The power and promise of Web-based procurement tools
Web-based spend management solutions can help companies achieve double-digit savings, but software can't do the job alone. To get the best results, companies must balance individuals' expertise with technology.
In 2009, when I wrote the white paper Riding the Crest of a New Wave: How the Original SaaS Companies Have Gained the Upper Hand, it became clear to me that a paradigm shift in vendor solutions had already been well under way as far back as 2000. The basis for this assertion was my discovery of a 2001 Software & Information Industry Association (SIIA) white paper called Strategic Backgrounder: Software as a Service.
In my own paper, I referenced SIIA's report, including its statement that "packaged desktop and enterprise applications will soon be swept away by the tide of Web-based, outsourced products and services"—a development, I wrote, that established the core principles or elements of the software-as-a-service (SaaS), or on-demand, model.
While there are various pricing structures, the SaaS model is different from traditional software licensing agreements, in that a customer only pays a transaction fee based upon actual usage, as opposed to having to make a large capital investment upfront. From an implementation standpoint, SaaS solutions can be operational within a matter of weeks, if not days. This is a major advantage over something like an enterprise-type solution, which can take up to several years to implement.
The SIIA paper concluded that the emergence of the new model would remove the responsibility for installation, maintenance, and upgrades (and the associated heavy costs) from overburdened management information systems (MIS) staff. As a result, the paper predicted, "packaged software as a separate entity will cease to exist."
Although the SIIA report stressed at the time of its publication that due to "technical and business issues" such drastic predictions had not yet come to pass, it nonetheless had sent up the first flare warning that a very significant change was about to happen.
This third-party confirmation of the SaaS trend is significant because it challenged (and still challenges) the mainstream pundits who question the viability of these new platforms. While some have begun to change their views, there are many who consider SaaS-based spend management solutions (the subject of this article) to be "nothing more than Madison Avenue buzz terminology designed to shoot some Botox into a segment of the spend management market" and think that references to the type of market shift identified by SIIA are somehow "misleading."1
This is an important point, as anyone (myself included) who takes the position that spend management solutions are capable of delivering double-digit savings—subject, of course, to an individual organization's purchasing practices, both past and present—would have to prove that the prerequisite technological breakthrough is in fact real. If, as the above-referenced pundits maintain, the new spend management solutions are nothing more than vacuous marketing "sizzle," then the prospects for savings, let alone sustained savings, become highly questionable, and the discussion would have to shift from one of leveraging new technologies to one of discovering why existing platforms have consistently failed to produce the expected results.
Not by technology alone
One of the key positions championed by the naysayers regarding SaaS-based spend management solutions is that obtaining true spend intelligence is solely dependent upon the expertise of individuals to gather, synthesize, and analyze the data, and then produce meaningful insight and results. If this is in fact the case, then why are these same "experts" hard-pressed to explain why the great majority of technology-based e-procurement initiatives fail to achieve the expected savings?
There is no shortage of articles and reports pointing to a high failure rate for spend management initiatives that are based on the traditional, enterprise resource planning (ERP)-centric licensing model. The actual rate of failure is subject to debate; some observers place it at more than 50 percent while many others say it is as high as 90 percent. The reason for the discrepancies is that most e-procurement undertakings are part of larger ERP-based implementations. This makes it difficult to narrow the analysis to a supply chain management (SCM)-only problem. That said, reports from research organizations such as the META Group (now part of Gartner), which in 2001 estimated that 70 percent of SCM technology projects had failed, to the more recent 2007 Toolbox.com article, which reported that 90 percent of such projects "fail to deliver any ROI (return on investment)," are nonetheless disconcerting.
Given that abysmal track record, it should come as no surprise that many people consider the low-cost, pay-per-use SaaS models to be the solutions of the future—or that many companies are already adopting them. The fact that some ERP vendors have abandoned their traditional business model in favor of offering an on-demand solution testifies to the monumental shift to SaaS that is now under way.
Of course the impact and effectiveness of any technological breakthrough are to a certain degree dependent upon the proper application of data to make informed decisions. Yet without the new technology, no amount of internal expertise would have produced the double-digit savings some companies that use these solutions have achieved. This is because with traditional spend management applications, the mere extraction of the required data proved to be a laborious exercise that failed to produce meaningful intelligence on a timely basis. Put another way, SaaS-based spend-intelligence solutions make meaningful data readily accessible to anyone and everyone associated with the purchasing function—not just the individuals who have the level of expertise required for data extraction and analysis with traditional software applications.
That said, it is important to note that I am not suggesting that technology, no matter how advanced, will in and of itself lead to savings without the active involvement of knowledgeable and engaged purchasing personnel. Instead, it is the combination of the timely access to spend intelligence afforded by new Web-based platforms and the ability of individual purchasing professionals to properly apply that information that drives savings.
This, as it turns out, is the linchpin—the critical factor that makes possible the transformational cost savings that have eluded so many organizations that rely on traditional ERP-based applications in their spend management quest. To illustrate my point, let's consider the case of an organization that achieved double-digit savings over a multiyear period.
The Department of National Defence (DND) in Canada struggled with poor service-level agreement performance and escalating costs associated with the procurement of indirect materials.
With the introduction to the purchasing process of a Web-based, pay-as-you-go solution, frontline buyers were able to leverage both key historical value indicators (past delivery performance and product quality) and real-time value indicators (such as current product costs and factors affecting price) to select the right vendor 98.2 percent of the time.
A particularly telling example of the impact of real-time value indicators (information that previously was not available to the DND) involves the relationship between product cost and the time of day a product was ordered. Trend analysis using the new software demonstrated that a particular maintenance and repair part that was sourced at 9:30 a.m. might cost C$130. If the same product was sourced at 3:30 p.m., it was not uncommon for the cost to rise to as much as C$1,000.
Because this data was available to buyers as part of the purchasing process (as opposed to becoming available through an adjunct, after-the-fact reporting function) the DND used this information to its advantage when making purchasing decisions, and thus realized significant gains. These included:
An almost immediate improvement in next-day delivery performance, from 53 percent to 97 percent of all orders arriving at the appointed destination within 24 hours;
A year-over-year cost-of-goods savings of 23 percent for seven consecutive years; and
A reduction in headcount over the first 18 months, from 23 buyers to three buyers.
An interesting point: despite the impressive results in the areas of delivery performance and cost reduction, it is the third point of savings that has garnered the greatest attention. In light of the DND's recent announcement that the agency would be cutting 2,300 positions from its present workforce, one can understand why.
Situational circumstances driven by external factors (such as a struggling economy) notwithstanding, it would be erroneous to assume that a reduction in headcount is a primary savings component, because technology **italic{empowers} an engaged workforce, as opposed to replacing or reducing it. This is not to say that there are no instances in which a reduction would be warranted, as demonstrated by the DND example. However, to blindly believe that automation alone will enable an organization to reduce its workforce, and do so in a window of time that is commensurate with immediate financial concerns, is pure folly.
In the DND's case, reducing headcount was a by-product of increased efficiency that had been achieved not just through automation but also through a solid understanding of the logistical elements needed to meet a service-level agreement's demanding requirements. It was only after the SaaS solution had been successfully implemented and had begun producing the expected results over a 12-month period that the organization could strategically consider eliminating personnel, and then act upon that plan.
Achieve the right balance
When organizations put workforce reduction at the top of the savings list, it negatively skews their focus, creating an over-reliance on technology that, as previously discussed, rarely delivers the expected savings.
In this context, it is the sustainable savings that are directly and predominantly linked to cost-of-goods reductions that should be the primary focus of any initiative—not the one-time benefits like reduced headcount.
So what is the key takeaway relative to SaaS, or Web-based, procurement tools?
Because Web-based spend management solutions are better able to address market volatility, and thus ensure that organizations achieve the best value when acquiring materials and supplies, they are the effective means by which double-digit savings can be realized.
However, the key to realizing said savings are and always will be based on ascertaining and achieving the all-important balance between purchasing personnel's capabilities and those of emerging Web-based technology.
Container imports at U.S. ports are seeing another busy month as retailers and manufacturers hustle to get their orders into the country ahead of a potential labor strike that could stop operations at East Coast and Gulf Coast ports as soon as October 1.
Less than two weeks from now, the existing contract between the International Longshoremen’s Association (ILA) and the United States Maritime Alliance covering East and Gulf Coast ports is set to expire. With negotiations hung up on issues like wages and automation, the ILA has threatened to put its 85,000 members on strike if a new contract is not reached by then, prompting business groups like the National Retail Federation (NRF) to call for both sides to reach an agreement.
But until such an agreement is reached, importers are playing it safe and accelerating their plans. “Import levels are being impacted by concerns about the potential East and Gulf Coast port strike,” Hackett Associates Founder Ben Hackett said in a release. “This has caused some cargo owners to bring forward shipments, bumping up June-through-September imports. In addition, some importers are weighing the decision to bring forward some goods, particularly from China, that could be impacted by rising tariffs following the election.”
The stakes are high, since a potential strike would come at a sensitive time when businesses are already facing other global supply chain disruptions, according to FourKites’ Mike DeAngelis, senior director of international solutions. “We're facing a perfect storm — with the Red Sea disruptions preventing normal access to the Suez Canal and the Panama Canal’s still-reduced capacity, an ILA strike would effectively choke off major arteries of global trade,” DeAngelis said in a statement.
Although West Coast and Canadian ports would see a surge in traffic if the strike occurs, they cannot absorb all the volume from the East and Gulf Coast ports. And the influx of freight there could cause weeks, if not months-long backlogs, even after the strikes end, reshaping shipping patterns well into 2025, DeAngelis said.
With an eye on those consequences, importers are also looking at more creative contingency plans, such as turning to air freight, west coast ports, or intermodal combinations of rail and truck modes, according to less than truckload (LTL) carrier Averitt Express.
“While some importers and exporters have already rerouted shipments to West Coast ports or delayed shipping altogether, there are still significant volumes of cargo en route to the East and Gulf Coast ports that cannot be rerouted. Unfortunately, once cargo is on a vessel, it becomes virtually impossible to change its destination, leaving shippers with limited options for those shipments,” Averitt said in a release.
However, one silver lining for coping with a potential strike is that prevailing global supply chain turbulence has already prompted many U.S. companies to stock up for bad weather, said Christian Roeloffs, co-founder and CEO of Container xChange.
"While the threat of strikes looms large, it’s important to note that U.S. inventories are currently strong due to the pulling forward of orders earlier this year to avoid existing disruptions. This stockpile will act as an essential buffer, mitigating the risk of container rates spiking dramatically due to the strikes,” Roeloffs said.
In addition, forecasts for a fairly modest winter peak shopping season could take the edge off the impact of a strike. “With no significant signs of peak season demand strengthening, these strikes might not have as intense an impact as historically seen. However, the overall impact will largely depend on the duration of the strikes, with prolonged disruptions having the potential to intensify the implications for supply chains, leading to more pronounced bottlenecks and greater challenges in container availability, " he said.
A coalition of freight transport and cargo handling organizations is calling on countries to honor their existing resolutions to report the results of national container inspection programs, and for the International Maritime Organization (IMO) to publish those results.
Those two steps would help improve safety in the carriage of goods by sea, according to the Cargo Integrity Group (CIG), which is a is a partnership of industry associations seeking to raise awareness and greater uptake of the IMO/ILO/UNECE Code of Practice for Packing of Cargo Transport Units (2014) – often referred to as CTU Code.
According to the Cargo Integrity Group, member governments of the IMO adopted resolutions more than 20 years ago agreeing to conduct routine inspections of freight containers and the cargoes packed in them. But less than 5% of 167 national administrations covered by the agreement are regularly submitting the results of their inspections to IMO in publicly available form.
The low numbers of reports means that insufficient data is available for IMO or industry to draw reliable conclusions, fundamentally undermining their efforts to improve the safety and sustainability of shipments by sea, CIG said.
Meanwhile, the dangers posed by poorly packed, mis-handled, or mis-declared containerized shipments has been demonstrated again recently in a series of fires and explosions aboard container ships. Whilst the precise circumstances of those incidents remain under investigation, the Cargo Integrity Group says it is concerned that measures already in place to help identify possible weaknesses are not being fully implemented and that opportunities for improving compliance standards are being missed.
By the numbers, overall retail sales in August were up 0.1% seasonally adjusted month over month and up 2.1% unadjusted year over year. That compared with increases of 1.1% month over month and 2.9% year over year in July.
August’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.3% seasonally adjusted month over month and up 3.3% unadjusted year over year. Core retail sales were up 3.4% year over year for the first eight months of the year, in line with NRF’s forecast for 2024 retail sales to grow between 2.5% and 3.5% over 2023.
“These numbers show the continued resiliency of the American consumer,” NRF Chief Economist Jack Kleinhenz said in a release. “While sales growth decelerated from last month’s pace, there is little hint of consumer spending unraveling. Households have the underpinnings to spend as recent wage gains have outpaced inflation even though payroll growth saw a slowdown in July and August. Easing inflation is providing added spending capacity to cost-weary shoppers and the interest rate cuts expected to come from the Fed should help create a more positive environment for consumers in the future.”
The U.S., U.K., and Australia will strengthen supply chain resiliency by sharing data and taking joint actions under the terms of a pact signed last week, the three nations said.
The agreement creates a “Supply Chain Resilience Cooperation Group” designed to build resilience in priority supply chains and to enhance the members’ mutual ability to identify and address risks, threats, and disruptions, according to the U.K.’s Department for Business and Trade.
One of the top priorities for the new group is developing an early warning pilot focused on the telecommunications supply chain, which is essential for the three countries’ global, digitized economies, they said. By identifying and monitoring disruption risks to the telecommunications supply chain, this pilot will enhance all three countries’ knowledge of relevant vulnerabilities, criticality, and residual risks. It will also develop procedures for sharing this information and responding cooperatively to disruptions.
According to the U.S. Department of Homeland Security (DHS), the group chose that sector because telecommunications infrastructure is vital to the distribution of public safety information, emergency services, and the day to day lives of many citizens. For example, undersea fiberoptic cables carry over 95% of transoceanic data traffic without which smartphones, financial networks, and communications systems would cease to function reliably.
“The resilience of our critical supply chains is a homeland security and economic security imperative,” Secretary of Homeland Security Alejandro N. Mayorkas said in a release. “Collaboration with international partners allows us to anticipate and mitigate disruptions before they occur. Our new U.S.-U.K.-Australia Supply Chain Resilience Cooperation Group will help ensure that our communities continue to have the essential goods and services they need, when they need them.”
A new survey finds a disconnect in organizations’ approach to maintenance, repair, and operations (MRO), as specialists call for greater focus than executives are providing, according to a report from Verusen, a provider of inventory optimization software.
Nearly three-quarters (71%) of the 250 procurement and operations leaders surveyed think MRO procurement/operations should be treated as a strategic initiative for continuous improvement and a potential innovation source. However, just over half (58%) of respondents note that MRO procurement/operations are treated as strategic organizational initiatives.
That result comes from “Future Strategies for MRO Inventory Optimization,” a survey produced by Atlanta-based Verusen along with WBR Insights and ProcureCon MRO.
Balancing MRO working capital and risk has become increasingly important as large asset-intensive industries such as oil and gas, mining, energy and utilities, resources, and heavy manufacturing seek solutions to optimize their MRO inventories, spend, and risk with deeper intelligence. Roughly half of organizations need to take a risk-based approach, as the survey found that 46% of organizations do not include asset criticality (spare parts deemed the most critical to continuous operations) in their materials planning process.
“Rather than merely seeing the MRO function as a necessary project or cost, businesses now see it as a mission-critical deliverable, and companies are more apt to explore new methods and technologies, including AI, to enhance this capability and drive innovation,” Scott Matthews, CEO of Verusen, said in a release. “This is because improving MRO, while addressing asset criticality, delivers tangible results by removing risk and expense from procurement initiatives.”
Survey respondents expressed specific challenges with product data inconsistencies and inaccuracies from different systems and sources. A lack of standardized data formats and incomplete information hampers efficient inventory management. The problem is further compounded by the complexity of integrating legacy systems with modern data management, leading to fragmented/siloed data. Centralizing inventory management and optimizing procurement without standardized product data is especially challenging.
In fact, only 39% of survey respondents report full data uniformity across all materials, and many respondents do not regularly review asset criticality, which adds to the challenges.