Procurement’s 7 Deadly Sins. Part V: Effectiveness Tools Handicap

I often get asked about the tools and investments I have used to transform the different procurement organizations I’ve led.  As I pondered, listened, and counseled with industry peers regarding this topic, I discovered the 5th Deadly Sin of Procurement.  I have come to call it the “Effectiveness Tools Handicap.”

We often don’t see the ROI we expect on our technology investments.  Worse, the shift from Industry 3.0 tools, like spreadsheets and emails, to an Industry 4.0 world replete with Artificial Intelligence (AI), Machine Learning (ML), Robotic Process Automation (RPA) and Decision Analytics tools (to name a few) seems to intimidate us, or at least disintermediate our current processes, so much that we are likely only using a miniscule fraction of the capabilities available to us and for which we are paying.

The reason why is simple: we are not good at managing and measuring the effectiveness of our Source-2-Contract (S2C) process.  Which is critical when it come to identifying savings for it is during this upstream contracting process, in contrast to the downstream purchase process, that we have the most opportunity to negotiate value.  Moreover, we have had few, if any, tools to measure and manage our effectiveness and even less budget to spend on S2C process management.

Measuring Procurement Effectiveness

Have you ever wondered if your enterprise procurement team was getting the best deal it could on the opportunities presented by the business? 

When I refer to effectiveness, I mean beyond the efficiencies sought in transaction processing, it’s got to be about business impact.  Impact as defined by your business can be best described as your desired Business Outcomes: Innovation, Digital Disruption Enablement, Savings, Diversity, Sustainability, etc.  I addressed part of this gap in my last blog on Stakeholder Centricity. While stakeholder’s needs are a primary business impact, meeting their goals does not inherently mean you’ve gotten the best deal nor achieved all the expected business outcomes.  Much like you they are measured on specific goals and the overall business impact typically extends beyond any singular function’s focus, thus a deal goodness must measure all of the relevant desired business outcomes.

For example, you may be helping marketing source TV ads and their priority is creativity and conversion rate.  You also must be cognizant of pricing and market competitive terms that they may or may not care about.  You bring that knowledge into a negotiation to effectively support business objectives while ensuring that the deal is competitive given market conditions and capture the maximum value.

We add value when we deliver on both the metrics that matter to the business and ensure that the final deal maximizes value for spend.  In other words, we can’t just ignore cost controls and savings. In that context, do you have enough visibility on how the deals are getting done to ensure if know your Procurement Team is getting a good deal or not?  My answer to that question is an emphatic “NO.” 

I’ve struggled mightily with this holy grail of conundrums – balancing the “best deal” construct with business and operational constraints – throughout my tenure in procurement.  I have savings targets that the budget owner may, or may not, care about.  They have needs that I have to care about to be successful.

After gaining the privilege of leading, and the opportunity to call some of the shots, at several Fortune 500 companies these musings expanded to my team and then ultimately our entire profession.  What if my team could get to the perfect set of conditions for the best deal outcomes?  What circumstances would need to exist? Are there tools to help create such opportunities?  And if so, how much more impactful would my team be?  What if procurement could be focused on savings without being a gatekeeper that encouraged business partners to skirt policy and avoid working with us or entering a competitive process?

Challenging the notion that we were limited by existing processes and policies drove some profound insights and actions (which have formed the basis for my Procurement’s Deadly Sins theory) but it was when I looked at the tools we were using and asked if they were the right ones (and being used the right way) that I realized we had a major blind spot.  We have some great tools available, but because we don’t invest in technology, training and talent sufficiently to support the upstream Source-2-Contract (S2C) aspect of our responsibilities. as a function we have an effectiveness tools gap.  We don’t know how well our teams are using technology investments which frankly handicaps our teams, our performance and our value proposition. Simply put we have an “Effectiveness Tools Handicap.”

In fact, we don’t really measure or report on the effectiveness of our sourcing activities beyond savings.  By comparison, we measure cycle time on purchase orders from requisition through supplier acceptance and even payment.  We measure total transactions, total spend, whether we are buying on-contract and many other metrics to make sure we spend money in the right ways.  However, when it comes to the S2C realm, we don’t always even know how many deals are active, nor have an easy and clear means for the business to request support, much less metrics for on-time performance, or measuring progress against targets at a negotiation level. This limited historical data is only slightly better than the dearth of future looking metrics.  We can forget about a pipeline or visibility into how much support the business needs.  This is BUSTED.

This is what I call the Effectiveness Tools Handicap – we can’t get better if we can’t see what we are working on and how we are performing at a comprehensive yet sufficiently granular level.

Value Levers CPOs Must Action to Mitigate the Effectiveness Tools Handicap

To Drive Value in Enterprise Procurement, CPOs must action these three value-levers:

1. Increase the number of sourcing events (throughput) at both the team and individual level.

   One part of this is using big data analytics on bids, will get more done, more impactfully and more quickly.  Specifically look for sourcing tools that offer advanced optimization but still offer flexible enough cost models to be anything from finished price to a complex cost model.

   Also make sure you have the right people working on the right jobs

   Sneak Preview: In a future post, I will discuss how Ken Black, Russ Swansen, and Matthew Hamilton collapsed analytics from two and a half months to two and a half days with terrific business results.

2. Having figured out how to compete more spend you can action more of your tail spend.  Traditionally thinking is that this 15-20% of spend (and ~80% of the suppliers).  Moreover, common sense says that it is unrealistic to manage given resource constraints and principles of diminishing returns.   

   I have been known to say that what people think of when we say tail spend is a mouse tail, when we should be thinking about it like a Tyrannosaurus Rex tail.   There is a tremendous about of value to unlock in that tail spend.

   According to Andrew Bartolini at Ardent Partners, there is roughly a 12% savings opportunity on those tail spend items. Most of us can benefit from an incremental 12% savings. So why are we ignoring tail spend?

3. Lastly, it is critical to better manage your S2C performance.  You should focus on the effectiveness of every sourcing opportunity and stop leakage that you don’t even see.   The fix is Effectiveness Tools such as Pierpont Holding’s solution Enterprise Procurement Performance, EP2.

I have personally used these three steps to transform my procurement teams multiple Fortune 500 companies, elevate our function and increase business value.  I am happy to help you if you too believe that there is a better way.

Where can you get help?

These issues are correctable with the right application of tools, processes, and team capability building.  At issue is that too many of us simply don’t know how.  Bill Gates’ wisdom can be helpful here:  determine “who has done it well and what can we learn from that.”  I believe that among my 30,000 social media followers, the answers are out there.

We now need to get those solutions to the people that are still struggling with problems that someone knows how to solve.  These Seven Deadly Sins are fixable, we simply need to get the solutions to the folks that are suffering in silence.  When we are done, and when the solutions are deployed, the business world that drives I aspire to be a catalyst for that functional change in industry.

If you think your team is limited by Blindness, 3-5% Savings Fallacy, Three Bids in a Buy Abuse Lack of Stakeholder Centricity, then here is what I recommend you do:

1. FOLLOW ME on twitter @waltcharlesIII and FOLLOW ME on Instagram @officialwaltcharles

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

3. Continue to READ and SHARE my blog article with anyone in your network that is struggling with any of the “SEVEN DEADLY SINS” mentioned – I still have three to go.

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

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

Incase you missed it, catch up on the other Deadly Sins:

Part 1: Blindness

Part 2: 3-5% Savings Fallacy

Part 3: Three Bids in a Buy Abuse

Part 4: Lack of Stakeholder Centricity

Procurement’s 7 Deadly Sins. Part IV: Lack of Stakeholder Centricity

Happy New Year!

For this segment, I want to talk about relationships - not supplier relationship, but business partner relationships.  While we spend most of our time managing external partners, we can easily overlook that our mandate is intrinsically Stakeholder Centric.  But what, you may be asking, is Stakeholder Centricity?

Most simply it means understanding and prioritizing your business partner, aka your internal stakeholders’ objectives and goals.  I believe that there is an opportunity to materially improve how procurement professionals manage these relationships and interact with the most important stakeholder in the business… the one who controls the budget and makes the decisions. 

For your consideration, in Deloitte’s Global Chief Procurement Survey of CPOs in 2018 they reported three top strategic priorities for procurement:

• 78% are focused on Cost Reduction

• 58% are involved with about New Product and Market Development

• 54% are worried about Managing Risk

And yet, only 1 in 4 of us felt they are “excellent business partners contributing significantly to strategic value.”  Said differently, 75% of us have the opportunity for engage business partners in a different and more strategic way.  So, the question is: how can we become more strategic? My answer is Stakeholder Centricity.

How does Stakeholder Centricity make us we more strategic today?

Procurement’s greatest opportunity to impact the business is through the business budget owners.  Our job is to help them get the most bang for their buck.  They are our customers, "help them” is the operative phrase.  Yet very few of us even keep customer service metrics! Why is that? 

Consider this simple question. What percentage of the time did your global procurement team deliver the needed contract in the time that the business said it needed it?  Was it 99%, 52% or do you not even track this KPI, much less know the answer?  How tragic is that!  Even more tragic is that for many of us we do not understand, or at least measure, the metrics that matter to our business.

Spoiler Alert!  Procurement is a Service!!!  The metrics by which you measure your performance should matter to your customers.  And while savings is a big one, it is not the only one.  When I first started measuring on-time performance for sourcing activities it entirely changed the way my business partners engaged with my team because suddenly they saw me as seeking to fulfill their priorities over mine.

Consider this example: If the car service that took me to the airport this morning for a flight didn’t know whether they’d be able to get me there in time for my flight this morning, the viability of their service would most assuredly be in question. If upon missing my flight as a result of their routing they provided me savings metrics on tolls I would not trust them to provide any future services since they did not understand my priorities.  I believe that for Procurement to evolve, we’ve got to embrace the fact and the truth, that at our core we are a service, and we have to deliver on what matters to our customers.   

I also know that some of you are saying that “on-time sourcing” metrics is unfair.  It’s unfair because sometimes our customers call us today with a procurement opportunity that was needed to be contracted yesterday.  And, in fact, this “Blindness” is the first Procurement Deadly Sin I blogged about a few months ago (click here to read now).    

That epiphany, like so many, came from a conversation with a Procurement friend named Ron Wright, who leads the procurement team at KAR Global.  In a call I had with him, he told me about feedback from a Finance leader at his company that helped him realize the link between late procurement engagement and his stakeholder’s satisfaction with his team’s performance.  It turns out, last minute requests frequently resulted in frustrated business partners. 

Tragically, Ron is not unique in having this problem.  I believe the opportunity is in knowing what to do about it these two related sins.  We can fix them both by measuring our performance and providing visibility to our business partners.  We can motivate them to help us mitigate blindness which in turn lets us more satisfactorily meet business partner needs and expectations. In other words, measuring our performance makes us inherently more Stakeholder Centric. 

I started reflecting on how my experience and handling of these exact issues as well as engaging with other to get their insights and solutions.  One source that focused on Stakeholder Engagement, from a company called Procuredesk, includes an eight-part list.

1)      Start with building relationships; savings come later

2)      Be an Enabler vs. Policy Enforcer

3)      Understand Business First

4)      Add value to the conversation

5)      Understand personalities

6)      Empathy – Put yourself in their shoes

7)      Align procurement goals with your stakeholder department

8)      Listen first, prescribe later

While I'm absolutely aligned with what they said and see these as valuable steps towards Stakeholder Centricity, it is something more.  I posit that we must move beyond engagement, which is procurement serving, to centricity which is stakeholder serving. I would boil it down to how robust are your procurement processes and how accountable is your organization’s leadership (second spoiler alert these are recurring themes in all the Deadly Sins). 

In focusing on Stakeholder Centricity, I have developed a mantra of three questions to ask our key stakeholders on every procurement opportunity: 

1)       What are your pain points?

2)       What are your aspirations and dreams for how to buy this product or service better? 

3)       And how do we find the right population suppliers to deliver game-changing outcomes in those two (aspirations & dreams) dimensions?

Taking the time to have this conversation is invaluable in improving your service delivery metrics and even more importantly transforming your role from tactical gatekeep to strategic business partner.

Additionally, Procurement succeeds like any other business: by having satisfied customers. Keep mind that customer service assumes that the conditions of an unspoken contract have been honored.  This one is huge for me and often missed by procurement teams.   How many of us seek feedback from our stakeholders?  The unspoken aspect is that to provide a service to the business, we must know what you want; when you want it; with enough granularity to have multiple suppliers to compete for it; and with enough lead time to put it through a robust competitive process.  If any one of the above-listed things is absent, a sub-optimal outcome is the likely result.  Again tragically, many of us don’t have these data but my three questions, when answered completely, should help us with many of them and a new SaaS tool called EP-Squared can help you manage a more Stakeholder Centric process.

Finally, and extremely important, align procurement goals with your stakeholder department.  If budget and savings is the priority, as it was in 2018, that should be your focus.  If supply continuity and risk mitigation is the business’ primary concern, as has become prevalent in the COVID era, then that should be your priority as well.  In both cases you are working with suppliers on your business stakeholders’ behalf and your outcomes should be as close to their objectives as possible.  This is how procurement becomes Stakeholder Centric.

Where can you get help?

These issues are correctable with the right application of tools, processes, and team capability building.  At issue is that too many of us simply don’t know how.  Bill Gates’ wisdom can be helpful here:  determine “who has done it well and what can we learn from that.”  I believe that among my 30,000 social media followers, the answers are out there. 

We now need to get those solutions to the people that are still struggling with problems that someone knows how to solve.  These Seven Deadly Sins are fixable, we simply need to get the solutions to the folks that are suffering in silence.  When we are done, and when the solutions are deployed, the business world that drives I aspire to be a catalyst for that functional change in industry.   

If you think your team is limited by Blindness, 3-5% Savings Fallacy, Three Bids in a Buy Abuse Lack of Stakeholder Centricity, then here is what I recommend you do:

1.       FOLLOW ME on twitter @waltcharlesIII and FOLLOW ME on Instagram @officialwaltcharles

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

3.       Continue to READ and SHARE my blog article with anyone in your network that is struggling with any of the “SEVEN DEADLY SINS” mentioned – I still have three to go.

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

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

Incase you missed it, catch up on the other Deadly Sins:

Part 1: Blindness

Part 2: 3-5% Savings Fallacy

Part 3: Three Bids in a Buy Abuse

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.