Mike Farnworth MA (Hons) MSc MCIPS MCMI MIC
We are approaching the time of year when most organisations are starting to look at budgets. And logically, your Procurement team should be well on the way to developing their own plans for spending the organisation’s cash, and developing and enhancing their contribution to the success of the organisation over the next period.
In organisations large and small, it might also an appropriate time for the CEO to review the contribution made by the organisation’s Procurement professionals, and to start to consider what expectations the organisation should have of its key departments.
The first question a CEO should ask is: what are my expectations for the contribution that Procurement can make in my organisation? If you can articulate this, the chances are that you are working with a function whose capability is good, and one which is communicating its goals and targets clearly. Your expectations of capability will be high, and you will set a challenge to deliver more aggressive results in the coming year. Even if you do understand the core capabilities of your Procurement activity, are you missing anything? You’ve probably invested heavily in the competence, so you want to know whether there is further value to be derived from the activity.
In this article, we will identify the key areas of contribution that a Procurement function could – and should – be able to promise your organisation. Some of them might surprise you – but if you aspire to run an organisation that maximises the contribution from Procurement, you should be monitoring carefully all the areas in this checklist. Here are a few common expectations:
1. Managing cost and value. No CEO – or CFO, for that matter – worth their salt could afford to ignore the potential, and indeed the duty, of the Procurement function to save money and reduce overall costs, sometimes termed the ‘Total Cost of Ownership’. This isn’t just about getting lower prices for goods and services, it’s about ensuring that full value is extracted from the supplier relationship across a whole swathe of categories. This should include: assurance of supply, meeting regulatory requirements, guaranteeing service and quality levels, and exploiting the innovation potential of suppliers. Not just what’s needed today, but into the future, too.
2. Reducing risk and vulnerability. The more organisations rely on external partners to deliver competences – be that goods or services – the greater the propensity for risk and vulnerability to lurk within an organisation’s supply chains. You can’t plan for everything, but Procurement needs to be able to demonstrate an understanding of the likely sources of risk – maybe as part of a focus on sustainability in the extended enterprise – and develop either mitigation or contingency plans based on measures of the scale of impact and likelihood.
3. Improving productivity. Is your Procurement team measuring – and seeking to improve – its performance and contribution? Whether your organisation takes a tactical or strategic approach, there are many productivity metrics that you can choose from to track productivity gains: these could include the number of contracts managed and executed per buyer over appropriate timeframes, the average length of sourcing cycle, the number of strategies for categories of spend which are developed and implemented.
4. Supporting and differentiating your brand. Your organisation’s mission or vision statement sets out how your organisation wants to be perceived in the marketplace and how it wants to be differentiated from its competition, such as offering quality and reliability, faster delivery or time-to-market, better service, lower cost, or more innovation. Make sure that your Procurement team’s decisions and metrics – and outward-facing supplier management approach – support your organisation’s brand and differentiation strategy.
5. Delivering Customer Satisfaction. Sometimes, Procurement teams can feel separated from your organisation’s customers. However, you rely on Procurement for a number of key aspects of the customer experience, such as assuring continuity of supply, maintaining high quality levels, to keep your promises. Moreover, consumers of your products and services are becoming increasingly conscious of the sustainability agenda, and your corporate attitude towards social, ethical and environmental standards. Ensure that your Procurement associates realise that they can personally be responsible for your organisation’s success, or failure, to meet customer expectations.
6. Managing working capital. 30 days? 60 days? 90 days? In some organisations, the timing of receipts and payments is critical – it can be a survival issue if not handled carefully. Organisations understand that they cannot afford to have more cash leaving the company than coming in during certain periods. Your Procurement team should be aware of that, and negotiate appropriate terms with your suppliers. Don’t just pay them late and hope that they don’t notice! And if payment terms are carefully aligned between customers and suppliers, the extension of payment terms becomes less critical.
7. Striving to be the best. While a handful of senior managers may be somewhat in the dark about what some of their departments do, most would say that they want the best performance possible out of each and every one of those departments. Whether they push for benchmarking or expect the individual departments to benchmark on their own, management teams want to know that departments like Procurement are promoting and adopting the latest best practices. And this extends to how effective the Procurement team is in communication with other stakeholders in the business to gain a full understanding of business requirements and to develop a dialogue around supplier requirements.
8. Recruiting and retaining the best talent. A key factor in the success of any organisation is the quality of its people, the level of competence – when measured both individually and collectively – and the continuing development of that competence. Training is an important part of the mix, but so too are job rotation, succession planning, mentoring and the recruitment of specialist skills as required. And the organisation needs to be built in a manner which reflects the nature of the activities being undertaken and the behaviours which are appropriate for a blend of strategic and transactional activity.
9. Generating Revenue. It’s well-understood that Procurement’s cost saving efforts can help an organisation’s bottom-line, but the fact that Procurement can actually generate revenue is still in the early stages of discovery among organisations. Through supplier rebates on employee and customer purchases, managing warranty returns and refunds, and other innovative practices, Procurement can actually bring cash into an organisation.
10. Creating competitive advantage. These days, with more and more activities and functions being outsourced, the marketplace isn’t just a competition between companies to gain customers – it’s a competition between entire supply chains. The suppliers that you select and manage often determine the relative strength of your organisation and your customer proposition compared to your competitors. Your expectation should be that Procurement develops a stronger supply chain than your rivals; and for what Procurement does, and how it does it, to be key elements in securing competitive advantage.
Now, it’s important to recognise that ‘Procurement’ is a process, not a function. Organisations too often get hung up on job titles, empires and hierarchies, only to end up with dysfunctional and isolated silos – and the lack of trust, poor communication and in-fighting that goes with it. To execute successfully, everyone has a role to play, and needs to be involved – it’s a ‘team game’. This requires engagement, both from and with multiple stakeholders, a clear definition of business needs, and a thorough understanding of what the process, and its key elements, should be.
If your Procurement team is presently addressing all of these expectations, urge them keep up with the good work and discuss with them how they are going to make enhancements to further improve their capability to deliver. If not, I would recommend an urgent meeting with your Head of Procurement – you’ve got a lot to talk about.
June 2014