SRM and eAuctions - two peas in a pod?

My time in procurement has been interlinked quite strongly with the rise web 2.0 as a powerful business tool and an advance in technological solutions, some of which are shaping the way procurement functions around the globe operate on a day to day basis.

I will be blogging over the next few weeks and months on my observations and thoughts on a wide array of procurement technologies, both how they are currently utilized and how they will continue to develop over the coming years.

To start off this blogging exercise I will be covering e-auctions and specifically the link between e-auctions and successful supplier relationship management (SRM), an association seen on both the buyer and supplier side seen as highly paradoxical. It’s easy to see why. A common view, from the supplier side, is that eAuctions are a highly aggressive sourcing technique devoid of any (or limited at best) human interaction. SRM on the other hand is still viewed with a modicum of suspicion by procurement professionals who view long term relationships as areas of untapped opportunities for savings rather than an effective tool for achieving long term value.

On closer inspection however the two tools can make for happy bedfellows.  A core part of the success of SRM involves an element of trust, openness and transparency. The openness and transparency should ensure there are no surprises for either party involved and that includes the ongoing assurance of the commercial competitiveness of whatever good or service is being purchased. This in turn generates trust, both for the buyer and the supplier, that the goods or services will not be retendered without prior discussion.

The underlying commercial structure of an account is not the be all and end all, and nor does it need to be.  A good SRM however will ensure that a mechanism exists to define how and when the competitiveness of the goods or services provided will be ratified. It may be that the approach, agreed by all parties involved, is to confirm the competitiveness in the most transparent way possible – a full market test. If this is the case then it would make sense to test the market in the most efficient, effective and ultimately transparent way possible, utilizing the latest available eAuction technology.

I would also take umbrage with the view that the use of eAuctions removes the use of a key part of any procurement activity, the important skill of human-human communication and interaction. Generations of individuals are now growing up adapting to the world of social media and differing communication channels. Whilst interaction through technology has its drawbacks it also has massive advantages as well and let’s face it, we aren’t going back to a time before computers and the internet. I’m not saying that interaction through these channels is better, just different.

Over time we will begin to adapt and see this form of communication as totally normal but for now let’s address the oft-raised concern that eAuctions embody an impersonal procurement approach or indeed have an effect on a supplier relationship or their ongoing performance. I think it simply comes down to the way that the use of the eAuction is positioned in the first place. If positioned, as outlined above, as part of a defined, transparent way, to validate the cost effectiveness of an account then there are no other methods so effective at the job.

So in conclusion eAuctions and SRM are not mutually exclusive and do not need to be seen as such. An effective SRM must include an agreed mechanism to test the commercial validity of the account and an eAuction is the must transparent, effective and efficient way of conducting the market test. The technology isn’t going away and needs to be utilised by procurement teams to manage relationships and realize further benefits.

Next week I will be discussing the various different types of eAuction available to the procurement professional along with their respective appropriateness, strengths and weaknesses.

A holistic approach to working capital - Why increased payment terms don't always result in a benefit

We have seen many articles and news stories over the past few months regarding the ethical positions of organisations and their procurement teams. I would like to specifically focus on what I have seen happen in the past when firms decide to focus heavily on implementing quick win payment term extensions which, of the 3 elements of working capital (payables, receivables and stock management) the easiest element to focus.

Payment terms negotiated and agreed as part of any supplier contract have a direct impact on the organization’s cost of working capital, the lifeblood of any business.

For Procurement however payment terms can be a double edged sword. Extended payment terms may help lower the cost of working capital but they don’t always support healthy supplier relationships or indeed their finances. Further this easy approach doesn’t make sense as, looking at this holistically, it costs a fortune, especially in our post 2008 world.

With interest rates so low even exceptionally cash rich organisations achieve little more than 1% on their cash holding and extending payment terms for a further 30 days will see them gain minimally (less than 0.01%). The supplier on the other hand may have to pay a 3%+ factoring cost to cover that extra period with additional costs for early payment. Although firms implementing these changes may not see it as such the reality is that these additional costs will not only be passed downstream but back upstream as well.

In many instances procurement departments don’t even consider working capital, and there are benefits to be had from tying the two areas together. Extending payment terms isn’t necessarily the right answer though.

Procurement should look more generally at their supply chain to understand the potential benefits of supply chain finance. By understanding the working capital requirements of suppliers, significant sourcing cost can be generated by imaginative use of discounts in return for early payment. Supply chain techniques like dynamic discounting should be developed and managed by Procurement who should take the lead in identifying and prioritizing suppliers.

It may also be true that a slightly more managed approach, such as supplier discounting, provides an important fail safe mechanism for a supplier during turbulent times and for the buyer, it helps to mitigate the risk of the supplier failing.

So in a nutshell, firms should take a broader view of procurement costs and consider the wider implications of payment term changes in the supply chain. There may be further hidden opportunity costs of not using supply chain finance that simply focusing on extending payment terms can blind you to.

All of this does involve a pretty joined up approach between Procurement, Finance and the Treasury team. Clearly there is a downside to “days payable outstanding” (DPO) for early payment and in a siloed world that’s all that Finance may focus on.

Of course all I have really done here is focus on one element of working capital, namely the payment process, but there may be wider benefit in procurement considering their impact on working capital more generally as well (stock management etc.). For example a buyer, incentivised solely on achieving a favourable unit price, may negotiate a rate at 50% below the market price but if the company ends up with 10 years stock the deal may not necessarily be of overall value to the business.

Working capital provides the financial foundation to any commercial business and has traditionally been seen as being within the realm of a firm’s finance function. A joined up approach with Procurement however may help organisations to develop a more rounded view on the subject. Such an approach may help firms uncover further benefits and, again linking to the recent headlines, avoid such ethical quandaries. 

Natural Resource Scarcity: The Implications for Procurement

Economic development around the world has continued to drive up the demand for natural resources that are required to build infrastructure or produce new consumer products.

In simplistic terms an increased number of consumers in new places and an increased buyer power amongst those consumers heighten the level of demand. This increased demand will need to be met with an equivalent increase in supply and that may not be possible. In such a scenario the supply of critical resources will no longer be a question of money; securing the limited amount of natural resources available will become the key challenge for procurement teams.

Geopolitics, limited suppliers, price rises and sustainability concerns are just some of the drivers of resource constraints and we are seeing examples of these issues today.

One such example surrounds the supply of rare earth metals, which are used extensively in now common place technologies such as fuel cells, LED lighting, batteries, mobile phones and wind turbine generators. Worldwide demand for these metals already exceeds supply, over 90% of which is from mainland China, and this gap will not be closed unless major new supply sources are developed.

Food or water could be also be highlighted as other areas of scarcity. Global food reserves recently hit an all-time low and, married to continuing population increases, are unlikely to improve in the short term. A recent FT article cited access to water as one of the most significant business risks to the mining industry.

Scarcity is an issue that is on the sustainable procurement agenda now but is moving towards the centre of business strategy in certain industries, with a focus on securing long term supply cost efficiently and sustainably. Firms that are unable to protect themselves from the threat will face significant challenges to their growth plans and long term competitive advantage.

Procurement is often the first function in a business to be confronted by the impact of scarcity (challenges in supply, price increases etc.) and so should be well placed to take a lead in elevating
the topic onto management’s strategic agenda. Other functions such as R&D (innovation) , Marketing (forecasting) and Supply Chain also have a key role to play in developing responses to the scarcity challenge, but may not be as sufficiently engaged.

Social Media and Procurement

Over recent years social media has revolutionised the way that people interact with each other, at both an individual and a global level. Businesses have recently begun to leverage social media, transforming the approach that they take to functions such as sales, marketing and their customer handling.

Now firms are beginning to see that social media can also be used effectively by procurement, offering an unparalleled level of opportunity for collaboration and information sharing which, if harnessed, can offer huge performance improvements.

These improvements can be broken down into three separate areas:

• Efficiency: Social media offers information on tap and enables users to exchange their relevant knowledge, discuss specific topics and raise or address any immediate concerns in a controlled setting. Social media can be used to reduce the time people spend chasing each other down, allowing them to spend more time working effectively.

• Innovation: Social media allows procurement professionals to engage suppliers directly and manage the information flow back and forth in an efficient manner. Such an approach provides an open platform for change which can help speed up the innovation and development process. Bringing suppliers into the innovation process as soon as possible, or enlightening them to a problem that needs to be solved, encourages collaborative working and helps foster strategic partners.

• Decision making: It’s important for procurement professionals to stay up to date on relevant suppliers and their offerings. Using public forums available on social networks, procurement professionals can study what suppliers have to say about industry issues, new opportunities, upcoming trends or market expansion plans. The information can also be used to give procurement professionals deep insights about the general supply market and help them mitigate risk in their purchasing decisions.

New procurement professionals are active users of online communities such as LinkedIn and Facebook and traditional technology providers are working to modify their offerings to include “collaboration modules”, bringing together traditional purchasing with social media. Although very few companies have yet adopted social media as an integral part of their procurement process this is expected to change in 2015.