Countless studies have established that the C-suite and boards of directors want their supply chains to become fully-fledged business functions and with the ability to influence organisational objectives or in the case of private sector, profitability. We have been here before, but what has been tangible proof of “from backroom to boardroom, procurement goes strategic”? How do you measure the true value of procurement’s influence on organisation strategy? The answer is a function of the level of influence supply chain teams have on overall organisation strategy, says Medacy Mudekwa, Head of Content for Smart Procurement World.
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Let me be clear from the outset: I do not pretend to have a precise roadmap for achieving the desired level of procurement strategic contribution to organisation goals and performance, but there are at least six ingredients essential in realising this agenda.
The first is talent. Make procurement a destination for top talent. Today, doing what you’ve always done, even if you do it exceptionally well, is no longer acceptable. Applying conventional and traditional supply chain principles alone is a business risk. 21st-Century business models are anything but traditional. Supply chain executives who lack financial agility, analytical skills and aptitude for technology will compromise their organisation’s chances of success. To cope better and give them a distinct advantage over competition under economic turbulence and vulnerability, organisations should simply make procurement a destination for top talent, which will ensure that engagement at board level is bold and follow-through is masterful, ultimately avoiding strategy derailment.
Attract and retain only top talent to lead your strategic procurement initiatives. Competent teams create a numerical advantage in procurement teams and develop a psychological edge, which in-turn enables them to apply predictive thinking in strategy formulation.
The second ingredient is that procurement teams should understand business imperatives. If you asked me to buy you an apple, I would buy what I think is the sweetest, in my opinion. However, if you told me to buy an apple so that you can make an apple pie I would probably make a different choice. The point is, if your team understands your business demands they would probably act differently.
Use your procurement team as a dialogue link to facilitate and drive an improved and aligned dialogue between internal and external stakeholders. It all boils down to the simple fact that with proper communication between stakeholders, especially external suppliers, more creative ideas can be brought to the table, thus improving the process.
If communication is limited, so is the procurement department’s ability to influence organisational objectives and profitability.
Third, the current legislative climate provides procurement with the opportunity to drive strategy through compliance. Granted, it can be difficult to organise a procurement function to drive compliance and profitability while masterminding a competitive edge for the business at the same time. Therefore, CPOs should seek to find a good balance between the effectiveness of their compliance strategy, outcomes and benefits of complying. A compliance strategy will only be effective if it is holistic and comprehensive. It should link up with process, performance and strategic management.
“Potentially the risk of disruption has increased dramatically as the result of too-narrow focus on supply chain efficiency at the expense of effectiveness. Unless management recognises the challenge and acts upon it, the implications for us all could be chilling.” – Prof. Martin Christopher, Professor of Marketing & Logistics at Cranfield School of Management, Cranfield University.
Supply chain management policies and procedures should follow an appropriate sequence and structure, and it is important to review them frequently and bring them up to date. Keeping them realistic and easy to understand and follow will help to ensure compliance.
Keep in mind that it is certainly possible to go too far in establishing policies and procedures. That is why best-in-class companies periodically review their policies and controls to ensure that they are not creating bottlenecks. Their objective is to streamline them without sacrificing the ability of those controls to deter theft, fraud and other problems.
The fourth ingredient is that the procurement function should focus on total cost, not price.
The benefit of strategic sourcing is that it shifts the focus from looking only at the purchase price to understanding the total cost of owning or consuming a product or service. For significant spend areas, procurement teams at best-in-class organisations are abandoning the outmoded practice of receiving multiple bids and selecting a supplier simply on price. Instead, they consider many other factors that affect the total cost. This makes good sense when you consider that acquisition costs account for only 25 to 40 percent of the total cost for most products and services. The balance of the total cost comprises operating, training, maintenance, warehousing, environmental, quality and transportation costs as well as the cost to salvage the product’s value later on.
Looking at the entire process of procuring and consuming the product or service can only happen with co-operation and input from both the procurement function and the seller. Best-in-class organisations do not stop there, however. They also ask suppliers and internal stakeholders the following important question: “How can we work together to reduce the total cost?”
Establishing a “total cost” mind-set is a goal that the supply management function needs to embrace and perpetuate throughout the entire organisation. It will not be easy, however, to convince your organisation’s executive leadership to truly prioritise value over price. Since the global financial collapse in 2009, most chief executives have focused on cost reductions, which they expect will translate to reduced prices.
The fifth ingredient is to take sustainability and corporate social responsibility (CSR) seriously. Reducing a supply chain’s carbon footprint is no longer a nice-but-not-necessary practice. Best-in-class companies have ‘gone sustainability’ and their buyers must take environmental impact into consideration when they choose suppliers. Requests for proposal (RFPs) ask suppliers and service providers to provide information about their sustainability.
Procurement functions are also considering social responsibility when making purchases. Social responsibility consists of a framework of measurable corporate policies and procedures that result in behaviour designed to benefit the workplace, the individual, the organisation and the community. Social responsibility is playing an increasingly significant role in best-in-class supply management organisations’ decisions, not just when it comes to purchasing but also risk evaluation. An organisation that does not have a meaningful social responsibility programme risks criticism from employees and/or consumers.
The sixth ingredient is a contingency plan. Granted, an organisation may never use a contingency plan, but it is important to have one. Many executives may have a plan B, but in most cases it is always to enforce plan A. Contingency plans will help reduce losses and prevent organisational panic. The European Union explains “turbulence risk” as “turbulent business uncertainties… hard to predict and measure, associated with large scale projects that emerge from a range of unforeseen events that lead various actors in the whole process to re-assess their priorities or change their expectations.”
If well documented, a contingency plan becomes a risk mitigation plan. If risk is well identified then a roadmap and a risk mitigation strategy (including a contingency plan for alternative action) will help deal with the unwanted eventualities. This will build confidence in procurement teams and drive strategic value when executing strategy.
Risk mitigation strategies go hand-in-hand with policies and controls, and best-in-class supply chain organisations integrate risk-mitigation methodologies into their sourcing decision processes. This is a complicated subject that we can touch on only briefly here, but in short, these organisations are adopting sound methodologies that include: (1) identifying all of the risk elements, (2) determining the probability of the risk event occurring, (3) assessing the financial impact on the sourcing decision if the risk event actually takes place, and (4) prioritising risks for monitoring and prevention.
Risks to organisations of not involving procurement at an early stage
• No effective challenge to the proposed business case
• No formulation of a procurement strategy
• Non-compliance with standing orders
• Lack of due diligence on proposed suppliers
• Lack of procurement contribution to risk management process
• A failure to apply world-class procurement standards
• No effective counterbalance to supplier’s sales tactics
• Realistic timetables not developed
• Flawed tender evaluation criteria
• The risk of fraudulent and corruptive practice
• Curtails opportunities for enterprise development