In the beginning, procurement was pretty simple: Get the needs from Engineering, Accounting, and Sales; open the appropriate catalogues; order the appropriate products; wait for them to arrive; receive and pay the invoice; repeat.
But then the outsourcing and right-sourcing crazes began, and more and more of an organization’s spend was shifted outside of its four walls. The need for savings intensified and sometimes buyers had to track down a supplier who could provide a custom-manufactured part not included in the standard catalog. Suppliers had to be discovered—no more waiting for the salesperson to come to you.
Once organizations began to regularly need custom manufactured products, it was the end of the catalog era. Procurement had to evolve. Supplier discovery was required on a regular basis and, as the need for even more savings materialized, organizations had to begin putting out RFPs and tenders on a regular basis. And so the age of three-bids-and-a-buy e-procurement began.
Procurement went from catalog management to tender management. Instead of waiting for catalogs to arrive or salespeople to knock on the door, buyers began to proactively do their market research, identify potential suppliers, and vet their options. Once three potential suppliers were identified, an RFP needed to be created and sent to the suppliers. The tender process began, and once three responses were received, analysis began. Once a supplier was chosen, contract negotiations began.
Why only three suppliers? The work involved in trying to compare more than three responses side-by-side was often insurmountable given the time and resources available for most sourcing projects. One has to remember that the first spreadsheet product, VisiCalc for the Apple 2, did not appear on the market until 1979, and the first spreadsheet product for PCs, Microsoft Excel, did not appear until 1987. As a result, the amount of manual paper processing required to compare more than three bids was often ridiculous. This was the status quo until first generation RFX platforms hit the market and buyers could compare as many bids as they could collect from vetted suppliers. Moreover, these suppliers could also be vetted through the tool with its integrated survey capability.
Then auction platforms hit the scene and bids could be collected online and in real-time. Furthermore, for well-defined commodities and market baskets within a category, awards could be made in real-time.
In lock-step with these technological improvements, sourcing project management advanced and we saw a number of big consultancies, vendors, associations, and publications put forward best-practice x-step models, including Denali’s five step strategy, The Procurement Center’s step by step model, and Supply Management’s seven stage strategy plan, which laid out a simple path for any organization to follow. For some organizations sourcing common categories, the process was almost scripted. The project definitions and management support from third parties was just that good.
Sourcing approached light speed, and all was good with the world. At least until it came time to re-source the category, which began with a review of the current contract…a review that typically found that only 70% or less of the expected savings actually materialized.
What happened? Why did the expected savings fail to appear?
While best-in-class sourcing methods and platforms were being touted by vendors and analysts alike, very little attention was given to the procurement process and procurement project management. As a result, the best laid plans never came to fruition. But this is about to change. Check in with next week’s post to find out how.