This blog entry is inspired by Leo King, independent journalist, who recently asked three questions and interviewed me for an article in The Times, 21 January, “Building a First-Class Procurement Function.” These are my notes in preparation for the interview, with a few additions and corrected grammar for this publication.
Q1: What are the key factors required for a strong procurement function? Why are these so important?
Apart from appropriate skills, which I shall address in answer to Q2:
1. Recognition that procurement is part of a supply chain and the goal is to optimise the supply chain.
This is important because supply chains compete, not individual businesses.
Many businesses build deep departmental or functional expertise, but the departments or functions operate within silos. This can impact on both order fulfilment and product development cycles. Also, in many supply chains, customers and suppliers don’t work together anywhere near as effectively as they could.
Procurement’s role is to develop and engage with supply markets firstly to maximise the sustainable competitive advantage of the supply chain, then to extract the maximum sustainable benefit for the individual business.
2. Understanding the real needs of the business – both strategic and operational.
This is important because procurement can easily be pursuing inappropriate goals.
Most common misdirection is to focus on cost reduction (with procurement success measured by purchase price variance). No business ever saved its way to success.
Be clear. Are you turning round/retrenching/restructuring? Are you prospecting/diversifying/innovating/going for growth? Procurement goals and strategies may be very different, depending on overarching business goals and strategies. (Also the term “sustainable”, used above, has different meaning & timescale in different business contexts.)
A useful tool for exploring the business needs is value chain analysis. Suggestions for a light-weight approach for procurement strategy can be found in “10 Tips on the use of Value Chain Analysis for Procurement Strategy.”
3. Appropriate procurement categories – reflecting both the business need for systems and the structure of the supply markets.
This is important because:
- It is easy to lose sight of critical requirements within a bundle of commodity items.
- It is easy to overlook the interdependencies of component supplies in providing a required outcome (systems thinking).
- It is easy to dilute your attractiveness to key suppliers, or dilute your leverage by bundling requirements in ways that don’t take account of the way the supply markets work.
Q2: How important and how easy is it to have the right skills? What do businesses need to do?
Having the right skills is hugely important. Procurement functional skills are increasingly available – thanks to CIPS. The difficulty comes in finding the appropriate business skills to engage with stakeholders and to use the functional skills appropriately in context.
An excellent building is created by an architect, a structural engineer, and builders with appropriate tools and skills in their use. In similar fashion, an excellent procurement function needs a solutions architect (business analyst & strategist), a business process engineer, and procurement operational practitioners with appropriate tools and skills.
What businesses need to do
First let’s consider what is often going wrong:
- Procurement is concerned only with “procurement practice”, i.e. the operational tools and techniques;
- Procurement is driven by spend analytics and an obsession to reduce cost;
- Procurement focus is on “the price of everything and the value of nothing”.
My concerns were confirmed by a recent article by a respected procurement professional who put the first three (of ten) challenges of the CPO as ‘cost control’, ‘visibility of savings’ and ‘contract compliance’. At number 5 was ‘effective use of the procurement function,’ which needs ‘the authority … to channel all processes across the department.’ Does this suggest Procurement’s preoccupation with justifying its existence, imposing its practices and rounding up maverick spend? These are no substitute for demonstrating value, placing contracts that truly reflect the business needs and providing services that internal customers use by choice.
How can procurement gain a better appreciation of business requirements?
Procurement can benefit from the skills and knowledge of other functions. Career opportunities for procurement specialists have increased as procurement practices have developed and the function has matured. Much emphasis is placed on procurement skills retention; perhaps more attention could be given to attracting business talent. Fortunately each procurement organisation doesn’t need large numbers of business architects and process engineers .
6 Steps to Develop and Make Best Use of Procurement Skills
- Recognize functional silos of excellence are not enough; the big opportunities are in getting functions to work in a coherent and co-ordinated whole.
- Create pathways to bring business talent to Procurement. Procurement is seldom seen as a pathway to general management or senior level within other functions. If procurement is to attract talent it has to enable talented people to pursue their career aspirations, including those outside procurement. There need to be more opportunities for cross-functional career moves and secondments to and from other functions. But simply creating the opportunities and empowering Procurement is not enough; Procurement has to transform its role and its performance.
- Either encourage and develop, or engage, facilitators (if external, preferably interim executives, not consultants) to establish effective cross-functional working. In many organisations the skills already exist, it’s their application that needs direction. Business processes are sometimes lacking or unnecessarily bureaucratic.
- Direct talent in the right way – on strategic goals, not on sub-optimal departmental “targets” or constantly consumed by fire fighting.
- Validate and verify procurement initiatives – validation in terms of meeting the business requirement, and verifying that the procurement is in accordance with good procurement practice. Kill initiatives that don’t pass the test.
- Put in place a joined up set of KPIs to ensure that procurement and other functions are aligned, and are focused on achieving the broader business goals.
Q3: How can businesses improve the ways they communicate internally, as well as with suppliers, for a better procurement function?
An obvious answer is to have a formal communications strategy and processes through which procurement programmes are communicated. Communication is not enough. Procurement has to meet the business’s requirements and the aspirations of stakeholders – which demands effective stakeholder engagement and management. A strategy for stakeholder engagement – to address both internal and external stakeholders – is needed.
Regarding communications and engagement with suppliers it is first necessary to classify suppliers:
- Core – protect and enhance.
- Preferred – develop/grow to core, in the meantime use as opportunity allows.
- Tactical – exploit within parameters allowed by category strategy.
- Nuisance – divest.
Generally you will open with core suppliers and preferred suppliers:
- sharing market intelligence;
- aiming for shared objectives of growing volume (increasing share or enabling business growth), value (increasing scope at constant share); collaborating where this makes sense;
- or simply working together to improve performance.
With tactical and nuisance suppliers you may be keeping your strategy confidential, or withholding information for obvious reasons.
Internal stakeholders need to be aware that occasionally you may be open with tactical and nuisance suppliers (for example recognising mutual advantage in co-operating tactically) or closed to core and preferred suppliers (for example to protect against monopolistic exploitation).
In any programme intended to deliver significant change, effective stakeholder engagement -internal and sometimes external – is critical. Procurement programmes are no different. I see there are 7 elements:
- Sponsorship: Ensuring sponsorship for the change at a senior executive level from both supplier and customer perspectives.
- Involvement: Involving the right people in the design and implementation of changes, to make sure the right changes are made.
- Impact: Assessing and addressing how the changes will affect people
- Communication: Telling everyone who is affected about the changes… and listening.
- Readiness: Getting people ready for the changes, by ensuring they have the right information, training and help.
- Responsibilities: Ensuring people understand and accept their responsibilities, and are held accountable.
- Compliance: Addressing resistance; in most cases revisiting 1-6 above, but occasionally requiring the removal of negative influences.
In conclusion, these three questions and my answers do not constitute a blueprint for a first-class procurement function. They do set out some pre-requisites and offer sound advice on strengthening procurement.