If you’re unfamiliar with PPO, you aren’t alone. Here’s how Westfall Technik discovered it and is turning it into a powerful tool to simplify and streamline procurement.
— BY DAVID SCHULTZ
This is a story of what-ifs. Here are 10 to get started.
What if the procurement process could be more: Disciplined
Predictive. Productive. Data dependent. Strategic.
What if the procurement process could be less: Reactive. Time consuming. Costly. Isolated. Uncertain.
That’s a lot of what-ifs, each with the potential for a strong ripple effect across a business. And at Westfall Technik, those what-ifs are powerful outcomes that today are driven by predictive procurement orchestration (PPO). And even though we are still in the early stages of implementing PPO, we know it is the preferred platform for a highly effective and efficient procurement process at Westfall.
But first, a little background. The company is a $350 million roll up of more than 15 injection molding and mold building companies assembled by private equity funds over a five-year span. Westfall molds plastic parts on demand primarily for healthcare and consumer packaged goods for more than 250 different companies.
In a typical year, the company molds hundreds of millions of parts at a dozen or so locations around the United States. To make those parts, Westfall buys tens of millions of pounds of more than 100 different plastic resins. In many cases, these resins are proprietary blends developed for specific products that Westfall molds for its customers. As you already suspect, all those corporate entities had their own unique procurement processes.
That’s a lot of pressure on an organization like Westfall. There was nothing standardized, streamlined, coordinated, or forward-looking in the overall procurement process. Did I mention that it was costly and slow, too? The big picture might have even been called undisciplined. Westfall CEO Mark Gomulka wasn’t having that for long.
That’s where I came into the picture in early 2022 with my experience as the chief procurement officer and chief supply chain officer at both publicly traded and private companies.
The basics of PPO
Despite that procurement experience, I had never deployed predictive procurement. In fact, automated sourcing when I first heard of it, I rejected it out of hand. Or to be more diplomatic, I wasn’t a fan. But I am now.
My conversation with Edmund Zagorin started at a chief procurement officer event that I was chairing, an event that focused on technology trends across the procurement profession in different industries. When Zagorin isn’t spending time at conferences, he is the founder and chief strategy officer of Arkestro (which at the time was still called Bid Ops).
Let’s start with the generic name itself: predictive procurement orchestration. Zagorin says it’s called predictive procurement because it suggests upfront in the supplier’s quoting process a price for the items a company wants to purchase. It essentially predicts a commercial outcome at the beginning. And then orchestration relates to the platform that coordinates all data and communications in the bidding process. As required, orchestration extends the platform’s reach to key enterprise software layers at the user.
Drilling down, Arkestro’s PPO platform is an embedded layer of intelligence in the form of continuous simulations and predictions running on Arkestro servers and using a range of data points, including real-time market data and statistical models, to monitor and inject recommendations via email into the procurement process.
Westfall procurement staff and suppliers tap into the business opportunity process via email using an interface similar to DocuSign that radically reduces friction from suppliers logging in and having to create multiple profiles with the same customer. Relevant data at key points in the process are pushed to individuals and their personalized control towers, not to a centralized dashboard.
Unlike traditional procurement platforms, Arkestro’s PPO process starts with a suggested price, delivery date, and other relevant conditions for the buy. Bidders respond by email via the platform to the offer in a series of rounds. In each round, individual bidders are ranked by both a predictive model (e.g., comparing an actual quote against the predicted outcome) as well as versus the other suppliers, to let the supplier know where they stand in the process.
As the process tracks toward an optimal commercial outcome, Westfall’s procurement team gets notified with recommendations for award allocation that takes into account the holistic nature of the supplier relationship, commercial history, and even factors like supplier risk and operational performance. What was remarkable to us was that in Arkestro, this process typically takes days, not weeks or months.
While I generally liked the process of PPO, I did not initially embrace the premise. Why offer a price to a supplier? From that point forward, I’m negotiating with myself. Or so I thought.
This is where I connected the dots to something in game theory I had heard about previously, which is called the anchoring effect. It’s a basic premise of Arkestro’s PPO that works alarmingly well.
One example of the anchoring effect on human behavior is organ donation in Germany and Austria. While the two countries have much in common, they have dramatically different participation rates when it comes to organ donation.
In Austria, which has a 99% contribution level, all citizens are automatically enrolled in the organ donation program at birth and are forced to opt-out if they elect not to participate. But in Germany, with a 12% donation level, each person must enroll personally or opt-in to be included. In Germany’s case, attaining the desired outcome is more work (extra decision points, extra paperwork), not less.
In game theory, the anchoring effect, quite simply, selects the preferred outcome upfront in a process that not only removes extra steps but also establishes the desirability of that outcome. It’s the same reason so many marketing messages arrive with a check in the opt-in box for their email newsletter before you even know what the company is selling.
Most people in procurement are taught to never make the first offer in a negotiation. However, making the first offer here is actually a powerful anchoring effect in getting to a preferred price for goods and services relatively quickly. It’s not so much that you are guaranteed to get the price you offer, but rather by going first, you prevent the other person from anchoring, and the power of the other party’s anchor is so influential that people who make the first offer end up ahead.
There is one other benefit. Because no one I know in procurement likes the data input stage of the buying process, it clearly doesn’t hurt to suggest a price upfront to potential suppliers. Quite simply, it eliminates their need to manually enter that number during the process. This approach is contingent upon the purchaser knowing the category/commodity well enough to predict what the outcome should be in a competitive marketplace.
This is where the AI/ML analytics take center stage to analyze the data and determine the proper place to begin the process.
There’s also the matter of taking time out of the process of receiving and analyzing a supplier’s quote, whether that’s part of a formal bidding process or a spot buy-purchase. We’ve all been in negotiations that drag on for an extended period of time, maybe even a month or two. And while that time ultimately might result in a lower price, it can be detrimental too.
For instance, your objective may be to make a buy with the potential to save $1 million a month. If the bidding process extends for a couple of months, that’s $2 million in savings that you can never get back. It’s referred to as the cost of delay (COD) and can be prohibitively costly. PPO is an antidote.
It is also worth noting that PPO does not, as a process, guarantee the lowest possible price. But from what I have found, PPO does generally get to the best price quickly, which, after all, is only one of the criteria in any buy. And it does so without taxing the supplier relationship, which for many of our suppliers is absolutely critical.
My experience over the years has resulted in significant frustrations voiced by suppliers when subjected to reverse auctions for several obvious reasons. This process seems to enable very similar levels of cost reductions through the transparency of the feedback but doesn’t result in a fractured relationship going forward.
There is one qualifier here, too. Arkestro’s PPO starts with informed pricing based on real-time input from sources that track market conditions. Combined with historical data, these real-time information feeds provide valuable insights that naturally lead to an initial price in the supplier’s quote submission process. Because it’s data-driven, we don’t need to spend a lot of time in pivot tables analyzing quotes on the back end. If Arkestro suggests it to a supplier, we know that it’s informed by market data and customized to the competitive environment and supplier base we have at Westfall.
This is not a matter of picking a number out of thin air. Instead, PPO allows Westfall to sufficiently understand the subject matter prior to suggesting a price. Artificial intelligence has a role here. More on that in a bit.
Setting up the pilot at Westfall
Understanding all of this was my “aha” moment with PPO. It’s a good fit for Westfall, which, beyond making great products, is focused on speed and the lowest total cost of ownership, as well as providing negotiation services to our internal customers and reporting reliable, trustworthy data about our supply base and our cost structure. In procurement, PPO is our best shot at being both fast and highly cost-effective.
I got to this point relatively quickly. However, I wasn’t the only one at Westfall who needed to understand the value of PPO. IT and the extended procurement team also needed to understand.
At our headquarters in Las Vegas, I pulled together a team of four in April 2022. It included our CIO and other key stakeholders. Unsurprisingly, IT was plenty busy with other projects. They didn’t need a procurement guy introducing them to new software that they were completely unfamiliar with.
Here’s the good news. As far as Westfall is concerned, Arkestro’s PPO solution is a platform. Everything runs on Arkestro’s servers, not Westfall’s. There certainly is software on Arkestro’s end, but there is no software to install or learn here at Westfall. CIO Andrew Jankowski was much relieved, to say the least. We spent the first four hours or so introducing the PPO concept to the assembled team, laying out the premise and the game theory behind it. From there, we moved on to a pilot for making an indirect materials purchase of new laptops for Westfall. Within 72 hours, the team had reached an agreement to purchase our yearly requirement of laptops using PPO. In only this pilot, we saved significant time and dollars. Now, we could start to see the real-world potential of PPO for a company that was always buying large quantities of many different direct and indirect materials, including plastic resins, to service our customers’ needs.
This was a live test. People quickly noticed there was no user’s manual. That’s because all of what was on their screens was highly intuitive. (See sidebar for a rundown on the steps in the supplier quote request process.)
The secret sauce
In a word, the secret sauce here is data that’s timely and relevant and packaged up with an action, not data that we have to dig through a dashboard in order to know if we’re getting the right quoted price from the best supplier. But it’s much more than internal data about already preferred suppliers. It also includes external, real-time market data from multiple sources.
In a traditional procurement operation, internal data points such as supplier profiles are the centerpiece of buying data. They include histories, patterns, fluctuations, and frequencies of what has been purchased and for what terms.
In advanced procurement departments, business intelligence software is used. Our CIO, Jankowski, made sure that when I came in, we had dashboards set up with all of our ERP activity showing our spend, orders, and requisitions, all visualized in near-real-time on a set of dashboards. The challenge wasn’t that we couldn’t see any of our spend. The challenge was: how do we use this when we’re interacting with suppliers, and where do we embed and leverage this data during negotiations and strategic sourcing and purchasing activities? As everyone knows, most datasets in procurement aren’t always fully accurate, complete, or updated to the current state. That can also make it challenging to embed or incorporate them into the context of sensitive communications with suppliers. The most frustrating thing is to have so much data that it’s impossible to find the needle in the haystack, and the really important insights are only uncovered after it’s already too late.
In addition, it is not uncommon for such workstream data to be less than the best quality. But it is the company’s data, which carries its own biases. The challenge is to make all data involved in the procurement process complete, consistent, and normalized.
With PPO, Westfall easily accessed and enriched internal historical data with Arkestro’s predictive models and then augmented these simulations using external real-time market data. The latter is as disparate as news reports on commodity prices, economic leading indicators, and even supply chain disruptions, as well as Dun & Bradstreet, Rapid Ratings, and many other sources.
But it’s not only data. With PPO, data analytics brings new relevance to the data. And its artificial intelligence and machine learning capabilities allow the platform to learn from the new data and resulting analytics, ensuring more current and precise information.
These predictive models that update themselves based on incoming data from multiple sources are the heart of PPO. This gives Westfall the ability to have a sense of the range of preferred outcomes before we even reach out to suppliers.
In other words, the AI capabilities simulate the supplier’s quotes before we even reach out to the supplier. As a result, we are not asking for a quote but pushing a suggested offer out to our suppliers. To me, this is really the predictive in predictive procurement, and it helps us take advantage of the anchoring effect and insights from game theory and behavioral science that make our process move faster toward a preferred outcome.
This also puts a different spin on our relationships with suppliers. Typically, each supplier knows upfront the relative possibility of winning a contract based on the suggested price and their history with Westfall. Better yet, decisions can be made in a fraction of the time once required and can better incorporate our internal stakeholders’ perspective.
Our suppliers also appreciate the fact that while they have multiple chances to win our business, they are only able to iterate their offers three times. After that, everyone gets fatigued. And with all the information we have prior to starting the first round, there really is no need to go longer than three. Clearly, PPO is not a live reverse auction with seemingly endless rounds that often force people into making irrational decisions based on a fear of missing out. It’s kind of a Goldilocks between the classic RFQ (where suppliers only have one shot to get it right with their best and final offer) versus an auction where there’s potentially an unlimited race to the bottom.
For us, and for our suppliers, it’s the best of both worlds—not too hot, not too cold, just right.
We have also found that our suppliers trust and appreciate the rankings during the rounds because they are at the SKU level and thus can affect our allocation decisions. Not only are they informed where they rank numerically, but they are told how far they are from the leading offer. We have heard that the feedback is valuable and enhances trust and transparency around our decision-making, as well as making it much faster (rather than going back and forth with them). It also injects a bit of predictability into the process. The rankings actually help our suppliers better target their offers on the parts of our business they are most interested in and understand what they need to do commercially to win the business. Three additional benefits of PPO, say our suppliers, are:
- they have an instant idea of where they stand during a quote evaluation process;
- there is a minimum of manual data entry on their part, and;
- they are selling value not only price to us.
Best of all, the level of trust between us and our suppli- ers continues to build with the new procurement process.
The future of PPO at Westfall
At this point, Westfall is using barely one quarter of the capabilities of PPO. We have a long way to go but are on our way. To begin, we are using PPO for strategic direct materials sourcing and purchasing across our resins portfolio, plus some indirect buys like IT. Where we’d like to be is every single time we’re getting a quote, at least run it through the model and see how many of our quotes could be improved and use Arkestro to generate their instant counter-offers to the relevant supplier. We’re really excited about this capability because we’ve seen it show value even when we only have one supplier (provided that it’s a single-source, not sole-source supplier). Our primary emphasis now is integrating PPO into the daily lives of key people at Westfall. That includes rolling out access to the platform to more and more people while ensuring they have access to the control towers that feed data-driven recommendations to them individually.
We are also getting closer to the point where the PPO platform will be tied into our enterprise software systems, especially our ERP system.
Final words of advice
I’ve come to realize over the past few years that the procurement landscape is changing at a very torrid pace. The tools, techniques, and approaches that have been adequate in the past may not be capable of capturing the value required in today’s ultra-competitive marketplace. With this in mind, it is important to note that some elements of the past live on forever and should never be compromised, no matter the advances in technology. These include the following:
- Informed decisions always drive better results. Avoid “opinion masquerading as fact” at all costs. This is one of the biggest pitfalls in business today as many are afraid to utter those three words: I don’t know. As it has been said many times, “if you don’t know where you’re going, any road will get you there.”
- Relationships should never be discounted no matter what technology is in use. Trust remains at the core of everything we do. A win/win is not when one side wins twice.
- Much has been written and said about AI and ML, and it is certainly offering a whole new dimension to deal-making and business. Don’t overlook the HI (human intelligence) component. This remains key, and that’s why the results of any sourcing activity need to pass through the business leadership before any final decisions are made to ensure all nuances of the decision are considered properly.
Finally, make sure you make any process enjoyable. For those who know me, I’ve always relied on my sense of humor to work through important and challenging issues. This is serious business but can also result in serious fun and be quite rewarding when done properly.
PPO allows Westfall to get the best pricing from preferred suppliers on favorable terms more frequently. That’s a great value proposition from where I sit.