Strategic Supply Chain Management (SCM) is designed to strategically equip Chief Purchasing Officers (CPOs) or Heads of Supply Chain to adequately deliver and ensure that their organisations realise maximum value. Properly positioned, CPOs can fully contribute to organisational profitability by realigning the procurement strategy and objectives to the corporate strategy and objectives, Ronald Mlalazi (MCIPS), of Commerce Edge Academy, tells SmartProcurement.
In his sixth article for SmartProcurement’s World-Class Procurement Practice series, Mlalazi discusses the need for Procurement professionals to understand the role and significance of corporate strategies and goals, and the benefits of aligning the procurement strategy and objectives thereto.
The series is based on Chartered Institute of Purchasing & Supply (CIPS) unit content and on recent research done by Commerce Edge Academy. This month’s article is based on Level 6, Unit 2, ‘Strategic Supply Chain Management’.
“The activities of Procurement have a direct impact on the overall performance of the organisation, as they cut across the whole organisation, ‘a product well bought is half sold’”, says Mlalazi.
Supply chain executives need to fully understand the corporate strategy and goals at a high level so that they can own and easily align the Procurement strategy and goals to that of the organisation.
For purchasing objectives to reflect and be aligned to corporate objectives, it is critical that corporate objectives and strategies are defined, and then used to derive the purchasing objectives and strategy.
“If Procurement fully understands its role and mandate, the procurement strategy can be aligned easily to the business strategy,” notes Mlalazi.
Managing by objectives (MBO) is based on linking and cascading the aims and objectives of the organisation throughout the business with those of departments and personal objectives.
If properly implemented, MBO can harness all the efforts and energies of departments and staff into achieving corporate goals without promoting competition within departments.
As corporate strategies become more centered on overall corporate performance, supply / purchasing / sourcing processes will need to play more of a conduit role to the supply base. At a minimum, this requires being part of the team that interfaces demand with supply in bringing new, better featured, and better value products to the market faster so that revenue starts flowing to the bottom line sooner.
For example, where there is no early involvement of Procurement in new product development (to ascertain supply market availability and risks associated with supply such as lead times, price, cost fluctuations and the availability of substitutes), the company will fail to achieve its intended objectives.
Similarly, Economic Value Added (EVA) linkage has become more important in determining a specific business strategy’s level of contribution. Linkage also should prove to be highly useful in determining which of several possible strategies is likely to be most successful. For example, where the organisation is intending to launch a new product, Procurement needs to know and be part of the New Product Development team so that targets are met in both timing and costs.
High-level business strategy objectives such as cost-leadership, differentiation or focus require the support of a range of functional strategies of which supply chain strategy is one.
Often Procurement fails to deliver value and rise to expectations because supply chain aspects are not represented at the executive committee (Execo) level during strategic sessions, or appear at the end of the agenda and are not given due attention, says Mlalazi.
The consequence is that organisations will not realise the full potential of cost-savings and experience strategic drift. Procurement is then pressured to negotiate for price discounts and once-off, unsustainable discounts instead of negotiating for the lowest total cost of ownership (TCO). The lowest TCO seeks to find the best balance in the five purchasing rights: The right quality, the right quantity, delivery to the right place, performance or delivery on time and at the right acceptable price. The five rights will then form the basis of the key performance indicators.
Do you know your organisation’s corporate objective? Can you derive your purchasing objectives and formulate a procurement strategy?
Tools that can enhance strategic supply chain management and lead to the attainment of the corporate objectives include:
• Achieving a balance between the five purchasing rights and the cost.
• Knowing how to develop specifications.
• Understanding the concepts underlying strategy and strategic management.
• Understanding and application of the models of the strategic process.
• Understanding your operating environment.
• Providing sufficient and appropriate resources to the Procurement department in order to achieve corporate objectives.
• How to develop commitment to, and alignment with, corporate strategy.
• Understanding the impact of organisational structure to supply chain strategy.