Rogers and Hammerstein: The Future of Sourcing

Last week, Michael Lamoureux asked Dave Stephens, Dave Bush, Jason Busch, Tim Minahan and I to post on the future of sourcing. I’ve found their responses fascinating and informative. I’m regularly astonished at the insights I get from this group of guys (Why no women?) and how narrowly my expertise is focused. But, going with my strengths, I am posting on the future of sourcing as it relates to structuring effective purchaser / vendor relationships.

A couple of months ago I posted on a little experiment I conducted on sourcing music based on stated requirements. In the study I analysed the appropriateness of songs found by Pandora compared to songs played by Yahoo Music given the same requirements i.e. songs liked by a Dandy Warhols fan. I concluded that Pandora found more suitable music than Yahoo.

In my opinion, improving techniques to find vendors is not the future of sourcing. Reflecting on the best examples of sourcing I’ve seen over the past few years, I realised that they all involve the purchaser and the vendor creating a more efficient relationship structure rather than a purchaser simply finding a new vendor.

An example of a more efficient relationship structure is the vendor and purchaser using a novel distribution strategy that creates operational efficiencies for the vendor and a competitive advantage for the purchaser; or the vendor and purchaser working together to impact demand rather than unit cost. The critical feature of the more efficient relationship structure is that it is created by the purchaser contributing internal knowledge about such things as its purchasing patterns, logistical challenges and payment requirements and the vendor contributing its market knowledge to produce an item or service that perfectly fits the purchaser’s needs and the vendor’s ability to service those needs.

The future of sourcing will involve good purchasers using better techniques to find good vendors but it will also involve good purchasers and vendors creating great new products and services. As Time Magazine says of Rogers and Hammerstein “Each had already made his mark — but as collaborators they created musical theater that enchanted audiences and redefined the art form”.

I wonder what technology will enable this type of collaborative innovation?

Assessing the value of a blog

I had a discussion last week with another sourcing specialist about whether it was better to reduce tender submissions to a weighted result out of 10 or to a dollar figure. My preference is to work with my clients to assign a dollar figure to intangibles such as risk of moving from the incumbent to a new supplier and to display a single dollar figure for each respondent. Of course, assigning dollars to intangibles is more art than science and generally uses some largely unsubstantiated theory to arrive at the result.

I’m happy to see that someone has developed a similarly unsubstantiated mechanism to assign a value to blogs based on applying the link to dollar ratio from the AOL-Weblogs Inc deal. Congratulations to Dave Stephens and Dave Bush whose blogs are worth more than three times mine and to Michael Lamoureux whose blog, after a prolific couple of months, is valued the same as mine. And further congratulations to Jason Busch who’s streets ahead of the rest of us.

Consolidation and the Long Tail

A typical spend reduction initiative starts by convincing your C-Level executives to mandate the consolidation of spend throughout your company. Through such consolidation, you ensure your suppliers can reduce their margins yet still make enough to service the payments on their salespeople’s Beemers.

If you cannot consolidate your spend, you must find other ways to convince suppliers to lower their prices and/or increase their services without reducing their margins to an unsustainable, sub-Beemer, level. One way of doing this is to reduce your supplier’s cost of sales. Doing this, along with reducing your cost of managing your vendors, allows you to punch far above your weight with your suppliers.

Let’s consider two companies, Big Company and Small Company, buying a non-customised widget. If the widget salesperson is willing to set their margin for Big Company so that a sale results in $1 million gross profit, they should, theoretically, be willing to reduce their margin to the same level for a sale to Small Company that nets them $100,000 in gross profit provided that sale takes 1/10 the sales effort to close and execute.

So what does this have to do with the long tail concept? Well, if there is such a thing as the long tail in procurement, the long tail calculation must include both sales cost as well as transaction costs.