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Q: I have just returned from a meeting of CPOs who share the common problem of procurement not being involved enough with other functions and in company decision-making. What can be done about this?
A: Understanding the problem is the first step to solving it. It goes back to the days of Adam Smith and, in effect, the birth of "functions".
Many organisations (public and private) still possess sizeable physical assets that "do the business". These demand daily management attention: keeping things running is the top priority and other functions are subservient to it. Thus, procurement finds itself serving the physical operations and focusing on the direct cost of doing it Ð the "traditional spend".
This limits procurement's role to executing the supply implications of decisions that others have made, focusing on cost reduction and being barred from non-traditional spend. The emphasis is always on what is bought rather than the way it is done and by whom.
A broader remit is needed, but this brings two challenges: to open the minds of internal colleagues to the wily ways of supply markets, and to make procurement's mandate more strategic.
It is probable that your company is very good at specifying what it wants to purchase, so I suggest you spend more time improving the way it buys things rather than what. Increase commercial awareness across the business, ensure early involvement of procurement considerations in the design of business strategy and new products, and use streetwise approaches to supply markets that concentrate purchasing power rather than diluting it.
Get your sales colleagues to run an internal seminar for non-buyers on sales tactics and pricing policies. This heightens commercial awareness and protects against cost-sensitive information haemorrhaging from the company.
You will encounter resistance from people in other functions who think you are trespassing on their territory and diminishing their decision-making ability. Emphasise that this is not so, that their authority (to requisition) remains intact but that it complements the different authority (to commit) vested in buyers.
This will convert some, but leave others still viewing procurement as a service function. Procurement cannot be a service and strategic at the same time. It only has the potential to become strategic when it is accepted as a shared process spanning across and from top to bottom of the business.
To make this change requires a pincer movement. One part of the pincer is the set of tactics described above. The other part involves the company leadership asserting that procurement is a key driver of business performance, and reflecting that belief in their daily priorities and in the way they hold line managers accountable.
Redefine procurement's role and state the principles that clearly apply to all people whose work impinges on the procurement process, not just the buyers. Procurement's purpose is to ensure that the company has cost-managed access to the supply markets that it needs and to have ultimate authority and control over the process whereby the company interacts with them.
While this is not exactly Martin Luther King, it's better than Adam Smith.
Q: I have just taken over as general manager of a medium-sized business in which supply costs account for about 40 per cent of cost of sales. How do I know if we are doing procurement intelligently?
A: If you know the facts; understand and manage the supply-side risks to which business continuity and profitability is exposed; have a principled process for interacting with your supply markets; and have a framework for delegating and controlling commitment authority, then this is intelligent and responsible. No facts and you are flying blind. No risk management equals nasty surprises. No process means lost productivity and less purchasing power. No framework and it will be like writing blank cheques.
This sounds like a negative justification for procurement's role but there is also a positive case to make. Here, supplier relationships are developed so that the company attracts superior value and preferential treatment from suppliers, thriving on these often-untapped sources of competitive advantage. This improves sales revenue, margins and cash flow.
All companies face challenges but most look internally for solutions. The intelligent ones believe better answers may lie outside the company in supply markets where there is much goodwill and ingenuity - if you can get at it. There will be many general business issues for you to sort out, so develop the habit of asking: "How can our suppliers help us solve them?"
Dr Richard Russill (www.russill.com) is a business adviser and writer, specialising in supply, cost and relationship management
