Viewpoint
Enabling technology
– the right way
Jon W. Hansen Glow Images
In his book Good to Great, Jim Collins even talked
“Technology is the key in the supply chain about the “Myth of Technology Driven Change” in
organization of the future. The right technology which an organization believes that a “breakthrough can
will enable enterprise-wide supply management, external be achieved by using technology to leapfrog the compe-
supply chain visibility, and internal and external collaboration.” tition.” And while Collins’ findings acknowledged the
This statement, taken from a ISM, CAPS and AT Kearney
fact that technology does have an important role to play,
he emphasized that in and of itself technology is not the
report, provides the single most important reason why the
reason behind an organization’s success.
majority of e-procurement initiatives fail.
Process, not technology
Over the years, I have made note of the change in focus Between 2001 and 2005 75 percent to 85 percent of
expressed by procurement professionals attending my all e-procurement initiatives failed to achieve the pro-
conferences. Unlike years past, where attention was pre- mised results in terms of savings. Accentuated by high
dominantly centered on learning more about new and profile misses such as the automotive industry’s Covisint
emerging technologies, today’s procurement professionals marketplace and the Veterans Health Administration’s
are seeking insights into the actual processes that drive 7 year, $650 million JD Edwards-Oracle misadventure,
their enterprises. a dramatic change in thinking was bound to occur.
In essence, they are now looking at technology as a At the heart of this change is a growing realization
means of accelerating their processes versus defining of a fundamental truth that process and not technology
them. is the driving force behind a successful e-procurement
46 – Efficient Purchasing No 7 2008

» Process and not technology
is the driving force behind
a successful e-procurement
initiative.«
initiative. Specifically, it is through process understanding to which I am referring are based on averages over
and refinement combined with the ability for technology an extended period of time.) Flat Line commodities
to adapt to the way in which the real world operates that usually account for 80 percent of an organization’s overall
credible targets are established and ultimately met. spend and 10 percent of its procurement cycle time.
However, before you can understand and refine A Flux commodity is characterized by a dramatic and
your organization’s procurement process, you must first consistent fluctuation in cost that is mirrored by a steady
understand the characteristics of your spend. This is the downward price performance over an extended period
first and most important step in a three-step process. of time. It is further accentuated by a wide (usually sig-
nificant) floor to ceiling price chasm. Indirect materials
Analyse your commodity and in particular MRO commodities commonly exhibit
Over a period of 14 years I have monitored commodity Flux characteristics. Flux commodities on average account
characteristics in an effort to properly align the purcha- for 15 to 20 percent of an organization’s overall spend,
sing processes organizations’ use to procure goods (and and 90 percent of its procurement cycle time.
services). Individual commodities within the indirect material
Through this exhaustive exercise we have discovered MRO classification tend to exhibit both Flat Line and
that all commodities consistently fall into one of two Flux characteristics.
categories – Flat Line and Dynamic Flux. The reason that commodity characteristics are
A Flat Line commodity is characterized by a static important is that the absence of this knowledge has been
price performance where there are minimal cost fluc- a major contributor to both process and technological
tuations over an extended period of time. It is further misalignment.
accentuated by a “narrow” floor to ceiling price chasm.
Direct materials as well as specialty products such as Beware of “Pull-through”
scientific and medical equipment commonly exhibit The majority of e-procurement initiatives initially tend
Flat Line characteristics. (Note: I want to emphasize that to focus on the high-dollar, low transactional volume
there are no absolutes and therefore temporary spend within an enterprise. As a result most vendors
exceptions do occur. For example, you may recall the have developed their solutions to manage centrally
impact that China’s missile practice over Taiwan in the negotiated contracts that are combined with an aggres-
mid-nineties had on memory prices – they went through sive supplier compression strategy.
the roof, albeit for a short time period. The findings However after lengthy implementation periods
Efficient Purchasing No 7 2008 – 47

» Unfortunately the purchasing processes
that apply to one type of commodity
characteristic do not apply to the other.
This ultimately leads to compliance and
change management problems.«
(usually involving a change management program), period of time (in some cases almost immediately). This
the anticipated and sustainable savings have rarely is one of the factors that fuel the buyer’s claim that they
materialized to the point of justifying the original and can usually beat the centrally negotiated contract pricing
ongoing technological investment. It is at this point that with a single phone call to a local supplier.
both process and technological misalignment occurs.
One example of process and technological mis- Effective process alignment
alignment is actually indirectly supported by a 2003 Once a commodity characteristic analysis has been
CAPS study on reverse auctions. The report’s findings completed, you are in a much stronger position to
stated that the organizations that had utilized a reverse review, understand and refine your current processes
auction tool indicated that their cost of goods savings to maximize efficiency and savings. This second step is
diminished with each event so that by the third or fourth what I refer to as the process alignment phase.
auction there were no longer any appreciable gains in This is the point where stakeholder input (especially
this area. The study did suggest that there would be from your purchasing department and supply base) will
potential process-related savings. enable you to lay a solid foundation to evaluate both
current and proposed technologies. Besides eliminating
One size does not fit all compliance associated challenges, you will be able to
However, based on our findings that the procurement know exactly where and how technology can be utilized
cycle time for direct material acquisition only accounts to deliver savings. Of equal importance is that you will
for approximately 10 percent of a purchasing depart- also be able to accurately project realistic savings and
ment’s time, the ongoing savings were ultimately dis- therefore gain an important edge in negotiating licensing
proportionate to the software vendor’s licensing and fees that will be commensurate with the expected results.
maintenance fees. Therefore, and as a means of justi- Direct material (Flat Line) commodities are best pro-
fying the technological investment, most organizations cured utilizing a centrally negotiated contract whereby
tended to employ a transactional “pull-through” strategy volume discounts can be leveraged and strategic supp-
whereby the entire enterprise’s spend (both Flat Line lier relationships established and monitored.
and Flux commodities) fall under one umbrella. Unfor- Conversely, with indirect material (Flux) MRO com-
tunately the purchasing processes that apply to one type modities, the best method for procurement is through
of commodity characteristic do not apply to the other reliable, real-time access to a dynamic market in which
– hence misalignment. This ultimately leads to the the largest number of potential suppliers are engaged.
compliance and change management problems experi- Through a cross-verification mechanism, buyers can
enced by most organizations. simultaneously access data from both spend categories
By applying the same purchasing process used for to confirm that best value decisions are made for each
direct material (Flat Line) procurement to indirect and every purchase.
material (Flux) commodities, the perceived volume As indicated earlier, the key here is that once your
discount savings are virtually negated within a very short organization’s processes are understood, refined and
48 – Efficient Purchasing No 7 2008

» Once your organization’s processes are
understood, refined and aligned you
will be able to evaluate technologies
that will accelerate the procurement
process rather than define it.«
aligned you will be able to evaluate technologies that will buyer could reliably procure commodities on a real-time
accelerate the procurement process rather than define it. basis outside of the confines of a centrally negotiated
contract. To do this effectively, the buyer would have to
Effective technological alignment simultaneously engage key stakeholders such as suppliers,
In their 2001 book, The Seven Steps to Nirvana: Strategic courier companies and customs brokers – enter the Meta-
Insights into eBusiness Transformation, authors Mohanbir prise. Given the fact that off-contract procurement was at
Sawhney and Jeff Zabin discussed the emergence of the epidemic levels (which negatively impacted both the
Metaprise and in particular its impact on enterprise buying organization as well as an increasingly skeptical
application development. Sawney and Zabin referred supply base) it was essential to lessen rather than increase
to it as meta-enterprise software development. I would the purchasing cycle time. This was a critical component
strongly recommend that you read the book as it pro- in that we wanted to eliminate the compliance issues that
vides a useful hindsight perspective that is both interes- had plagued so many initiatives (as it still does today).
ting and informative. By 2003 a full production program was introduced and
In short a Metaprise is a synchronized versus sequen- successfully tested. (In the test case, a major public sector
tial architecture (private hub) that simultaneously links organization realized a 23percent cost of goods savings
or incorporates the unique operating attributes of all annually over a period of several years, while simultane-
transactional stakeholders on a real-world, real-time ously reducing the number of buyers required to manage
basis. This is a far cry from the “near” real-time capabi- the contract to 3 from an original 23. Delivery perfor-
lities of the much touted Service Oriented Architecture mance and product quality also improved dramatically.)
(SOA) which links disparate systems or processes often What is important here is not the software (although
referred to as the “loose coupling of services.” it is now available through a variety of resellers), but
the fact that unlike traditional applications, which have
Forethought pays off origins in either a finance (ERP)-centric or IT-centric
Motivated by the identification of the two commodity initiative, the technology was introduced after the
characteristics (in particular the Flux findings), I began commodity characteristic analysis step and process
to investigate the potential to utilize advanced algo- alignment step were successfully completed. This meant
rithms in 1998 as a means to both accelerate and in- that the technology was the final step in the process. As a
crease purchasing autonomy on the front lines while still result, it adapted to the real-world processes of the client
adhering to centrally established objectives. In short, eliminating the need for an overarching, long-term
although I did not know it at the time I was working to implementation period. It also cost a fraction of the
develop a meta-enterprise application. price of traditional applications, thereby producing a
Throughout the research period (which was part- realistic ROI. This is enablement in its truest form.
ly funded by the Government of Canada’s Scientific
More from Jon W Hansen at the Procurement Insights blog,
Research and Experimental Development – SR&ED
http://procureinsights.wordpress.com
program), we consistently looked for ways in which a
Efficient Purchasing No 7 2008 – 49