The Procurement Game Plan

Winning Strategies and Techniques for Supply Management Professionals

Charles Dominick, Soheila Lunney

• Publisher: J. Ross Publishing
• Year: 2012
• ISBN:
  9781604277166
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Operaciones

This valuable guide provides an easy-to-follow game plan with strategies for procurement and supply management professionals to improve supplier relationships, secure measurable cost reductions, achieve operational effectiveness and efficiency, and positively impact margins and competitiveness for their organizations. The Procurement Game Plan offers the guidance needed to take the procurement professional's career and department to the next level. This tool is ideal for self-learning, training, and classroom instruction.

PROCUREMENT’S PLACE IN THE ORGANIZATION: WHAT POSITION DOES SUPPLY MANAGEMENT PLAY?

Procurement—Except for perhaps sales, it is arguably the department within an organization that has the most impact on that organization’s bottom line. Unfortunately, the leaders and top management of many organizations have not discovered that, yet.

Imagine a sports team. That sports team has players for every position, just like every other team in their league. But picture the coach having no idea how one of those positions can contribute to victory.

That sounds ludicrous, right? It is ludicrous. Yet, that scenario has parallels to the way that procurement is perceived in many organizations throughout the world. The management teams of those organizations are just not aware of the value that procurement can contribute.

PROCUREMENT IS AN IMPORTANT PLAYER ON ANY BUSINES TEAM

We have a fond memory from a business conference that we attended. At one point, we spoke to another attendee, who was a senior manager for a government contractor. Out of curiosity and to make conversation, we asked him about how his procurement department operated and what improvement initiatives they were pursuing. He replied nonchalantly that his company really didn’t do much in terms of procurement 2 training or process improvement, and he wasn’t concerned. They were a small company and didn’t spend much, relatively speaking.

We then learned that his company spends about $20 million per year on goods and services, so we asked if the company could save 5% of that—in other words, if pretax profit increased by $1 million—would the owners care? Would that be too small to matter? We could see by the look in the manager’s eyes that he had an epiphany at that very moment.

The coach came to a dramatic realization of how one of his players can contribute to victory.

Corporate victory through smart procurement is what this book is about. It is literally a game plan for supply management success, providing play-by-play descriptions of how to achieve measurable results for your organization.

MANAGEMENT’S EXPECTATIONS OF MODERN PROCUREMENT

As stated earlier, some management teams have no clue about the value that procurement can deliver to the organization. It is up to you to demonstrate that value.

The best way to demonstrate value is by performing well and delivering real, measurable results. If you are in a procurement department that has not gotten much respect or attention over the years, you may need help in the form of new staff, technology, or training. You may need to ask management to make an investment in improving procurement performance.

You may also find yourself asking a question similar to the one we asked of the government contractor’s senior manager, as described earlier in this chapter: “If you could have $x more in profit, would that matter to the owners/investors/ stockholders?”

What else can a reasonable person say? Saving, say, 5% of spend may be tough in an inflationary market, if you already squeezed out cost savings in the past few years. But if the company hasn’t been historically concerned with procurement, there is likely a lot of low hanging fruit, a common phrase used to describe easy and obvious decisions that you can make quickly to achieve positive results.

On the other hand, management may have had its procurement epiphany a while ago. If so, they may have high expectations of you and they will challenge you to deliver more aggressive results. So what does management want from procurement? Here are a few common expectations:

•Cost savings—Management wants procurement to save money and reduce overall costs. Please note that the previous sentence is not synonymous with management wants procurement to get lower prices. You need to focus on the reduction of total cost of ownership, not just price reduction at any cost. Upcoming chapters will teach you more about total cost of ownership.

•Productivity improvements—Management will always expect you to do more work with fewer resources. No matter whether you are in a tactical or strategic procurement organization, there are many productivity metrics that you can choose from to track productivity gains: contracts executed per buyer per month/quarter/year, average length of sourcing cycle, man-hours per dollar saved, etc.

•Brand/differentiation support—Your organization’s mission or vision statement should give you some clues as to how your organization wants to be perceived in the marketplace and how it wants to be differentiated from its competition, such as offering higher quality, faster cycle time, better service, lower cost, or something similar. Make sure that your decisions and metrics support your management’s brand and differentiation strategy. As logical as this may sound, you would be surprised by how many organizations have a mission of being the highest quality provider in their industry, yet their procurement departments measure only cost savings.

•Customer satisfaction—Sometimes, being in procurement can make you feel separated from your organization’s customers. But management relies on things that you’re responsible for, like assuring continuity of supply, to keep its promises to its customers. Realize that you can personally be responsible for your organization’s failure to meet customer expectations. In this era of tough competition, organizations have to meet or exceed customer expectations simply to survive, and you have a critical role in that survival.

•Positive cash flow—In some organizations, the timing of monetary receipts and payments is critical. Those organizations cannot afford to have more cash leaving the company than coming in during certain periods. Be aware of that limitation and negotiate appropriate terms with your suppliers. Never pay them late and hope that they don’t notice!

•To be the best—While some senior managers may have no real understanding of exactly what some of their departments do, most want the best performance possible out of each and every one of those departments. Whether they push for benchmarking or expect the individual departments to benchmark on their own, management teams want to know that departments, such as procurement, are promoting and adopting the latest best practices.

•Efficient service to internal customers—Every department within an organization is tasked to get something done to contribute to the success of the organization. Procurement can facilitate the timely contributions of other departments. Often, procurement is blamed for being an obstacle to timely contributions. So management expects procurement to continually improve processes in order to better serve those who are making their own contributions to the organization’s success.

•Generating revenue—It is no longer a secret that procurement’s cost saving efforts can help an organization’s bottom line get bigger. But the fact that procurement can actually generate revenue, too, is still in the early stages of discovery among many organizations. Through supplier rebates on employee and customer purchases, and other innovative practices discussed later, procurement can actually bring cash into an organization. Later in this chapter, we’ll talk about the emergence of the Procurement as a Profit Center view. The management teams that have learned about this concept and other creative approaches now have revenue generating expectations of their procurement groups.

•Competitive advantage—Why do your organization’s customers do business with your organization? They do business with your organization because it offers something that the customers view as being more beneficial than other organizations. Collectively, the aspects of your organization that are more beneficial in the eyes of the customer are referred to as your organization’s competitive advantage. These days, with more functions being outsourced, the marketplace is not a war of company versus company—it is a war of supply chain versus supply chain. So the suppliers that you select and manage often determine the relative strength of your organization, compared to its competitors. Therefore, management expects procurement to develop a stronger supply chain and, thus, for procurement to be its competitive advantage.

Experienced procurement professionals know the traditional contributions expected of them—such as faster and more reliable supplier delivery, quality approaching perfection, and collaborative supplier relationships focused on continuous improvement—but, it is important to know how those contributions fit into the big scheme of things from senior management’s perspective. Procurement professionals who do understand senior management’s point of view find themselves leading modern procurement departments. How do you know if your organization qualifies as a modern procurement department? If you are working in a modern procurement department, your department will have all 12 of these characteristics:

1. The head of procurement reports directly to the CEO of your company.
2. Procurement is actively involved in senior management level, long-term strategic planning.
3. Procurement has established a senior-management endorsed Procurement Governance Council.
4. Procurement is involved in the early stages of new product/service development.
5. Your department is responsible for procurement in nontraditional spend areas, such as healthcare benefits, fleet management, facilities and construction, temporary labor, and travel.
6. The procurement staff is responsible for placing only a small percentage of your organization’s purchase orders.
7. Contract management, logistics, and inventory functions either fall under procurement or supply management on the organizational chart, or are integrated into the work of procurement or supply management staff.
8. Maverick buying—when an end user orders from a noncontracted supplier despite the organization having a contract with another supplier—is a thing of the past.
9. When dealing with large, frequently used suppliers, no paper is exchanged between the time that a need for a product or service is defined until the time that the supplier receives payment.
10. No major sourcing process is conducted without the use of a cross-functional team.
11. You are buying from a large list of global sources and measuring non-domestic spend as a percentage of total spend.
12. Your department has social responsibility goals and measurements in place.

While most procurement leaders consider their departments to be modern, when they compare their departments with this list, they often realize how far they still have to go to truly earn that modern distinction.

TYPES OF GOALS THAT PROCUREMENT TEAMS HAVE

In analyzing procurement departments across many different industries and geographies, one thing is clear—goals can vary wildly! While this book draws comparisons between procurement and sports, the topic of goals is where procurement and sports are dramatically different. In sports, the goal is generally simple—win the game. In procurement, go...