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CHAPTER

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

PROCUREMENT IS AN IMPORTANT PLAYER ON ANY BUSINESS TEAM

MANAGEMENT’S EXPECTATIONS OF MODERN PROCUREMENT

• 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.
• Supply continuity and risk management—Attaining the lowest price on a product or service is absolutely meaningless if the product doesn’t get delivered or the service doesn’t get performed when needed. Organizations depend on an uninterrupted flow of goods, services, and information—both into the organization as well as out of the organization—to accomplish what they are in business to do. Procurement plays a vital role in ensuring that the incoming flow of goods, services, and information is happening at a rate that is optimal for the organization. This means being able to overcome foreseeable and unforeseeable challenges by maintaining a resilient supply chain. It also means being proactive in predicting demand fluctuations and mitigating any negative impact, as well as being agile and seamlessly responding to any surprising changes in the market that could pose a risk to supply continuity.
• 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, along with 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.

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, if any at all.
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 nondomestic spend as a percentage of total spend.
12. Your department has social responsibility goals and measurements in place.

TYPES OF GOALS THAT PROCUREMENT TEAMS HAVE