6 Rules of Successful Procurement
Optimising the Key Drivers Within Procurement Operations
Procurement is the appropriate acquisition of goods and services from an external source. It is a business function which requires that goods and services are procured at the best possible cost to meet the needs of the purchaser in terms of quality, quantity, time, and location.
Despite what may be the perception of many non procurement practitioners, procurement is rarely driven by lowest cost alone. It is critical for business to continuously review the ever changing supply and competitor landscape, including spend habits to be able to make informed decisions on what to buy, when to buy it and which supplier to buy it from. This is achieved through a dynamic, strategic and sustainable Category Plan, procurement driven sourcing events, and is supported by a robust supplier performance management plan undertaken periodically through the life of the contract.
Procurement can be often complex and challenging even for the most seasoned professionals. Open Windows has produced the following tips to help you avoid risks in the purchasing process.
1. Cheap is Not Always Cheerful
A purely price focussed procurement lens will ensure only a fraction of benefits are realised and can lead to the demise of a procurement function within the organisation due to the perceived ‘value’ being attributed to procurement activities ever declining in line with the price. No matter how skilled the practitioner, or how strong the negotiation strategy, prices can only decrease to such an extent before the supply, quality and quantity of the goods or services are also affected. This potential erosion often happens quickly as the supplier crumbles under the financial pressure leaving the business with a supply risk which could be more expensive to eradicate than the original ‘value’ claimed by procurement through the commercial negotiations.
Strategic procurement takes into account ‘whole of life costs’ including all environmental, economic and social factors to select the best total benefit for the business. From an internal resource perspective, price driven sourcing can also lead to staff dissatisfaction and ultimately high staff turnover within the procurement department. When the perceived value being delivered is decreasing but the effort required to achieve positive results is increasing organisations struggle to retain the strategic thinkers within the organisation. We need to think of good procurement practitioners like sales people who are primarily driven by positive results and recognition. Of course a price driven savings target often needs to be set for procurement practitioners but this can be achieved without just focusing on ‘more for less’ objectives.
Often the value being achieved through cost avoidance, building stronger strategic relationships with a smaller group of suppliers, reductions in internal resources or a consolidation of the supply chain achieved through a sourcing event is not measured in dollar value and applied against the procurement target. By allowing such benefits to be measured and counted, it incentivises the practitioner to identify all forms of financial value to ensure benefits to your organisation are fully maximised.
2. Invest in the Right Resources
Best practice procurement policies and processes will without doubt deliver bottom line benefits to an organisation. To fully maximise the value driven by procurement it is critical that appropriate resources are allocated in the right areas. As an example recruiters will often place candidates in organisations where they would be responsible for managing categories of spend which they had no professional experience in managing. It is important to note that internal stakeholders are often experts in ‘consuming’ the goods or services you are sourcing but rarely do they have experience in ‘buying’ the same goods or services. Consuming versus buying are two very different tasks each which requires a unique set of skills and insights. Sadly it is often assumed that if a procurement professional can source nuts and bolts, then they must also be good at sourcing marketing services for example. This is not the case, at least not if you want to maximise the benefits being delivered.
The greatest potential value that can be driven from a sourcing event, and ongoing supplier management, is often realised from a robust and strategic strategy based on an in-depth understanding of the market, the trends, the suppliers and, the environmental, economic and social factors affecting the product or service which you are sourcing. It is crucial that resources have the essential expertise for the categories they are sourcing and just as importantly, need to be targeting the strategic spend areas within your organisation.
3. Understand Your Spend Habits
It amazes me that even in Fortune 500 companies they are willing to invest in the right procurement resources but fail to provide them with the tools which enable them to effectively do their job. By this I refer to financial systems which can, at the very least, provide basic and accurate spend information across business units and further broken down to general ledger codes relating to the particular good or service. Due to lack of system capability and integration such information is often pieced together by the practitioner on a spreadsheet drawn from numerous unreliable, and often questionable, sources and washed against the 20/80 rule which you hope carries a close resemblance to reality. Procurement people essentially ‘measure’ however it is still not all that common for organisations to provide practitioners with the effective tools to undertake accurate analysis of historical, and real time spend reports. “You can’t manage what you can’t measure”.
Undertaking thorough spend analysis to build accurate baselines, allows you to improve your value outputs by gaining full transparency of ‘current state’ versus what is being offered as “future state” options for your organisation.
4. Understand Your Suppliers
Organisations often place a great deal of importance on the value that can be driven through a sourcing event but often drops the contract into a drawer to gather dust until it’s time to go back to market. It is believed that up to 35% of a contracts ‘value’ can be lost by no ongoing performance management of the supplier through the contract. For many organisations this can be because the resources to manage every contract is simply not available or they don’t have the infrastructure in place to easily undertake this on a regular basis.
It is important to start at the top down when developing your supplier performance plan. This will enable you to allocate the necessary resourcing depending on a set of key criteria unique to your organisation. To begin, you will need to map each supplier. A common set of criteria is grouping them according to how much you spend with a supplier and their risk to your business. This means gaining an understanding of the value of the relationship in order to build a plan which supports both the supplier and the organisation, to meet the KPI’s which were defined in the contract.
Your strategic suppliers could be providing your organisation with a unique product or service in the marketplace or could be providing you with a number of products or services across a range of categories. A KPI review should be incorporated into a regular program of supplier reviews. One of the benefits I find of working closely with suppliers is, that they often have a great deal of passion for doing business with your organisation and have some great ideas on how to save you money.
If you work within a medium to large organisation, you may have heard the word ‘Silo’ being used around the office and often when a breakdown in communication has occurred. It is no surprise that in today’s fast passed office environment, despite having many options available to use as methods of internal communication, more often than not, groups within your organisation are so busy performing their daily duties that they unfortunately fail to share and interact with other departments. When this happens, many opportunities are missed. Procurement within your organisation should not behave as an entity which exists within its own ecosystem. Rather it must be positioned so that it is fully integrated across, and within all business units. One way to achieve this is to physically position practitioners within areas of your business that is responsible for strategic areas of spend. For instance, if your marketing department has the biggest budget, is afraid that procurement will destroy key supplier relationships through sourcing events, and is failing to understand the value of procurement, then assign a practitioner to be physically positioned in their area. This will assist in nurturing internal stakeholder relationships, enable a better understanding of the value proposition being driven by procurement and provide transparency of the procurement opportunities within the department. When you integrate a practitioner into another department it allows staff to interact on a day to day basis in a collaborative environment where both departments commit to supplier management and sourcing plans. This eliminates many obstacles faced by procurement caused by only interacting with departments when a souring event has been planned.
6. Bigger is Often Better
It is not uncommon for different business units within your organisation to unknowingly use the same supplier for goods and services. Often when this happens the total spend with the supplier is left unconsolidated and each department potentially pays an unleveraged higher price, or worst case, your organisation is paying different prices from department to department. This is often occurs in companies experiencing fast growth over an extended period of time, or within companies who have more than one finance department. If your organisation has not undertaken a business unit supplier comparison, this could potentially be an opportunity for you to quickly and easily achieve some great benefits for the organisation. By undertaking such an exercise it may also identify ‘maverick’ spend with suppliers not under contract but who provides goods or services to your organisation which are similar to those already being provided by a contracted supplier. In this case spend can be consolidated and leveraged to ensure the best price for your organisation, or it may enable you to define panels and rate cards which can be better managed to ensure future changes to your organisations buying patterns are reflected in your contracts. A business units supplier comparison should also include a review of all contracted and uncontracted commodity spend. By consolidating commodity spend across all business units it will allow your organisation to take full advantage of volume based pricing and improved terms which may not be achievable, or accessible by being purchased individually.