Procurement’s 7 Deadly Sins. Part III: Three Bids in a Buy Abuse

What is Three Bids and a Buy Abuse?

Almost every major evolved enterprise procurement team since the 1970s has something called a “Three Bids in a Buy Policy” which states, “If you're going to spend more than a certain amount of money, you have to include at least three bidders on the actual bid”.  This policy establishes the minimum acceptance standard for the amount of competition on a bid.  But over the years, this purposefully minimum standard has become the de facto standard at many Fortune 2000 companies.  Meaning that many procurement teams stop at three suppliers instead of including as many suppliers on the bid as possible.  It is believed that this practice thereby erodes millions of dollars of value each year for even the small companies.

One of my favorite and fabulously witty CPO colleagues is Sue Spence.  Sue is the Chief Procurement Officer at FedEx, and she calls Three Bids in a Buy, “Three Bids in a Cloud of Dust”, because the dust is all of your opportunity evaporating and not driving any real value.  So the question is how much value is this abuse costing your business?

“Three Bids and a Buy” is Really “Three Bids and a Cloud of Dust”

- Sue Spence: Chief Procurement Officer, FedEx

What would Evolved Procurement Look Like?

What is Procurement as it was intended?  Consider for a minute a mysterious alternative universe. A universe where procurement nirvana has been achieved on every bid that your organization had last year.  What would that look like? How would that be fundamentally different from the realities of today's procurement practices?  One future-state pivot would include using 300 suppliers on every bid that you could instead of just three. In the 300-supplier bid process, you would be able to purposefully look for the innovators in every category that you were buying in and include their differentiated product offerings to benefit your business.   You would bring new process innovation, new business models and new product innovation and be able to capitalize on something I call a supplier’s hunger quotient.  

“Hunger Quotient” - the extent to which a supplier might be willing to submit a materially advantageous deal due to their desire for deal.

- Walter Charles: Multi-Industry Chief Procurement Officer

This hyper-competition would increase the number of suppliers by 100 times. You would be able to effortlessly exploit all 64 value levers in Kearney’s chessboard. You’d be able to unpack the cost drivers on every major bid from a price-only to the top 100 elements that might be influencing that price. Between the 100 times more suppliers and 100 times more cost granularity from the price, you’d be powering up the strength of your bids by 10,000 times (100 X 100 = 10,000). Lastly to get to actionable bid insights you’d might be able to get the bid analytics done in 2.5 days instead of 2.5 months.

I know what you’re thinking, this sounds like some futuristic science fiction! Admittedly, when juxtaposed to our current state-of-the-arc practices, I also agree that this future state sounds like science fiction. But I am here to tell you that this is science fact! Pointedly, I have used a new raft of tools and processes at 4 of the Fortune 500 companies that I have had the privilege of leading as CPO. In the process, my teams and I unlocked between 150% and 299% more value for those companies. I believe that every company that is reading this article can benefit from these next generation approaches.

Moreover, you can join my blog to find out how and help your company escape the stupidity of these tragically flawed status-quo processes.

Several years back, I shared with an audience something I called the Physics of Procurement.  It is as true today as it was when I first shared it. 

The PHYSICS OF PROCUREMENT

·      COMPETITION brings FRICTION

·      FRICTION creates HEAT

·      HEAT creates LIFT through process innovation, business model innovation and product innovation… 

·      LIFT creates VALUE like SAVINGS, AGILITY, RESILIENCY, and Improved CASH FLOW

Said directly, more competition creates more value.  How many CPOs know the degree of competition on the bids they have?  How many CPOs know how much value is lost by the abuse of the three bids and a buy practice?  Sadly, too few of us can answer these questions.  But if we could, how game-changingly impactful could that be?  Importantly however, you don’t have to continue to accept this today due to the new raft of tools that are new making their way to the market.  I personally have used next generation supplier discovery engines to find more suppliers faster than googling and less expensively than asking consultants.  PLEASE SIGN UP FOR MY FREE BLOG NOW at www.waltcharles.com and I will be sharing how you can learn who I’ve used to get relief from these issues.  I will also be asking some of my ~30,000 LinkedIN followers, many of whom are Supply Chain and procurement professionals, to share their perspectives in future blog updates as well.  PLEASE join the CONVERSATION BY JOINING TODAY.

What are the Impacts of this 3rd Deadly Sin?

When 3 bids and a buy is overused to the exclusion of executing a robust sourcing process, massive value can be lost.  Tragically, most CPOs today can't tell their business or their management how many deals went through last year and how many millions of dollars went through the previous year without going through a robust competitive process. That's not a metric we typically capture.  

A New Procurement Methodology Offers Relief

This is where I introduce you to a new Procurement Methodology that has been trade marked by Pierpont Holdings LLC.  This proprietary process is called Constraint-Less Bidding MethodologyTM, and it represents a breakthrough for all of the Procurement folks struggling  with the “3 bids and a Buy” deadly sin. If you didn't have the constraint of going to three bids in a buy, how many people would you go out to bid to?  What new industry 4.0 tools might you need to utilize in order to drive value from this expanded list of suppliers.   How might your existing processes need to be adjusted to better take advantage of these next generation tools?  How might you need to rethink the capabilities of your team to navigate the many value eroding challenges associated with competitively sourcing deals.  These questions are what constraint-less bidding is intended to get after.   I think that this new process is such a tremendously powerful unlock for Procurement processionals around the globe that I am offering to personally get you connected to the solutions providers and consultants that have helped me deliver an impressive track record of success as a CPO.  Below are the 5 things you can do TODAY to get more free information and get you started on your digital transformation journey!

What You Can Do About it TODAY in Your Business…

If you think your team is abusing this 3rd deadly sin, then here is what I recommend you do:

1.     JOIN my FREE blog at www.waltcharles.com by entering your email address at the “Stay IN The LOOP” below

2.     SHARE my blog article with ANYONE in your network that is struggling with any of the “SEVEN DEADLY SINS” mentioned

3.     ADVOCATE THESE NEW APPROACHES at your BUSINESS – email me at waltcharlesiii@gmail.com to get help

4.     FOLLOW ME on twitter @officialwaltcharles

5.     TEXT “TOOLS” to 786-566-1766 if your Company has over $1B in Sales and you need help.

Procurement’s 7 Deadly Sins. Part II: 3-5% Savings Fallacy

Everyone ubiquitously cites 3% to 5% as your savings target but I believe that 3% to 5% savings number is a fallacy. Why am I calling that a fallacy? I believe it could be 2-3 times bigger, but you've got to focus on some things differently. So what should you focus on? What real world evidence do I have to support this admittedly non-mainstream fallacy assertion? Well at four Fortune 500 companies that I’ve had the privilege to lead, my teams delivered between 150% and 299% times those benchmarked targets, in other words up to 15%. Those outlier outcomes reinforced my belief that our universally accepted benchmarks are broken.

Consider the following thought experiment. Imagine you are in a simple footrace with 30 other companies. You are at the starting gate and instead of everyone pinning on a jersey number, they intentionally blindfolded both eyes. This symbolizes the Blindness problem as we discussed in my previous blog post. Then 29 of them shackle 100-pound blocks of cement to each foot at the beginning of the race. This was done to symbolize the numerous stupid things that happen in the Source to Contract (S2C) process to erode value. By contrast, one of the companies skips these two steps, and as the crackle of the starting pistol is fired, they are off. The question is who wins the race? The answer, the un-blindfolded and un-shackled racer takes the finish tape by a huge margin. Therefore, I am saying that your company must figure out how to be unshackled with unimpeded vision as they embark on creating value with the Procurement function. These are the three things you should consider:

1. Your Benchmarks Might be Busted, Right? Are you tethering to the right benchmarks to actually drive to the right types of outcomes for your business or not? In 2015 while on vacation, I had the honor of speaking to a Mastering SAP conference in Melbourne, Australia. At that event, I talked about a gangly, 6’-4” Olympic hopeful who in 1968 reimagined an event and drove a step-change in outcomes for his event. The event was the High Jump and a small-town civil engineering student from Oregon named Richard applied his engineering perspective to the problem of getting a body over a bar without knocking it down. He invented a new process, refined a new approach, and set a world and Olympic record forever relegating the prior high jump techniques (namely the western roll, scissor jump and straddle technique) as underperforming legacy practices that elite athletes jettisoned for the higher performing Fosbury technique.... That revolutionary high jump technique is commonly referred to as the, unfortunately named but highly effective, Fosbury Flop. Below is a graph illustrating the game changing leap in improvement that this back-first technique delivered:

Correspondingly in Procurement with new thinking, processes and Industry 4.0 tools, Procurement teams can reach new heights in savings impacts and business outcomes. But importantly, it does require the purposeful abandonment, replacement and outright elimination of the old, 1970’s vintage tools, busted processes and old ineffective stakeholder management practices. If you have these challenges, keep reading, help is on the way!

2. Process, Tools and Capabilities (PTC) - these are the three legs of the stool that underpin your savings and business outcomes. Notably it's the (1) interdependency of processes to which you are beholden (2) the tools that you deploy, and (3) the capabilities of your team that will actually effectively drive the outcome for your business. Buying a new industry 4.0 tool without also addressing interdependent process and team capability challenges will leave value on the table and render that value undeliverable. Spoiler alert, before you read on, know this, that there is no tool-only silver bullet that can unlock savings, instead there are a series of coordinated adjustments that are needed to across the three legs of the PTC stool.

3. Your Tools need to be Upgraded to Industry 4.0 Game Changers That will allow you to get more done, more robustly and in fractions of the time. If you are among the 98% of the readers using spreadsheets for bid analytics.

So what can YOU do about these issues? In two words “get help”. So Here is My Challenge and Your Call to Action! If you are a company that has $1 Billion in revenues, and you believe that your business is hampered by some of the challenges mentioned above, I will be that help. If you reach out to me at waltcharlesiii@gmail.com, I will put you in touch with the companies and solutions providers that have helped me navigate the journey “from Busted to Brilliant”. “Remember Advice is FREE, but Continued Ignorance Costs Money!”

Stay tuned. “Part III: Three Bids in a Buy Abuse”, coming soon. If you haven’t read “Part I: Blindness”, I suggest you catch up.

Procurement’s 7 Deadly Sins. Part I: Blindness

I want to share with you some thinking I’ve done around, what I call “Procurement’s 7 Deadly Sins”. It's a little bit tongue in cheek, but as a CPO for some major companies, I wanted to make sure I gave you essential information that you could surely apply. What I want to do in upcoming blogs is talk about each one of these problem statements - each one of these sins - and specifically what can be done to mitigate each of those sins. I will be making a blog for each one but if you want a sneak peak, contact me.

The 1st of what I call, “Procurement’s 7 Deadly Sins”, is Blindness -

• “You can’t source what you can’t see”

• “Focusing on getting this right in every instance that matters first.”

As a procurement buyer, have you ever had your customer call you at the last minute about something they needed yesterday? If you have, you probably didn't have enough time to actually do your job. That's one artifact of blindness.  It is a deadly sin and I'll share with you as we go through this, the things that can be done to mitigate each of these particular problems.  

The other artifact of blindness is people not following the procurement policy, not involving you on spend, pursuant to the policy - for example: greater than $100,000 - and basically just doing the deal without Procurement and the professional buying expertise we bring.

So the million dollar, or maybe tens of millions of dollars, question is - “Can you see all of the sourcing opportunities that you are supposed to be actioning with enough time to actually action it?” If you can't, or if you don't know the answer, I would suggest to you that's the first place to start. Finding a way to engage your stakeholders is critical to eliminating blindness.

Poor Stakeholder management by Procurement drives Maverick Spend and costs business’ millions of dollars per year in missed sourcing opportunities.  The highly respected supply chain consulting firm, Hackett, did a fantastic survey on Maverick Spend in 2019.  Below summarizes what they found:

When I started in Procurement decades ago, the way you were supposed to or manage this is with something called “Relationship”.  Relationship today is as nebulous now as it was when I was a novice procurement guy and remains as elusive today as it was decades ago for me.  In fact, more often than we want to admit it our stakeholders are calling us today about a contract they urgently need yesterday.  The result is a massive, missed opportunity for your business. 

The global COVID-19 pandemic just likely made the already bad maverick spend problem even worse by the work-from-home mandates.  Procurement now has to service stakeholders from their homes.  At Allergan, we went form 30 locations to tens of thousands of locations overnight.  It is time for Procurement Functions to Pivot to “Process” over Relationship and finally embrace a SaaS process that works for this long-standing chronic problem.

This can be fixed today by a next generation tool called EP-Squared, launched by a novel SaaS company called Pierpont Holdings LLC.  Procurement folks, isn't it about time that we “PUT AN END TO MAVERICK SPEND ???

The Most Game-Changing Deal in My Career

I want to talk a little bit about the most game changing deal in my career - most importantly, the people I really wanted to thank in my life that were a part of that deal who helped drive the tremendous outcome for the business.

The players: Dave Radeke, who was the CPO then. Raymond Kirton, a direct materials guy, Sixto Hernandez, another direct materials guy, manager level and director level, respectively. Those people were tasked in my first deal, four months in at Johnson & Johnson, for a critical stent manufacturer (medical device). Because of the hard work that the team put together to get after it, it changed my life.

What was the challenge? It was a sole source supplier supporting a billion-dollar product blockbuster for Johnson & Johnson. It was a key medical device component that had high switching cost times which was two to three years due to validation, regulatory stuff, etc. and there were huge barriers to switching like proprietary process upgrades. 

The supplier had a single location for manufacturing, located in this 100-year-old legacy building from when their company started. That particular facility represented massive financial risk with no backup in the event that if anything didn’t go as planned, you could only do one-year deals. I had a constraint from my boss's boss, who was the VP of operations - I can only do one-year deals. All the deals within the business were one-year deals and we had a massive “should-cost” gap, north of 35%. In other words, we thought we should have been paying materially less for this product than we were paying. In addition, we needed to radically increase output for customer demand. That would mean that we needed to get more product. Right? 

The desired outcome was to either go to a dual source by either taking half the business to another supplier or go to a dual location with the existing supplier to protect customers in manufacturing. We wanted to dramatically increase the output to unleash more revenues for our business. We wanted to pivot the relationship from a tactical relationship to a strategic relationship. We wanted to ensure that our supplier and our company's interests were met.  

We used an interest-based negotiation approach, which was awesome. We wanted to drive to the optimal cost framework as quickly as we could, while increasing output as a key deliverable. I think most people had low expectations. We were expecting to have to actually deal with a price increase and ended up getting one of the largest price decreases in my career - 35.2% in year one, and then we had successive reductions in multiple years.

It was a massive cost reduction over time. We identified automation opportunities at the three phases of their operation in 1. electrical electro polishing, 2. by going to faster automation for carriage assembly, and 3.  in quality inspection, going to fine scan visual inspection. Going from people to machines allowed for throughput to go through the roof and for us to actually deliver better outcomes.   

We had found opportunities for them to reduce their costs and pass through that savings. But we had to have commitments so that they, the suppliers, could afford to make the needed investments. In other words, we had to accommodate the risk they accepted in order to reduce our costs by committing to the volumes for multiple years.  Now remember, I was only authorized to do one-year deal.  That meant getting my boss’s boss’s approval. 

Well that is where the team came together and helped compel that VP of operations (shout to Vic Chance) to allow us to make this commitment and reduce our piece price.  

So, what was the outcome? After four months at Johnson & Johnson, I closed one of the biggest deals with that team. We went to the location, we negotiated with the company, and we get what looks like the largest savings deal in J&J’s history, one of the biggest savings deals in the medical devices sector at that time. It was about $100 million savings over four years. We materially increased throughput for the business, which allowed us to unlock more revenues. 

Now this went beyond just a savings outcome. I continued to speak with the CFO during the deal closure and over time after we closed this deal.  He initially had revenue expectations of about a half-billion dollars in net income contributions for this product that the component was critical to, but we ended up delivering a full billion dollars because we had the ability to produce the volumes and match market demand. So a billion with a B in, in profits for the franchise that year because we were able to pivot the supplier and our internal policies for the best interest of our business.  

When it was all said and done, what happens to the players? One of the players in this deal was promoted to take over the sector on the supply-chain side. I get promoted into his role and becoming an extraordinarily young vice-president reporting to a man by the name of Vic Chance and ultimately transformed my entire career. 

To Ray Kirton, Sixto Hernandez, David Radeke and Vic Chance – I thank them all for the phenomenal work they did on that deal.  The impact we has which became folklore for Johnson & Johnson, and was the most game-changing deal of my career.