This latest BriefingsDirect podcast, from the recent 2013 Ariba LIVE Conference in Washington, D.C., explores the rapid adoption of better means for companies to conduct so-called spot buying -- a more ad-hoc and agile, yet managed, approach to buying products and services.
We'll examine new spot-buying research from The Hackett Group on the latest and greatest around agile procurement of low-volume purchases, and we'll learn how two companies are benefiting from making spot buying a new competency.
The panel consists of Kurt Albertson, Associate Principal Advisor at The Hackett Group in Atlanta; Ian Thomson, Koozoo’s Head of Business Development, based in San Francisco, and Cal Miller, Vice President of Business Development for Blue Marble Media in Atlanta. The interview is conducted Dana Gardner, Principal Analyst at Interarbor Solutions. [Disclosure: Ariba, an SAP company, is a sponsor of BriefingsDirect podcasts.]
Here are some excerpts:
Gardner: How did we get to the need for tactical sourcing, and how did we actually begin dividing tactical and strategic sourcing at all?
Albertson: When you look at enterprises out there, our Key Issues Study for 2013 identified the top priorities area as profitability. So companies are continuing to focus on the profitability objective.
The second slot was customer satisfaction, and you can view customer satisfaction as external customers, but also internal customers and the satisfaction around that.
With that as the overlay in terms of the two most important objectives for the enterprise -- the third, by the way, is revenue growth -- let’s cascade down to why tactical sourcing or spot buying is important.
The importance comes from those two topics. Companies are continuing to drive profitability, which means continuing take out cost. Most mature organizations have very robust and mature strategic-sourcing processes in place. They've hired very seasoned category managers to run those processes and they want them focused on the most valuable categories of spend, where you want to align your most strategic assets.
On the other side of that equation, you have this transactional stuff. Someone puts through a purchase order, where procurement has very little involvement. The requisitioners make the decision on what to buy and they go out and get pricing. Purchasing’s role is to issue a purchase order, and there is no kind of category management or expense management practice in place.
That’s been the traditional approach by organizations, this two-tiered approach to procurement. The issue, however, comes when you have your category managers trying to get involved in spend where it’s not necessarily strategic, but you still want some level of spend management applied to it. So you've got these very seasoned resources focused on categories of spend that aren’t necessarily where they can add the biggest bang for the buck.
That’s what caused this phenomenon around spot buy, or tactical buy, taking this middle ground of spend, which our research shows is about 43 percent of spend on average. More importantly, more than sometimes half the transactional activity comes through it. So it's putting in place a better model to support that type of spend, so your category managers can go off and do what you hired them to do.
Gardner: And that 43 percent, does that cut across large companies as well as smaller ones?
Albertson: The 43 percent is an average, and there are going to be variances in that, depending on the industry, spend profile, and scale of the company, as you noted. Companies need to look at their spend, get the spend analytics in place to understand what they're buying to nail down the value proposition around this.
Smaller companies generally aren't going to have the maturity in place in terms of managing their spend. They're not going to have the category-manager capabilities in place. In all likelihood, they could be handling a much higher percentage of their spend through a more transactional nature. So for them, the opportunity might even be greater.
When we think about the reasons for doing spot buying, profitability was one reason, but customer service was the other, and customer service translates into cycle time.
That’s usually the issue with this type of spend. You can’t afford to have a category manager take it through a strategic sourcing process, which can take anywhere from six to 30 weeks.
People need this tomorrow. They need it in a week, and so you need a mechanism in place to focus on shorter cycle times and meet the needs of the customers. If you can’t do that, they're just going to bypass procurement, go do their own thing, and apply no rigor of spend management against that.
It's a common misperception that of that 43 percent of influence spend that we would consider tactical, it's all emergency buys. A lot of it isn’t necessarily emergency buys. It’s just that a large percentage of that is more category-specific types of purchases, but companies just don’t have the preferred suppliers or the category expertise in place to go out, identify suppliers, and manage that spend. It falls under the standard levels that companies might have for sending something through strategic sourcing.
Gardner: Let’s go to some organizations that are grappling with these issues. First, Koozoo. Ian, tell us a little bit about Koozoo and how spot buying plays a role in your life.
Thomson: Koozoo is a technology startup based in San Francisco. We're venture-backed and we've made it very easy to share your view using an existing device. You take an old mobile phone, and we can convert that, using our software application, into a live-stream webcam.
In terms of efficiency, we're like many organizations, but as a start-up, in particular, we're resource constrained. I'm also the procurement manager, as it turns out. It’s not in my job title, but we needed to find something fast. We were launching a product and we needed something to support it.
It wasn’t a catalog item, and it wasn’t something I could find on Amazon. So looked for some suppliers online and found somebody that could meet our need within two weeks, which was super important, as we were looking at a launch date.
More developed need
I had gone to Alibaba and I looked at what Alibaba’s competitors were. Ariba Discovery came up as one of them. So that’s pretty much how I ran into it.
I think I "spot buyed" Ariba in order to spot buy. I tested Alibaba, and to be fair, it was not a very clean approach. I got a lot of messy inbound input and responses when I asked for what I thought was a relatively simple request.
There were things that weren’t meeting my needs. The communication wasn’t very easy on Alibaba, maybe because of the international nature of the would-be suppliers.
Gardner: Let’s go to Cal Miller at Blue Marble Media. First, Cal, tell us a bit about Blue Marble and why this nature of buying is important for you?
Miller: Blue Marble is a very small company, but we develop high profile video, film, motion graphics, and animation. We came to be involved with Ariba about three years ago. We were selected as a supplier to help them with a marketing project. The relationship grew, and as we learned more about Ariba, someone said, "You guys need to be on the Discovery Network program." We did, and it was a very wise decision, very fortunate.
Gardner: Are you using the spot buying and Discovery as a way of buying goods or allowing others to buy your goods in that spot-buying mode or both?
Miller: Our involvement is almost totally as a seller. In our business, at least half of our clients are in a spot-buy scenario. It’s not something they do every month or even every year. We have even Fortune 500 companies that will say they need to do this series of videos and haven’t done it for three years. So whoever gets assigned to start that project it is a spot buy, and we're hopeful that they'll find us and then we get that opportunity. So spot buying is a real strategy for us and for developing our revenue.
Gardner: You found therefore a channel in Ariba through which people who are in this ad-hoc need to execute quickly, but not with a lot of organization and history to it, can find you. How did that compare to other methods that you would typically use to be found?
Miller: Actually, there is very little comparison. The batting average, if you will, is excellent. The quality of people who are coming out to say, "We would like to meet you" is outstanding. Most generally, it’s a C-level contact. What we find is the interaction allows for a real relationship-development process. So even if we don’t get that particular opportunity, we're secure as one of their shortlisted go-to people, and that’s worth everything.
Gardner: Kurt Albertson, when you listen to both a buyer and a seller, it seems to me that there is a huge untapped potential for organizing and managing spot buying in the market.
Finding new customers
Albertson: Listen to Cal talk about Blue Marble’s experience. Certainly from a business development perspective, it’s another tool that I'm sure Cal appreciates in terms of going out and finding new customers.
Listening to Ian talk about it from the buy side is interesting. You have users like Ian who don’t have a mature procurement organization in place, and this is a tool they're using to go out and drive their procurement process.
But then, on the other end of that scale, you do have large global companies as well. As I talked about, these large global companies who haven’t done a good job of managing what we would consider tactical spend, which again is about 43 percent of what’s influenced.
For them, while they have built out very robust procurement organizations to manage the more strategic spend, it’s this 43 percent of influence spend that’s sub-optimized. So it’s more of an evolution of their procurement strategy to start putting in place the capabilities to address that chunk of spend that’s been sub-optimized.
Gardner: Tell us a bit more about your research. Were there any other findings that would benefit us, as we try to understand what spot buying is and why it should be important to more buyers and sellers?
Albertson: The first question that everyone generally tends to ask when trying to build out a new type of capability is what’s the return on that. Why would we do this? We have already talked about the issue of longer cycle times that occur, if you try to manage the spend through a traditional kind of procurement process and the dissatisfaction that causes. But the other option is to just let the requesters do what they want, and you don’t drive any kind of spend management practices around it.
When we look at the numbers, Dana, typically going through a traditional strategic sourcing process with highly skilled category managers, on average you'll drive just over 6 percent savings on that spend. Whereas, if you put in place more of a tactical spot-buy type process, the savings you will drive is less, 4.3 percent on average, according to our research.
So there's a little bit of a delta there by putting it through a more formal process. But the important thing is that if you look at the return, you're obviously not spending as much time and you're not having as mature resources and as experienced resources having to support that spend. So the investment is less. The return on investment that you get from a tactical process, as opposed to the more strategic process, is actually higher.
There is a very strong business case for going out and putting in place the capabilities to address the spend. That’s the question that most organizations will ask -- what is the return on the investment?
Gardner: Are all the procurement providers, service providers jumping on this? Is Ariba in front of the game in any way?
Albertson: There are some challenges with this process, and if you look at Ariba, they evolved from the front end of the sourcing process, built out capabilities to support that, and have a lot of maturity in that space.
The other thing that they have built out is the networked community. If you look at tactical buying and spot buying, both of those are extremely important. First of all, you want a front-end ERFx process that you can quickly enable, can quickly go out in a standard methodology, and go to the market with standard requirements.
But the other component of that is that you need to have this network of a whole bunch of suppliers out there that you can then send that to. That’s where Ariba’s strength is in the fact that they have built out a very large network, the largest network out there for suppliers and buyers to interact.
And that’s really the most significant advantage that Ariba has in this space -- that network of buyers and suppliers, so they can very quickly go out and implement a supplier discovery type of execution and identify particular suppliers.
We may call this tactical spend, but it’s still important to the people who are going out within the companies and looking for what they're trying to get, a product or service. There needs to be a level of due diligence against these suppliers. There needs to be a level of trust. Compare that to doing a Google search and going out there and just finding suppliers. The Ariba Network provides that additional level of comfort and trust and prequalification of suppliers to participate in this process.
You're going to find companies coming at it from both ends. The smaller, less mature organizations from a procurement perspective are going to come at it from a primary buying and sourcing channel, whereas for the larger organizations, the bigger bang for the buck for them is going after and getting control over the strategic spend.
Again, we're in an environment right now, particularly for the larger organizations, where everyone is trying to continue to evolve the value proposition. Strategic category managers are moving into supply-relationship management, innovation, and how do they collaborate with suppliers to drive innovation.
We all know that across the G&A function, including procurement, there are not the significant investments of resources being made. So the only way they are going to be able to do that is extract themselves out of this kind of tactical activity and build out a different type of capability internally, including leveraging solutions like Ariba and the Supplier Discovery capability to go out and help facilitate that buy so that those category managers can continue to evolve the value that they provide to the business.
Gardner: It seems that the cloud model really suits this spot-buying and tactical-buying approach very well. You log on, the network can grow rapidly, and buyers and sellers can participate in this networked economy. Is this something that wouldn’t have happened 5 or 10 years ago, when we only looked at on-premise systems? Is the cloud a factor in why spot buying works now?
Albertson: Obviously, one of the drivers of this is how quickly can you get up to speed and start leveraging the technology and enabling the spot-buy tactical sourcing capabilities that you're building.
Then on the supply end, one of the driving forces is to enable as many suppliers and as many participants into this environment. That is going to be one of the key factors that determines success in this area, and certainly a software-as-a-service (SaaS) model works better for accomplishing that than an on-premise model does.
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