CIOs will recognize the word “elastic” from cloud computing.

Elastic procurement™ is a delivery model that is to Big Procurement technology systems what cloud computing was to the corporate data center. It lowers costs, eliminates complexity, and empowers staff.

Before Amazon Web Services or Microsoft Azure, CIOs managed large private data centers, often in multiple locations. These were anything but elastic. One might characterize them as flabby and inflexible.

Private data centers needed to have enough capacity to handle peak loads. You can imagine demand that spiked on weekends or at specific times of the year like Black Friday. Practically, the data centers lay underutilized most of the time.

In order to ensure continuous availability, CIOs needed data centers in redundant locations. If Data Center A went down, Data Center B needed to be able to step into the breach. More infrastructure meant more expense.

Imagine a startup that grew quickly (or hoped to do so). The new venture would purchase a ton of capacity in anticipation of the future demand. If the forecast proved too optimistic, then the startup would have burned through a tremendous amount of cash. This forecasting risk was expensive.

If a company wanted a global (or even a regional) presence, this meant running data centers in multiple geographies. CIOs who didn’t do this experienced high latency. It might take a long time for customers to download what they needed from corporate web applications.

CIOs needed real estate in which to house the data centers full of servers and they needed IT staff to support them.

Another aspect of the old data center model is the accounting treatment. Before cloud computing, there were large capital expenses for the equipment, depreciated, say, in a straight-line over four years. The operating expense of the IT team made things worse.

It wasn’t just about infrastructure. Before cloud computing, if the technology team built an app, they needed to provision everything themselves such as security. As Microsoft notes, the team needed “middleware, development tools, business intelligence (BI) services, database management systems, and more.”

“PaaS is designed to support the complete web application lifecycle: building, testing, deploying, managing, and updating.”

Cloud computing addressed all of these things.

CIOs could scale up and scale down their resources to match their demand, paying only for what they used. This eliminated underutilization and the forecasting problem that bedeviled so many startups.

Cloud computing economically enabled geographic diversity addressing the need for availability and low latency.

There was no more need for real estate or IT staff. Of course, some companies pursue a hybrid model in which they have corporate data centers that they choose to augment with cloud computing resources.

Most significantly, companies pay for what they use.

“You purchase the resources you need from a cloud service provider on a pay-as-you-go basis and access them over a secure Internet connection.”

Presumably, the costs for the cloud provider of running and managing this infrastructure on a unit basis fell below the internal unit costs given the greater scale at which the provider operates. The CIO benefits from these cost savings.

This kind of flexibility led to a revolution in infrastructure. More and more companies move some or all of their infrastructure into the cloud every day.

It also created the “software-as-a-service” model.

Now, startups could provide scalable offerings for consumers and businesses with a subscription model. In the case of B2B offerings, an enterprise client would purchase seats for its internal staff engaged in some sort of function. For example, salespeople may use a Customer Relationship Management SaaS offering that enables them to manage their workflow in the cloud. These solutions exceed the functionality and user experience of in-house or legacy systems. The SaaS provider updates them automatically and seamlessly.

So, what would an elastic procurement™ system look like? How would it differ from Big Procurement?

First, an elastic procurement™ approach would “auto-scale.” When you needed it, you could increase its availability. When you didn’t need it, you could turn it off. Some businesses have highly seasonal purchasing patterns. Imagine a mining company in northern Canada, for example. They purchase a great deal in anticipation of the warm weather; they are quiescent in the winter.

Second, with an elastic approach, you pay for what you use. When you’re not using it, you don’t pay. With a SaaS offering, you pay expensive subscription fees with no connection to utilization.

Third, an elastic approach would have some base level of free features. Everyone in the organization should have a seat license for free to access core functions. The elastic system would charge for executing value-added services to buyers such as reverse auctions such as RFPs or RFQs or it might charge suppliers for tools that help them sell. Big procurement is often so expensive that only the procurement staff get seat licenses. When you restrict access to the procurement system, when you limit the visibility of the data it generates, procurement shrinks as a business function. Elastic procurement™ is the best path to making procurement a strategic function.

Fourth, when anyone in the organization can get a seat license, cross-functional collaboration becomes much easier. Stakeholders from finance, operations, product, and sales now have a unique place for procurement conversations, oriented around structured data that they can share with one another simply.

Fifth, an elastic approach leverages tools, data, and intelligence that would be very expensive for the individual purchasing organization to develop independently. The scale of the elastic system and the community it creates with its pricing model makes this much easier and less expensive just as cloud computing platforms facilitate “middleware, development tools, business intelligence (BI) services, database management systems, and more.”

Sixth, and most importantly, a truly elastic approach is scale-independent. It works well for small organizations and for large organizations. It works for groups within large organizations. A good elastic procurement™ solution will have the ability to interface and share data with other corporate systems.

As for who should care, CIOs and SMEs should care. Elastic procurement™ is perfect for CIOs who want to manage the purchasing process independently while complying with in-house procedures in a manner that satisfies procurement. Small and medium-sized businesses who are stuck using email and spreadsheets or legacy systems because they can’t justify the expense of Big Procurement now have an alternative.

EdgeworthBox is elastic procurement™. It is the only truly elastic procurement solution around.

We offer buyers and suppliers a set of tools, data, and community. It is free for users to join. We charge buyers to execute competitive purchases via reverse auction and we charge suppliers for additional selling tools such as the Reverse RFP. EdgeworthBox offers an unlimited number of free seat licenses to organizations so stakeholders from across the enterprise can use it as the hub for all conversations about purchasing goods and services, centered on structured data relating to live and historic purchasing activity. On top of our phalanx of free features, buyers and suppliers pay only for what they use. You can see more in this short video.

There is no other procurement system in the world with our approach. And we’re just getting started. We’ve developed an AI tool for RFP templates and we’re looking at using Web3 to replace catalogs, making every purchase, even smaller ones, competitive on price and solution.

Let’s talk.

New York, NY | September 9, 2021 – EdgeworthBox announces the launch of its cloud-based strategic sourcing platform focused on small and medium businesses (including the divisions of larger organizations). With EdgeworthBox, companies can transform their procurement process digitally with free access to tools, data, and community for both buyers and suppliers. Buyers can elect to pay to host and execute a Request for Proposal or a simpler Request for Quotation on a pay-as-you-go basis.

The pricing model distinguishes EdgeworthBox from incumbent systems requiring commitment to expensive subscription fees. Additionally, EdgeworthBox brings a unique combination of features to the procurement technology stack including central clearing of counterparty risk, public and private repositories of live and historic RFP data, and social networking in the form of profiles and messaging connecting all the users on the platform to one another. Buyers can use it to augment their incumbent approach, ranging anywhere from a combination of email and spreadsheets to the sourcing modules of cloud-based ERP systems. Suppliers can use it enable sales.

“Covid has disrupted supply chains globally for well over a year. Most procurement processes were built for a world that no longer exists. EdgeworthBox helps buyers and suppliers adapt to the new environment with tools proven to work in financial markets. There is no implementation of the cloud-based platform, so users can get to work immediately. Buyers get a solid set of features for free, paying only for RFPs and RFQs they execute on the platform. Suppliers access the tools, data, and community for no charge. Our prices are much lower than the equivalent large systems in the space making EdgeworthBox well suited for small and medium businesses, as well as groups within larger organizations.”

EdgeworthBox is a cloud-based software platform for shortening the sourcing cycle, lowering transactions costs, and lowering opportunity costs by helping to increase both the quality and the quantity of proposals buyers receive when they conduct reverse auctions as part of a buying process while also reducing the cost of sales and identifying new highly qualified leads for suppliers.

CONTACT:

Chand Sooran
Founder & CEO
EdgeworthBox, Inc.
chand.sooran@edgeworthbox.com
201-649-3228
87 35th Street, 2nd Floor
NYU Tandon Veterans Future Lab
Brooklyn, NY 11232

In actuality, taking an analog reverse auction process that worked well in some contexts and executing it using digital tools, made it easier to use reverse auctions uniformly.

When you have a hammer, everything looks like a nail.

When you have an eSourcing platform, everything looks like a Request for Proposal process.

Compared to the Industrial Revolution that spawned the RFP, we live in a more service-oriented economy in which buyers increasingly acquire complex services contracts with cascading consequences of failure, and difficulty in things like invoice reconciliation given complicated deliverables.

The principal risk of using an RFP is that you throw an auction and nobody shows up, or at least not enough of the right suppliers.

This is why many RFPs fail to deliver value-for-money.

They have become bureaucratic exercises in box-ticking compliance, an exercise of form over substance.

Academically, it makes intuitive, linear sense that the best way for buyers to focus on their immediate profitability is a reverse auction that compels multiple businesses to bid aggressively to win the sale.

Of course, like any academic theory, this is predicated on several assumptions. Here is where they fail.

Incorrect Assumption #1: suppliers are selling perfectly substitutable commodities in perfect competition, so the job of the buyer is to drive price down to marginal cost.

Is that really true for most of the things we purchase? Not everything is a paperclip. Using an RFP to buy differentiated products like technology, highly tooled machinery, or marketing optimization obscures deeper questions about value-for-money. Instead of purchasing the best value per buck spent, buyers tend towards purchasing lower value items for the least amount of dollars spent.

Incorrect Assumption #2: the key to success in procurement is cost savings.

Actually, the key to success in procurement is enabling the enterprise to increase its competitive advantage. We conceive of new products that will give our customers a reason to buy our goods and services instead of those offered by the competition. We have better technology, better networks, better brand, that lead to pricing power. Does sourcing from the lowest price supplier reinforce any of that? Are you doing business with the most innovative suppliers? Or is your competition? Cost savings should be the objective when the buyer is buying something that does not really matter to her competitive advantage, one way or the other. Cost savings should not be the primary objective if the buyer is acquiring a good or service that enables them to create more value for their own customers.

Lowest cost procurement is often a lazy proxy for improving competitive advantage in the 21st century.

Incorrect Assumption #3: this is a multi-period game with no memory.

In game theory, memory leads to more cooperative behavior in which both players act in a way that benefits them both for the longer term. The longer the game, the longer the memories, and the greater is the potential for cooperative gains for both buyers and suppliers. Everyone playing a multi-period game knows that their actions in any period affect behavior and outcomes in subsequent periods.

The RFP approach suggests that RFP events exist independent of the context of prior RFPs.

But here’s the thing. Suppliers are intelligent and they remember everything. Suppliers are looking to create value for their customers and share in the creation of that value. If an RFP doesn’t permit them to share in a way that they think is fair and reasonable, then they will go elsewhere.

As the Covid supply chain crisis has demonstrated, this is a question of risk management. Not only will suppliers potentially cease to respond to your RFPs, they may ditch you for buyers who treated them more collaboratively when times become tough. Ironically, the RFP process may lead you to scramble for supply in tight markets, paying exorbitant prices because you alienated suppliers when you had the chance to build a relationship with them.

There is a better way.

Desired outcome #1: buyers source in a way that delivers value-for-money.

Categorize sourcing activities by type, as suggested here. How important is the supplier relationship from a risk management perspective? How did things turn out during the Covid crisis? Is this a commodity or a differentiated product? Is this a strategic acquisition? How many responses have you received in prior RFPs? Depending on the answers to these questions, a more collaborative approach with a smaller group of suppliers may be in order, leading to cooperation on product development or security of supply. In a recent survey, 77% of buying firms said that improving collaboration with their suppliers was a key priority.

Desired outcome #2: buyers focus on increasing their firm’s competitive advantage.

This means that buyers need to be integrated into other parts of their company’s decision-making including product development, marketing, sales, finance, and operations. They have to understand the full competitive dynamic in which their company operates. There needs to be more collaboration internally, as well as externally, even as many companies have no real platform for doing so when it comes to procurement.

Desired outcome #3: buyers develop an approach to the market that is dynamically robust.

Buyers consider the behavior of suppliers in adjusting how they work with them. If the buyer is having difficulty getting suppliers to submit bids, then they need to adjust so that suppliers engage.

Just as the adoption of eSourcing platforms over the past twenty years have led to an excessive use of the RFP, changing your procurement process likely requires a technology-driven approach.

EdgeworthBox is a platform for strategic sourcing, generally, that enables this more holistic approach. We do so as a layer that complements existing procurement infrastructure, so that buyers can execute an RFP cycle that leads to more supplier proposals, when an RFP is appropriate and also develop relationships with suppliers that are suited to a broader context. All without changing the infrastructure they have invested so much in building to date. Give us a shout. Or take us for a free spin.

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Paul Graham is an entrepreneur and investor focused on startups, but who deviates occasionally into philosophy.

Survival is the key to life, not just startups. As they used to say in Canada, “You have to be in it to win it.”

Similarly, Jared Dillian is an investor and commentator who writes extensively about public markets and who deviates occasionally into philosophy.

Ironically, the lesson we took away from the 2008 Global Financial Crisis (not to be confused with the 2020 Global Financial Crisis) is that we should focus on returns without thinking about risk.

In an earlier life, I spent a few years as a foreign exchange options market maker. I worked for several banks, managing portfolios of plain vanilla and then-exotic options across currency pairs with maturities within two years. I started just after the British pound fell out of the Exchange Rate Mechanism and I moved on around the time of the Asian Financial Crisis, having traded through events like the Mexican Crisis, the Quebec Separation Referendum, and a putative Russian coup.

It was great training. It was even more fun. It was a wonderful thing to do as a young man.

The market is a harsh teacher. As a dealer, you’re making markets to various clients some of whom are laying off risk for you to manage and some of whom are taking risk off your hands so they can earn a fee for doing so. Dealers earn a bid/offer spread for providing liquidity.

You win or you lose, you live or you die, by making sure that the market isn’t stuffing you full of risks that are beyond your capacity to handle without paying you enough to take the pain.

You learn very quickly to take only risks that you understand and to be vigilant for bets that you didn’t realize you were taking, or whose scale you may be underestimating. These risk holes can be lethal.

The best risk managers in financial markets dump these risk holes on others willing to take them for a reasonable price.

The corollary point here is that you need liquidity, too. You need to have the relationships in place so that people will work with you when things get rough. And you need to have enough relationships to diversify the possibility that some people will close their doors to you when you need help the most.

Why is the analogy to financial markets appropriate?

Because the grand lesson of the Covid-19 crisis is that sourcing and procurement should be thought of as risk management, first and foremost.

Thinking of sourcing as a transactional process meant that companies ignored the need for a margin of safety and focused exclusively on lowering costs, just as investors fixated on returns, even if that meant taking extraordinary risk of being forced to sell at lower prices, permanently destroying capital. For every Bayer that practiced “just-in-case” acquisition, there were hundreds focused on “just-in-time” purchasing.

Knowing what we all know now, how would you design the perfect sourcing setup?

Manage Risk Firmwide: Sourcing needs to be part of a firmwide conversation about risk. There are people in product, sales, marketing, finance, and operations who receive intelligence about different markets. When they hear rumblings about a weird virus in China, sourcing should know straightaway to be able to react nimbly.

Build Relationships: It is vital for sourcing to cultivate good relationships with suppliers. When supplies get constrained, vendors will take care of their best customers first. Anyone who treated them in an adversarial way beforehand will get the adversarial treatment themselves when it matters most.

Onboard Rapidly: During a crisis like this one, buyers will need to identify, vet, and onboard new suppliers as quickly as possible. Having a bureaucratic process will ironically increase the firm’s risk.

Standardize: Standardize processes and make it easy and predictable for your suppliers. The more obstacles you can remove the better.

Collaborate: Collaborate with your suppliers to help them help you. Find others in different sectors who purchase the same goods and services and work with them to improve outcomes. Work cooperatively with your competitors, too. They aren’t going to learn anything from your sourcing operation that they don’t already know or can’t already figure out.

Diversify: Diversify your suppliers by geography. Don’t concentrate your purchasing with one vendor just for the sake of getting marginally lower unit costs.

Simulate: Use structured data to simulate different scenarios. How did your suppliers perform during the SARS crisis? How did they perform during the tsunami? During a great blizzard? During the 2008 crisis?

Build a Margin-of-Safety: Build a cushion of inventories for key inputs.

None of these things were part and parcel of the digital approach to sourcing before the crisis.

Digitization, it turns out, was just purchasing bureaucracy 2.0.

Of course, the events of 2020 have been unprecedented. A risk management approach to sourcing that worked well would have mitigated the damage, not eliminated it. But, as the old joke goes, you don’t have to run faster than the bear you meet in the woods. You just have to run faster than the other people.

If you want to talk about the tools that you can use to supplement your existing investment in digital tools for procurement, while enabling you to put in place risk management measures such as firmwide risk management, collaboration, diversification, and data-driven decision-making, give us a shout. Come check us out for a free trial.

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Axios reports that “the COVID-19 outbreak has caused supply chain disruptions for nearly three-quarters of U.S. companies, and many are already pricing in revenue losses this year as a result, according to a special ISM survey.”

Here’s the Financial Times on March 8, 2020:

“Peter Guarraia, who leads the global supply chain practice at Bain & Co, estimated that up to 60 per cent of executives have no knowledge of the items in their supply chain beyond the tier one group.”

“Lora Cecere, founder of Supply Chain Insights, a research group, said two-thirds of businesses do not even know the locations of their second and third-tier suppliers, let alone the factory names and critical details needed to make a solid assessment.”

In the pursuit of ever cheaper inputs, American companies have put the country in a strategically difficult position.

“About 72% [sic] manufacturers of pharmaceutical ingredients supplying the U.S. are overseas, including 13% in China, according to FDA testimony last year.”

“’The problem we are facing is: What is the risk? We just don’t know,’ Pocan said in an interview.”

This is terrifying. To put things into an economic perspective using the framework developed by Frank Knight, “risk applies to situations where we do not know the outcome of a given situation, but can accurately measure the odds. Uncertainty, on the other hand, applies to situations where we cannot know all the information we need in order to set accurate odds in the first place.”

You know who doesn’t like uncertainty? Capital markets. They despise it. US equity markets entered bear market territory on March 11, even as credit markets were panicked with the yield on the 10-Year US Treasury Note trading down below 0.4%, briefly on March 9, 2020.

Corporations globally were self-insuring the risk of supply chain disruption without any real sense of how bad the checks could be that they might have to write.

Imagine if someone were willing to write hurricane insurance on a house without bothering to take the time or energy to check out where it was located, or what the history of tropical storms had been in the area, merely asking the broker about how much premium they could earn. Is it really a surprise that the homes with the highest rates were the ones in harm’s way? Or that when the Big One finally came, the collected premia didn’t come close to covering the damages?

U.S. News & World Report summed it up well:

“In a way, one central question for supply chain dynamics moving forward seems to be greed versus safety. Stockpiling, redundant suppliers – these prophylactic measures cost money, Broadman says.

“’The reality is that many of these manufacturers and retailers have experienced disruption in the past and agreed that the cost savings were worth the risk,’ says Steve Agran, a managing director with Carl Marks advisors, a middle-market investment bank and advisory service.”

What are the problems in sourcing that led us to this point and what could sourcing staff have done differently?

Sourcing Has to Change and It Has to Change Now

In the context of sourcing, full supply chain visibility means knowing who your suppliers are, who your suppliers’ suppliers are, and so on all the way through to the original input.

Let’s consider a simplified, fictitious example: a fabless analog semiconductor company called HypeCom. HypeCom designs chips and outsources manufacturing to a third party. HypeCom uses Taiwan Semiconductor as its sole Tier 1 supplier a semiconductor fabrication facility. (HypeCom isn’t big enough so they concentrate all their volume with Taiwan Semiconductor to get the best pricing.) Taiwan Semiconductor would, in turn, source blank silicon wafers from one set of companies as well as electric power and semiconductor manufacturing equipment from various other companies. These suppliers to Taiwan Semiconductor would be Tier 2 suppliers for our fabless semi company. The wafer companies would need to source sand from yet someone else who would be … a Tier 3 supplier for the fabless semiconductor company.

If HypeCom is like most companies, they know everything there is to know about Taiwan Semiconductor. They have visited the plant in Taiwan where Taiwan Semi produces the chips and spent time with senior management. They parse the quarterly financial statements and public disclosures religiously to understand and quantify the risk that Taiwan Semiconductor presents to HypeCom operations.

What they don’t do is research who Taiwan Semi sources from. They don’t know where they get the wafers or the power or the equipment. Even if they did know some of the names, they have no information or follow through in conducting a diligent investigation into these suppliers, many of whom are private companies. They haven’t asked Taiwan Semi for this information either. Everyone other than Taiwan Semi in this contrived case is said to be an “invisible” supplier, from the HypeCom perspective.

Yet, HypeCom is exposed to weaknesses in these Tier 2 and Tier 3 suppliers. What if there is a run on wafers that causes Taiwan Semi to slow down production for all its clients, giving preference to its largest, most strategically vital customers? Or, if there is a quality issue with the sand that leads to plummeting yields in the fab? This can negatively affect HypeCom’s ability to fulfill contracts to its own customers who may be using HypeCom chips to make smartphones.

These kinds of cascading, unintended consequences are indicative of complexity. Designing analog semiconductors is a complicated art at the best of times. But, HypeCom’s business exhibits a fragile vulnerability to factors not only beyond its control, but outside of its awareness.

The funny thing is it keeps on happening!

Tom Linton and Bindiya Vakil write for Harvard Business Review, “While most companies could quickly assess the impacts that Fukushima had on their direct supplies, they were blindsided by the impacts on second- and third-tier suppliers in the affected region.”

The tsunami that hit the nuclear plant in Fukushima took place on March 11, 2011.

There are even cases when people know that they are taking a risk, but they do it anyway because the upfront economics are irresistible. Consider the HypeCom sourcing officer who sole-sourced a large contract with Taiwan Semiconductor in order to concentrate volume and ensure that they get the supply when things are tight.

Those cost savings are the insurance premium HypeCom collects for the house in the Caribbean with the good view of the beach.

Why does sourcing not pursue full visibility into their supply chains?

On the face of it, there don’t seem to be any good solutions other than brute force labor. But, good procurement staff are difficult to find. Procurement departments are short-staffed. They are struggling to keep up with the massive bureaucracy that is the RFP business process. (Even then, they fall prey to “shaped” RFPs.) Depending on what they source, companies may have a ton of small suppliers, who have their own suppliers. Everyone thinks that they need to keep their cards close to the chest. There are lots of reasons.

Sometimes people just don’t comply with the procurement policies. Sourcing has become such a complicated endeavor that people end up treating it as a pro forma exercise in compliance instead of executing it the way it was intended.

It is often not about getting the right thing from the right supplier at the right price as much as it is about appearing to follow procedure.

Over time, sourcing on paper has come to look like a belts-and-suspenders process, but in practice is more of a clothing optional affair, to Buffett’s point.

Procurement expert Sigi Osagie is spot on in Spend Matters:

“Purchasing processes that are cumbersome or entail too many worthless activities drain value from Procurement’s work … If your processes (and any related systems or tools) are arduous, don’t expect high levels of compliance.”

These Kinds of Shocks Are Going to Keep Coming

The Wall Street Journal refers to the accelerating pace of global pandemics (or, at least, our heightened awareness of them) “including SARS in 2002 and 2003, Swine Flu (also known as H1N1) in 2009, MERS in 2012, Ebola in 2014-2016, Zika in 2015, and Dengue in 2016.”

“Epidemics of infectious diseases have become a regular part of the global landscape in the past quarter-century, thanks in part to economic trends including urbanization, globalization and increased human consumption of animal proteins as society becomes more prosperous, these experts say.”

“Mr. Daszak estimates pandemics could cost as much as $23.5 trillion over the next 30 years. That estimate includes not just lost economic activity and property, but also the statistical value of lost human lives.”

Investors are going to demand that companies have more robust supply chain procedures in place and they are going to incorporate an assessment of supply chain risk increasingly into corporate valuation.

Staffing Constraints Make the Problem Worse

We have written previously about the difficulties of getting the right procurement staff in place.

Combine this with the nature of the process and it’s no wonder that people cut corners. There is a reason why so many RFPs are “shaped.”

The Procurement Office has a good note on this dimension of the problem. They highlight the vicious spiral in which it is difficult to recruit, train and retain staff, leading to a constant under-staffing of procurement functions which, in turn, places even greater stress on those still in their jobs, motivating more of them to leave.

In fact, being short-staffed can lead to people to take the path of least resistance. “The GAO found that the high rate of sole-sourcing was caused by staffing shortages since the ETA had insufficient staff to properly administer the required tendering processes.”

Furthermore, “… the failure to properly staff a procurement department can have a significant adverse impact on an institution’s ability to properly manage its contracting practices. Public institutions should be careful to avoid normalizing staffing shortages since this can create a significant spiral effect of further staff departures that result in recurring cycles of sub-optimal contracting processes.”

As Baby Boomers and GenX employees approach retirement or restructuring, this may worsen, as experienced hands take their institutional knowledge with them to be replaced by a new generation of contracting staff who are impatient with bureaucracy and skeptical of bad technology.

What Would a New Approach Look Like?

The role of procurement is bound to evolve. As CIPS puts it, ““Procurement will play a key role in the management of these critical suppliers and supply chains. We might even get renamed ‘risk managers’ or ‘supply chain protectors.’”

Procurement staff will focus on complexity. “Future employees may expect to self-serve the majority of their procurement needs through established systems, leaving purchasing and supply professionals to concentrate on solving complex issues, partnering and sustainability.”

First, sourcing has to understand the problem. Staff need to be able to convert the uncertainty of an invisible supply chain into the known and understood risks of a visible supply chain. You can’t manage what you cannot see. Linton and Vakil suggest active management of company’s Tier 1 and Tier 2 suppliers with knowledge of the risks of every other supplier. Understand your exposure to get a sense for how to mitigate risks that your investors are not paying you to take. This means knowing what is happening operationally and strategically for these suppliers. Are their corporate restructurings in the sector? Is there M&A? Have companies been reporting poor financial results? Is there litigation in the sector?

This isn’t going to be free. As CIPS points out, “During this crisis, companies are recognizing the value of supplier relationship management programmes – especially when a supplier treats the organization as a priority customer if stocks are limited. However, buyers also understand the need to accept price rises as part of the relationship while the supply/demand equilibrium changes.”

Second, sourcing needs to diversify its supply. We need to redefine the concept of value-for-money to be “the right thing from the right suppliers at the right price and an appropriate level of risk.” Diversifying sourcing by spreading the business across multiple suppliers, in different geographies, is a prudent first step. Ensure that your suppliers don’t rely on the same set of Tier 2 and Tier 3 suppliers. Such overlap defeats the purpose of diversification.

Third, lay off the risk of business disruption that your firm cannot or will not manage itself to third-parties who are willing to insure your firm in consideration for a premium. Perhaps, there are “natural” hedgers out there, including in the firm’s customer base. Understand the fundamental commodity markets. Try to make sure your customers are paying you for the risk you are taking.

For example, Pilgrim’s Pride filed for bankruptcy in 2008 because their pricing model had them manage the underlying commodity price risk on behalf of their customers. Extreme volatility in the prices for key input commodities and poor management of this price risk combined to force the restructuring. When the company exited from bankruptcy, they had changed their pricing model to put the commodity price risk onto their customers (as did the other producers in the chicken industry).

Fourth, build up inventories of key parts, especially for those items that the firm must purchase on a sole source basis.

Fifth, collaborate, collaborate, collaborate.

Here is Supply Game Changer on the pervasive sense that collaboration with suppliers will become necessary, ““Sixty-five percent of procurement practitioners say procurement at their company is becoming more collaborative with suppliers, according to The Future of Procurement, Making Collaboration Pay Off, by Oxford Economics.”

Get this right and it’s not just about securing supply, it becomes a much deeper relationship. “Suppliers don’t just collaborate with you to provide a critical component or service. They also work with your engineers to help ensure costs are optimized from the buyer’s perspective as well as the supplier’s side. They may even take over the provisioning of an entire end-to-end solution. Or, co-design with your R&D team through joint research and development.”

This kind of fundamental change in the buyer-supplier relationship is enhanced by bringing in others from across the buyer firm to the conversation.

“Supplier relationships, like every aspect of the integrated supply chain, have grown increasingly complex. To achieve a competitive advantage it’s important that you approach sourcing as a strategic, systematic, cross-functional and cross-enterprise process. By establishing active collaborative relationship, sourcing evolves beyond pure transaction management to a networked, mutually beneficial partnership.”

The more that procurement staff know about the priorities of the business units, the better poised everyone is to assess and weight the risks involved. Procurement becomes strategic, as this CPO rising article points out:

“In the field of international relations, the parable of the stag hunt is used to describe and explain the dynamics, opportunities, and risks of collaboration versus competition. If countries (or in this case, buyers, line-of-business users, and suppliers) collaborate to hunt big game, like deer, the reward can be mighty: if they are successful, every member of the hunting party will take home their fair share. But if party members break off to pursue small game, like rabbits, then the rewards will be smaller and each party will be a competitor. In the realm of sourcing, going it alone may seem like the natural and rational thing to do, but the risks often outweigh the rewards. Meanwhile, sourcing organizations that have adopted a more collaborative approach are, among other things, helping to develop both new products and lower cost products, identify new markets to enter, and find M&A targets in the supply base. There’s something for every one to gain in the hunt.”

That is to say, it’s not just collaboration with suppliers, though. Collaboration with other buyers has benefits, too. There is collaborative procurement, for example, in which buyers jointly purchase items. Get this right and you can purchase in larger volume (producing greater cost savings), even as you diversify your supply, while reducing the duplication in effort of your already hard-pressed procurement staff. And you just might learn something about the category from another procurement officer at a different organization.

Sixth, find and use good quality, structured data. Data is the key to making procurement part of strategy, interfacing with other parts of the buyer enterprise, and measuring and managing sourcing risk. This article sums it up well.

“When procurement data is combined with data sources such as operations, finance and even human resources, new insights into cost control, cash flows and even fraudulent transactions can be generated. I firmly believe that the procurement team can play a central role in the data transformation of a company.”

Key to enhancing supply chain visibility and managing supplier risk is going to be data about the suppliers, located accessibly in a structured, preprocessed format. Supply Chain Brief gets it right.

“In another recent report, Gartner predicted that by 2023, organizations that don’t really tackle the issue of supplier master data management will very likely have the wrong information for half of their suppliers. When you think that many CPOs are looking to Supply Chain professionals in their organizations for data which will be used to make strategic decisions on AI, IOT, blockchain and contract automation, there is definitely a compelling reason to get this right. But it’s not easy.”

Combine this with staffing shortages and demographically driven turnover in procurement officers, the need for good quality data becomes more urgent as automation solutions can drive actionable intelligence. Per McKinsey:

“For deeper insights into purchasing data and trends, we find that advanced analytics-based systems beat traditional models every time—and the capabilities require little added investment. In most cases, all it takes is a change in mind-set. Since the potential savings from better-informed negotiations are so substantial, procurement functions have no excuse for delay.”

How Do You Implement a New Approach?

What we’re talking about here is re-engineering a business process and giving the team the tools to make that happen.

The best way to implement this change is to focus on the right technology.

At EdgeworthBox, we have taken a holistic approach to building a platform with this kind of process re-design in mind. We have layered three sets of tools on top of a marketplace that matches buyers and suppliers. The tools come from financial markets where these kinds of questions about sourcing and risk are routine for participants who trade millions of times daily in a compliance-intensive environment. We designed our 21st century app-like user experience to appeal to the changing, younger workforce.

We have a central clearinghouse for administration focused on making supplier risk management much easier for both buyers and suppliers. EdgeworthBox converts the traditional cumbersome one-to-one supplier onboarding into one-to-many vendor management using our version of a common application. Suppliers can just give potential buyers access to the relevant answers and supporting documentation with the flip of a switch. A process that IBM takes more than a month to execute (with seventy steps!) can be reduced to a minute, once the documentation is uploaded. Suppliers also benefit from only seeing relevant RFPs, avoiding the noisy stream in which they live now and missing fewer opportunities. With EdgeworthBox, a buyer can ask its Tier 1 suppliers to have their Tier 2 and Tier 3 suppliers join the platform for ready access to their underlying information.

We have a central clearinghouse for structured data, in two repositories (one private with restricted access to the firm user, and one public with government information). This data shows information about live RFPs, historic RFPs (and the interactions around them such as supplier responses), and historic contracts (including prices paid).

We have social networking to promote shared information on profile pages as well as a messaging platform that connects buyers to other buyers, suppliers to other suppliers, and buyers to suppliers. Collaborate, collaborate, collaborate. With Tier 2 and Tier 3 suppliers on the EdgeworthBox platform, particularly in times of crisis, buyers can get direct information from their full supply chain.

Our business model is such that buyers pay a small monthly SaaS fee for this functionality, a fraction of what they pay for their existing solutions. In fact, one way to think of EdgeworthBox is as a service that augments the existing investment in ERP services or cloud-based P2P or S2P systems. With the buyer’s organizational license, they get an unlimited number of seat licenses so that individuals from Finance, Operations, Product, Marketing, and Sales can join in the procurement conversation. Suppliers join for free.

Take a free trial. See what it’s all about for yourself. If you like what you see, give us a shout.

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The Business Roundtable recently released a high-profile “Statement on the Purpose of a Corporation.”

What they are calling Common-Good Capitalism is a hot topic these days with politicians descrying the current state of capitalist affairs and promoting concepts like “common-good capitalism.”

A prior, more fundamental question is, “What is the purpose of a corporation?” something the Business Roundtable endeavors to answer after laying out a list of commitments most notably, “Dealing fairly and ethically with our suppliers.”

“Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities, and our country.”

A company, in this articulated vision, is an artificial construct generating value by providing goods and services, sharing the value it creates in an economically and social optimal way across its different “stakeholders:” government, management, workers, owners of capital, and communities.

We live in remarkable times.

The balance between different stakeholders is a topic of debate.

Some would argue that optimality is driven by the amount of value any putative distribution can create. Some allocations of value lead to a bigger pie than others.

Other argue that the fairness of the distribution is equally or more important than the size of the pie. Why? Because fairness implies sustainability. A company can generate much more cumulative value over time with a fair distribution than one that is perceived to be inconsistent with the times.

And the times, they are a changin’, as the bard wrote.

An important part of the shifting perspective on balance and fairness stems from our changing demographics. Women make up a greater percentage of the workforce and of the entrepreneurial class. There are more minorities proportionally than there used to be.  We are more sensitive to the historical injustice of the treatment of indigenous peoples. We are grateful for the sacrifices of men and women who were disabled in service to their country, as we should be.

From the 2016 Hackett Supplier Diversity Study:

Yet, according to UPS, there are big problems.

“According to the 2019 Supplier Diversity Study conducted by the Hackett Group, supplier diversity programs hit only half of their intended goals, and more than three-fourths of corporations say they lack funding for outreach and training.

“This is not how critical business functions typically work, and no amount of CEO statements or awards banquets can overcome the level of misalignment between supplier diversity and corporate strategy.”

More from the UPS citation of the Hackett study on diversity:

“Today, two-thirds of corporations find it difficult to get the organization to adhere to supplier diversity program policy …”

There’s the rub.

For supplier diversity to really take hold, everyone involved needs to understand why it’s important for generating value, to making the pie larger and/or more sustainable.

And it needs to be easier for these diverse suppliers to engage with large corporations. This means better user experiences, more engagement, more mentoring.

Again, from the 2016 Hackett report:

Just saying you’re going to spend more with diverse suppliers isn’t enough.

Buyers have to develop their suppliers with investments of time, money, and knowledge.

Get this right and there are plenty of benefits to investing in diversity in procurement.

• “Better ROI: From a financial perspective, a report from the Hackett Group, ROI Related Supplier Diversity, found that companies that participate in a long-term supplier diversity program generate a 133% greater ROI than those companies that use the suppliers they have traditionally relied upon. “On average, supplier diversity programs add $3.6 million to the bottom line for every $1 million in procurement operation costs.”
• “Lower operating costs and higher profits: Companies in the Hackett Group survey with supplier diversity programs spent an average of 20% less on their buying operations compared to similar companies operating without these programs. These “pro-diversity” organizations also drove an additional $3.6 million to their bottom lines for every $1 million spent in procurement operating costs.
• “Increased innovation: A Harvard Business review study reported that increased cultural diversity is a boon to innovation, and businesses run by culturally diverse leadership teams were more likely to develop new products than those with homogeneous leadership. As an added twist, a study conducted by Boston Consulting Group (BCG) showed that organizations with more than 20% of women in management positions are likely to see 10% more innovative revenue — revenue driven by radical new products or services– than their less-diverse peers.”

EdgeworthBox overcomes key obstacles to dealing with suppliers from traditionally disadvantaged backgrounds.

An easy user experience that requires little-to-no training, a cloud-based SaaS offering with no IT footprint, social networking and a data clearinghouse to facilitate mentoring and knowledge sharing, and a zero cost option for suppliers make it very straightforward to onboard diverse suppliers.

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It’s an exciting time to be alive. It’s also a terrifying time to be alive. Exciting if you are at a startup, you’re young and unencumbered, and you have access to tools that make it easier than ever to build a product. Terrifying if you are a mid-career executive at a large corporation who worries that some kid in a hoodie will invent an AI product that will throw you out on the street, even as the message comes from on high that investors want innovation and they want it yesterday.

You can build it, you can buy it, or you can rent it.

Building it means hiring engineers and scientists to develop new products. Some established companies are very, very good at this. It is their core competence. Look at 3M: 50% gross margins, strong free cash flow generation, the US Government’s highest award for innovation, the National Medal of Technology. Scientists and end users collaborate to identify key problems and build products to solve them, even as in-house technical staff share ideas. They have a rule that says that 30% of revenue must be generated by products developed in the previous four years. This is in addition to doing longer term, fundamental research. 3M has created novel incentive and career structures, even seeding internal teams for new products with small, educated bets. Much has been written about Google’s free time they give to employees to pursue projects, but 3M has had its 15% rule for years. 3M scientists can spend 15% of their time on projects that interest them.

Here’s the rub. Not every company can be 3M. In fact, 3M is extraordinary for having the scale and the culture to make this happen.

What’s a big behemoth to do? CBInsights has a great profile of things not to do. These include paying someone to set up a corporate accelerator so that you can source innovation, engaging in corporate venture capital, emulation of what you think startups do, etc. If your firm cannot be 3M, then you buy or you rent (say, with a SaaS license).

Large corporations have lots of internal and external customers who, in turn, have lots of problems. What they may not have is the culture of innovation to be able to do it internally, or the resources to make it happen systematically.

This is a matching problem: pairing startups that have solutions with corporations that have problems.

Corporates seeking innovation can either passively wait for it to come to them, or they can solicit it actively.

Waiting passively doesn’t typically work. Imagine you are the head of innovation for a bank. Frequently, you receive unsolicited proposals from startups who have built products. The only thing is that these products likely don’t have anything to do with your problems because the startups don’t understand your context. So, you waste a lot of time saying no.

Active solicitation means spending a lot of time hunting for startups whose products could solve your problems. This may not be terribly efficient. This is the motivation for corporate venture and corporate-sponsored accelerators. The problem is that the corporate wastes a lot of time and money in the hunt, with not much to show for it.

Here’s a chart from CBInsights describing the obstacles corporate VCs need to overcome from their State of CVC report:

Ideally, what you would like is to vet only those startups that understand your problem set (or, at least, the outline its outline).

This is perfectly suited for a marketplace of, ahem, ideas.

Imagine that a corporate buyer could post a “challenge” describing in as much or as little detail the problem they wanted to solve, without over-specifying what a solution would look like, to a marketplace where the suppliers were all startups. They don’t need to be from your industry, either. A startup in industry X may have come up with a product that solves a problem in industry Y without any knowledge of it. Just tell the startups what the desired outcome should be. For example, if you were a bank, you may say that you would like a solution that detects patterns (fraud) in large sets of data of a particular form: anti-money-laundering due diligence questionnaires. You will attract more potential responses from companies that specialize in AI, generally, than if you go just to companies that specialize in fraud.

EdgeworthBox is a cloud-based managed marketplace that can enable corporate buyers to source innovation from startups with a focus on outcome-oriented procurement. This is a faster way to access new products with a wider aperture, lower transactions costs, and lower risk than setting up a corporate accelerator or a corporate venture arm. Also, our social networking can promote collaboration across buyers. Come check us out or sign up for a free trial.

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