Can a $10 hinge be strategic?

I bet if I asked the average person that question they would look at me blankly. Even if I asked 'where would a hinge be positioned in a Kraljic matrix?', I suspect most would think it was on the lower end of risk.

But what if the hinge is on a laptop?  What if it was going to adversely impact on the new Windows 8?  Today's WSJ has a fascinating article 'Window 8 Success Hinges on $10 Part' which illustrates the importance of laptop hinges.

Strange thing is the number of times procurement people tell me that low value purchases are not where there attention should be focused.  My response could be something about the straw which breaks the camels back; now on reflection I think I will refer to the $10 hinge which moves the laptop's back. Aim for lowest price and a single source supplier and you may just have made a mistake!

Lesson learnt: strategic sourcing is about more than price.

Procurement responsibility, accountability and L'Aquila

I do not intend to address the procurement weaknesses associated with the 2009 earthquake which led to 308 dying. However, for those unaware of ongoing story, I want to touch on the consequential sentencing yesterday of six scientists and a senior government official.  They were members of Italy's 'Great Risks Commission' and they've now been sentenced to six years imprisonment.  The seven plan to appeal but, nevertheless, two judges decided the experts had downplayed the risks of a massive earthquake.  I have no way of knowing if that was a reasonable judgement, or whether the penalty is proportionate.

Please, please don't get me wrong, I am not trivialising the L'Aquila tragedy. However, in the procurement world we have many academics, advisors and practitioners who are asked to future-gaze and make recommendations on what should be expected or providing reassurance. Sometimes the recommendations are implied predictions of savings to be achieved, sometimes of predictions of impact, sometimes predictions supply risk.  What would happen if, as procurement predictors, we were held more accountable for our predictions.  Personally, I would welcome this.  It would lead to more robust research, less over-selling, and greater focus on outcomes. It could weed out the snake oil salesmen and charlatans.

But it may also drive a better ownership of supply risk management - ownership which is clearly lacking, if we can accept KPMG's recent benchmarking report which implies that only 18% of organisations have risk management integrated into procurement for direct spend (8% for indirect spend).

Are we ready for greater accountability, or is that just one risk we are not prepared to accept?

PRM: stepping in where banks fear to tread

I've discussed SRM a lot lately - more often than not about the vulnerability of firms which do not take it seriously (you can pick up on the previous discussions here).  So learning of Rolls Royce and GlaxoSmithKline stepping in where banks have feared to tread, by providing supply chain financing, impressed me quite a bit.

Rolls Royce have stepped in to lend £500m to small suppliers as a result of banks failing to do so - prior to the Global Financial Crisis there had been no need to.  It's not clear how much GSK have lent. Honda haven't actually lent any money but they have spoken up on behalf of their suppliers so that they can obtain bank finance.

This has to be a strong demonstration of true partnership working.  I would like to hear the government had learnt from this and were going to do similar.  However, it may be more pragmatic if the government introduced an incentive for others to do likewise by under-writing some of the risk the buyers have taken on.  If that were the case, and the offer was extended to public authorities too, I could see this being just the type of initiative which could encourage SME investment and accelerate the UK recovery - let's wait and see if the Chancellor or Business Secretary think so too, mind you I'll not hold my breath.

Is it wise to announce a lack of confidence in your vital statistics?

Some months ago I wrote a cautionary and fictitious blog on a future Procurement Litigation Agency. Today we may have seen the first signs that may become a reality with the government effectively announcing a lack of confidence in its own financial models.

You will recall the recent  Rail Franchise fiasco, which led to the Minister having to admit, that despite previous reassurances as to the robustness of the procurement process, the vital statistics just didn't add up. The permanent secretary put it down to "a lack of proper quality assurance"! Clearly the Franchise has set the 'cat among the pigeons' and, so low must be the level of confidence in government calculators and spreadsheets that, an urgent review has now started to test the reliability of the Government's key calculations.  Not just procurement calculations but also the accuracy of the models relating to climate change, income distribution, benefits claims, and farming subsidies. Quite honestly I have never heard the like of it before in my life!

I would like to hear what scenario planning and risk assessment has been completed on the initiative? What will happen if one, never mind the majority, of the key models prove to be defective?  What will happen if key policies have been launched and introduced on the back of flawed models? How much will all this cost?

Nearer to home, which key procurement models will be tested and what will happen if they are considered weak?  While politically a U-turn can be painful, the might of the Remedies Directive and the Freedom of Information Act may lead the government walking into a potential Procurement Litigation Agency scenario having to address an abundance of FoI requests and procurement challenges.  What will be the impact beyond central government - could the localism powers be extended to enable a referendum to be called for a review of all procurement models and decisions in an area. We are only too familiar with a war having been started on the back of flawed assumptions and 'reported facts' but that doesn't mean we can turn back the clock.

Of course the need for the review may be considered politically expedient, however, what I would advocate instead is a U-turn. Instead of a 'rear-view mirror' analysis, review the effectiveness of  scrutiny, gateway reviews, risk management and quality assurance - particularly for procurement decisions (this blog has highlighted many examples where that has proved ineffective). Such a review of the protection mechanisms will help in the avoidance of future fiascos. That will encourage honesty while the current review can only be expected to encourage defensiveness and a hiding in the sahdows, particularly given the backdrop that mandarins we now be penalised for not implementing government policy.


 

Riding the outsourcing wave

There is little doubt that the strategic make or buy decision is territory which requires procurement expertise, but it requires more than 'how to' knowledge, it requires acute stakeholder management and ownership. Today we learnt of the political cost which can be an outcome of a lack of stakeholder ownership, but it strikes me that there are other lessons which we can learn from today's political fallout at Cornwall County Council.

By way of background Cornwall County Council have been wrestling with the decision of whether or not to outsource £300m of council services.  The rationale for the outsourcing was quite explicit:

Under the proposal one of the two companies bidding for the contract - BT and CSC- will be legally required to deliver at least £5m of savings over the next two years, with ongoing further savings in future years, and to create a minimum of 500 net new jobs in Cornwall.

That seems a fairly clear statement of what was intended. Yet the politicians in Cornwall must have questions about the likelihood of achievement as today they had a vote of no confidence which removed the Leader of the Council.  The vote was specifically linked to the outsourcing decision.  The final decision on whether or not to proceed with the outsourcing has yet to be made, but this is not a good foundation for a successful outsourcing arrangement.

Prior to proceeding with any outsourcing there needs to be

Can MOD procurement be influenced by ex-Generals?

Today's Sunday Times carries an Insight Investigation into MOD procurement, claiming that ex-generals are available for lobbying those who make procurement decisions. The focus of the report appears to be on the so-called 'revolving door'.  That presents only one side of the potential problem.

Whether or not the Generals are breaching agreements and lobbying too early, to me, is irrelevant.  What is relevant, yet doesn't appear to have been probed, is why do both the lobbyists and the Generals appear to believe that investment in them will pay dividends?

Surely, it implies that the Generals, who were formerly MOD staff, did see and experience  procurement decisions improperly influenced - that  has to be the real issue. If procurement decisions have been influenced in the past, we need to know and we need to see the full might of the Bribery Act 2010 brought to bear.  Of course, if the Generals are found to be misleading and self-serving, they need to be discredited and an end brought to the implied allegations against MOD procurement.  We need to have a reassurance that such enormous sums of of public money are spent honestly; up to now we have had no cause to doubt that.  Now the Generals have muddied the waters the doubt has to be removed.  The Generals have cast aspirations on MOD defence; they have brought shame on the organisation with which they should have had greatest pride.  Shame on them.  Shame on us if we don't remove the doubt.

Doctor in Commissioning

How long has GP commissioning been argued about?  How long has it been implied that GPs and their group practices could take on a wider commissioning role with assumed procurement expertise?

Today we hear that GPs have a tendency to hand out anti-depressants too hastily.  Meanwhile I'm reading Ben Goldacre's excellent book on Bad Phama which suggests that decisions by GPs are frequently distorted by skewed information from journals and the market which shape their decision making.

To me these are both indicative of poor procurement practice and, to use a widely used medical term, question the efficacy of GP commissioning. Why?

1. Good procurement is concerned with seeking out that best whole life cost solution.  Prescribing  drugs unnecessarily doesn't sit well with that as it suggests a narrow options appraisal, a lack of Whole Life Costing for patient, the NHS and even the GPs surgery;
2. Good procurement is about challenging potential requisitioners (patients) and whether there is need to consume (buy), albeit via the NHS, anything at all;
3. Good procurement is about ensuring the best possible unbiased search of the market and avoid being swayed by the marketing (see Goldacre's analysis of the existing pharma marketing).

The pursuit of GP commissioning may well be on a sound foundation of trying to get as close to the patient needs as possible, but there are some fairly basic procurement principles which need to be more generally practiced too.

Now, since it's the weekend a loosely relevant good ol' YouTube:

    

Recalling PRM woes

No, I am not pursuing an interest in cars.  It's just that the automotive industry seems determined to usurp public sector procurement as 'could do better on Supply Risk Management' and SRM has been a recurring theme of recent blogs.  Toyota, you will recall were the birthplace of Systems Thinking and Lean Supply, yet are recalling vehicles once again. One recall by a manufacturer is perhaps to be expected,  but Toyota appear to becoming masters of it.

The lessons for procurement are: think about the risks of prolific standardisation of parts, processes and specifications.  Why? Well as Toyota now know to its cost, if you are following a 'globalised standardisation approach', and it goes wrong - it is multiplied globally.  That's a big risk and not necessarily cost reduction!

It's also very difficult to make a switch to an alternative source, particularly if you are reliant on the intellectual property or patients of your suppliers.

But 'recalls' have other adverse impacts: customers who experience repeated 'recalls' become less tolerant, brand loyalty evaporates, and stock market value deteriorates.

Were these basic risks considered, and if so what were the mitigation plans?

All this provides yet more justification of the need to ensure procurement risk management at the board room.

I hope that our friends in central government procurement, who appear to be aiming to put in place bigger and bigger, standardised contracts, give some thought to these potential risks too.   I hope they also recognise that the 'kings of lean thinking' don't always get it right.

PRM, supply resilience and the exponential Prisoner's Dilemma

Recently we've discussed supply risk management (SRM) and some of the issues which may be keeping Apple leadership awake at night. But SRM, or perhaps the lack of it, is becoming a fairly regular news item and even the once exemplars of procurement are not immune.  For example, there was a time when the procurement world looked to the automotive industry in awe - that was the model to be copied; the exemplar. A lot has changed. We now hear that the woes of Lotus cars could be added to, yes, by SRM or the lack of it!

The Lotus scenario is one of a 'multiple whammy': a number of the firms suppliers claim they are owed a total of £23m and are threatening legal action. The question of 'too big to fail' has re-emerged, with HMRC being asked to show some tolerance towards Lotus so that Lotus can maintain its cashflow. That's an interesting twist in itself - should HMRC agree in the hope of helping Lotus survive and look forward to a future revenue stream, or should HMRC demand their pound of flesh and risk being the straw which breaks the camel's back?

Anyway, £23m appears to be owed to suppliers at 90 days overdue, with a further £7m at 30-90 days.  If one or more of those suppliers feel they have no alternative but to sue the whole edifice could crumble - it's an exponential Prisoners Dilemma:

• HMRC have a payment risk; 
• Lotus are at risk from HMRC saying 'pay up now';
• Lotus' suppliers are at risk from the decision HMRC make;
• Lotus are at risk from one of their suppliers (as are HMRC);
• All Lotus' suppliers are at risk from the potential actions of one their peers.

Needless to say car production is suffering too!

SRM was once little more than a potential exam question; a hypothetical - that's no longer the case. If anything the Global Financial Crisis, has increased the likelihood of catastrophic impacts throughout supply chains.  I am now coming to the conclusion that SRM or supply resilience will replace cost reduction as the #1 priority for CPO's - is it your's?  

Grease was the word, now it's 'procurement'

Once upon a time, if you said you worked in procurement, no one really had a clue what that meant.  All that has changed: the Prime Minister, at the height of the political conference season, finds himself compelled to discuss procurement. Even the Undercover Economist has started to discuss bid evaluation.  I am not going to add to the rail franchise debacle debate, save my previous blog.  My concern with the franchise is not that mistakes were made but that reassurances were wrongly given to ministers that the procurement process was 'robust'  when it was not - that is inexcusable and, to me, does more damage to the profession than the making of the actual mistakes.  Of course this isn't an isolated mess, it comes hot on the heels of the Olympic security fiasco.

However, rather than let public sector procurement take all the flack, private sector procurement has thankfully shared the load and also managed to grab the headlines.  Once again Apple's iPhone 5 sole supplier is in the news.  I recently discussed the issue of supply chain risk and the dependency which Apple had on one supplier for the new iPhone.  In that blog I referred to riots which had taken place at the Foxconn factory and how that may have adversely impacted on share price and customer experience.  Today we learn that there are more problems at the factory - this time specification quality standards are at issue: fights between workers and quality controllers, contributed to a strike yesterday.  While Apple is a household name, synonymous with quality, their supply chain dependency is becoming a regular news item.  The behind the procurement story is one of the relative power the key supplier's workforce over the delivery of iPhones, and the negative impact on share price and customer experience. Supply chain risk management must now be a boardroom topic.

It is often said that there is 'no such thing as bad publicity'.  In spite of the negative headlines of the last few weeks, I believe some good may come out of this.  For too long there has been insufficient boardroom discussion on procurement strategy, insufficient robust challenge of award recommendations, and a lack of concern with supply chain risk management - expect that to change.  There has also been a tendency for procurement staff to be appointed in the absence of real scrutiny - expect that to change too.

For good or bad, the next time someone asks what you do for a living, and you reply, "procurement", expect an informed discussion as opposed to a blank stare.

Third sector health warning for addicts

There’s a touch of irony in today’s reports that Cabinet Office enforcers will punish mandarins who opt not to implement government policy, while on the same day we learn that third sector organisations, providing specialist support to NHS patients addicted to prescription drugs, believe they are the victim of a badly designed procurement process that could force them to close.  What happened to Third Sector Commissioning and the Big Society?  This is one example of policy failing to be implemented in  the procurement practice.

To cut a long story short, it appears a new tender approach is underway that requires a comprehensive service in which only bidders which provide support to alcoholics and those addicted to illegal drugs, AND those addicted to legal drugs are eligible to compete.

While I am an advocate of category management, category management needs to be pragmatic.  It has to include understanding the market and how the market works.  It also has to ensure that any bidding which takes place does not stand in the way of making the market work.

However, the approach strategic commissioning is even more baffling. Government and NHS approach to commissioning is to include dialogue with both users and the market as early as possible in order to shape the service.  Third sector criticism of this tender would suggest that dialogue did not take place – can we also assume that specifying outcomes may also have been set aside?

Bizarrely the change in tender approach is being blamed on NHS cuts, yet,

Come fly with me or should I say our agency staff

There is absolutely no doubt that the increasing use of temporary staff as helped raise the profile of procurement.  I actually quite enjoyed letting contracts for agency staff - they provided real influence over big expenditure decisions which had previously been 'closed' and they also delivered significant cost reductions.  One of the things which puzzled me was the exponential demand for the contract which doubled in size every year.

One of my abiding memories of working with Belfast City Council was Bill Clinton's Presidential visit.  It wasn't the razzmatazz or even the special agents approach to sweeping the building, but bizarrely, that Clinton met a disproportionate number of Agency staff about whom very little was known.  I sometimes ask myself: 'did we escape a terrorist attack by the skin of our teeth?' Are there some roles which shouldn't be considered suitable for temporary staff?

It is against that background I was amazed to learn of what now seems to be an over-dependency of Ryanair on Agency staff.  Not temporary baggage handlers, not temporary cabin crew, not even temporary check-in staff - no agency staff as aircraft pilots!