Founder and Chief Strategy Officer of Arkestro, a leading Predictive Procurement Orchestration platform.
getty
In procurement, cadence and tempo describe the time between order communication and fulfillment to meet both inventory needs and lead time agreements. Ideally, all orders are communicated early, but many procurement professionals face delays due to complex processes.
Thankfully there are a few strategies to help procurement leaders get their order cadence and tempo under control, be more prepared for disruption, and achieve cost savings.
High Costs For Delays
In most manufacturing operations, a demand planner regularly releases demand to procurement to confirm and place orders with suppliers. A logistics planner releases demand to procurement to place purchase orders with carriers. Procurement, which sometimes falls under the rubric of “supply planning,” must match demand with supply at scale, often across a supply base with variable capacity. When a primary or preferred supplier runs out of capacity, the team must pivot to find secondary providers.
The problem for large enterprises arises due to an inflexible process for approving demand and converting that into supply plans. What happens when the market goes from long to short? Capacity gets gobbled up fast, and by the time orders may get sent to preferred suppliers, they have already sold some or all of their allocation.
We saw this during the Covid pandemic with logistics. When the spot market for less-than-truckload (LTL) freight surged, carriers defected from their contracted pricing and logistics procurement teams at many companies were left holding the bag.
The underlying factor is often the result of an invisible cascade—the inclusion of “cycle time” for order communication into lead time. In the just-in-time (JIT) era, supply planning teams and their suppliers became used to communicating orders at the last possible moment. While there are many critics of JIT supply chains, there are also benefits to using this approach. The invisible cost comes when companies insist that their suppliers adhere to short lead times not because the demand becomes known at the last moment but because their order approval processes are fundamentally inefficient.
Increasingly, as procurement approvals have become ever more intricate and complex, the steps needed to send a purchase order to a new supplier can be so laborious that the supplier has already delivered the product and sent an invoice. There are very limited opportunities for procurement to create value or improve costs in this scenario.
However, because spend data typically doesn’t componentize the costs associated with rush delivery, weekend delivery, demurrage or other fees associated with unplanned urgent procurement tasks, the exact costs of these long cycles remain difficult to spot in the procurement data. In certain cases, costs are linked to additional fees not even associated with the agreed-upon contracted unit price, which can make them difficult to pick up on. That’s why conducting a unique data analysis on cadence and tempo of orders is so important. You will quickly see if spikes in cost correlate with longer cycle times, and which spend categories this issue is the most acute in.
A solution to rising costs attached to order cadence and tempo is to conduct a realistic time-series analysis of transaction data. To do this, simply look at a set of transactions for the same item across time and with quantity. This will tell you if there is a potential benefit in consolidating more orders into fewer shipments or if you are potentially paying more for orders that are delivered on a weekend or outside of normal business hours for the specific plant location.
Furthermore, this aims to tie the source of truth back to the quoted cost components, not simply the purchase order which may display the supplier spend at an aggregate rather than itemized level. The goal is to identify temporal clusters of orders and compare them to price variances. There are quick wins to be found by examining this data, which can produce dramatic cost reductions.
Seasonality: Procurement Events And Market Tests
Suppose specific parts, materials, ingredients or commodities have a pattern of seasonality associated with a rapid influx of demand. In that case, there’s often a dramatic cost savings opportunity in strategically timing the negotiation and forming the agreement separately from the finalized order. By leveraging the impact of holidays and seasonal demand to calendar the quoting process with suppliers (rather than simply triage reviews based on quarterly financial reporting periods or contract expiration dates), procurement teams can be proactive in setting desirable terms for their business partners.
Identifying Predictably Wrong Demand Plans
In certain demand plans, I’ve seen a chronic issue of underestimated demand numbers that then sway the cadence of orders. In many organizations, this is entirely logical from a cultural standpoint; sales teams tend to prefer a forecast that estimates the number of sold units and then outperforms that estimate. However, when demand and prices are both high in the market, that predictably wrong demand plan creates unnecessary shipping costs and sub-optimizes the procurement cadence and tempo with unintended consequences.
It’s helpful in these cases to perform a looking-back analysis on historical demand forecasts. By doing so, you are asking the question, “How accurate do my demand forecasts tend to be?” For example, if your demand forecasts are always 5% conservative (and then you end up paying rush delivery fees on the 5% that has to be ordered at the last minute), then this is a bias that you can track and eventually adjust for over time.
We know that demand forecasting is an iterative exercise that’s more of an art than a science at most companies, but if we track the iterations, we can see that like many of our human biases, our demand forecasts are often inaccurate in somewhat predictable and well-patterned ways.
If they’ve always been wrong by a margin of 3%-5% in a market where the price of logistics has gone up, it can be a useful exercise to lock in some additional capacity that can then be released, planning for additional capacity instead of having to scramble for spot quotes at the last minute.
Market Basket
Order fragmentation and consolidation is a quick win that can help achieve dramatic cost reductions. By placing orders for the same items in bulk to the same manufacturer, it’s possible to take advantage of volume-based discounts or rebates associated with that type of consolidation. Additionally, this process also helps simplify transaction reporting as companies can communicate material demands to suppliers who can easily track and respond.
Previously, these savings were impossible because smaller orders didn’t have time to wait in a queue for procurement to take action. However, in a world where decentralized purchasing has become just as digital as its centralized counterpart, it’s now possible to combine orders on the fly from workstreams moving in parallel, unlocking business benefits in the process.
There are simple, commonsense approaches anyone in procurement can use to identify and act on cost-saving opportunities at scale. These strategies not only offer continuous improvement in the quality of the underlying “data foundation,” but also bring about tangible and measurable business benefits for any manufacturing enterprise and its supply chain.
Forbes Technology Council is an invitation-only community for world-class CIOs, CTOs and technology executives. Do I qualify?
