Are you needing a roadmap to elevate your procurement practices? In this article, the Purchasing Procurement Centre based in the USA, provides insights into embracing technology, streamlining processes and cultivating robust supplier relationships.
1. Implement Spend Profile/ABC Categorization
Start with a spend profile analysis and get rid of C’s and focus on A suppliers. Yes, this is fundamental – but applying fundamentals consistently leads to success.
As per image on the left – Getters focus their time equally among all suppliers, without realizing that they are wasting their time by focusing 75% of the time with the suppliers that get only 5% of their business.
Strategic buyers not only understand that they must focus on A items/suppliers 80% of their time but also implement systems and processes on dealing with C items/suppliers, so that they get rid of time & effort wasted on Cs.
2. Leverage Supplier Relationships
While the Kraljic Matrix is used to segment suppliers based on the complexity (or risk) of the supply market, you can generate real power in the Leverage Quadrant – image on the right.
While it is a common practice to encourage buyers to focus on strategic suppliers as a best procurement practice, this is not the best usage of the Kraljic Matrix.
The better practice is to take suppliers from Routine/Non- Critical (R) & Strategic (S) quadrants and move them to Leverage for much better results related to cost savings and strategic relationship building.
3. Price vs Total Cost of Ownership (TCO) or Both?
While it is best practice to buy based on Total Cost of Ownership it is not always so.
When to Award on Price
Certain commodities are best purchased based on price, e.g. stationeries.
When to Award on TCO
But in sophisticated buying, a Total Cost of Ownership Model must be followed, where price is only one of the items being considered with others like warranties, training and service levels given a rating to ensure that even if you are buying at a higher price, the TCO is lower.
In such cases whatever you do, think before you ever award a contract with the principle of “3 bids and select the lowest bidder.”
4. Negotiate Beyond Price
Amateurs negotiate only the price. The pros negotiate more than price including quantity, contract type, delivery, down- payment, installation etc. On the right is an illustration of 30 items to negotiate apart from price.
5. Use the Correct Contract Type
As a general rule, all contracts must make a clear reference to the PERFORMANCE/RESULT that you want the supplier to deliver. Here are the 3 Statement of Work (SOW) types to be used in Contracts:
Design/Details SOWS
This tells the supplier how to do the work. The buyer requires the contractor to follow the buyer’s way of performing the task. The risk of performance is on the buyer unless the supplier is negligent.
Level-of-Effort or Time & Material or Unit Rate SOWs The real deliverable under this type of contract is an hour of work and the material required to perform the service, repair, development etc.
Performance/Result-Based SOWs
Generally, the preferred method of stating the needs. A Performance Based SOW does not dictate how the work is to be done. Results of the contractor’s effort can be measured in terms of performance, technical and quality achievement or cost performance.
6. You Are as Good as Your Suppliers
The reality is that regardless of how well you perform, if your suppliers don’t – then you will have problems.
Jim Collins in his Best Seller Book “From Good to Great” says that world class companies “get the right people on the bus” first. Meaning they hire the best people first. It should not be a surprise that it is the same with suppliers.
7. Train & Develop Your Procurement Team
Training is essential as a best practice, yet often overlooked in procurement. Suppliers outperform procurement teams because salespeople receive 200 hours of training annually, compared to procurement’s 25 hours.
Don’t Just Train Procurement Systems & Software
Training should extend beyond procurement systems and software. Young professionals must learn the fundamentals of purchasing and not just how to use systems. They should understand the foundational principles and logical processes.
Train Functional Competencies First
Training should prioritize functional competencies, focusing first on essential procurement skills, then on broader business and personal development. On the left you see a framework of 10 functional skills that the Purchasing Procurement Centre uses to train and develop our clients’ procurement teams.
About the Purchasing Procurement Centre:
The Purchasing Procurement Center explores procurement practices and gives a guide offering key strategies for optimizing costs, mitigating risks and fostering strategic partnerships in modern business. They are a resource that builds and trains individual & team procurement skills to world class levels.
