Point to Ponder - 80/20 Rule

By Michael Thornton posted 03-22-2018 12:03

  

I have been giving procurement systems some thought lately and have this observation.

Most, I’ll say all, e-procurement systems focus on ‘bids’, more accurately formal bids, and ‘suppliers’.

I believe it is safe to apply the Pareto principal to procurement transactions.

  • 20% of the dollars are spent with 80% of the transactions.
  • 80% of the dollars are spent with 20% of the transactions.
  • 20% of the procurements are done through formal bid and 80% are done through small purchase methods such as POs, p-cards, and off contracts.

There are many software companies that provide software that only address 20% of our procurement transactions.  It seems like improving the process for the 80% has been overlooked.  Since the bulk of the work for the 80% may be done by our end users (departments) it gets overlooked as being important.

Our agency is in the process of revamping the organizational goals.  This means I have to redo my goals and develop meaning KPIs.  This is a good thing.  While procurement may not contribute directly to the new goals of the organization (because of what the goals are) the fact that we provide support to every department that does contribute directly means we are a second tier contributor.

I have identified one area for improvement would be to provide better programs or systems for the 80%.  Improve the process used for small dollar purchases.  By doing that we would be improving 100% of the transactions conducted by the departments.

I’ll share a little bit from the recent supplier survey that I released.  Of the 497 responses received so far, 21.59% of the suppliers say their average invoice amount is $1,001 to $5,000.  That percentage is the highest of all the dollar ranges provided.  In my agency that dollar range qualifies as a small dollar purchase and would be delegated to our departments through the use of a p-card.

Improving the efficiency for the 80% is important.  Yet it seems the focus of procurement is on systems and the process for the 20%.  Is it out of sight out of mind?

There are a lot of e-procurement systems out there and I have used several and seen many, but not all.  I cannot think of any that really stood out as providing a good solution to be used by our end users for small dollar purchases, the 80% of transactions.

While direct (hard) dollar savings on the 20% can be greater, I would guess improving efficiencies for the 80% could result in similar indirect savings.  End user time, quality and payment processing.

I can’t say I have the answer, yet.  But I believe I have identified a problem.  If the procurement profession can provide better solutions for the 80% it would go a long way to end the question, “What does purchasing do?!”

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05-01-2018 15:53

As an implementor of procurement into a large Non-profit. I learned a valuable lesson. One that should be adopted by more government shops as well. When I introduced procurement to my organization I focused on agile procurement. Meeting the 80% where they're located on the fringes, streamlining their processes and making suggestions based off of spend analysis and reporting.

My organization is a bit different from the government because it is Non-profit, but I have been able to utilize co-ops to justify using approval workflow within vendor/ supplier databases, then attaching wishlists to Reqs for PO conversion. Even CCs need a Req. The selling point is that gives me the ability to track Actuals and Committed funds against budget balances. End users can continuously project end of year balances and that is appreciated. 

I think the ultimate procurement app will: 
  • Let you facilitate and customize vendor management 
  • Bidding
  • PO to CO support with vendor notifying and justifying 
  • Informal quote request support
  • Encumbrance and expense controls on the expense category level 
The procurement of the future should promote lowering transactional costs, spend analysis and agile procurement. 

04-20-2018 08:30

Michael,

I share your frustration with procurement systems that don't quite work.  In addition to the fact that they tend to only focus on one type of procurement or another, when you add that it needs to work with your financial system it becomes even more arduous! The fact that many programmers of such systems have never performed procurement functions to have the knowledge base to build a system is frustrating at best.  As procurement leadership, I guess we will have to start working with some of these organizations to better inform them of the needs of our industry.