By Bernie van Niekerk
It seems that everyone in the organisation has a reason why Procurement should not get TOO involved in their particular area of the spend! Ask the IT function, and they’ll be of the opinion that IT’s too technical and only propeller heads can really understand it…
Never mind the fact that they make some awful commercial mistakes in the acquiring process. Speak to marketing and they would like to know what does Procurement know about advertising and sponsorships. Its often the same story with transportation (that’s Logistics’ domain!), insurance and so on…
With what’s left of the spend, there is often little opportunity for procurement to really make its mark… and the company loses out in the process.
Fortunately, this is not the case with all companies / organizations. Some interesting research from CAPS (Centre for Advanced Purchasing Studies) showed that in many large global companies procurement now play a very senior role within the organisation.
– in the Aerospace industry 47% of the time procurement reports directly to the CEO
– in the engineering / construction industry 41.67% of the time procurement reports
directly to the CEO
– in the diversified foods industry 33.33% of the time procurement reports directly to the CEO
– in Mining 27,27% of the time procurement reports directly to the CEO
– in Municipalities 17.2% reports directly to the City Manager and a further 6.9% to the Mayor
– in the Petrochemicals industry 30.77% of the time procurement reports directly to the CEO
– in the Telecoms industry 11.11% report directly to the CEO
– in the Utilities industry 6.25% report directly to the CEO
– in the Banking industry 83.33% of the time procurement reported at a corporate and not a department level.
But the research does go further to show that even in the case of these companies, procurement is not always getting its hands on all the available spend.
However, in the most progressive environments procurement is deeply involved in just about all bought in goods and services.
In talking to some of the companies that I have trained recently, procurement is even getting involved in the acquisition of COMPANIES! (An interesting question: Should buying a company be classified as Goods or Services?)
Whatever the answer, some progressive companies are using the procurement function to identify strategic sourcing opportunities in the company to be acquired. This enables the buyer to acquire a company, knowing that their is significant cost reduction opportunities which would ultimately significantly increase the value of the acquired company. Talk about World-Class Procurement!
The big question for some procurement functions then become: ‘How do we reposition the function so that it can play this strategic role?’
One of the most important steps towards creating a world-class organisation is to create a compelling and comprehensive vision for what the function should be doing inside the organisation. (I have written a more comprehensive article on this topic which can be accessed here.) The key point to make about this vision is that it takes the form of conditional bargaining.
For those of you who have attended negotiations training, you’ll remember that the little word IF plays a very important role in the bargaining process. It ensures that one never gives away something for nothing!
In the same way, the procurement vision has to contain a comprehensive IF statement.
And this is where the concept of MANDATE will be achieved.
Any organisation would love massive cost reductions and other supply chain benefits from the procurement function. While we all know that procurement can achieve these benefits, it cannot do so without the appropriate resources or the appropriate mandate…
And this is the point where a NEW DEAL needs to be struck between procurement and the organisation.
The NEW DEAL will read something like this:
Procurement will be able to deliver to the organisation the following benefits:
1. e.g. Increase operating profits by at least 50% through reducing the overall spend by at least 5%. (the effect on operating profit will vary by company, but reducing the overall spend by at least 5% is well within reach)
2. e.g. Improve inbound supply chain performance (delivery, quality, service, innovation etc) by 5% per annum year on year… and various other inspiring goals…
IF… (This is where the conditional bargaining comes in)…IF, the organisation agrees to do the following (examples):
1. Provide the function with the appropriate organisational resources .. E.g Staff, management level ,incentives etc.
2. Puts money aside for appropriate technology. (Codification, Contract Management, e-Procurement, Purchasing cards etc.)
3. Agrees that procurement is responsible for driving value out of the entire spend through strategic sourcing…. and whatever other infrastructure, policies, mandates etc. are required. (for an interesting case study follow this link)
The fundamental difference between acting in this way and the traditional procurement approach is that the organisation invests back into procurement according to the benefits produced. Often procurement professionals report significant savings but do not see a single cent spent back on creating a world-class function.
The NEW DEAL is like a contract with the organisation. In fact, its a 2 way Service-Level- Agreement (SLA). The contract is between procurement and the board as well as procurement and the various key functions in the business (such as Sales, Operations, IT and the like)
Most procurement people understand this concept since we do this with suppliers the whole day! Now just apply in the opposite direction.
In closing, (and referring to the title of this article), its quite obvious that procurement deserves to have the greater mandate for achieving world class procurement. The company also deserves world-class procurement. The only question remains whether or not Procurement truly believes it deserves the mandate…
To your success!