Business & Technology Nexus

I always wanted to meet the Yoda of Procurement, Gene Richter. He grew up through Ford’s purchasing organization eons ago, and did some wonderful things for IBM too. It’s rare when a discipline’s leadership all agree on who Yoda is, but with Gene you had unanimous consent. After getting his contact information years ago, I sat on it because as a lowly software development guy I was reluctant to call him – why could he possibly want to talk to me? I reached out and left him a voice mail just days before he died. By all means check out this tribute to Gene posted on his foundation’s website.

A few of my posts will just be level-setting stuff. Good material to file away, but hardly exciting. This one falls into that camp. It covers Procurement’s transactional scope.

The diagram above describes the transactional flow of a typical procurement application. Demand enters the system in the form of requisitions. Requisitions are created from individual employee requests, from project work, or from inventory and production systems. Often requisitions are subject to an approval process achieved via an approval hierarchy. That hierachy will usually match an organization’s management hierarchy and will also contain some added complexity. Approval authorization limits are placed at each level of management. For some goods and services a specialist approver, somtimes called a Subject Matter Expert, is required to sign-off on the request.

Requests are often converted directly into Purchase Orders, but are sometimes held to achieve minimum order quantities or volume discounts. Requisitions sometimes also require sourcing to be performed via a RFI or RFP or RFQ or reverse Auction.

Sourcing can have different objectives – sometimes for a purchase to be made “on the spot,” often called a spot buy. But often sourcing activities are performed to make longer-term decisions about who to buy from. Exhaustive evaluations of not just price, but quality, capacity, and speed result in a long-term contract.

Once a purchase order is issued, organizations record the expected cost of goods and services ordered as a liability. The reason is a PO represents a binding legal agreement or “promise to buy”. Many suppliers will not begin to perform work without one!

Employees receive and optionally record receipt of goods and services. Performance of work by the supplier triggers their systems to issue the “bill” or invoice. Once an invoice is received, most organizations control cash flow by not paying immediately. Instead, pre-negotiated “Payment Terms” are followed, the most common being “Net30″. Once the invoice becomes due, payment is issued via an EFT, Check, or other disbursement method.

Effective procurement practices save money three ways: by lowering prices paid for goods and services through negotiation, by lowering overhead costs associated with the buying and paying process, and by helping organizations avoid purchases altogether. It also improves corporate oversight and reduces risk.

And to be sure, effective procurement practices can be accomplished without dedicated software tools. But it’s hard. And as companies grow larger, procurement tools enable productivity and communication that would otherwise be impossible.

I’ll break down this problem into pieces and look at Contract Management, eProcurement, Supplier Enablement, Sourcing, etc. I’ll separate the tools and technology problems from the real business issues Procurement departments are struggling with. I’ll shoot for a meaningful post a day, and we’ll see how it goes.

I’ve learned a ton from all the Procurement customers I’ve met over the last decade while working at Oracle. My role over that time had been to design and build dedicated Procurement applications to make things easier. But software was all too often the easy part of an organization’s migration to effective procurement practices. There were common struggles I saw time and again.

I’m hoping to use this forum to document what I’ve learned and to speculate a little about the future. You see, my view is Procurement tools are still in their infancy, and that the majority of organizations still don’t have effective systems.

Procurement was never an area I expected to fall in love with. But I have. I’ve always admired its focus on efficiency. Procurement is about moving faster and making better decisions, all the while trying to lower costs. What’s not to love?

I have to say Jason Busch over at spendmatters.com is doing an amazing job covering the Procurement news beat. So I won’t try and do the same here. What I will do is recap my experiences with customers and their deployments. Hats off to you Jason, you are seriously plugged in! Keep up the good work!