Procurement Blogs I’m reading

Here are the procurement blogs I have on my current reading list

These are without a doubt the top 2 blogs in the space. Top 2 in terms of quality and quantity. Read these blogs first; anything of burning significance will end up on one of these two sooner or later.

Blogs allied to a particular vendor/service provider.

General supply chain commentary

Other specialist blogs (dare I call them niche?)

Ones that I enjoyed but seem to have tailed off in recent months. Watch them if they come back

The various magazines also have their own blogs/RSS feeds. I distinguish between a blog which by its nature is more immediate and informal and an RSS feed of magazine articles. The blogs in my list right now are:

From what I can tell S&DC Exec and CPO Agenda don’t (yet) offer blogs.
   

 

How many suppliers should I have in a reverse auction?

A few years back we did some work with Oxford University. They were interested in how procurement auctions fitted into the bigger auction picture. We were interested in finding out how in line with auction theory we were. I was looking through my old material from that study and I want to share a neat graph from that work that models how expected savings rise the more suppliers you include in an auction.

 How increasing suppliers increases savings

If you assume that all suppliers in a marketplace have a price evenly distributed between a low price and a high price then, on average, the savings you would get increase as shown in the graphic above. This helps emphasise that 4 bidders is a good number for a reverse English auction, as I have often said. But one thing to clarify: this is a model – you can do better than the model by ensuring that when you select potential suppliers that you are selecting suppliers who have a lower price rather than selecting suppliers at random from the marketplace.

The poor, misunderstood reverse auction

Reverse auctions as we we know them today started in the mid 90s. So now seems about the right time for them to be going through their poor, misunderstood phase.

Tim Cummins writes a great analysis of how buyers reap what they sow: screw your suppliers when times are good and you can’t expect your suppliers to queue up and looking for win-win opportunities when the markets move against you.

Two years ago, IACCM was warning its members that the change was coming and that suppliers were shifting their loyalties – for example, they were investing their marketing dollars in emerging markets, rather than their traditional (disloyal) customers.. We alerted buyers to the fact that they would pay a price for alienating the supply base. But the good times rolled on – commoditization, reverse auctions, confrontational contract terms – these were just some of the ways that buyers showed their lack of loyalty to the traditional supply base in their haste to grab low prices and exert their dominance.

A timely warning, and nothing contentious, you might think. But now read the paragraph again and see how “reverse auction” is equated with “showing disloyalty to your suppliers”.

This is to put the cart before the horse. It’s (short-sighted) buyers who screw suppliers, not reverse auctions. And don’t forget that short-sighted buyers are able to screw suppliers with all kinds of methods: you certainly don’t need an auction to demonstrate disloyalty to your suppliers. You can screw a supplier perfectly well using certain contract clauses – but that is not to say that contracts are a bad idea.

From my own experience: I recently awarded a contract for software development services via a reverse auction. I have a good relationship with both the current and previous supplier. I believe this is because I was open and up front during the whole process (including explaining to the incumbent why I was going to market). The reverse auction in fact helped the decision making process be more transparent. And the contract was far easier to implement than would have been the case without an auction.

In that example the reverse auction helped both with achieving the right price and with helping build the supplier relationship.

 

Bid rigging and e-sourcing

The Office Of Fair Trading claims to have uncovered more and more evidence of bid rigging in the UK construction industry. See here from Yahoo news today, here from The London Times Online on March 22nd.

The OFT press release here gives some more detail on the substance of the claims:

The investigation has uncovered evidence of bid rigging activities which include cover pricing, where companies obtain a price from a competitor in the tender process which is not designed to win the contract but is intended to give the appearance of competition. The Competition Appeal Tribunal has fully endorsed the OFT’s decision in its investigations and confirmed that cover pricing is anti-competitive and contravenes the Chapter I prohibition. In some instances the OFT has also found evidence in the current investigation of compensation payments or ‘bungs’ being passed between competitors in exchange for a cover price.

The construction industry has a reputation for resisting e-sourcing in general and e-auctions in particular as suppliers. I wonder how much of this reticence is down to a fear that e-auctions (in particular) make it harder for cartels to operate? Certainly, if you read this article from the World Bank  about an e-rfp system implemented in Andhra Pradesh, India (hat tip to Andrew Moorhouse for passing it on) – there is a view out there that e-sourcing systems may be a good way to combat cartels and collusion. According to the document there were some pretty blatant abuses in the manual system. One of which was:

Cartel formation to suppress competition: Through dubious means, the participating bidders would gather the list of prospective bidders for a procurement request. They would use this information to lobby for formation of syndicates or cartels and bid at higher quotations.

 

Some questions about finding (reliable) new suppliers

Finding credible, reliable new suppliers remains one of the major unsolved issues in the e-sourcing space.

Take Alibaba, for instance. They provide a massive supplier list, but with essentially zero quality control. Suppliers can pay to improve their kudos in the system with services such as TrustPass: but this seems to amount to little more than validating that the company really exists. In fact  – do a google search on “Alibaba TrustPass” and you get as many hits raising concerns about its value (like this and this), as you get hits explaining its benefits. 

MFG.com have taken some steps to address this issue. Buyers can provide star ratings on suppliers. This is an improvement but is still not perfect. For one thing, suppliers pay an annual license for unlimited access to MFG.com while the service is free to buyers. So, in theory at least, a supplier could create some bogus buyers, set up some bogus RFQs, award themselves some bogus contracts, and give themselves bogus high scores. OK, so that might be a bit far-fetched for real life but there are three more practical issues with the value of these star ratings.

• Star ratings are not particularly reliable
• Good feedback doesn’t make someone honest
• Confidentiality

Star ratings are not particularly reliable

Star ratings are not all that reliable. A major proponent of star ratings for buyers and sellers is eBay. Though even they have recently wised up to the over-simplification of star ratings. They have changed the way star ratings for sellers work.  The change itself is not as important as the reason for the change. They changed the feedback system because buyers and sellers were, in effect trading positive feedback: sellers would not leave feedback to a buyer until they had already received positive feedback from that buyer. Even where the star ratings are only applied by buyers, they are still visible and so, in effect, tradeable commodities.

And buyers know this. On a random day I picked up the following two posts from MFGx.com’s forums: this and this. Both were high traffic threads raising questions of how to know that a supplier you are going to work with is reliable. All this despite the existence of a star rating system.

Good feedback doesn’t make someone honest

Even worse than this, regular readers of this blog might recall one of my early postings commenting on an eBay power seller who had his eBay account shut down when it was discovered he was shill bidding (i.e. artificially driving up the price of his wares). His customers were evidently happy, as evidenced by his high positive feedback scores. But this didn’t stop him ripping them off.

Confidentiality

I recall talking to a major retailer about their experiences in one of the early exchanges. The plan had been that aggregated information from all the participants would be shared to give all participants in the exchange in order to deliver useful market information to everyone. In practice this retailer believed they were putting more in than they were getting out and so stopped information sharing.

When I step back and try to be objective I have to say that I don’t blame them. Who would want to share key information like this with their competitors? Would I share  information with David Bush about where I am finding the best developers these days?. No. So if I had found a great supplier of certain services, what would be my incentive to publicise that company on a public site for all my competitors to see?

This is also one of the stories why Covisint, a grand-daddy of internet B2B marketplaces, fell to pieces: Suppliers resisted putting information onto a site that they felt would be shared amongst multiple automotive companies.

True, there are some stories about competitive companies being open with each other about certain sub sets of their spends. Such as this story from Supply Management about hotels collaborating in the purchase of indirects. But this kind of activity is limited to only a subset of non-core spend.

There is no magic bullet that guarantees a supplier is going to be reliable – despite the wealth of information that is available (in theory at least) on the web. The rather unsatisfying answer all too often comes down to little more than “do your homework, and buyer beware”. Even credit ratings will not necessarily give you the full information you need on all potential suppliers. Is there a better solution for supply chain professionals that produces information by inferring what suppliers are really up to, rather than relying on manual feedback systems? Will this webinar that Jason Busch/Aravo are hosting next week  present any insights? Might we need to wait for a semantic web solution ?

Like I said – I only have questions at this stage. If anyone has any answers I’d love to hear them.

Procurement vs procurement

Thanks, Jason, for your recent links and the extra traffic that has come my way as a result. I hope some of you new readers stick around and weigh in via the comments.

I haven’t posted for a while and I hope this posting goes some way to make up for the absence. I’ll be back to posting about e-auctions next week, but in the meantime here are seven strands, weaving between IT and Procurement. In my view, two very similar departments/functions/processes. I’d be interested to hear your views on how the strands pull together.

Strand One: A quick glance at the recent history of the IT department

My background before ending up in Procurement/Sourcing/Purchasing/SCM (whatever you want to call it) was in the IT space. 20 or 30 years ago, I am told, the IT department was a musty backwater. Then, with things like ERP systems and the Internet boom, IT became more important, more “strategic”. You heard more talk about IT being a strategic asset and not a support function. You heard more about CIOs (Chief Information Officers) and CTOs (Chief Technology Officers) and whether they should be on the board.

Then the wave of excitement began to recede. IT started began to lose its mystique. Some companies started even eliminating their CIO/IT Director roles. Some companies even pushed out responsibility for IT equipment directly to end users. And now, insofar as people talk about CIOs or CTOs, they are clear that the role is as much a business role as it is a technical role.

Strand Two: Procurement becomes more strategic

Claire Brabec-Lagrange , vice-president, purchasing, at Thales, quoted in CPO Agenda’s Autumn 2007 executive debate.

As well as our two to three-year operational plan, we also have a strategic business plan for the next five to 10 years. In the past, purchasing was not part of this exercise, which mainly involved sales and strategy, operations and technology. Now we are part of this strategic exercise and this has made a huge change because it has led purchasing to get closer to sales and strategy in order to understand where the business wants to go and what will be the requirements in sourcing. What are the core technologies that we need to have in-house? What are the key enablers we need to source outside? Who are the key competitors out there and are they our suppliers? Do we have to go to Asia because the business in aeronautics is moving to Asia? How are we going to source locally for local needs? By being involved at this stage we are recognised as being business partners to the sales people, to the technology people and globally to the strategy.
It is the first year we’ve been integrated in this strategic plan and three divisions have been through this exercise. I convinced the business that if we are a strategic function we need to be involved in this strategic plan, otherwise we are just executing purchasing orders.

Strand Three: Procurement have proved they can source goods and services. What about becoming the organisation’s recruiters?

Some quotes from Supply Management magazine 28 Feb 2008 in a news article entitled: Buyers: the new recruiters?

Chrisk Sawchuck (Hackett): “Other functions are trying to work out how to source talent. Why can’t procurement take a leadership role in that? It is the business process of sourcing.”

and

Christina Langley (Langley Search & Selection): “The best purchasers are good at building relationships. They often make good recruiters in today’s tight markets for staff as it is important that companies build strong relationships … Buyers are able to make the jump from sourcing goods and services to sourcing people.”

Strand Four: Hell, Procurement can do anything at all

Genentech’s CPO, Clive Heal, interviewed in CPO Agenda in summer 2006.

One of the initiatives we ran last year was focused not only on the cost elements, but also how we could improve the business process to make it faster and much more efficient. I believe there are opportunities for procurement to support revenue generation – not from suppliers, but helping the business to grow at the top end. That moves us beyond the term “procurement”, which in itself is a constraint and will need to change.

Strand Five: Hang on, sourcing isn’t as simple as that. You need special understandings to do procurement in different areas

A recent post from Deal Architect talking about the complexities of sourcing IT services.

I know I am being critical of my own clients in saying so, but like I wrote here , I wish more procurement folks would treat IT spend, not just IT services, as very different from MRO or other direct spend, not just try to find homogeneous “solutions” .

Strand Six: So do you really need a procurement department to negotiate supplier contracts?

I’ve just been reading an interview with the new Chief Executive of CIPS (the UK version of ISM) in Supply Management 28th Feb 2008. His background is not procurement though in his previous role he

… brought together six associations. One of the first jobs we did was to renegotiate their contract with the outsourced supplier … So on behalf of 55 clients I was responsible for a team that negotiated a new commercial contract, compliant with regulations, requirements and complete with service level agreements … I now recognise that many of the issues we wrestled with … as procurement issues … Should we provide these services in-house, or in collaboration with our competitors, or through an outsource provider? How do we create a relationship … which works well for both sides [buyer and supplier] and reflects the reality that each depends on the other? And against that background some hard negotiators trying to get a better deal.

Asked whether any procurement professionals were involved, his answer is instructive:

I wasn’t aware of the label [procurement] then so it never occurred to me to ask my negotiating team. I think they were probably chief operating officers, who would be responsible for back office functions and negotiating such an outsourced contract.

Strand Seven: Procurement is a process, not a department

Pierre Mitchell’s excellent comments likening procurement with Six Sigma.

“Procurement is a set of processes, not a department … Procurement doesn’t have to own it, but it should continually be expanding its circle of influence to influence the process more deeply and make sure that the organization does it – regardless of where the reporting lines are … think about Six Sigma – it’s not a professional quality function that does it, but rather a mass deployment of the best practices to the masses.”

Pulling the strands together

The Procurement department has been following a similar trajectory to the IT department. But half a decade or a decade behind. We are now at the point where CPOs are making their mark on corporations and even moving onto the board. Claire Brabac-Legrange and Clive Heal are ambitious enough to try to drive procurement to greater heights in their organisations – or even to transcend the moniker “procurement” for good.

But how to take procurement (or Procurement) to the next level?

Just because good buyers are good at building relationships does not mean that other people are not good at this. It doesn’t follow that recruitment should come under the control of buyers. It’s worth contrasting the Sawchuck quote with the Langley quote. Sawchuck argues that Procurement should take a lead in sourcing people. Langley goes further and says that buyers themselves make great recruiters. Sawchuck sees procurement as a process, with its practitioners taking the lead in sourcing stuff. Langley sees Procurement as the buyers themselves doing the buying – as a department.

Particular categories require particular expertise to source effectively. They cannot simply be subsumed into a monolithic procurement process. This is the case for the IT services Vinnie Marchandi describes; it certainly is the case for recruitment. And no less than the current Chief Executive of CIPS, in his previous role, was able to consolidate spend and negotiate with suppliers without formal Procurement people involved. procurement is a process after all. Every function needs to procure.

Back to IT for a moment. As IT became all pervasive, companies actually started relying less and less on the IT department. The same is bound to happen in procurement. As the process of procurement  (little p) becomes better understood and takes centre stage the role of the Procurement department (big P) itself will become less important.

Or is the future you envisage one in which the Procurement department becomes the mirror image of the Sales function, handling all the inputs to the business?

How much steam is there left in reverse auctions?

Two contrasting views:

  1. Been there, done that. The vast majority of companies have now done aucions and taken all the margin out. The age of the reverse auction as a revolutionary procurement tool is over. Time now for buyers to focus on other things raher than continuing to beat suppliers on price.
  2. My god, we’ve barely scratched the surface. The vast majority of companies have either done no auctions, or just one auction and really haven’t exploited the benefits of auctions to lower price and increase quality.

As you might think, my views tend towards the latter 🙂 

Aberdeen reckons the average auction saving is around the 12% mark. TradingPartners’ average auction savings are nearer the 20% mark. I’m not sure how meaningful one rolled-up average number is, but suffice to say that this number covers categories that have been auctioned twice, three times or more as well as rising markets, falling markets etc. Reasons as to why this should be the case are for another blog but, even taking Aberdeen’s number there is clearly still some margin left in 2007 for buyers to take out.

Admittedly if I didn’t believe this then I would not be working for an auction provider – so feel free to provide me some evidence to the contrary if you think I’m wrong.

Why buyers should run electronic reverse auctions

The technical jargon is asymmetry of information.

In English: You, the buyer, don’t know what price potential suppliers would be prepared to supply to you. Each supplier knows what price he could go to but, cartels aside, each supplier does not know what price other suppliers would be prepared to go to.

In this kind of climate everyone has to assume a market price. Usually they assume this market price based on what was paid last year. If you negotiate a 5% saving based on last year’s prices then you might think you got a good deal. But if all the suppliers would have been willing to give you 15% or even more then you got a bad deal.

You will never know the true market price until you run a reverse auction which contains (and only contains) well-qualified, serious suppliers.