much you are spending with FedEx as a whole unless the transactions are entered identically by different people.
ERP Systems Don’t Contain Good Commodity Information: A good ERP system provides the ability to assign category codes to transactions, but the practitioner who is entering in the transactions usually is not well versed in the coding structure. In many, cases people don’t take the time to find the correct code, because they don’t understand the importance of it.
ERP Data is Unchanging: ERP systems are financial accounting systems by nature and because of that are designed to be rigid and make changing information about vendors or category codes very difficult. It can take weeks or months to modify the information.
All of these issues cause a very cloudy view of Spend Analysis. The problem multiplies itself with large global corporations, or with mergers and acquisitions, where you have numerous disparate ERP systems that don’t talk to each other. With incomplete, bad data, enormous savings opportunities are missed. This is where the data ends and the role of spend analysis begins. Stay tuned for Part 2: What is the value of Spend Analysis?
For more information about this topic and Spend Analysis click here for our White Paper.
Category management is very valuable to organizations that conduct sourcing initiatives and want to capture key knowledge around that specific sourcing category, integrated with the corresponding organizational Spend. This allows for ongoing category-specific measurements, such as rebate programs, Diversity Spend relative to specific items, and managing the overall status of the sourcing program to continually capture the intended cost savings. This can now be done category by category, which are typically managed by different personnel in the organization. Having Category management integrated with your Spend Analysis provides your organization with more than Spend Visibility and Spend Analysis. It truly provides ongoing and comprehensive “Spend Management”.
Spend Category Management requires 3 basic Spend Analysis related capabilities:
1) The ability to classify your Spend data to company sourcing categories, with flexibility for ongoing changes and sourcing breakouts.
2) The ability to isolate Sourcing categories as separate knowledge bases unto themselves, incorporating additional supplier, item, and market data.
3) The ability to channel and refresh organizational Spend data to the specific sourcing category on a regular basis, to drive ongoing measurements and Spend Management capabilities.
Until now, the above has been difficult. Spend data has typically been classified to UNSPSC codes and other classification schemes, but not specifically to the organizational Sourcing categories. Sometimes the data is rolled up into sourcing categories, but it has been difficult to maintain the relationships over time, especially as sourcing categories evolve with the organizations Sourcing programs and initiatives.
The graphs below summarize how Spend Analysis directly feeds into Category management, and the type of information that can be structured for ongoing measurements, dashboards, and management:
Organizations require Category management capabilities integrated with Spend Analysis as they mature and begin tracking specific Spend by Sourcing category. Category Management ensures that expected savings are managed and realized over the longer haul.
One of the big cost and “choke” points in Spend Analysis has been the difficulty in collecting the many different sources of Spend related data. Spend data typically resides in disparate systems, including ERP, AP, PO, Pcard, Suppliers, Supplier enrichment, Expenses, Invoices, Freight Bills, financial systems, sales systems, and more. Spend data can also be spread across many different company locations and systems, as well as available only in foreign languages, thereby making “all” Spend data very difficult to collect. Comprehensive Spend data is needed to achieve more in-depth Spend visibility and to uncover larger cost savings for the company. Typically in the past, vendors required companies to format the data, so it could be put into a fixed database, so it could be rendered to fixed reporting and analytics capabilities. Now that has all changed.
No, data cannot be collected in 10-15 seconds, aka Star Trek “Transporter” capabilities. But today’s data collection capabilities are not far off either. With newer data management applications having underlying dynamic database “data driven” technologies applied, company data can now be collected, audited, and cleansed easily, and in a short amount of time (in hours, vs. days and weeks). All that is needed is a header row defining the file’s data fields, a related template defined, and data validation and integration points applied. This is now done within the vendor data management system, so no IT burden is placed on the organization, except to forward month-end or year-end Spend related files as appropriate, which is an easy thing to do. No more data extraction templates forcing IT people to do field mapping and hard-code their own fields to fields that are predetermined. No data formatting to prescribed translation maps finding places for extraneous or custom data within a fixed database. Simply forward a Spend-related file to a vendor FTP site, and they take it from there.
This new data collection capability may be hard to initially comprehend, but now you can enjoy the ability to easily collect more expansive Spend related data, and drive new analysis and management capabilities. The more complex your organizational disparate data is, the more that “data driven” capabilities apply.
The available selection choices are not truly relevant to new “data driven” Spend Analysis applications. Dynamic database technology saves IT departments’ hours, if not days and weeks of work, and shortens the time to deployment or refresh. Essentially, translation maps are obsolete and a rigid element of the past.
The current political debate about Health care made me think about how this debate is relevant to Cost Reduction and Cost Avoidance. To provide a baseline of how I am defining my terminology I will use these definitions:
Cost reduction unquestionably creates value for an organization, by lowering costs compared to prior-period actual costs.
Cost avoidance means that actual costs continue to increase year over year, though perhaps “less fast” compared to some expectations.
I want to take a close look at the proposed solutions and comments made about this topic to identify how what method politicians are using in qualifying their savings.
Example 1: June 2009 AP article that states “Health industry leaders told [President] Obama they would slow rate increases by 1.5 percentage points a year by improving coordination, focusing on efficiency and embracing better technology and regulatory reform.”
This is a classic example of cost avoidance that truly provides no “real” savings. The costs will continue to go up, but it will simply be at slower rate than previous years.
Example 2: Implementing Electronic Medical Records
This could provide “real” cost reduction and savings on the amount spent in materials, time and coordination in the health care arena. It’s a standardized practice within Veteran Affairs Agency.
Example 3: Credits available for low income persons to obtain health insurance.
This is cost reduction. If an uninsured person is sick or seriously ill and needs medical care they go the emergency room. This cost the person enormous amounts of money and sometimes they don’t pay. The cost is then pushed onto other patients in the form of increased fees. If the uninsured are now insured it will reduce cost across the board.
Example 4: Allowing people to purchase health insurance across state lines
The natural ability of free markets and increased competition would drive the prices down thus creating cost reduction from previous years.
Example 5: Tort Reform
This is a huge area of cost reduction in Health care. The reason number one reason why it is so expensive to go to see a doctor is because they have to pay for very expensive malpractice insurance to help them in case someone sues them. With modifications in the law to limit their exposure and liability would require them to recoup less in their fees to their patients.
Now I am not a financial expert but it’s clear that out government is years behind in looking at ways for cost reduction. If we listen carefully to any proposal we can become more educated on whether the savings are realized or a smoke screen that slows rising costs. I think there are some good ideas in government, but any reform should always have a goal of cost reduction. As one CPO stated “You can literally go out of business while reporting great cost avoidance results.”
In the world of Spend Data Management and Spend Analytics, not much new technology has come forth over the past 5 years, until now. We have been stuck with ETL’s requiring structured data templates, fixed databases, reporting cubes, and manual data classification to name a few. Each of these technologies had less-than-desired automation and difficulties, or “choke” points, along the Spend Analysis process of collecting data, integrating it, cleansing it, classifying it, and analyzing/reporting on it for company Spend insights and cost savings opportunities. The new technology is known as “Dynamic Database” technology, and it is an advanced data processing capability perfect for Spend Analysis, Spend Management, and Category Management.
Dynamic database technology can quickly become a very technical discussion, and although it is revolutionary, it is not widely known beyond database guru’s, such as Oracle engineers. It is not like you start out with an existing car with no motor and customize the engine (an existing technology and tailor it). Everything about a dynamic database is setup for a specific purpose… you guessed it… “dynamically”. Applying it to the world of Spend Analysis, with real world examples, can help explain how it has opened up new capabilities in Spend Analysis not previously available with older technologies:
Examples and expanded capabilities of dynamic database technology across the Spend Analysis process:
Data Collection. Each companies specific data and business of sourcing, and we mean everything, can be accommodated, including global data in foreign languages. The data capture process is dynamic, meaning any data can be collected in any format easily. No formatted extracts are required.
Data Validation, Integration, and Cleansing. How data is validated…is dynamic, as data can now be integrated in ways it has never been integrated before, and cleansed more thoroughly across the additional relationships that are created.
Data Classification. How that data is classified…is dynamic, so multiple taxonomies can be supported independently AND related to each other. The rules that operate on the data are dynamic, and can be applied leveraging years of project and industry experience, as well as specific company business anomalies.
Analysis and Reporting. How data is reported…is dynamic, as all data is in memory and many core views and metrics across the customer data can now be rendered. Virtually any data collected can be reported. Strategic Sourcing and Category Management programs can be mirrored and monitored over time (with easy data refresh). Any change in business requirements and analysis needs can be accommodated by quickly collecting pertinent data and making simple reporting adjustments.
Application Interface. What really advances dynamic database technology is controlling all data and the related QA processes through a Spend Analysis application interface, making it flexible and easy to use.
Dynamic database technology, combined with a robust application interface for data collection, cleansing, classification, and reporting, is very unique and very powerful for Spend Analysis. It is a huge differentiation and advancement from previous methods and technologies. It truly raises the bar regarding what companies can now do to enhance Spend visibility, find new cost savings, and manage those savings.
To approve Spend Analysis projects, project Sponsors often need to justify to their management why they need to utilize Spend Analysis providers to do the project, as opposed to internal IT resources. Some companies may not have this problem in that they don’t have IT resources available, so it is obvious they need to use outside help. But sometimes there may be conflicts internally. The simple answer is that internal IT resources usually do not have the focused experience and knowledge regarding the unique data cleansing and classification needed for Spend Analysis.
Internal IT resources typically have…
Familiarity with the corporate data sets and applications
Familiarity with the Corporate IT environment
Familiarity with a Corporate Reporting tool
Internal IT resources likely do not have (and Spend analysis providers have in spades)…
Related to (1) above…. IT resources can easily provide data files, but Vendors are more experienced to integrate and reconcile organizational data to specific Spend fields needed to properly drive meaningful Spend Analysis. Significant relationships exist between Spend data, and vendors know what to look for. They also have structured tools to process the data effectively.
Related to (3) above – IT resources can help with getting cleansed and classified data back into the company reporting environment, if a company reporting tool exists. Companies can also utilize vendor “Smart” Reporting, which is tailored for detailed Spend visibility and opportunity assessment.
Experience with cleansing data – for example, we have over 50,000 cleansing rules built over 12 years across over 200 projects and customers in many industries, already defined.
Experience with Supplier Grouping.
Experience optimizing Supplier data enrichment from vendors such as CVM Solutions or D&B.
Experience with data classification, handling numerous taxonomies for analysis, and grouping Spend data into meaningful sourcing categories. For example, we have a master library of over 100,000 master rules for items and categories we have seen across all those projects mentioned above.
Experience with structured data “refresh” and handling the nuances of combining, re-cleansing, re-grouping, and reclassifying data with rigor to all the taxonomies in use.
Experience in foreign languages and associated data processing and translation.
Experience in mining and reporting in-depth level s of “savings opportunity assessment and identification” versus basic pivot tables and cubes.
Internal IT resources usually do not have authority across divisions and countries to get data, so a vendor can help to make the integration and change happen.
Spend Analysis vendors provide focused tools and resources to implement advanced Spend Analysis within your organization, and can be utilized effectively in place of internal IT resource. And the cost is usually less than 1 or 2 full time equivalent headcount, which is a bargain as you discover savings opportunities.
An article in the Wallstreet Journal provides a wonderful example of how implemented best practices and process improvement programs like Six Sigma can go astray after experts move to other projects, Managers relax accountability and excitement fades. The cartoon depicted below by Leif Parsons, gives the perfect illustration of what happens in the progression of these engagements.
The article reveals how at one aerospace company this implementation was executed then returned to the old poor practices.
The first step, as with any improvement program like AA or Six Sigma, is admitting and identify that you have a problem.
In the Aerospace company example, the second step was to bring in help by utilizing an expert in Six Sigma that energized the staff and helped them to understand where they needed to improve. They provided accountability in assigning tasks to these improvements. Employees embraced the new processes and implemented them. At first it slowed productivity, but quickly, as they became more accustomed to the new methods, productivity returned to normal levels. Once the goals of a department were reached, they were communicated with the company as a whole. This empowered the employees and gave them ownership of the project and their achievements. They are also rewarded with other rewards such as, restaurant gift cards, bonuses and exposure through notices in corporate newsletters.
After goals of improvement had been reached in one department, the expert and Managers would move their attention to another project or department assuming the success would sustain itself without continued support. This is where accountability loosens and enthusiasm for the process starts to revert to old practices. You can see this progression in the cartoon.
If you are one of these companies struggling to understand why these programs aren’t continuing to demonstrate results, ask yourself a simple question….What accountability and continued support am I providing my teams so they don’t revert? Think outside the box. You don’t need an expert to solve this problem. You need an expert to identify and fix it originally. The same goes for eSourcing technology deployments. Vendors can diagnose the opportunity and implement the technology properly, but sustainability needs to constantly be addressed with either internal or external resources.
Telecom is normally one of the largest spend categories that is over looked within large multi-national corporations. Most CIO’s don’t have the knowledge or background to understand the spend they have in Telecom. This lack of understanding leads to very ineffective Telecom sourcing projects.
According to research conducted by Forester Consulting, “80% of all telecoms sourcing projects are not as efficient as they should be, and large organizations globally are feeling the effect to the tune of £12bn annually.”
This is a large amount of savings missed because of poor visibility and understanding when running these projects. This is a complex category in which IASTA has had enormous success in continually producing savings. We have continually been able to provide at least an 8% savings to clients in this one category alone. This small percentage in savings equates to a large dollar savings when looking at the total spend in Telecom.
As the article goes on to state, “this issue is one of getting in the right people who understand the technology and the objectives of a telecoms sourcing strategy.”
Take a close look at your internal knowledge base of Telecom and see if this is an area that is not producing optimal results when it should.
While ITIL, the most widely accepted collection of best practices for IT Service Management (ITSM), has taken an important first step in evolving its guidance on outsourcing within the context of ITSM in its 2007 Version 3 release, it may have fallen short on providing the breadth of advice required in today’s market. Of particular note is the introduction of a few integral sourcing-related frameworks, including Service Provider Types in the Service Strategy core book and Service Delivery Strategies in the Service Design core book. Service Design has also consecrated a separate process to Supplier Management aimed at addressing service provider selection and relationship management activities.
While these additions can be seen as improvements over ITIL V2, the overall approach to engaging with suppliers in ITIL V3 could be construed as overly procurement-focused and lacking in sufficient guidance on the level of integration and governance required across the service delivery value network and service life cycle. Also unclear is the extent of the inter-mediation required of the client- retained IT organization to effectively integrate outsourced IT services and translate them into value for its business customer.
To help navigate the new sourcing related ITIL V3 guidance and bridge your ITSM and outsourcing strategies, consider these 5 tips:
1. Ensure service management integration is appropriately resourced in the client-retained IT organization. While Supplier Management can serve as the point of contact for relationships with external service providers, these resources typically do not have the skills or capabilities to integrate service management processes across organizations in an outsourced model. When service management remains a client-retained function, we recommend giving ITIL service managers the responsibility to integrate outsourced IT services to ensure effective end-to-end service delivery, separating this from the Supplier Management responsibilities in the organization.
2. Take a pragmatic approach to integrating ITSM processes and tools. When entering into outsourcing agreements, be sure to define the integration points, handshakes and required inputs and outputs across all ITIL processes and functions — particularly Service Desk, Incident Management, Problem Management and Change Management — between organizations in the service delivery model. Bear in mind that external service providers will have their own processes and tools, which will need to align with those of the client-retained IT organization. Do not over-engineer this integration but do consider moving to the service provider’s methodologies if they are more sophisticated. Note that this exercise becomes increasingly complex the more service providers in the service delivery model (see tip number one). At a minimum, make sure all parties are clear on who is ‘leading’ and who is ‘following’ and make sure these roles are documented in the various outsourcing agreements.
3. Implement a business-focused Service Catalog. Define your Service Catalog first in terms of the services delivered to the business customer (Business Service Catalog) and then work backwards to define the contributing IT component-based view (Technical Service Catalog). This will help ensure that the right resources and capabilities to deliver to the business service requirements are identified and will clarify the optimal sourcing mix for the service. Do not use the external service provider’s Technical Service Catalog as your Business Service Catalog.
4. Negotiate a Service Level Agreement with end-to-end service levels. Do not begin service level discussions with suppliers without having first implemented a formal Service Level Agreement (SLA) with your business customer. Formalize end-to-end service levels in a business-focused SLA and define the IT component service level targets in Underpinning Contracts with external service providers and Operating Level Agreements with internal service providers. Always ensure that the combination of these targets will meet the service levels agreed to in the SLA. Lastly, remember that an Underpinning Contract is never a surrogate for an SLA with your business customer.
5. Look beyond ITIL for IT governance. Against the backdrop of corporate malfeasance and recent legislation aimed at preventing it, corporate governance — of which IT governance is a subset — has taken on a renewed focus in business. While ITIL V3 does broach the subject of IT governance, particularly in IT Service Continuity Management and Information Security Management, Supplier Management provides only limited guidance on IT governance related to sourcing. For this, a number of other frameworks can be consulted. Of particular note is COBIT (Control Objectives for Information Technology), which is prescriptive on what to monitor and control and serves as a compliment to ITIL, which advises on how to implement monitoring and control as process activities.
I recently read an interesting article at the Institute for Supply Management about the Sourcing Transformation of United Airlines. As we all know this is an industry that to this day, stays alive on thin margins. In that capacity, it is crucial that they have strong supply chain management and procurement practices. Grace Puma, who took charge of United’s sourcing transformation, gives a detailed look at how she was able to get her team, the company, and her suppliers to buy into her new strategy.
She was able to lay the foundation for success with strong team buy in from her department and suppliers by creating strong lines of communication and development.
“The cornerstone of this process was that it was very collaborative in nature, so throughout our discussions and the process no one felt that anyone else had a greater role, and that was a big change for United,” says Kate Gebo, vice president of corporate real estate. “We explained that by working together, we’re providing a value-added service for bringing new suppliers in, introducing new analytics and looking at things from a total cost of ownership perspective. It’s been an evolving process, but today it’s simply the way we do business.”
The other interesting component of this article was United’s level of transparency and development with their suppliers. She created collaborative supplier workshops and ongoing supplier summits to strengthen communication, educate suppliers, and educate themselves on their supplier’s price components. Puma summarizes her rationale for this level of communication and development perfectly.
“Our approach to sourcing is really around supplier development, helping them to understand that our success is their success, and that they have an active accountability to ensure that our customers have a good experience on board our planes.”
I thought this was an interesting look at how the Airline industry continues to survive. It’s because of people like Ms. Puma, who can transform an out dated process and turn it into a mutually beneficial relationship between company and suppliers.
Numerous larger organizations, such as international or holding companies with disparate global operations, often have difficulty getting an organizational Spend Analysis project launched, primarily due to the independent operations within each company in the portfolio. A typical, comprehensive Spend Analysis project would address all Spend. This is typically all AP, PO, P-Card, and Expense data across all sites and systems. These companies would argue that opportunities to better leverage spend do exist, but the challenge of coordinating efforts across disparate operating units has historically slowed adoption within these firms. For these types of situations, a phased approach to Spend Analysis is a solid deployment method that enables the company to start identifying and executing on savings opportunities while gradually incorporating other business units. Outlined below are the most common examples:
Alternative Approach 1 – Accounts Payable Focus: Extracting data out of the Accounts Payable systems is generally a straight-forward process. While A/P alone does not provide the same level of insight as does the Purchase Order/Expenses/P-Card data, it often reveals many savings opportunities that can be addressed immediately. This approach can be further simplified by applying a reverse Pareto principle – only extracting the top 80% of the A/P spends. As sourcing opportunities are identified at this high level, they can then be further broken down during the sourcing initiative and additional data collected as appropriate.
Alternative Approach 2 – Geography/Operating Unit Focus: Some organizations decide to focus on an area they can control, such as a particular geography or business unit, and collect more detailed data for that area. In this manner there are fewer people involved and they can get very detailed visibility into data and sourcing opportunities for the area in scope. The data can then be extrapolated to the entire company as targeted sourcing efforts are conducted.
Alternative Approach 3 – Category Focus: Some organizations identify a top 10 list of Spend categories that they know can produce cost savings, and then collect as much data as they can from those sites having a good amount of these Spend categories. (Areas such as Ocean Freight, Print, Office Supplies, Telecom, Temp Labor, etc.) The data is then quickly extracted from the overall data set and analyzed for the specific perceived opportunities. Only the Spend for those initiatives is focused in the data classification process.
Alternative Approach 4 – A Combination of the Above: Invariably, a Spend Analysis project comes down to people and executive sponsorship. It has been proven over and over again that savings exist well beyond the cost of any Spend Analysis project (10X to 50X ROI). But typically it is hard to get sponsorship organization wide, as this usually requires the involvement of the CFO and even the CEO. The CPO, or Director of Strategic Sourcing, has a span of control (and budget) that they can use to get some form of Spend Analysis project started. As even small Spend Analysis projects can produce large savings, getting something started and generating a quick ROI can be leveraged to look further and deeper across the organization. Those initial savings can be invested forward to get more approval to conduct more projects with larger scope. We find this is very common to exercise the largest span of control a person may have who believes in the value of Spend Analysis done right, and they go after the corresponding savings that can be achieved.
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