“The problem is that there are so many suppliers, compounded by many procurement professionals being spread thin. Often, initially procurement has less specialist knowledge about a market than do their stakeholders. The consequence is procurement only being engaged late in the process, then spending their time completing RFIs, RFPs, negotiating and contracting (all processes) – ostensibly playing draw level on the knowledge held by your stakeholders. Procurement then has to move onto the next supplier or category, and is not able to stay abreast of the market.”
It probably is you, not because you don’t know what you’re doing, but because it seems to be a universally encountered challenge in procurement.
The average large business spends five times as much on suppliers as it does on its people. Even central government spends more on suppliers than civil servants (even in SA, where our government spends a third of its annual budget on public sector salaries). With an ever-more complex inter-connected world, this supplier/civil servant ratio is only going to increase.
Suppliers are important because they can expand your capability and increase productivity, or in some instances replace your in-house capability. Increasingly, they are the source of innovation in your business. Much of your business’ environmental/CSR impact is the result of suppliers working on your behalf, and the majority of your operational risk will reside within your supply base.
Businesses need suppliers because of what those suppliers provide, not because they save money. And suppliers allow you to focus on the strategic differentiators of your business.
If you do not manage your suppliers, they will manage you. A contract is a promise at a moment in time of the benefits/value that will be delivered; however, markets and suppliers evolve. It is a critical mistake to focus only on the deal and neglect to continually manage suppliers both commercially and operationally.
Buying is about knowledge flows. Your business is operating with partial information.
FIVE incorrect assumptions
1. Every time you save money you are quantifying how much the market has moved and how badly your business has managed your supplier by not keeping up. Your ambition should be to move with the market. Success is a tender that saves nothing because you have been adjusting continually. Functions that are exclusively focused on savings usually end in disappointment and marginalisation. Those that help mobilise suppliers to achieve the strategy of the business last because they focus on aligning with it.
2. Not all suppliers are cheaper as they get bigger, so don’t assume economies of scale.
3. Procurement is a skill with many elements to it. If your sales team is smarter than your buying capability across all these elements, assume you deserve to continue to fund your suppliers with excess profits.
4. Great sales teams have great data and run rings around data-blind procurement professionals.
5. Businesses under invest in procurement because different Return on Investment (ROI) criteria is applied between procurement and other internal functions. Procurement’s role should be to help the business to be consistent. The ROI of better buying is greater than anything else, other than raising prices, so invest more in procurement.
Most procurement professionals will be familiar with most of these points, but it will be new to most of your colleagues. Remind them.
Adapted from an article that first appeared in Supply Management.