The effective management of contract management is a major responsibility of the Procurement Function. Procurement Professionals are expected to protect their organizations from risks related to spend management and the support of operations. The identification of Critical Points of Failure (CPFs), mitigation strategies, and tactics deployed to protect our supply chains from the negative impacts of risks is a must.
Contract Management is a powerful mechanism to realize the required risk management competencies to keep modern supply chains intact. We will be remiss if we do not examine the reason why supply chains exist. Supply chains are the mechanism by which organizations realize their purpose, mission, vision, and reason for existence. Supply chains have supplier selection processes, procurement activities, manufacturing/conversion processes, inventory management and logistics functions. All of which pose significant risks for the modern business.
The following are ways to reduce pain points from Contract Management:
1.) Understanding stakeholder needs and requirements with a purpose: This is the most important factor in removing pain points in the deployment of effective contract management tactics. The key is to identify and prioritizes the requirements of all key stakeholders especially customers or end users. This enables procurement professionals to laser focus and aligns the capabilities of their suppliers in meeting these requirements. All contractual agreements must be underpinned by these requirements as critical targeted criteria. A clear purpose around stakeholder requirements must drive all contract management processes.
2.) Selection of suppliers with Expert Process Capability: This is critical after understanding stakeholder needs and requirements the selection of suppliers with a high degree of process capability and performance is key. High process capability reduces the risk of defective inputs, late deliveries and supply disruptions. This in turn, increases the probability of success in contract management initiatives. Leveraging superior supplier and customer contract management capabilities can be of great benefit in reducing contact management pain points.
3.) Contract Management Skills: The acquisition of contract management skills is essential in eliminating pain points and reducing supply chain risks. Procurement leaders must assure that their staffs can design, implement and manage all contracts under their influence. This is a core element in reducing supply risks, stress points, and reducing the high cost of legal issues.
4.) Technology: Once stakeholder requirements are understood, capable suppliers selected to deliver critical inputs, procurement staffs are equipped with the necessary skills, effective technology must be put in place. These technologies should be robust, easy to use, support stakeholder requirements, and enhances collaboration across value chains.
5.) Accountability: Once the above mechanisms are in place, all supply chain stakeholders must be held accountable. Part of this accountability involves managing supplier performance and the performance of procurement staff. This will require effective contract management metrics and scorecard mechanisms being in place. Non-conformance to contractual criteria must be measured in terms of severity of impact, the degree of occurrence and ability to detect non-conformance and effective remedies deployed to mitigate risks.
What Procurement Professional Need to Know in 2019
Cyber Security is an at front and center of the modern supply chain thought processes. Procurement Professionals are required to ensure that their organizations are protected from risks that impact their ability to manage to spend and support operations. The management of spend, support of operations, and shielding organizations from risks is the mission of procurement departments, the reason for their existence.
The Procurement Function is responsible for ensuring a consistent supply of raw material inputs to be utilized by their own conversion or manufacturing processes to produced useful outputs, products, and services that customers are willing to pay for. Cyber Threats can be present in all these activities and can come from all stakeholder groups. Therefore, Cyber Threats can come from internal and external (suppliers, partners, customers) sources.
What are at risks at hand? Everything, corporate secrets, mission-critical recipes, formulas, process data breaches, metrics, sensitive customer information breaches, financial data breaches, lawsuits, brand damage, loss of goodwill, crippling supply chain disruption, and so on.
Procurement Professionals must acquire the skills to collaborate with their IT Departments to do the following:
- Identify Points of Cyber Attack in supply chain processes which are the most impactful. The key is to understand the severity of threats, the total number of current intrusions, and the ability of current defense mechanism to detect and neutralize cyber threats
- Leverage Computer Hardening processes which create buffer zones around IT systems to shield them from cyber-attacks. A major component of this is to ensure that all activities that do not create value for a business should be curtailed to reduce the probability of cyber-attack
- Audit supplier cyber security capability to determine the degree of risks they pose to the buying organizations. Audits include supplier selection processes and ongoing performance monitoring processes
- Deploy a Cyber Threat Response Plan which provides protocol on what constitutes a cyber-attack occurs, who is responses, when, where, and how to respond.
- Hold procurement staff accountable for cybersecurity processes in their sphere. This is best done when integrated into the performance criteria of the procurement staff. The idea is to create a Pocket of Cyber Security Excellence within the Procurement Organization.
The Better Business Bureau recommends that managers tell their employees the following:
- Not to open e-mail from unknown sources
- What to do when they receive suspicious e-mail (when in doubt, delete!)
- To disconnect from the Internet when not online
- To consider the risks of file-sharing
- How to perform data back-up procedures
- Actions to take if their computers become infected.
Intelligent Procurement: How can AI expand Value
There is a great number of reports, articles, and studies done on Intelligent Procurement. This is indeed a rapidly evolving science. For context, it is prudent to define the Concept of Value, Value Chains, and Value Streams.
Value has 3 components:
- At set of activities are engaged in transforming inputs and raw materials from on stage to the next
- All activities are done right the first time
- Customers are willing to pay for the resulting outputs (good and services)
Value Streams are Supply Chain and are:
- Systems that source inputs that interact with data points, machines, processes, metrics, conversion mechanisms, logistics functions, and people to develop and deliver useful products and services to customers
- A mixture of value-creating activities, non-value creating but essential activities, and wasteful activities. A Typical value Stream consists of 10% Value Creating, 30% non-value creating but essential activities, and 60% wasteful activities. All three activities can be mapped and quantified for time and dollar impact.
The degree of automation in supply chains vary from company to company depending on size, complexity, complexity, and industry. We will examine how Artificial Intelligence can expand value in Business Supply Chain Operation:
- AI Models for Supplier Selection. AI and Machine Learning can leverage sophisticated data models to determine the probability of a supplier meeting the business requirements of the buying organization. These advanced, prescriptive, predictive, and autonomous AI Models can virtually eliminate the probability of selecting the wrong suppliers to deliver mission-critical inputs.
- AI for ensuring efficient support of Mission-critical Operations. The Procurement function is responsible for ensuring that all mission-critical inputs are procured at the right price point, delivered on time, with the agreed upon AQL (Acceptable Quality Limit). AI can help create a high degree of visibility with the required analytics and decision execution prowess to guarantee that these inputs are consistently delivered in the required parameters.
- AI for ensuring robust Benchmarking. AI can be leveraged to pull data and behavioral models from best in class procurement departments and compared to the capabilities of the buying organization. Helpful gap analysis can be performed with a tip on how to improve processes to close performance gaps.
- AI for Leveraging Big Data Sets to realize robust Procurement Function Strategy AI systems are becoming better able to interpret business landscape factors such as socio-demographic, political, economic, technological, competitive, ecological trends. These assessments can be formulated into Strategic Response Models (SRMs) that underpin corporate strategic plans with solutions to link supply chain and procurement function to these corporate strategies.AI Models can be pivotal in executing much of the mundane procurement tasks and free time for procurement to focus on more strategic tasks.
- AI for ensuring Non-Value Add Waste Reduction. AI systems being leveraged in a manner to error-proof process, reduce duplicate efforts, and eliminate unnecessary transportation, inventory, motion, waiting, and defects in supply chain activities. These systems are improving in the ability to determine optimal patterns for supply chain optimization.
International Procurement Strategies : Challenges and Opportunities
International procurement has a host of complexities that must be effectively managed. The business case for international procurement is a superior price point or the availability of low-cost raw material inputs. The challenges include supply disruption, trade wars, cyber threats, delays, territorial warfare, piracy, bullwhip effect, cultural complexity, disruptive technologies, terrorism, traceability issues, and lengthy lead times.
Procurement Professionals must understand the business landscape in which their supply chains operate and in the context of customer requirements. The fact that the modern customer demands products and services delivered cheaper, quicker, and of higher quality poses another level of constraints on the international procurement function.
The following are strategies that can create opportunities for International Procurement Synergy:
- Leverage End to End Synergy. This requires Business Process Improvement and Optimization. The key is to clearly define supply chain problems, measure the degree of non-conformance to business and customer requirements, determine root causes of non-conformance and design cost-effective solutions to close performance gaps.
- Preserve and care about the Ecology and Landscape that provide raw material inputs. Procurement professionals must understand that there is a dramatic increase in demand for eco-friendly products and services. Strategies must be put in place to focus on doing business solely with eco-friendly suppliers who will facilitate this critical customer requirement. Buying organizations should stay abreast of developments related to climate change, global warming, and eco-friendly consciousness.
- Improve the lives of people in the international communities we purchase from. Many progressive companies provide educational, healthcare, and other social benefit programs to the international communities that provide raw material inputs they purchase. The key is sincerity!
- Leverage Common Interest into a solid Integrated Strategic Master Plan. This involves intense collaboration, information sharing, and innovation. The idea is to draft up a master document that draws on the basic strategic needs and requirements of all suppliers, customers, and buying organizations. The goal is to negotiate a synergistic strategic plan that maximizes benefit to all key stakeholders. The traditional procurement methods of beating up suppliers and focusing solely on price are losing ground. The key is to strengthen the entire supply chain by focusing on common interests and focusing on the collective needs, requirements, and interest of all key stakeholder groups.
- Leverage of Sophisticated Modern Technology. Artificial Intelligence, Blockchain, and other Digital Procurement Technologies can be leveraged to optimize procurement and supply chain processes. These initiatives can enhance the realization of point #1 of Leveraging “End to End Synergy”. These technologies greatly improve, transactional accuracy, visibility, error proofing, speed, and reduce the Total Cost of Ownership. Process Mapping, Value Stream Mapping, SIPOC Mapping, Root Cause Analysis, 80/20 and 4/50 Analysis, Input and Process Variable Analysis, Spend Analysis, Supplier Selection Analysis, Integrated Strategic Buying Plans, and Cost Savings Targets can be leveraged prior to technology deployment.
Next Generation Digital Procurement
We are indeed in the era of Smart Systems, Robotic Process Automation, Blockchain, and Artificial Intelligence. These mechanisms are underpinned by digitization and the true manifestation of “Systems Thinking.” The concept of Systems Thinking or the science of studying a business entity as a whole that consists of several parts working together to realize a specific outcome. The desired outcomes are usually a valuable product or service that meet customer requirements and specifications.
The reality is that businesses exist for the same reason why Supply chains and Procurement Functions exist, solely to create value for their customers. It is noteworthy that the traditional view of the Procurement Function is that it is rigid, a cost center, a tactical process, a hurdle, spender of wealth, and a necessary evil.
There are many examples of modern procurement departments that are the exact opposite of each one of these profoundly dire perceptions. They are highly collaborative, innovative, profit centers, that realize more value than they expend. They professionally ensure the support of operations by guaranteeing the consistent on-time delivery of high-quality inputs at the right price points via capable suppliers. The outputs of the cumulative sum of activities of the forward-thinking procurement departments are usually a valuable product or service that meet customer requirements and specifications. The mandate of the modern procurement department is to, manage to spend, support mission-critical operations, and to protect their organizations from risks.
The following are ways that progressive Procurement Departments can realize the outcomes of their mandates:
- Digitizing and leveraging Big Data Analytics. Data is the cornerstone of a business system. It is a critical input for decision-making processes to yield satisfactory outcomes for stakeholders. The key is to leverage data patterns related to Customer Requirements to the realization of those requirements by aligning the Procurement Function Process to Supplier, Manufacturing, logistics, and customer processes, mandates, technological platforms, and forecasting models.
- Developing Skills Assets around Technology and Digitization. The key is to build procurement teams with high degrees of IT skills and acumen. The key is the intersection of business, procurement, and IT acumen. This approach reduces the effects of silos, increases buy-in, and enhances inter-process synergy and collaboration.
- Strategic and Operational Model Design. It is critical that these models and frameworks are designed by thinking with the end in mind. AI can be leveraged to scan business landscapes to aid in the design of Strategic Response Models (SRMs). Once the Input, Process, and Out Variables are determined, and strategically and operationally aligned, digitizing can yield maximum benefits.
- Gain Buy in by leveraging User Case Methodology. Buy in is key to Digital Transformation or any type of transformation. The understanding that resistance to change is a natural phenomenon that must be effectively managed to realize desired outcomes. On average 20% of people in a business environment will readily support transformational initiatives, 60% will need to be persuaded, and 20% will resist change. The focal point should be 60% or Critical Mass. The key is to involve people early and continuously during the transformation process, solicit their input, advice, and ask them how they use the current tools to execute their functions. Look for pain points and let technology users help in the design of new solutions. People support what they help build!!
How to Evaluate a Procurement Solution
PurchTips Edition #444
The role of Procurement is to ensure the cost-effective, timely, risk-free, acquisition of Mission Critical Raw Material Inputs in support of Organizational Goals and Objectives. Procurement Functions are sub-sets of broader Supply Chain Mechanisms and must work in close synergy with Suppliers, Manufacturing, Logistics, Research and Development, Finance, Sales and Operations Planning, Marketing, and Customers.
The following are essential requirements for the evaluation of a Procurement Solution:
1. Problem Definition: A clear understanding of the Procurement Function issues and shortfalls that affect Competitive Advantage and Synergies. An effective Problem Statement is written that defines how long a set of Procurement Issues are occurring, the impact of the problems on customers and on the business. The Problem Statement also articulates the Fiscal Impact of the problems and which processes are affected by poor performance. A clear Definition of Customer Requirements and Specifications is formatted into a Customer Requirements Matrix (CRM) which underpins the entire initiative.
2. Gap Determination and Change Assessment: The Current State Performance Gap must be assessed for impact on Customers, Key Stakeholders, and Business Requirements. A complete Change Assessment to determine the Degree of Resistance to Change must be leveraged, as this will enable the deployment of Change Management Strategies to acquire essential Buy-in and success. Effective Current State Process Mapping to understand process steps, workflows, time elements, and decision points must be conducted.
3. User Case Scenario and Analysis: A clear understanding of how the Future State Procurement Solution is to be utilized by users must be documented. This Voice of the User (VOU), is a critical element of a Change Management Strategy. Understanding how a solution is to be used also requires effective Future State Process Mapping and simplification. The User Case Scenario Analysis is vital as it enhances leverage in terms of laser focusing Solution Requirements to only what is needed to cost-effectively solve performance issues. Care must be taken to collaborate with Suppliers and Customers to determine if solutions can be integrated with their systems.
4. Solution Selection Analysis and ROI Determination: The final draft of the Proposed Procurement Solution must be filtered against robust fiscal, technical feasibility, business, and customer requirements criteria to determine Return on Investment (ROI). The solution should be score carded against other solutions while leveraging the same solution selection criteria. A Solution Selection Matrix (SSM) should be designed for this purpose. Success Measures must be selected to determine the effectiveness of the Procurement Solution once it is deployed.
Use Your Purchasing Power to Build a More Ethical (and Profitable!) Company
Procurement isn’t just about delivering materials on-time, with less risk and at less cost. Social responsibility is now an integral part of the procurement landscape.
A bad social reputation can hurt you deeply with your potential customers. The 2016 US National Survey on Corporate Social Responsibility found that 39 percent of the respondents would avoid buying from a company that wasn’t responsible, and 25 percent would tell their family and friends to do the same. A full 84 percent said that they look for socially responsible companies when making their purchasing decisions.
What do we mean by “socially responsible?” Attributes include:
- Paying and treating workers fairly
- Paying (rather than avoiding) taxes
- Being environmentally conscious
- Having a positive impact in the community (including charitable giving and volunteerism)
- Producing and marketing products ethically
Many companies now include Corporate Social Responsibility (CSR) sections in their annual reports, and investors and other decisions makers read those sections carefully to decide whether those companies are a safe or risky investment!
Procurement has a vital role to play in CSR because so many of the areas mentioned above touch the supply chain. What happens if a news story shows that one of your overseas suppliers is using child workers, or polluting the environment? In this era of instant communication and social media outrage, you can’t afford to have an irresponsible link in your supply chain. Now is the time to think about doing the right thing, rather than reacting after the fact of being caught doing the wrong thing. As a procurement professional, you can personally make an enormous difference right now in the ethical and financial future of your company.
In a sense, every procurement decision is also an ethical choice, weighing responsibility against cost, speed, and risk. Your spending on the materials you procure is an investment, and you can choose to invest in ways that benefit your world as well as your company. All investments balance risks and rewards; consumers might choose to spend more with you if you took the risk of paying a little more to workers on the front end. And the more transparent you are about your CSR choices – in your marketing and your annual reports – the more you stand to gain in reputation and profits down the road. It’s the ultimate win-win!
Explore Best Practices for Procurement Savings
The Modern Procurement Department is required to realize procurement savings objectives by utilizing various means. Traditional methods focused on quality, delivery, terms, warranty, negotiations, contracts with a hyper-focus on price. Price has traditionally been the most critical Key Performance Indicator, not the Total Cost of Ownership (TCO). Indeed, TCO has been seen as “theory”, and not to be examined in a practical sense. Today’s Procurement Leaders are required to leverage their departments and supply chains to Gain Competitive Advantage.
The Mission of Modern Procurement is best realized by looking beyond price for Cost Reduction.
The following are Best Practices for realizing Procurement Savings:
1.Leveraging Design for Strategic Procurement: This is realized by designing your Procurement Function in such a way that it is underpinned by two axes:
- Enabling Value Creation – Value is assessed primarily from the perspective of customers, then by stakeholders. The understanding that organizations exist to create value for its customers is paramount. Value in itself has three components,
- A transformation from one stage to the next exist
- All activities involved in the transformation processes are done right the first time
- Your customers are willing to pay for the resulting products and services.
- Enabling Corporate Strategies – Your Procurement Savings Department Processes should be designed in a manner in which they are fully integrated into and support he realization of your Corporate Strategies and Objectives. Therefore, all the activities in your Procurement Function create cause and effect relationships with Corporate Strategies.
2.Leveraging an Annual Buying Plan: An Annual Buying Plan leverages several critical components to assist in cost reduction initiatives:
- Categories to be Procured
- Forecast of quantities to be procured
- Savings and Operational Targets
- Methods to be leveraged to execute the dimensions of the Annual Buying Plan
3.Unlocking savings by exposing and eliminating the 7 Wastes: The 7 Deadly Organizational Wastes are an ocean for Cost Reduction and Savings Opportunities.
These 7 Wastes are:
- Excess Inventories
- Excess Motion
- Excess Transportation
- Excess Waiting
4.Unlocking savings by reducing the 6 big losses: There are 6 major losses in business, and the cost to organizations can be staggering.
The 6 Big Losses are:
- Unplanned Stops
- Planned Stops
- Small Stops
- Slow Cycles
- Production Rejects
- Startup Rejects
5.Continuous Collaboration with Upstream and Downstream Processes: This involves collaboration with suppliers, strategic partners, internal departments, and customers. The key is to understand their interest, have them understand yours, and negotiate methods on the deployment of innovation, technology and knowledge transfer, and cost reduction opportunities
6.Continuous Source to Pay Process Improvement: This involves the deployment of Process Improvement Methodologies such as LEAN, Lean Six Sigma, and Kaizen. These methods focus on problem definition, impact assessment, root cause analysis, solution selection and control processes. These initiatives have saved billions of dollars around the globe
It has been confirmed that the Federal Communications Commission (FCC), will accelerate investment and deployment of 5G technology. The FCC order streamlines and modernizes the permit process for wireless infrastructure projects. The vote to accelerate availability of 5G technology will help small businesses and entrepreneurs be more resilient and competitive.
5G is fifth-generation wireless broadband. Operating with a 5Ghz signal and set to offer speeds of up to 1 Gb per second, 5G will provide better speeds and coverage than the current 4G.
AT&T is the first carrier in the U.S. to rollout mobile 5G. It was recently announced that 12 cities in America will experience standards-based mobile 5G from AT&T later this year.
Having access to 5G could be critical to the competitiveness and success of America’s small businesses.
Ways 5G Can Benefit Small Businesses
Take a look at the following five ways 5G can benefit small business.
Encourage Better Business Communications
From responding to customer queries to communicating with remote workers on remote access software, fast and reliable communications is vital for small business productivity, profitability and success.
Due to the incredibly-fast 5G connection, businesses will be able to stream high-resolution video, audio and images with practically no latency. This will generate huge opportunities for instantaneous communication between customers and co-workers.
With the faster speeds and enhanced coverage 5G wireless access brings, small businesses will be able to improve communications with customers, clients and colleagues.
Get Things Done Quicker
If you operate a business relying on network-related tasks, such as online sales or sharing of documents and files across the cloud, having access to faster internet speeds means your small business will be able to get things done quicker.
Carrying out vital business tasks at quicker speeds will inevitably have a positive effect on business efficiency. This improved efficiency is likely to result in greater productivity among staff, paving the way for lower overhead and ultimately increased bottom lines.
Cloud computing has already become an integral component of contemporary IT infrastructures. Thanks to the reduced latency 5G technology provides, employees can communicate more effectively and efficiently with one another than ever before.
Expand Capabilities with Internet of Things
Connected devices are increasingly evolving the way business is done. From managing production remotely and more efficiently, to speeding up deliveries to customers by connecting all relevant processes, harnessing the power of IoT helps small businesses increase efficiencies and ultimately profits.
5G networks are built to cater to the increasing connectivity requirements of the Internet of Things (IoT). By enabling device to device communications for up to a million devices per square kilometer, 5G will expand the burgeoning capabilities IoT brings to small businesses.
Furthermore, due to the technical improvements of networks, 5G will be more energy efficient than existing network standards, resulting in extended battery life for devices, which, again, helps improve efficiency.
Encourage Small Business Innovation
As Small Business and Entrepreneurship Council president and CEO Karen Kerrigan said in a statement about the FCC’s vote:
“The FCC’s bold action will accelerate the availability of 5G technology, which means our economy and businesses will be more innovative, resilient and competitive.”
One example of such business innovation would be businesses developing interactive virtual reality technologies which enable customers to enter dynamic video experiences.
Through 5G holographic projection, which enables users to view 3D video without the need of 3D glasses, businesses could provide presentations in 3D at meetings, conferences and events.
Such technological innovation would help boost a business’s appeal, helping them become pioneers in their field and giving them an edge over their competitors.
Improve Recruiting Processes and Bridge Skill Gaps
Another way 5G could significantly benefit small businesses is by improving recruitment processes, helping business owners recruit the right talent to help take their businesses forward.
One reason 5G is likely to help improve recruitment practices and results is the advance in video and remote technology. 5G technology removes recruitment barriers, enabling businesses to identify, interview, shortlist and recruit the best talent from anywhere in the world.
Not only can the improvements 5G brings to video and teleconferencing technology mean businesses can find and recruit top talent, but forward-thinking businesses can utilize the benefits of being a connected company with employees working remotely from anywhere in the world.
By helping small business recruit more effectively, 5G technology will help small companies bridge the skills gaps they may have been struggling to close.