Many procurement organisations have embarked on Strategic Sourcing in recent years, with mixed successes. “A lack of focus on the integration of the overall value chain has allowed sceptics to minimise the value of new generation procurement approaches. Cobus Rossouw, Managing Director of Volition Consulting Services, told SmartProcurement.”The way forward requires appropriate focus…
…on the different business processes required for either value chain or
back-office management. These principles apply to all types of
procurement; but with different focus in each.”
“The e-commerce hype provided the opportunity for many executives to invest in information technology on the basis of large reductions in the cost of ownership of procured materials. Many investment proposals quoted savings potential between 5% and 30%. Millions have, however, been lost in these information technology investments and few savings have proven to be sustainable. As a consequence, Strategic Sourcing has become a concept tainted by sceptism. Clearly e-procurement can enable best procurement practice, but too little evidence of this exists. ”
Strategic Sourcing has merely become “Better Informed Negotiations”
“In my view, the most fundamental mistake made is the one of generalisation”, says Cobus Rossouw “All procurement was approached with a common framework applying similar business processes and information technology enablers. Procurement professionals have taken short cuts, in the process limiting the potential impact of structured process improvements. ”
“Strategic Sourcing has thus merely become “better-informed” negotiations, with limited benefit beyond price changes. Information technology makes little contribution beyond providing the information required to out-play suppliers in the buying game.”
“Many Strategic Sourcing initiatives have focused on specific commodity streams (i.e. the commercial or “Secure Supply” process) and have allowed organisations to rationalise suppliers and establish favourable contracts. The benefits-case to suppliers has been largely focused on volume with extensive promises related to collaborative transaction flows, product development and supply chain management. In most cases, volume benefits were captured as part of aggressive market economics and little has come from promised collaboration. Limited focus on process integration has resulted in unsustainable relationships where suppliers cannot realise economic returns. In order to survive within contractual agreements, suppliers compromise on specifications conformance, service effectiveness and administration efficiency.”
“To extract value from the supply side, organisations need to view the procurement process as a collection of processes that all contribute to the total value chain; and not as a process in its own right. Procurement can maximise value if seen as a cross-functional contributor; and not by maximising its own functional excellence”, Rossouw continued.
Procurement Involves Four Different Processes
- Specify Needs: The technical process of determining the specific needs of the organisation, as well as delivering the product or service specification.
- Secure Supply: The commercial process of agreeing on the terms and conditions associated with the supply of a product or service to the organisation, as well as delivering on the supply contract.
- Enable Availability: The operational process of making materials (or services) available as and when required.
- Pay Suppliers: The administrative process dealing with the efficient transactions involved in procurement.
The above processes should be viewed as part of broader cross-functional streams in the organisation, namely:
- The specification of needs is part of the Product (or Service) Development Process and should incorporate the needs of the end-consumer beyond the boundaries of the buying organisation.
- Engaging contractual agreements is a part of where Risk Management Process organisations should consider the total impact of its environment when engaging in business.
- Availability is the key driver of the Supply Chain Process and supplier interactions should be seen in the context of all operational planning processes, focused on the supply of the eventual product or service.
- Administrative processes are part of the underlying Transaction Management Process in the organisation and do not have to be specialised for creditors as such.
It is not possible (or appropriate) for procurement professionals to want to control all aspects of supplier interaction. These processes require different focus and organisational value that can be maximised when these are integrated into the broader cross-functional processes. Buyers can add most value by retaining the supplier relationship, taking ownership of the Risk Management elements and facilitating other processes.
Fundamental Difference between the Effectiveness of the Value Chain & the Efficiency of Back-Office
Value Chain Management is defined as the integrated management of all activities that transform input materials and services into required products or services. Procurement of these mission-critical materials and services require focus on the total value chain, where specifications are derived from the end-consumer and the supply chain is affected by all operations.
The most important aspects to consider are consistent quality and predictable service with a clear understanding of the factors that influence these. The value of procurement in this environment is based on the ability to remove cost from the value chain and not by agreeing the best price for a specific product or service level specification. Although transactional efficiency remains important, the extent of payment activity reduces the potential benefit of focus in this area. The benefit of transactional integration for payment of these commodities comes from creating the knowledge base for improvement.
Back-Office Management is defined as the management of the support activities in the organisation. From a procurement perspective this is important since extensive money is spent on related products and services. For most organisations this includes maintenance, marketing and administration spend with extensive commitments made by non-professional buyers.
Procurement of support materials and services requires focus on the contractual and administrative processes. Specifications are less dependent on factors outside the control of the user and transaction intensity is high (or at least unpredictable). The value of procurement in this environment is to provide structure to control expenditure.
“The challenge for procurement professionals is thus to ultimately disengage from certain aspects of the supplier relationship and to focus on the appropriate areas as required by the type of procurement relationship”, Rossouw concluded.