What if a bidding process could include and analyze as many suppliers as possible without built-in constraints? In constraint-less bidding, businesses find innovative suppliers who deliver better options at less cost, unlocking hidden and lost value.
— By Cecil Perang
Most procurement bidding processes remain locked in the past, utilizing processes and old-time technologies that limit accessibility to suppliers and leave hidden spend in the dark. When Walter Charles III was told to save at least 150 percent in spend at Kraft, he realized that it was not possible without utilizing technology tools to support a radical change in the traditional bidding process.
Now the Biogen Chief Procurement Officer, Charles developed and applied a new methodology that he calls "constraint-less bidding" at Kraft, Kellogg's, Johnson & Johnson, and Biogen. Using big data analytics to support a different set of processes, smart procurement functions are implementing new processes plus big data analytics to include many more innovative suppliers in the bidding process to unlock value and generate significant savings by managing hidden and known tail spend.
Including More Suppliers Because You Can
Charles saved 150 to 250 percent at the iconic large firms of Johnson & Johnson, Kellogg's, Kraft, and Biogen utilizing a whole different set of processes and tools. The savings were generated despite limited people and resources, typical of most procurement functions, by embracing Industry 4.0 technology tools and platforms and procurement process reinvention to drive a step change in value creation in the supply chain. He saw opportunity to turn procurement into a lever for reducing spend, improving products and services, increasing supplier diversity, and unlocking innovation.
Historically, procurement functions have used the same suppliers year-in and year-out. They also follow the Pareto analysis 80/20 rule in which attention and resources are applied to the 80 percent of spend attributed to suppliers who make up only 20 percent of all suppliers with which purchases are made. The problem is that 20 percent of tail spend is ignored in terms of purchasing strategies.
The Pareto analysis was a decision-making model for its time in which procurement needed help managing spend while using simple technology tools like spreadsheets. The laborious use of spreadsheets limited procurement's ability to dive deeper into spend.
The development of Industry 4.0 technologies has led to speed-of-light processes. It took the telephone 75 years to get to 50 million customers, and it took Pokémon Go two days to gain the same number. Already digitization has disrupted industries, and much more is to come with the continued development and increasing use of artificial intelligence (AI), machine learning, and natural language processing.
The technologies have even changed the idea of value. Old guard businesses were once considered the most valuable in terms of market capitalization, but today it is technology companies like Facebook that have more market cap as Fortune 500 businesses continue to disappear.
Though the market for AI technologies is expected to reach more than 70 billion in 2020, procurement has remained on the fringes. The adoption of sophisticated technologies combined with revolutionized procurement processes is an opportunity to unlock value and savings. As the pace of change accelerates, procurement practices must evolve to take advantage of the technologies to source more spend by eliminating hidden and known tail spend while also re-inventing decades old procurement processes.
Already digitization has disrupted industries, and much more is to come with the continued development and increasing use of artificial intelligence (AI), machine learning, and natural language processing.
Less Tail Spend, Pareto Analysis and More Suppliers
Here is food for thought: If it is possible to analyze 1,000 suppliers as easy as it is to analyze 10 suppliers, why would procurement analyze 10?
Adhering to a procurement bidding process that involves getting a handful of bids for the 80 percent of spend, holding a few meetings, and selecting a bid from among a few suppliers offer more disadvantages than advantages. It excludes suppliers who could bring innovation to the 80 percent of spend; ignores the suppliers who can offer significant savings for tail spend; limits the inclusion of diverse suppliers that tend to be SMEs; requires labor-intensive procurement resources; does not generate the continuous improvement of ideas; and does not access full market intelligence.
What if procurement could analyze 1,000 bids in minutes with the touch of a button and find suppliers that offer market intelligence, cost savings, innovation and better ways of doing things? The bids offer invaluable supplier feedback that can be converted to data, analyzed, and used to generate significant savings.
Next generation tools and processes can deliver these advantages and more. Big data analytics can create hyper competition; help breakdown and inform about costs as a leverage for negotiations; discover current processes that are outdated and inefficient; collapse bid times; and optimize cash flows.
Bring It On!
Charles unlocked significant savings in various procurement functions by using what he called "constraint-less bidding." Let the suppliers bring what they have to offer instead of excluding so many based on bid constraints. The kind of tools used at companies like Kellogg's and Biogen, to unlock two or more times the savings, include clean sheet discipline, AI automation bots, Moments of Truth, 60/60 Platform and 45-second analytics.
Johnson & Johnson wanted revenue and innovation enablement by leveraging access to suppliers to drive new product development and growth, find unmet ideas, leverage intellectual property, and drive external investment in new products. The tools used in this case included the Ping Network Platform, 45-second analytics solutions, AI automation bots, machine learning, and a new SEI process methodology. J&J achieved four-times the results it sets as goals.
Pareto analysis works best within a constraint-based framework in which 80 percent of spend with 20 percent of suppliers is the focus. However, 20 percent of spend is hidden tail spend within the 80 percent and another 20 percent is just written off. Tail spend tends to be indirect spend on suppliers like consultants who set rates and dictate the level of expertise needed for particular work. Often, the hidden spend is given to category managers who also use Pareto analysis, meaning 20-40 percent of spend is now hidden or lost.
Leverage Big Data Analytics for Better Negotiations
A good example of how big data analytics and new supplier discovery processes can improve supplier negotiations is found in indirect spend categories like marketing, consulting, engineering, and IT.
Suppliers set hours and the level of expertise as to who can do the work. By accepting bids from 90 suppliers, rather than three suppliers, procurement learns a grade two person should be able to do the work in two hours. In the traditional three to five supplier bid process, suppliers claim only a grade seven person can do the work and it will take six hours. With analytics, procurement can ask the supplier why they are charging 20 percent more.
Standardized levels and rates are still used, but instead of comparing a few suppliers, hundreds of suppliers are compared. Instead of total cost assessment, procurement optimizes labor rates, materials, mix and hours. The final outcomes determine the supplier that has the least cost after optimizing and using deliverables–based costing.
Purposefully Searching for Disruption
Innovative suppliers can bring significant savings to the table. The process changes include making it easier for buyers to find the suppliers; making it easier for suppliers to engage buyers; reinventing the bidding process to include as many suppliers as possible; and using big data analytics to find alternatives.
It is a purposeful search for disruption. Rather than waiting for disruption to cause a panicked response, procurement disrupts its own process to find innovative and diverse suppliers.
Plugging along with the three-supplier bid process is likely to turn a business into one of the ones that competitively falls by the wayside. Constraint-less bidding removes arbitrary limitations and lets the suppliers show what they can do.