The state of category management today

In the early 1990s, my working life was dominated by the invitation to tender process and contract management. As the decade came to an end, the ITT process had evolved into the strategic sourcing process. At the time, the only difference seemed to be that I was encouraged to talk to internal stakeholder and suppliers. By the turn of the millennium I was introduced to category management which opened my eyes to the potential for procurement. Today most large procurement organisations use category management to drive value from complex third party spend. Or do they?

As a consultant, I have worked with clients in a wide variety of sectors. Most claim to use category management but very few are able to provide up-to-date category management plans. I have found a vast array of templates and many partially completed documents but hardly any plans that provide a framework for future procurement activity. I appreciate that category management often forms part of a hybrid organisation model combined with a functional approach or aligned to internal stakeholders. However, this should not be an excuse for a lack of understanding about supply and demand in key market.

In my experience, most organisations buy into the principles of category management but are unable to implement it effectively for three reasons. Firstly, they lack sufficient data about their own organisation and the markets they purchase from. Secondly, their staff lack the skills to analyse large volumes of data. Finally, senior management value sourcing and/or supplier relationship management more and therefore staff do not prioritise category management.

In short, effective category management requires a substantial investment in time and money. CHC can accelerate the development of category management and provide certainty about the return on investment. In the meantime, the procurement profession should continue to attract more people with strong analytical skills who will be able to utilise the growing market for spend analytics products to provide their organisations with game changing insights. Only then will we truly have the framework within which strategic sourcing, supplier relationship management and contract management all sit.

Transformational P2P

Last week I attended the launch of a white paper at the Ritz London. I would probably have attended just to have breakfast at one of the world’s most famous and luxurious hotels, however, I pleased to say that the event offered a lot more than just coffee and toast (albeit beautifully served)! Pete Loughlin, the respected procurement blogger, was presenting his report called Transformational Purchase to Pay on why, despite years of effort, many organisations struggle to implement purchase to pay technologies effectively.

The case for P2P is well known although different disciplines tend to emphasize different benefits. Finance tends to highlight reporting and fraud while operations focuses on supply chain disruption and administration overhead. From a procurement perspective, I am more interested on the improved negotiation position that a robust P2P process provides and the confidence it offers when forecasting savings.

The white paper provides a number of interesting insights:

  • We tend to think of supply chains as linear structures, however, the data flows that are generated are much more complex and look more like organic structures. A short video explains this in more detail. If we don’t fully appreciate all the data flows then information will be lost.
  • The basic data for a purchasing transaction already exists before a requisition is created. Leveraging existing data can only be achieved if data standards are consistent and compatible – not necessarily the same – across supply chains and business functions. Many organisation fail to fully recognise this which results in manual data input, errors and missing information.
  • Different disciplines tend to be responsible for designing and managing different parts of the process. Consequently, the end to end process is fragmented preventing the smooth flow of information.

The white paper makes the case for 100% compliance to the P2P process. For clarity, this includes direct as well as indirect spend, maverick spend such as marketing and non-standard categories such as insurance.

To achieve 100% compliance the P2P process needs to be easy to use, the data must be consistent and compatible across all systems and it must be designed and developed by P2P specialists. If this happens, then users will be as keen to use the P2P process as they are to log on to Amazon or eBay.

California dreaming

As the first signs of spring start to appear, longing for the warmth of Los Angeles doesn’t seem so far-fetched. The belief, however, that the abundance of data produced by the Internet of Things will change everything does seem ridiculous.

In a post called California dreaming: computers take over from humans, Gerard Chick of Optimum Procurement Group argues that you need proper scientific methods if you want to make sense of all this data “or put more simply that you can’t start messing with data unless you have a really good idea about what it is you hope to find”.

I’ve recently reviewed a number of spend analytic tools and found that many of the providers who appear to offer real-time data solutions actually employ a team of people to do the data crunching, analysis and production of reports. These providers are manually gathering their client’s data, using a mix of algorithms and manual cleansing techniques to deliver dashboards.

The abundance of data has undoubtedly changed the way many of us do things. Google was only listed in 2004 with the mission statement “to organize the world’s information and make it universally accessible and useful”. It now provides 3.5 billion searches a day. But understanding the relative strength of human judgement versus the accuracy of machines in key. McKinsey said recently: “knowing when to assert your own expertise or step out of the way [and let computers do it] is fast becoming a critical executive skill”.

The challenge for procurement and many other professions is to develop people who are able to use the analytic tools available and grasp the implications of the results. This means that businesses need to invest more in analyst skills so that their employees can apply analytic methods to specific problems using the scientific methods. It is no longer sufficient to be just commercially savvy.

Predictions for 2015

In January the great and the good publish their predictions for the year ahead. I’ve read a few and find them to be a mix of observations and wishful thinking with little explanation.

There are many factors that affect procurement but I think they boil down to the underlying political and economic environment, developments in IT and a profession that continues to evolve. With this in mind I’ve come up with my own predictions for 2015.

Political and economic

The World Bank expects developing countries to see an improvement in growth this year after a disappointing 2014. It cites low oil prices and continued low global interest rates. I think this means that some buyers will be able to negotiate lower prices for goods, particularly where oil is a major component. The managed slow-down of the Chinese economy is already having a negative impact on commodity prices. This is good news for some buyers, however, as wages continue to increase, China will become a less attractive manufacturing destination.

IT systems

IT systems continue to improve which will give procurement the opportunity to automate more transactional activity and make greater use of spend analytics. This is nothing new; procurement professionals have wanted to rid themselves of the drudgery of processes orders since the purchase order was invented. I think we’ll see more sophisticated workflow from the likes of SAP/Ariba, Oracle and Zycus. We will also see a greater use of eProcurement tools such as those offered by Scanmarket, Curtis Finch and Bravosolution. Competition in the market for spend analytics will drive innovation and reduce costs enabling greater adoption. I hope to see Rosslyn and Spend360 give the big players a run for their money.

Evolution

Adam Smith observed that the division of labour resulted a qualitative increase in productivity. I think this means that in 2015 we will see an increasing amount of procurement being outsourced which will reduce headcount and deliver great savings (assuming the outsourcers share the benefits of economies of scale with their clients).

And finally, if procurement can demonstrate that they understand the insights that big data offers and free themselves from transactional activity then there will be the opportunity to shift the agenda away from savings to risk management and a more strategic role.

Have a good 2015!

Beyond category management

Like many similar surveys, The Deloitte Global CPO Survey 2014 is written to flatter existing clients and engage potential clients. Although it lacks any scientific rigour many of its observations are a fair reflection of what I see in my day to day consulting work.

Deloitte say that cost control remains the top priority but its relative importance is lower than last year. Like the research published earlier in the year by Hackett which I wrote about in my August blog called What’s the agenda, 68% of respondents who describe their internal influence as “mixed” only measure financial performance rather than the broader parameters of risk, supplier performance, innovation and quality.

Picking up on the broader parameters, 77% of respondents’ approach to risk is limited to supplier pre-qualification and on-boarding. Less than 20% use predictive analytics to assess potential supply side risks.

Deloitte define innovation in terms of analysis and input from suppliers. Unfortunately the report has little more to say on innovation other than almost two thirds of respondents are investing in supplier portals.

Interestingly 57% or respondents feel that their teams do not have the necessary skills. The category management structure is being replaced by business partnering and transaction procurement, delivered either as part of shared services or outsourced to a specialist. The skills most lacking include relationship building, influencing, communication and leadership.

Unilever’s Sustainable Living Plan

My interest in sustainability was piqued earlier this year when I attended a series of presentations as part of the CIPS Fellows’ Summer Dinner. I summarised the presentations in an article in July called Sustainability and then followed up with some further research in August in More on sustainability.

A recent case study in the Economist drew my attention to Unilever, the Anglo-Dutch consumer-goods giant. I was aware that the founder, William Lever, pioneered the Victorian model of paternalistic business that involved marketing products for their health benefits and providing employees with housing in Port Sunlight, a purpose-built company town on Merseyside. I was interested to learn that their responsible approach to capitalism continues to this day under the leadership of Paul Polman, the current chief executive.

As I’ve previously observed, many sustainability or corporate responsibility plans have been cost reduction programs by another name. They have focused on efficiency measures related to energy consumption and waste reduction. Admittedly some consumer goods organisations such as SABMillar, Coca Cola and Walmart have gone further and included programs for training small farmers in developing countries.

Unilever’s scope is much broader. Polman launched Unilever’s Sustainable Living Plan (USLP) in 2010 with the aim of doubling the size of the business while reducing the environmental footprint and increasing what they call their “positive social impact”.

As part of the strategy, Unilever calculated that almost a quarter of their greenhouse gas foot print came from their suppliers’ production of raw materials and nearly 70% from consumers. Only 10% came from manufacturing, transport, retail and disposal. To achieve their aim they realised that they would have to engage the whole value chain from the sourcing of raw materials to the way consumers use their products.

Unilever is a major player in the agricultural supplies market. They buy around 12% of the world’s black tea, 3% of tomatoes for processing and 3% of the palm oil produced. In 2010, they claimed that only 14% agricultural supplies were “sourced sustainably”. They define this in terms of protecting scarce resources. By sourcing sustainably, they ensure that deforestation, land use and social and community issues are managed responsibly. They also ensure security of supply for their business and reduce costs.

Their progress has been impressive. By concentrating on their top ten agricultural raw materials which account for around two thirds of their volumes they now claim that 48% are sourced sustainably.

Unilever have achieved this partly by backing its suppliers’ innovations. For its soup brand, it created a €1m Knorr Sustainable Partnership Fund, which invested in schemes such as drip irrigation for tomatoes in Spain and California that have increased yields and reduced water use.

Marc Engel, Chief Procurement Officer, said that “market transformation can only happen if everyone involved takes responsibility and is held accountable for driving a sustainability agenda. Our progress has been made possible by the commitment and efforts of a number of our strategic suppliers. We will continue to engage with our suppliers, NGOs, governments, RSPO, end users and other industry stakeholders to develop collaborative solutions to halt deforestation, protect peat land, and to drive positive economic and social impact for people and local communities.”

Although I believe in sustainability, I have been skeptical about the way it has been defined and the business cases that have been put forward. By putting sustainability at the heart of its strategy Unilever seem to have overcome many of the issues. Since USLP was launched, Unilever’s share price has risen by more than 40%. And this was during a period when its biggest rival, Procter & Gamble of America, lost its way.

But Unilever appear to have reached a critical point. Its recent annual results disappointed the markets and the share price dropped below the previous year. The early rises appear to have been fuelled by niche investors who focus on environmental issues.

Arguably the biggest challenge will come in the next 5 years as they shift their focus to the smaller suppliers and address health issues such as obesity which some of their brands like Ben & Jerry’s ice cream contribute to causing. A Unilever executive conceded privately that it may require a crisis—such as a spike in food prices like the one in 2007-08—for investors properly to value the new approach. For the time being, it remains an ambitious approach which others should follow.

Tesco’s procurement practices exposed

Shoppers and investors were taken by surprise when Tesco announced a £250m black hole in their profits last month. Tesco’s suppliers, however, were not.

Tesco has been under pressure for some time. Shoppers are increasingly turning their backs on the big weekly grocery shop in favour of home delivery services, discount rivals Aldi and Lidl and local convenience stores. These trends have hit sales at Tesco’s big out-of-town supermarkets – its market share had declined from 30.1% to 28.8% in the past year – and it has recently taken the decision to mothball a number of big projects. Profit warnings led to the resignation of the Chief Executive, Philip Clarke, in July, however, it was only the arrival of his replacement, Dave Lewis, on 1 September that enabled the whistlerblower’s warnings about accounting practices to be heard. The problem relates to when the retailer books payments received from suppliers who pay the big grocery chains to run in-store promotions on their behalf.

An article by one of Tesco’s suppliers published in The Independent provides an interesting perspective on Tesco’s procurement practices. The supplier said:

“For years we have been bullied and browbeaten by Tesco’s buyers, who demand a lowball price for our goods then keep screwing us for more as the contract goes on.”

Poor forecast data coupled with poor behaviour from the dominate player led to a breakdown of trust. The supplier went on to say:

“Now compare that with Aldi. Don’t get me wrong, Aldi drives a very hard bargain, but once you’ve agreed a deal for a year, it sticks for a year. They don’t come back demanding new bonuses, discounts and every other trick.”

“As a result – and this news will not go down well at Tesco HQ – we’ll offer Aldi a better price at the outset. Yes, that’s right: for all its aggressive behaviour and demands for retrospective rebates and discounts, Tesco actually gets charged more than its bitterest rivals.”

This is a clear example of importance of the relationship between the buyer and supplier and the direct impact it can have on competitiveness. Unfortunately, it takes a long time to re-build trust so Tesco’s problems are far from over.

More on sustainability

In July I wrote about a series of presentations on sustainability that I attended with the CIPS Fellows. This piqued my interest and I’ve been looking out for interesting articles since then.

The Economist points out that “sustainability can refer to anything from building wind farms to combating social inequality” and adds that “an ill-defined, controversial notion is no basis for coherent policy.” Many so-called sustainability plans are efficiency policies driven by procurement that do little for the environment. Take, for example, consumer goods: the majority of greenhouse-gas emissions associated with consumer goods are produced either in the supply chain or by shoppers; there is only limited scope for such products’ makers to lessen their environmental footprints through green measures of their own.

For some companies that is changing. SABMiller, the world’s second-largest brewer and the focus of recent take-over talks has been a pioneer in the field. Until recently its sustainability efforts consisted of a laundry list of targets aimed at reducing carbon emissions or water usage in its brewing operations. This summer it unveiled new, broader targets which apply to suppliers, sellers and customers, as well as to SABMiller itself. It is promising to teach basic business skills to 500,000 small enterprises, mostly shops which sell its beer. It is helping farmers in India to use water more efficiently and it is sponsoring anti-drunkenness and road-safety campaigns aimed at its own customers.

Supply Management took a different approach by looking at sustainability in four sectors and tried to answer two key questions: is it possible for consumers to be sure that anything they are buying is 100 per cent ethical? And, are consumers able to make an informed decision about what they are buying?

1. Automotive

Sustainability is a big selling point in the automotive industry. When buying a car or motorcycle, consumers can access plenty of information about a vehicle’s carbon emissions and fuel efficiency. But finding information on whether the car is made with an ethical supply chain is much more of a challenge. There are industry reports such as the UK Society of Motor Manufacturers and Traders the car manufacturers annual CSR reports but these are limited to their policies to protect worker and human rights in the supply chain and mandatory reporting on conflict minerals (required by the US Dodd-Frank Act).

Supply Management gave a score of 3/5 for ethical concern and concluded that the policies are in place, but it’s not clear if the automotive firms really know what’s going on below the surface.

2. Food and drink

The ethics of the food supply chain were thrust into the limelight last year following the horse meat scandal that hit some major UK supermarkets. Producers like Premier Foods provide consumers with good quality information. Unfortuantely, most consumers are not aware of the company. Information on ethical sourcing on some of the major supermarkets’ websites is relatively accessible, if you are happy to search through the small print on a home page. When it comes to the eating out market, pub and restaurant chain Mitchells & Butlers has a clear section about how it sources its food in its report on social responsibility. Others point to their membership of the Sustainable Restaurant Association, which helps establishments ensure food is sustainable
Supply Management gave a score of 4/5 and commenting that the horse meat scandal may have pushed transparency, but there is still a worrying lack of information for consumers.

3. Technology

The CSR reports of high-profile companies like Apple or Samsung run to hundreds of pages and contain details of suppliers. Although audit are conducted regularly and there are examples when supplier contracts have been terminated little has changed on the ground
Supply Management gave a score of 3/5 and concluded that there is plenty of information available and asked if it signals real change?

4. Fashion

The ethical issues arising from the fast fashion supply chain model were brought into sharp focus after the Rana Plaza factory tragedy in Bangladesh in 2013. The sector’s dependency on a lean and agile supply chain that enables retailers to produce more lines each year at a lower cost and within weeks rather than months attracted heavy criticism following the disaster.

Supply Management gave a score of 3/5 and commented that retailers have responded post-Rana Plaza, but the similarity between policies makes it tough to establish who – if anyone – is leading the way.

The business case for the first wave of so-called sustainability plans is clear to see since most resulted in cost savings. Despite examples like SABMiller, the business case for the new wave is less clear. Unfortunately, most sectors require a scandal or tragedy to bring about any shift and even then it’s difficult for consumers to make informed decisions. Advocates of sustainability usually talk about investing in a licence now to be able operate in future. It’s hard not to be cynical about commercial organisations that claim to be forgoing short term profit for long term survival.

What’s the agenda?

Introduction

Research from the Hackett Group published early this year shows that procurement’s priorities continue to shift from focusing on cost to expanding the scope of spend influenced. The law of diminishing returns means that procurement is finding it more difficult to deliver savings from traditional categories. Consequently, procurement professionals are pushing into new categories to maintain past successes. This requires new skills and a re-prioritisation of existing skills. In particular Hackett’s research suggests that procurement should focus on supply risk, better utilisation of technology and broadening procurement’s measures.

Supply risk

Deciding the appropriate level of resource for supply risk mitigation activity has always been challenging. In the past many other strategic areas such as category management and SRM have had a higher profile. For most organisations supply risk mitigation has involved scanning supplier market intelligence for signs of financial distress and evaluating alternative sourcing arrangements. Unfortunately, this approach often felt time consuming and only appeared useful in the rare event that a supplier’s failure could be linked to its deteriorating financial health.

Increasingly, however, the scope of procurement’s role in risk management is expanding. Hackett considers a range of risks including demand side volatility, threat of competition, supply volatility, talent risk, regulatory risk, global economic crisis, financial volatility, supply chain risk and geopolitical risk.

From a more operational perspective, we see that safe-guarding sensitive and personal data private is a burning issue. There is no doubt that the amount of data stored and used by suppliers is growing exponentially. This gives rise to some critical questions, for example, what role does procurement play during the supplier pre-qualification process if suppliers will be handling sensitive data; and how should procurement work with IT to understand and track data-security compliance? For these and other risk-related topics, the key to success will be finding the right balance of governance, people, processes and technology to actively mitigate and manage supply risks. Easier said than done!

In my post on 28 September 2013 called Big Data I highlighted research from Gartner and Aberdeen that forecast the rise of big data. This presents both an opportunity and a threat for procurement. If we fail to develop the skills to manage big data then we will be left behind. If, on the other hand, we can prove to customers and suppliers that we understand the importance of big data and have the skills to keep it safe and analyse it appropriately, then we can get a much better grasp of the world around us.

Procurement technology and tools

Hackett believes that new procurement-related IT spending will be limited in this year. Unfortunately this means that Procurement and IT teams will not have lots of shiny new toys to play with. Instead, we will have to reconfigure or extend existing applications in order to obtain additional value from them. One way to do this is to improve the quality of the inputs. To that end, Hackett says that master data management (MDM) remains a priority in 2014. This was also the case in 2013 suggesting that procurement still haven’t got to grips with it.

Reinventing procurement’s value proposition

Savings have long been the key measure of procurement’s success. This is partly because that’s what our customers wanted to hear and partly because that’s what we thought we could measure. I am critical of procurement reporting on savings because it’s akin to someone marking their own homework. Like Aberdeen, Hackett say that procurement is becoming more sophisticated. While Aberdeen (see Big Data) focus on spend under management, procurement contract compliance and savings that are actually realised and implemented, Hackett believe improved performance in spend reduction, internal/supplier compliance and customer satisfaction are the key areas.

Conclusion

So what does the research from Hackett tell us? Procurement must broaden its agenda beyond savings. It must be better aligned to its customers and the overall business strategy. Perhaps it’s the legacy of the financial crisis but understanding risk is more important now. Central to these areas is a flexible approach that has good quality data as its foundation.

Doing the sums on opportunistic behaviour

I was recently invited to write an article for Outsourcing magazine. It is a resource that provides news, views, analysis and thought-leadership for a global outsourcing community of 50,000 people. Given the long and complicated relationships that are a feature of outsourced contracts, I chose to explain some of the behaviour that occurs by referencing game theory. The article was published yesterday and is called “Doing the sums on opportunistic behaviour

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