Ahmad A. Ghannoum | Partner
23rd December, 2014
When asked to describe his feelings as he departed earth’s atmosphere into outer space, astronaut John Glenn famously remarked “How would you feel if you knew you were on top of two million parts built by the lowest bidder?". Glenn’s retort will come across as light hearted to the layman. But to the procurement professional - be it at NASA or at Falafel UFO, it is a statement of galactic proportions underscoring the critical role played by procurement.
The procurement department is often viewed as an administrative function and is unfortunately often run as such. Staff find themselves stuck in a bureaucratic paradigm, wasting their hours reviewing Purchase Requisitions, gathering quotations, engaging in muscle bargaining and, of course, issuing Purchase Orders to the lowest bidder. All of which, in truth, are activities requiring no real expertise. They are activities that can very easily confine the procurement department to an inglorious rubber stamping role. So what should the role of procurement be then?
According to CAPS Research, procurement spend can add up to 79.24% of annual revenues for a company or division. Procurement, then, is really a very vital member of the organization. As organizations come to accept this, there becomes an increasing pressure on practitioners to abandon tedious administrative tasks in favour of a more central strategic role. A role requiring procurement teams to understand complex market segments, engage suppliers, develop sophisticated go-to-market strategies, improve planning and forecasting capabilities, lead make-or-buy decisions and adopt cutting-edge information technology systems. The intended outcomes, of course, are to ensure security of supply, generate savings and satisfy internal customers.
To enable a strategic role for procurement, an organization will benefit from probing 3 key pillars of procurement; structure, workstreams and systems. Collectively, these pillars provide a framework against which a roadmap can be drawn for transforming procurement into a strategic function. The rest of this article attempts to explore these 3 pillars and look at how each can be leveraged to generate value for the organization.
Structure: The head of procurement (or supply chain) should report directly to the CEO if their agenda is to be acknowledged, let alone realized. Companies frequently commit the sin of having procurement report to support services, or even worse, finance. Doing so opens the way for petty conflicts over delayed payments and sourcing through lowest bidders - both short-sighted objectives with potentially catastrophic long term results. In the process, drives for sustainable partnerships take a beating, obstructing integration across multiple sourcing tiers. In addition, the organization risks losing focus on sourcing decisions with high social and environmental impact.
Consider some of the challenges facing Pepsi and Coca Cola today. The impact of sourcing sugar on operations is such that they expectedly reserve Vice President level posts for sugar sourcing executives (e.g. VP of Procurement: Sugar). This not only allows procurement to tackle operations effectively, but also to deal with politically explosive issues as far down the supply chain as local operators of sugar mills and cogs engaging in unethical land grabs. (In fact, Pepsi and Coca Cola have both recently responded with new Land and Sugar Rights policies aimed at curbing illegal activities in their supply chain in countries like Brazil and Cambodia). This issue highlights the importance of having procurement/supply chain executives report directly to the CEO.
In addition, organizations pursuing strategic sourcing initiatives would do well to organize the procurement functions around product category verticals. This leads to specialization for securing items that are of especially high economic impact to the organization in a socially and environmentally sustainable manner.
Workstreams: There is a need to have multiple procurement processes rather than a one-size fits all in the form of a Multiple Quotations method. This method, while effective, can be costly in terms of time and effort. So much so, the costs involved often exceed the potential savings generated through the process. In addition, time spent comparing 3 quotations for the purpose of saving USD 5,000 or USD 50,000 can often be better spent on more strategic matters with the potential of saving millions of dollars.
An organization then needs to have simpler methods for items that have little economic impact on the organization and are readily available in the market. Examples of such methods include blanket agreements, single source purchasing and the repeat-order method. Similarly, an organization will engage in more complex go-to-market strategies like Joint Product/Process Improvement and full-fledged partnerships when it comes to items with considerable economic impact and a high sourcing risk factor.
Oil & Gas companies across the GCC are among many in the region making use of versatile procurement processes to source their respective needs. Processes stretch the gamut from 5 year-long blanket agreements covering stationery items through setting up 40 year-long joint ventures to run drilling operations.
Systems: Having the right technology has become a prerequisite for running a modern procurement function. Internally, an ERP system promotes better planning, faster processing, reliable cataloguing and improved controls. Externally, Electronic Data Interchange (EDI) solutions provide the foundations for B2B integration.
Procurement departments must continue to take advantage of opportunities provided by such systems by ensuring they are optimally configured to support desired processes (and not configuring processes to match system capabilities). In addition, they should leverage a centralized database to enable informed decision-making at the lower echelons of the organization. Doing so can reduce the number of approvals needed for routine purchases from as many as 14 (PR to delivery) to as little as 1 or 2. Doing so also frees up staff to focus on more strategic matters.
It is worth mentioning as a final note that improvements to a procurement department’s structure, workstreams and systems should be regarded as a journey with no finish line. The dynamic nature of an organization’s strategy, structure and target market make change the norm. As such, procurement departments must continuously improve and calibrate for alignment.
Every organization has a John Glenn to appease. By taking a more strategic role, the procurement function will give him less to worry about so he could finally sit back and enjoy the ride.