Proxima Blog

Does your procurement function exist to deliver savings? Then you’re doomed...

Posted by Tom Lawrence on Mon, Jul 30, 2012 @ 07:25 AM

Savings are important, don’t get me wrong, but they are not the reason for being.

I am surprised by just how many people, including senior executives of many blue chip organizations, think that the purpose of procurement is to deliver savings. And it’s evidenced by the performance of many procurement functions being measured predominantly on a savings metric. But this is an out-dated way of doing business. Think about it logically: budgets are not spent to achieve a saving. So procurement is misaligned to the needs of the stakeholders they serve if they are targeted on achieving savings. Savings are important, don’t get me wrong, but they are not the reason for being.

Achieving large savings is an ‘entry level’ measure of procurement capability. Savings are not a true measure of longer term success. Most types of savings that are delivered are best seen as defining historic weaknesses. They make little business sense as a stand-alone objective for excellent procurement.

Surely, procurement’s main purpose is to ensure the organization achieves value for money from its purchasing activities and the associated behaviors. The long term justification for procurement, therefore, needs to move away from today’s unrealistic promises of exceptionally large savings each year, of which only a fraction ever materialize on the bottom line. In its place is a one-off shift in the cost base in the first few years, followed by a function that stops the new cost base from deteriorating back to where it was. The business receives an invaluable service, providing a commercial edge, improvements in supplier engagement and innovation, market insight and advice, and an agent for change.

In short, there needs to be a paradigm shift in how procurement is perceived, away from delivering savings to where it should be – a customer centric function that strives for value for money from the cost base.

And if you really listen to what senior executives say they want, it’s quickly apparent how misaligned procurement and finance leaders are. We recently conducted a piece of research involving 120 senior finance and procurement executives, across US and Europe, aimed at understanding the current perceptions of procurement. It’s all in there – you just have to listen.

I’d be interested to hear other’s perspectives on this. Personally, I think the service that procurement provides to business is going to be held beck until this paradigm shift occurs. It’s got so much more to offer. And until we can help senior leaders understand this, procurement is never going to realize its true potential.

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Comments

What metric is suggested as an alternative to 'Savings'. Until there is a simple and standard alternative, it is unlikely that senior managers will expect anything other than Savings from Procurement, despite what they 'say they want'.

Posted @ Monday, July 30, 2012 1:38 PM by Bill Young

Bill makes a good point. Balance sheet impact has to be an imperative. That said this is as much about Procurement function maturity as Finance function drivers. Communication of risks, demand management, category management, exploration of supply chain finance options, Supplier and contract management etc should, whilst labour intensive, generate DATA which are useful for areas where Procurement can establish vfm/effectiveness as well as savings/performance metrics.

Posted @ Tuesday, July 31, 2012 5:29 AM by Adrian Lowther

Hi Tom,

Nice article.

Sitting on the supplier side and dealing a lot with procurement, of course I fully support what you say :)

Trying to put myself into the position of a purchaser I would argue that it sounds nice in theory and that in practice it is only really possible if management has an eye for a long-term strategy, rather for short term savings.

Best regards,
David

Posted @ Tuesday, July 31, 2012 5:38 AM by David

Thanks, Adrian, for your thoughts. Demonstrating balance sheet (or P&L) impact is certainly good however it is difficult to do credibly. I had something else in mind - a measure of Procurement's engagement with internal clients, based on an audit of spend.

Posted @ Wednesday, August 01, 2012 5:04 AM by Bill Young

Adrian, I agree with you wholeheartedly in that it is all about the maturity of a procurement function – in terms of where it is on its journey and what it is trying to achieve. Bill asks for a single metric, and whilst he’s not alone in asking for this, I don’t think that’s the perspective to be taking (although I do agree we should to seek to measure how engaged the business is with procurement). And here’s why:

- Firstly, metrics should be designed to measure the outcomes you are trying to achieve. This will vary from company to company, depending such things as the maturity of the function, its aims, the overall business aims, the sector, etc. A single common metric can’t do this.

- Look at other functions such as HR, IT, Finance. They don’t have a single metric they are measured against. And they also don’t need to constantly justify their existence through the ROI they generate. (Don’t you think it’s ironic that procurement is measured in a savings driven ROI, given it generates is far a greater return than these other functions).

So why does procurement feel the need to constantly justify itself ? Is it procurement’s doing? Or is it business/ finance leaders taking too simplistic approach in their measurement of procurement effectiveness?

Posted @ Wednesday, August 01, 2012 5:18 AM by Tom Lawrence

My sense is the original article is very unrealistic, maybe idealistic. On the other hand the comments here are great, especially Adrian's.

The reality is the bottom line is the bottom line. The great thing about savings on the material line is that they drop to the profit line.

Posted @ Wednesday, August 01, 2012 11:26 AM by Mark Olejarczyk

From speaking to many non purchasing professionals over recent months I realise we've failed to convey what it is we do. I agree with you Tom we need different metrics yet for me thats not the issue. Somehow our identity is now defined by the metric we use. I'm not sure that's true for other functions and if I was coaching someone whose identified was defined by similarly I'd realise we had some work to do.

Posted @ Thursday, August 02, 2012 1:34 AM by Alison Smith

Procurement Function plays a pivotal role to interact with the supplier market (bring in better suppliers, better processes, etc) which will result into savings for the organization. These savings may be visible within procurement KPIs or may show improvements in other areas (for example - process with a better capability will result into stable manufacturing process internally, so manufacuring efficiency improves & not purchase KPI).
So, from my perspective Savings at Organization Level is a possible end result of different initiatives / approaches which procurement can drive with different stakeholders in an organization. Which means procurement should be responsible for new supliers, new processes, better contract management, improve efficiency in supplier management, cost avoidance, etc. This will automatically result in organization level improvements

Posted @ Thursday, August 02, 2012 4:42 AM by Mandar Vaidya

I feel Procurement is a strategic function that involves cost management ( not just cost management) , risk management, supplier management etc. The sum of all these will revolve around strategy piece of procurement function. One should focus on organization objective with functional capabilities .. saving will come by virtue of same !!!

Posted @ Thursday, August 02, 2012 4:42 AM by Gaganreet Singh

Thanks for your response Mandar - It will, but I feel you are missing one of the main roles that procurement needs to play: business partnering. (And by the way this role is not yet played by procurement in many organizations). In our experience, being highly effective means only about 25% of procurement’s time should be spent externally facing to the supplier base, negotiating, managing suppliers, contract managing, etc.. The remaining 75% should be spent on changing internal perceptions, ways of working, processes and behaviors – this is where the real value is created.

Gaganreet - Absolutely – the trouble is, there seems to be no momentum to bring about the change, partly I feel because business leaders don’t know what they don’t know.

Posted @ Thursday, August 02, 2012 4:47 AM by Tom Lawrence

The article itself was clearly from emotion and lacks depth & definition into what savings means, what drives savings, and how savings is recognized. The drivers for savings have gone unconsidered. I do agree that this could potentially be a consultant looking to drum up business. Savings can come to fruition on many fronts - supply chain continuity, freight optimization, supply chain finance, material analysis, and so on. Whether a company is public or private has some influence on performance metrics. Many public companies tend to drive value to the shareholders first while private companies tend to drive value to the customer & take their reputation a bit more serious; i.e. Wal-Mart v. Local Hardware/Department/Grocery (quality). The necessity for savings stems from whether or not the products bought and sold are able to be differentiated from competition - if not, sales is driven by the price and the procurement function arrives at a fork in the road; how to deliver the same for less. Find a way to become "best in class" or consider all savings opportunities outside of the material cost itself. It is not simply a task of asking a vendor/supplier to relax margins.

Posted @ Thursday, August 02, 2012 4:53 AM by Matthew Michel

Matthew, thanks for your comment, but I feel you are missing one of the main roles the procurement needs to play: business partnering. (And by the way this role is not yet played by procurement in many organizations). In our experience, being highly effective means only about 25% of procurement’s time should be spent externally facing to the supplier base, negotiating, managing suppliers, contract managing, etc.. The remaining 75% should be spent on changing internal perceptions, ways of working, processes and behaviors – this is where the real value is created.

Posted @ Thursday, August 02, 2012 4:53 AM by Tom Lawrence

The challenge with the savings expectation may be a creation the procurement function and to its own detriment. Many of the organisations I have worked for expected speed to market, efficiency and effectiveness.Procurement teams attempt to demonstrate delivery through 'savings realised, delivering the best deals in the market i.e benchmarked savings {?}). I was recently challenged to demonstrate Procurement team's contribution to 'winning one more customer', selling one extra litre of product etc This calls for a different in metrics, KPIs, dashboard...

Posted @ Thursday, August 02, 2012 4:55 AM by Maryanne Karanja

Good point Maryanne. You only have to look at retail buyers who never talk about savings – they focus on gross margin.

Posted @ Thursday, August 02, 2012 4:55 AM by Tom Lawrence

I agree: the savings metric is very basic. Too often procurement is seen as a book-keeping function, a gate-keeper, and a nuisance. A good procurement department, that is well integrated with the whole organization, and is relying on modern tools and processes to gather and analyze insights, should be entrusted to guide the organization to obtaining strategic, long-term and sustainable partnerships with other (supplying) organizations, as well as to help avoid risks. Procurement can even help to guide overall strategy. Why is it difficult for many large corporations to invest in this concept?

Posted @ Thursday, August 02, 2012 5:13 AM by Rahul Dhingra

Rahul - It's a question I have been grappling with for a long time! I think Alison Smith summed it up well earlier in the discussion, by saying procurement is defined by its metric (i.e. savings). Until we can break this view in the minds of Finance leaders, I can't see it changing.

When we talk to CFOs, and get the point across, there is often a light bulb moment. When one CFO said the following to us recently, we knew we'd made a break through: "So I shouldn't worry about the $160 million we’ve saved. Instead, I should focus on the $2 billion cost base". And now they are engaging with procurement in a totally different way.

Posted @ Thursday, August 02, 2012 5:28 AM by Tom Lawrence

The general thread of the discussion, and the original statement, are consistent in that they lead us to conclude that fiscal savings are important (both as a measure and as a driver) largely since these are the Business' measure, the Shareholders' measure and consistent worldwide at P&L level. Other "Savings", from demand management, or against budget can come from manipulation of figures. After this much of the activity should be about Total Cost of Ownership/Usage. TCO covers both cost of acquisition and usage, implies a longer term view and can lead to more discussions about value for money or metrics which weight risk and other factors.

Posted @ Thursday, August 02, 2012 8:52 AM by Adrian Lowther

I'd like to add a simple thought to the "value for money" standard for Procurement.

I prefer "improving company earnings [over the long and short term] " as an updated standard.

Earnings improvement will encompass value for money, business partnering, risk management, cost and savings, pricing, process, and so forth. Isn't this one of the ultimate metrics to be shared by all employees in every department?

Posted @ Thursday, August 02, 2012 12:08 PM by Doug Cooper

Since, within most organizations, there are still many "historic weaknesses" to be reconciled, Cost Savings will continue to be an important metric. Only when these "low hanging" fruits are harvested and a structure put in place to keep them harvested, will we be able to really concentrate on our true function: Strategic partnerships, TCO and operational excellence.

Posted @ Friday, August 03, 2012 4:21 AM by Mike Alexander

Too true Mike – the procurement maturity within an organisation being one of the drivers of what the metrics should be.

Posted @ Friday, August 03, 2012 4:23 AM by Tom Lawrence

Personally i see saving initiatives as a way of ensuring we get value for money. Too often departments pay over the odds for equipment, people consumables etc, or just waste money on things we do not need. At one company we were paying for 450 servers which were not doing anything and people just couldn't be bothered to return them and stop paying the lease. This initiative saved the company over $20m. It was a saving but it was more an elimination of wastefulness. If we can get people to treat the money as if it were their own, reduce wastefulness, get the best possible price rather than the first price offered, then we will not have to run saving initiatives.

This is a real cultural change for many organizations but once its achieved then the focus can be on generating real business value through investment.

Posted @ Friday, August 03, 2012 4:30 AM by Gordon Tredgold

Gordon - I really like your idea of getting people to treat a company’s money like it’s their own. There’s a similar aspiration in the world of employee engagement, of getting people to behave like they are owners of the company (a concept that a couple of Harvard professors have developed, called the ownership quotient) – and I think this is similar.

Posted @ Friday, August 03, 2012 4:31 AM by Tom Lawrence

What company uses savings as the primary metric procurement is measured on? Wal-mart?.....they seem to be pretty successful.

Posted @ Friday, August 03, 2012 4:32 AM by Todd Fanning

Ha ha. But are you sure Todd? I would wager them focusing on gross margin.

Posted @ Friday, August 03, 2012 4:32 AM by Tom Lawrence

when you say "In our experience, being effective means only about 25%...." could you please explain where you get this data. I am guessing you have plenty of data to back up your claims so that will help you make your statement. How do you go about changing internal perception?

We would like to get more into detail about this discussion. Since you are wanting to change the perception for the good of commercial business I am guessing you would be more than happy to engage in discussion. Looking forward to plenty of interaction with this discussion.

Posted @ Friday, August 03, 2012 4:36 AM by Davy W

Davy – of course, I’d be more than happy to have a conversation. This a too deep an issue for me to cover in here, but I’ll try to briefly address your two questions. Firstly – the 25% comes from analysing our timesheets. It goes up and down depending on the company we are working with and the exact nature of what we are contracted to do – but it tends to average around 25%. Secondly, we change perceptions by first of all having a passion for wanting to offer an excellent customer service based on their business needs. We talk their language – not procurement-speak. We listen, we take time to understand the real need (not the perceived need), we work with stakeholders to challenge common held points of view and ways of working, we share with them what innovation is going on, what other organizations are doing, and ultimately we work with them to create a commercial solution that serves the business need. It sounds simple – but it’s not what many procurement functions do. Hence why the majority of our time is spent outside of the sourcing process and instead is spent looming inwards at the organisations itself.

Posted @ Friday, August 03, 2012 4:36 AM by Tom Lawrence

What abut value added...to the organisation and to those within it and its stakeholders. Procurement is about getting the right provider to work with you at a cost that can be considered to add value to the organisation. Some of the measurement of that is subjective but does need to be evidence based.

Posted @ Friday, August 03, 2012 8:17 AM by Martin Colwell

Martin - Absolutely – there is a need for a balanced scorecard approach so that you measure what you want to achieve – and in many cases it isn’t savings. For example, a CMO wants to maximise the ROI on marketing’s activity, and get the most out of his/ her budget. Measuring savings is likely to drive a wedge between marketing and procurement.

Posted @ Friday, August 03, 2012 8:17 AM by Tom Lawrence

I jsut want to throw on the wild card here.. CSR ..how does corporate procument deal with this issues ??

After all, brand equity and perception increase shareholder value.. and thereby valution of a company and impacts customer stickiness..!!

Posted @ Friday, August 03, 2012 8:21 AM by Peter Dawson

@Peter - I can see this discussion lasting a lifetime. Consider why an organization needs to add value within their community. Value proposition or risk management? To build brand equity, CSR must add value to the customer. In my honest opinion, I cannot think of a single organization that successfully [directly] builds brand equity through CSR. Thinking from my investor and consumer perspective, I do not purchase Starbucks coffee because of their participation in fair trade, nor do I avoid purchasing Exxon-Mobil products if they are cheaper than the competition. Similarly, I base investments on measures of trends and solvency, not because I feel that the company is selecting good charities for the capital I provide. CSR does provide intrinsic value and a feeling of importance to employees. I’m sure value comes in the form of teambuilding, employee retention, greater motivation, increased morale, etc. which translates into intangible value [increased productivity]. Good luck measuring what is a direct result of CSR. DST Systems comes to mind – building homes, maintaining community gardens, operating area food banks… all supporting team productivity in the workplace. CSR is a great thought if it was volunteer work, but as an investor or executive, I see it as more of a risk without reward than a value addition. I wouldn’t place a departmental role on procurement because I would not authorize capital to be allocated to CSR.

Posted @ Friday, August 03, 2012 8:22 AM by Matthew Michel

Great points Matthew. I am having a tough time wrapping my head around this. The overall goal is always to reduce costs and raise sales. Obviously to Matthew's point, sacrificing OTD, service, and quality would not be cost efficient. Maximizing value in realation to cost while maintaining the principals of your company's environment is in my opinion where you can be successful. Lets be honest, attemping to change an environment is daunting, and if you are the only one attempting to implement a change, it will bust. Look forward to seeing more posts

Posted @ Friday, August 03, 2012 8:23 AM by Greg Kloosterman

It's certainly not the profession I signed up to. Savings are a complex business at any time, never mind during times of recession. Procurement used to be about helping acquire the optimum quality goods and services at the best whole life cost. Pressure to make short term savings can lead to sacrificing long-term value by purchasing the wrong goods and services, and in my experience can actually lead to the organisation resisting procurement initiatives all the more. This can in give the procurement function a negative image of being cost-cutting apparatchiks rather than a strategic support service which assists in identifying and procuring the best goods and services.

Posted @ Friday, August 03, 2012 8:27 AM by Nigel Rudyard

It’s a good point Nigel – and I’ve seen several instances of where procurement gets into a vicious cycle, of being perceived in the wrong light, so then it doesn’t deliver in the way expected, so receives less funding, and so the cycle goes on.

Posted @ Friday, August 03, 2012 8:27 AM by Tom Lawrence

Couldn't agree more; the amount of times (am sure others have seen this) that procurement/supply chain functions leveraged as a pure cost saving mechanism and in the process facilitates an environment of constant supplier changes, driving lack of loyalty, breading anti-competitive behviour, opportunistic traits and ending in the most part with service failures as a by product.

Agree savings are important, but believe a longer term partnership in some (not all) circumstances can bring about greater benefit especially when you count the cost of a new supplier disaster!

Posted @ Friday, August 03, 2012 11:19 AM by Liam Fassam

When working in Procurement it is not only dollar savings that one should be looking at. In industry, for instance, procurement should make sure that your suppliers delivers in time the goods ordered (quality, delivery time, etc..) for your own production. In case that delivery from your supplier is at risk, procurement should take all (pro-active) measures to avoid band-stops at your plant. That is a huge saving for your company.
This means that procurement must communicate internally (stakeholders) as well as externally (suppliers) to ensure continuity. Procurement has moved from just purchasing order writing (as ordered by stakeholder - and dont ask questions why) to a key player in the company but that means that procurement itself must get involved in the whole process of the company you work for.

Posted @ Friday, August 03, 2012 11:20 AM by Hans Albers Belderink

This excellent article expresses a concern I have held for some time. Surely the purpose of every function of an organisation is to support the work, vision and values of that organisation. No other function has the sole and independent role of achieving savings. If this were for instance the sole purpose of the HR function we would see organisations on their knees. I fail to understand why procurement needs to be treated so differently. Value for money and innovative value creation must certainly the role of every function in an organisation. If procurement is run by savings matrices is misses all the vital strategic opportunities procurement brings to the table. In the public sector we have to deliver policy through procurement such as local business growth, employment opportunities for the long term unemployed etc etc. We cannot be ruled by a bottom line but naively we often are.
Of course it is laudable to deliver savings and procurement has a pretty good track record in this area but excellence has a thousand different measurements of which savings is merely one

Posted @ Tuesday, August 07, 2012 4:00 AM by Claire Smart

Claire - you mentioned a word that I think may part of the root cause of this – naivety. Procurement has a journey to go on, and it’s a long one. There are parallels to draw on with the journeys both Finance and HR have gone on in the last 25 years, and I’m sure businesses can learn from these.

Posted @ Tuesday, August 07, 2012 4:01 AM by Tom Lawrence

Posted @ Tuesday, August 07, 2012 4:04 AM by Hans Albers Belderink

True development of Procurement lies in Business Development in ccoperation with the thurougly selected Supply Chain. When you can release nad manage the potential that your partners can offer both within the existing business and their collected R&D, and sell this to your own organization, that's when you will see true Risk Management and really big potiential in your own business. Connecting the potential of your Supply Base to the end customers needs is really what lifts Procurement to a higher level. Imagine placing Purchasing together with your own Marketing dpmt to make thing happen...

Posted @ Tuesday, August 07, 2012 4:05 AM by Stefan Ek

Guy, If procurement delivers savings it has done TWO things, one it has delivered savings, Secondly It has increased the companies gross margin. Savings equals increased gross margin, that makes savings even more of a worthy goal. Wal-Mart is known for saving the customer money. To save the customer money they bring product to market cheaper than the vast majority of it's competitors. They sell volume cheaper to expand their gross margin. Sam Walton's Rule #9
"Control your expenses (savings) better than your competition. This is where you can always find the competitive advantage. You can make a lot of mistakes and still recover if you run an efficient operation. Or you can be brilliant and still go out of business if you’re too inefficient." Gross margin is why businesses exist.

Posted @ Tuesday, August 07, 2012 4:06 AM by Todd Fanning

On the other hand Todd, players like Tesco in the UK focuses on increasing grossmargin on product while trying to figure out each customers specific needs, while still managing to present themselves as a budgetalternative. The intelligence lies in finding out how to sell exectly what each customer "needs" and finds attractive enough to pay that little extra for, and supply that information to their supply chain so they can focus on selling the "correct" product. Companys like Coca Cola have recieved lots of intelligence from this strategy, so instead of CC telling Tesco what their campaigns are, Tecso tells CC what their customers wants . . . Low cost products in big volumes are still a valid way to deliver gross margins, but managing to increase margins on specific products will also bring the end results all companys so desparately wants. Including your suppliers in this way of thinking can actually bring som magic to your way of doing business and this in where modern procurement comes in.

Posted @ Tuesday, August 07, 2012 4:06 AM by Stefan Ek

Stefan – it’s not only a great idea, but we’ve seen it happen. Once Marketing understand what procurement is capable of and how they can help, they collaborate well, and produce surprising results.

Posted @ Tuesday, August 07, 2012 4:07 AM by Tom Lawrence

I believe you are spot on with your thinking. It is this view I have been speaking on for some time. Unfortunately procurement sold itself as a cost saving service and the business bought that. Most comment seems to focus on manufacturing or retail when yes, price might be key but what about buying on lowest price only for product failure, recalls and re-work? Do you factor those costs in. In many service based industries, such as P&C Insurance, Cost must be managed with Quality and Customer.
Business partnering is key and procurement in this industry should focus on implementing solutions that deliver on the brand promise. This may mean spending more and/or paying more. You can't keep dropping a lawyers fees and still expect the partner to spend the same amount of time on a matter.
Any purchase is about value, people will pay more if they see value, the same is for procurement - what value do you offer, if its just cost savings then you're a one trick pony with a limited lifespan in any organisation.

Posted @ Tuesday, August 07, 2012 5:31 AM by John Houston

Savings are important to any organization as long as it was not accomplished at the expense of practicality or some other compromise involving quality. Also, savings should always have a time restraint and be properly identified or categorized--it should either be short term or long term. The most important hing to consider in terms of savings is that procurement should always strive for the BEST VALUE rather than Lowest Bid.

Posted @ Tuesday, August 14, 2012 5:59 AM by Phil Rose

Todd - that is a good, classic concept for stuff you can order (as a company from OEM suppliers) or as end consumer directly via Internet. Let's also and always realize that particular industries in "traditional markets" need to move away from offering cheaper than their competitors w/o added value to their customers.

Posted @ Tuesday, August 14, 2012 6:12 AM by Elisabeth Wintrich-Geiter

"Let's also and always realize that particular industries in "traditional markets" need to move away from offering cheaper than their competitors w/o added value to their customers."

Elisabeth-I'm not sure this is a decision that should be made in the procurement division.

Posted @ Tuesday, August 14, 2012 6:14 AM by Todd Fanning

On the other hand Todd, players like Tesco in the UK focuses on increasing gross margin on product while trying to figure out each customers specific needs, while still managing to present themselves as a budget alternative. The intelligence lies in finding out how to sell exactly what each customer "needs" and finds attractive enough to pay that little extra for, and supply that information to their supply chain so they can focus on selling the "correct" product. Company's like Coca Cola have received lots of intelligence from this strategy, so instead of CC telling Tesco what their campaigns are, Tesco tells CC what their customers wants . . . Low cost products in big volumes are still a valid way to deliver gross margins, but managing to increase margins on specific products will also bring the end results all company's so desperately wants. Including your suppliers in this way of thinking can actually bring some magic to your way of doing business and this in where modern procurement comes in.

Posted @ Tuesday, August 14, 2012 6:15 AM by Stefan EK

Stefan, There is nothing "modern" or "magical" about giving your customers what they want and continuing to try to be more profitable at it. It happens at all ends of the spectrum, from the
cheapest to the most expensive, in large quantity or small. We agree, procurement should always try to deliver savings (i.e. increasing gross margins)no matter what form the savings may come in all the while maintaining a happy customer.

Posted @ Tuesday, August 14, 2012 6:17 AM by Todd Fanning

Purchasers are typically measured on cost reduction only; hence a focus on short term saving over the long term TCO.

Purchasing without a strategy is shopping.

Posted @ Tuesday, August 14, 2012 6:40 AM by Mark G Smith

Let's be clear, the target of a healthy company is to make profits...

The easiest ways for purchasing to contribute to the P&L are... price savings and payment terms. If we start to consider the cost approach, then quality and service become crucial. For me the real added value of a high class purchasing department is to make the company "sexy" for the supply base, in order to become preferred customers for the vendors. The measurable results of such a behavior are:
- Innovation: Buyers are the ones who see first what suppliers are developing
- Merger and acquisitions: Many M&A consist in buying a supplier or selling a division to a supplier
- Preferred treatment during a crisis: its good to be still delivered during a global shortage, when your competitors are begging...

To sum-up I would say that purchasing departments betting on "process" will (maybe) deliver savings, when at the same time purchasing department based on "human being" will deliver added value.

Posted @ Tuesday, August 14, 2012 6:41 AM by Philippe Juhelle

I would be interested to know if, in people's experience supply chain failures are costed in financial terms (even due to loss of sales emanating from a disruption) and then taken off any savings basket being claimed by procurement departments.

The negative cost of downtime and loss of sales directly attributable to a low resilience supply chain or contract. Do procurement staff take responsibility for supply chain failure?

What value add is paying more for resilience, map it into total cost of ownership and then calculate the true savings.

Posted @ Tuesday, August 14, 2012 6:42 AM by David Window

It 's all a question of being able to translate the idea into the buying sequence and necessitates working together with the stakeholder and explain clearly, (with -short- clarifying reports) what procurement could facilitate (pros en cons). It works!

Posted @ Tuesday, August 14, 2012 6:43 AM by Hans Albers Belderink

If procurement can demonstrate that they did sufficient and efficient category management, including portfolio analysis, risk assessments and continuity impact assessments, during engagement with the market, during the course of the bid process and continuously through supplier relationship management, then and only then are they free to claim innocence.

Business Continuity Plan execution starts when your risk controls (if any) have failed. Its there to deal with the uncontrollable hazard risks in supply chain.

Posted @ Tuesday, August 14, 2012 6:44 AM by David Window

David, most markets are dynamic, but for some very big organizations, most SCM/Procurement organizations are not sufficiently resourced to take this dynamism into consideration, efforts are mostly directed at quick wins and getting it done quickly now rather than the pre-planning/continuous risk management approach that would be beneficial in the long run. Most businesses wants the quick wins and it is how a PM can easily demonstrates that s/he's adding value otherwise s/he's out, the question at the year-end is what has s/he contributed to the bottom line ? I work for a big organization where all what you've stated are done but for smaller organizations that I've worked, reverse is the case mostly due to resources constraints and this is not the fault of the PM.

Posted @ Tuesday, August 14, 2012 6:45 AM by Deen Kudehinbu

From over a decade of experience in hi-tech environment entrenched deeply on the supplier side as well as internal customers my take away is that savings should NEVER be the solitary goal. Here is the total pie of continuous improvement: cost, technology, quality, delivery, services, and partnership. All of these rolled up should make the over-arching goal of Procurement Organization.

Posted @ Tuesday, August 14, 2012 6:46 AM by Kamal Jani

David, I agree. CEOs and CFOs of most small / medium scale organizations need better understanding of the benefits a well resourced and competently developed SCM dept will bring to the organization and the PMs should be in a position to demonstrate and market this continuously. It goes much more than delivering savings and quick wins!

Posted @ Tuesday, August 14, 2012 6:47 AM by Deen Kudehinbu

Yes, finding out what the customer wants and giving that to them is very important in business. ;) Brilliant
stuff.

Posted @ Tuesday, August 14, 2012 6:48 AM by Todd Fanning

Again nothing new here......Wal-Mart even had
it figured out;

Rule 7: Listen to everyone in your company and figure out ways to get them talking. The folks on the front lines — the ones who actually talk to the customer — are the only ones who really know what's
going on out there. You'd better find out what they know. This really is what total quality is all about. To push responsibility down in your organization,and to force good ideas to bubble up within it, you must listen to what your
associates are trying to tell you.

Rule 4: Communicate everything you
possibly can to your partners. The more they know, the more they'll
understand. The more they understand, the more they'll care. Once they care, there's no
stopping them. If you don't trust your associates to know what's going on, they'll know you really don't consider them partners. Information is power, and the gain you get from empowering your associates more than offsets the risk of informing your competitors.

Posted @ Tuesday, August 14, 2012 6:52 AM by Todd Fanning

To be successful procurement needs to provide value, savings is only one measurement of value. Within a company you can have different groups that are focused on driving different values. If you are consuming things cost reduction may be the measure and supply chain management go hand in hand , if you are reselling things, margin it what's important. If you do new product development it is probably time to market. If you support on-going service of customers its probably customer satisfaction so they renew their maintenance agreements.

Posted @ Tuesday, August 14, 2012 6:54 AM by John Tracy

Yes and No. In financial crises Procurements strategy is to negotiate savings and/or cost reductions to help the company out of the crises. I see a mix of delivering added value like Phillippe say and real cost savings. At some point Procurement are sales people selling and arguing the out come of a deal. These days you have to be very creative in negotiating a deal to get a higher value for your company. I dived it between tangible and non-tangible deliveries.

Posted @ Tuesday, August 14, 2012 6:55 AM by Christel Prinsén

So, the initial question was: Does your procurement function exist to deliver savings?

The answer to that question should be No. Procurement exists to create values, to the customer, within the company and together with/for your partners. If we are able to achieve this growth, increased margins etc will follow. The major challenge lies in making this happen within your own company and getting the stakeholders involved and being a driving of these ideas. That includes getting closely involved with Marketing, R&D and the end customers.

So basically I agree with all of the above, and nothing is really new. But let's learn from Wall-Mart and others in the front line to make that journey a bit smoother for the rest of us ;)

From a guy who works in a company founded in 1646. Let me tell you, adapting to "new" ideas is a bit of a challenge. But on the other hand we have been here for a while, so why rush it?

Posted @ Tuesday, August 14, 2012 6:56 AM by Stefan EK

What's needed is a holistic approach. Savings are important providing that a clear focus remains to maintain/improve safety plus product and service quality. Clearly, stakeholder engagement is vital to that as is buy in to good process.

In essence, all the above add value to the business and, after all, isn't that what we all want to do?

Posted @ Tuesday, August 14, 2012 6:57 AM by Ian Gay

Quality, Delivery, Cost in equal measures

Posted @ Tuesday, August 14, 2012 6:59 AM by James Williams

Thanks Tom for your frank comments & bring an important element of communication. I suppose I mentioned stakeholder value & did not elaborate.

Coming to how much time should be spent internally / externally - I believe this would be determined by the type of industry each one works in as well as level of organization development in the value chain. So, I would avoid getting into specific % split between these two.

Summing up, there is no doubt that procurement plays a strategic role & creates value for the organization. On the other hand we also agree that most organizations seem to focus only on the operational aspect of hard savings. (The management does not seem to know what they do not know)
So, I also propose that we expand the discussion to - what KPI's, approaches, etc should we start speaking about internally to create this awareness.

Posted @ Tuesday, August 14, 2012 7:01 AM by Mandar Vaidya

Until and unless the top line criteria for job performance evaluation in purchasing shifts from "amount saved" the profession will never be able to get out from under that particular tyranny and the stigma it carries! I've been talking with senior executives in finance and operations about this for 30 years. They keep saying they want purchasing to focus on the "big picture" then become stumped when I ask how they measure performance, hear those two dreaded words and understand the inherent conflict!!

Posted @ Tuesday, August 14, 2012 7:02 AM by Ivan Owen

You measure what your stakeholders expect plus what you want to educate them on. Procurement still has the stigma of being cost reduction orientated only, so measure and report on that because that's what people expect to see. However nothing is stopping you from measuring all the other benefits procurement has to offer - increased staff engagement, less error rates, less re-work, higher productivity, customer satisfaction, how you got more for the same spend, faster production/cycle times etc etc
This will help shift the paradigm.
Within P&C Insurance everyone talks about Customer, Brand & Cost in that order because it's the right thing to say but rest assured cost is still key whilst loss ratios rule the roost so procurement will never escape being cost focused and why should it - its why we exist, to reduce costs, to save money, to do more with less but with a whole lot of extra value add thrown in for free!

Posted @ Tuesday, August 14, 2012 7:43 AM by John Houston

No offense, but statements like "Quality, Delivery, Cost in equal measures" are the cliched silliness that give Procurement organizations a lack of credibility with CFO's. In what fungible units could those be measured, and why would it matter what proportion of each, so long as the bottom line contribution is the maximized? We need to understand the monetary value of quality and availability (delivery) and the financial impact of accepting variances for those factors, then driving for the optimal achievable levels. In some item and service categories and industries, the financial trade-off for varying degrees is substantial, and in others its less so. Perfection in quality and availability is almost never the ideal - or achievable - but understanding how much imperfection is the right amount is where we can add the most value.

Posted @ Tuesday, August 14, 2012 7:48 AM by Matt Anders

Good and important discussion... also consider that a procurement unit's biggest opportunity to provide value to it's organization (for profit or non-profit) changes "over time". Across the typical dimensions of people, process and technology "early" in a function's evolution one-time transformational opportunities present themselves (e.g. a tactical sourcing to a strategic sourcing transformation, manual process to automated business process transformations, etc.). The more mature or "advanced" organization will likely be focused on different opportunities (e.g. relationship development, leveraging business unit partnerships, supporting key institutional objectives, etc)

The transformation curve likely does level off somewhat for the mature organization but I'd argue that significant opportunities remain when aligned with organizational objectives and leveraging the procurement infrastructure remain.

Posted @ Tuesday, August 14, 2012 7:49 AM by John Mayes II

I think Procurement has and is evolving along many paths.

Agree that if Procurement is only thought to be the group that delivers savings- not doomed but certainly not understood or leveraged.

The first job of everyone in a profit-oriented organization is earnings improvement and long term profit.

Procurement's evolution from Buying and Purchasing has taken us through the steps of clerking and placing orders, organizing the acquisition and payment process, and market research and challenge ( strategic sourcing ). We're now at the point of building businesses through product development, Supplier [Market] partnering, joint venture-like creations ( outsourcing and co-packing ), capital planning, and of course tightly aligning with the company's strategic business objectives.

Gone are the days of passive cost savings. I rely on my own "hunter - gatherers" in Procurement to identify and develop opportunities.

Oh, Matt, I don't think it is silly at all to deliver Quality, Deliver, or Cost as critical components or building blocks toward Procurement's contributions to earnings. I'd throttle that thinking back a bit

Posted @ Tuesday, August 14, 2012 7:50 AM by Douglas Cooper

I always base my procurement KPI's on the Quality, Delivery, Cost (QDC) ethos, all 3 areas need to be given equal importance, having one without the others is pointless.

Posted @ Tuesday, August 14, 2012 7:51 AM by James Williams

Procurement exists to create opportunities to save by structuring strong contracts. Savings are achieved by proper implementation and use of the agreements.

Posted @ Tuesday, August 14, 2012 7:52 AM by Louis Normand Jr.

Matt, what silliness is there in delivering quality, delivery and cost to an organisation? Procurement is not a one trick pony, these are of fundamental importance to any organisation

Posted @ Tuesday, August 14, 2012 7:52 AM by James Williams

James, they are, but can you deliver all three equally? Quality, Delivery, Cost, Customer are cliches used by most management in most organisations.
I address this by asking you to imagine 4 levers neither of which can be in the same position as another lever at any point in time. If you pull cost hard then some sacrifices must be made in the other three areas. If you pull Customer hard then the solution may cost more and so forth.
So yes they are important and all will be more important than the other at some point dependent on what outcomes the organisation needs and what the commodity is.

Posted @ Tuesday, August 14, 2012 7:53 AM by John Houston

Quality comes at a price. Understanding the precise price and value of a unit of quality, the ROI of quality, in real, financial terms terms is the value we bring, to enable stakeholders to make the hard decisions about how much quality they can afford. The same math is required for "delivery." We can't and shouldn't have massive warehouses full of inventory "just in case." There is a cost to that, or to having your supplier carry that always/immediately available inventory. That's the true value we bring.

Posted @ Tuesday, August 14, 2012 7:53 AM by Matt Anders

My 2 cents.
Yes, Purchasing function exists to deliver savings. I have seen all kind of companies and all of them have savings as primary metric. There is no demerit in having this profile.
However, if you want to be more, you need to earn it through hard work and discipline.
In a Fortune 50 company, we went through a transformation becoming a strategic function jumping from 3.6% 9.2% savings. Saving was just the result. The real outcome was the implementation of 4 pillars:
- Strategic Sourcing Process where complex projects may take up to 6 month to complete.
- Partner Engagement where clients (business and functions) are involved in strategic discussions
- SRM where segmentation of suppliers define which suppliers are Strategic
- And, Governance where new metrics were created and governance model was implemented to manage all pillars.
- After implementation we benchmarked with Hackett Group and AT Kearney and we were classified in both as world class function.

Posted @ Tuesday, August 14, 2012 8:25 AM by Paulo Moretti

Doug, as part of innovation, we have just started tracking new Revenue for the company. Revenue generated when Purchasing initiates process with suppliers. For example, we buy packaging, so when the pack supplier may start buying raw materials from us, we tracked as new revenue for the company and its respective EBIT.

Posted @ Tuesday, August 14, 2012 9:26 AM by Paulo Moretti

Does anyone else track and report value enhancement from "balance of trade" with suppliers? Do your departments initiate and / or negotiate joint venture agreements?

Posted @ Wednesday, August 15, 2012 5:03 AM by Douglas Cooper

The best way for procurement to enhance revenue is to drive improved speed-to-market through supplier collaboration on new products or product enhancements.

Balance of Trade type activity has value, but is dangerous, especially of you set and measure attainment against actual quotas; and if its not worth measuring, its not worth doing.

From a compliance standpoint, there needs to be a clear firewall between procurement and Sales when there are "round trip" business relationships. Trading business can be interpreted as artificially inflating revenues (that is, you are willing to pay more for an item - and artificially increase your suppliers revenues - when they do the same with you). From an audit standpoint, you would need to clearly demonstrate that the relationship did not result in you paying a higher price or purchase higher volumes than you would have otherwise. That is difficult to do. It also can damage your relationship with competing suppliers, who see business with you as a pay-to-play environment.

Posted @ Wednesday, August 15, 2012 5:05 AM by Matt Anders

Matt / John, I think you have made a number of assumptions on what was a pretty simple tag, I am not saying we need to have massive warehouses just in case, I am saying that all 3 need to be measured of equal importance. For example there is no point selling to the business what a great job we have done in reducing prices if we lose customers 6 months down the line due to poor quality or service levels. PPV, PPM, DIFOT for example.
I agree with the other points btw.

Posted @ Wednesday, August 15, 2012 5:06 AM by James Williams

Individual achievements that benefited our business segments were evaluated in my department (procedure standardization, supplier adherence to corporate governance rules, general "getting along with others as a manager" and the like, etc.), but the overall and most important goal to senior management (and, thus, the existence of my department) were, in order of importance, (1) overall savings, (2) yearly savings, and (3) cost avoidance. There is much sense in this, of course, but savings in and of themselves are only one factor that benefits the procurement process as a whole, however that process is defined. IMO, adherence to quality standards and healthy client-supplier relationships help to REALIZE cost savings, which is much more difficult to manage after the ink dries on the contracts. Many senior managers without this experience neglect this, and therefore can't understand and define benchmarks to qualify success in these efforts.

Posted @ Thursday, August 16, 2012 4:54 AM by Brian Batch

James, I hope all of us are past the point of recognizing the simple concept that price isn't everything. But telling any competent CFO that "all 3 need to be measured of equal importance" will immediately disqualify you as a credible business leader. If you were buying cars for your company fleet, and the stakeholder providing you the requirements said "safety, reliability, price and performance are all of equal value," would that be useful information for you? Would you think that person is knowledgeable, or a thought leader? No.

Posted @ Thursday, August 16, 2012 4:55 AM by Matt Anders

Savings will always have a part in any Purchasing organization, yet this should not be the primary objective. My experience in direct materials tend to lead me to think that a large proportion of savings derive from previously missed opportunities (crash timings, lack of involvement…), thus one could cynically argue that tracking savings provides a good idea of the inefficiencies of the upstream processes. In that light requesting high year on year savings from the entire purchasing organization can prove to be counterproductive and lead to internal and/or short term focus, versus working on what will make the company’s success long term.
To deliver truly breakthrough results purchasing organizations will need to remove the “saving function” label and build an equity of delivering value. In the end optimizing subsets of a system will generally only result in sub optimization of the total system. Purchasing organizations need to be an integral part of the business/project teams and gradually move to common X-functional targets that the whole team is accountable for.

Posted @ Thursday, August 16, 2012 4:57 AM by Jean-Louis Coiquaud

Matt, from the examples you keep giving I don't think you understand my point, I'll leave you with your interpretation.

Posted @ Thursday, August 16, 2012 4:58 AM by James Williams

Today we need to look beyond just cost saving activity there does need to be a shift in thinking to include sustainability of providing growth and savings to the company. How to improve material usage and also reduce material usage so aiding driving downing costs but also improving inventory holding and turns and usage all without compromising but improving delivery and quality.
There is also the CSR issues that need to be addressed from the supply chain allied with the environmental associated issues of re-cycability and removal of harmful substances; this can only be achieved with co-operation with other departments like design and quality.

Posted @ Friday, August 17, 2012 4:48 AM by Neil Williams

There is a danger that procurement focuses on savings to the detriment of its other purposes, and starts reporting savings calculated on the most advantageous metric to procurement. I'm also seeing more and more the longer term business requirement sidelined just to achieve short term savings, then followed up by more "savings" when the low cost supplier is exposed as not fit for purpose, or more usually when they start adding days/weeks/months to ongoing project costs, and all the rate card discounts you want won't solve that problem.
More recently, Cloud Services contracts seem to produce alliances between suppliers and stakeholders even before procurement are involved, and that's where the business partner/trusted advisor relationship between procurement and stakeholder becomes strained if it isn't already strong.

Posted @ Friday, August 17, 2012 4:50 AM by Brian Lavery

Purchasing is value driven not price driven. In the old days when most companies felt that procurement was a necessary evil the successful ones did not. Purchasing value can be best price, best quality, best timing, best inventory turns, best use of suppliers resources for development of products and overall the best use from all resources available. Not many departments in a company that can increase product margins with phone calls. I have more to say but I'll leave it at that.

Posted @ Friday, August 17, 2012 4:51 AM by Pedro Tirado

What is the definition of savings? It is easy to get a 4% LTA if you've overpaid at the start! Most suppliers bake the customers LTA expectations into the price....
Purchasing need to think more holistically, in terms of TCO.

Posted @ Tuesday, August 21, 2012 8:09 AM by Mark G Smith

Balance of Trade is dangerous....buying a poor quality product from a customer compromises the efficiency of the business. Buying from your customer is a "nice to have" but the customer product needs to match the quality of the competition...the price may be more flexible depending on sales profitability.

Posted @ Tuesday, August 21, 2012 8:11 AM by Mark G Smith

"...the price may be more flexible depending on sales profitability" scares me. Unless your sales team wants to book that higher price delta as a marketing expense, you are effectively cooking the books.

Posted @ Tuesday, August 21, 2012 8:12 AM by Matt Anders

I agree the Procurement Department's sole or major function should not be savings. However, I strongly recommend having at least one senior person 100% dedicated to analyzing costs and finding/implementing cost reduction solutions otherwise substantial opportunities for growing the economic value of the enterprise may be lost.

Posted @ Tuesday, August 21, 2012 8:13 AM by Eric Butterworth

Having read the article there is a lot of truth in it. In general, procurement is perceived by the end user/client as a necessary evil or road block to overcome in order for them to order from, initiate, or engage with the supplier. The paradigm shift to which you refer needs to take place both in the field as well as within the minds of its practitioners. The quality of advice (clear and consistent), thorough analysis and research, proper supplier and contract management, relationship building (client and supplier side), client satisfaction including education and training afforded to clients, and the enabling of transformation and embedding of change could be some of the new metrics when measuring procurement efficacy or success.

We do need to move away from savings but at the moment, and historically, the worth of procurement and the professionals within are judged by their ability to 'negotiate' and hence improve contractual conditions, one element of which is, by default, commercial considerations i.e. savings for their end users/clients.

Posted @ Tuesday, August 21, 2012 8:15 AM by Memet Erdemgil

Frustratingly very true, Corporate dilution of the traditional Procurement role has pushed Procurement Managers towards a bottom line (cost) focus hence why so many are heavily involved in the negotiation with new and existing supplier's. These day's It is a rare thing to have a supplier management function integrated and reporting to Procurement.

There is a "key and critical" supply base that exist's in all companies and those supplier's/partner's should always be engaged, managed and proactively monitored by Procurement but most corporate's unfortunately find it very difficult to value relationship management indeed it is only when the relationship fail's the question's are asked and value's realised.

For at least the last 5 or 6 year's the tendency has been to push the relationship management toward's stakeholder's and contract owner's which has not only fragmented the relationship that procurement has internally but has confused the supplier base as to who actually own's the relationship and to any Procurement Manager that confusion provides a distinct contract advantage to the supplier. The strategic cost control that is active across all industries well that is something we all have to live with but to remain effective procurement manager's will have to negotiate internally and hopefully by presenting real working example's they will gain the support of the exec and in turn have enough resources to provide a valuable effective supply management function.

Posted @ Tuesday, August 21, 2012 8:29 AM by John Mason

Agree with John. It's not always black & white picture and about permanent push on one dimension. There is a lot about successful risk management, recognising and identifying opportunities, offsetting risks with proper initiatives, etc...how PRO role will be perceived in the organization depends on your abilities as well, how successfully you'll present goals, structure and means toward upper management .

Posted @ Wednesday, August 22, 2012 3:28 AM by Momcilo Orlandic

I have actually witnessed situations where senior leaders spend more time and effort arguing procurement cost savings in literal monetary terms. I also agree savings are important, but if anyone wants to realize them in monetary terms, then it means they have to change the way they do business.

I always emphasize the issue of Timing (planning and implementation), additional to the QDC ethos that James mentioned above. If we fail to beat the market, it will always beat our resources. Delivering on the budgets as planned is what senior leaders should be concerned with, not procurement savings.

Just a common scenario: If you know your are going to need diaries for the following year, why not plan to procure and have them delivered in the first semester, why wait for the market's peak period and expect to save?

Posted @ Wednesday, August 22, 2012 3:42 AM by Nokufa Matitoane

It's always, always, always about the money, ask the Finance Director/the holders of the budgets. Procurement rarely has the opportunity to create sales so they better have great ways to reduce the cost and add to the profit of everything else. If they are not supporting to save money and increase profits, they are losing the business money. They would become just another unnecessary expense, which in this economic climate is a luxury the business cannot afford and may as well be outsourced (well no, actually I don't mean that). Procurement needs to be professional and that does not come cheap. As a minimum they need to pay their way. There are infinite ways to save on costs and be creative for more profit and competitive edge, so let's share the how so as we can put the 'Great back into Britain'.

Posted @ Friday, August 24, 2012 5:32 AM by Sue Fleming

I feel that the link Tom posts is intentionally sensationalist. Of course procurement exists to deliver savings and ensure that the company's spending power is stretched as far as possible - buy more of what you need for less.

It's also true that some types of procurement lends itself to this more than others. I currently buy mostly indirects and many of these are project based meaning I may not buy the same service again so tactical cost reduction is a key driver.

Previously in a manufacture environment, the QCD principle applies - if there was an emergency I would pay more for my raw materials to ensure continuity of supply as the machinery needs to keep turning. As this was in a medical device market, quality was often an even greater priority than cost and I was monitored on the level of complaints or rejects as well as cost savings. Long term supply resilience, unlocking supplier innovation etc are all beneficial but if the cost isn't right they all look poor value for money.

Ultimately, as procurement professionals we make budgets go further than if we were not here and this will always be the prime metric in our world. The key is value for money, not cost saving but I've not seen a business yet that can develop a metric for VFM instead of cost savings.

Posted @ Friday, August 24, 2012 5:35 AM by Paul Scott

Having spent over 25 years involved business and process change, much of it specifically designed to reduce cost and improve efficiency. One observation I would make is that many enterprises I have worked with both large and small simply have no real idea where there real cost truly are.

They’re often so focused on their respective P&L and pet spread sheets that they fail to recognise that the actual numbers behind these are often understated, wrong or fail to recognise cost at a granular enough level to truly deliver sustainable long term cost reduction.

Most ledger coding systems are designed to allow executives to manage costs at a high level and optimise the P/L. They are not intended to facilitate detailed cost analysis and investigation leading to continuous improvement and waste management programmes. And because most Business Intelligence systems extract their data from the ledgers the same is equally true of them.

The balance lies between creating effective granular coding structures that identify cost at a more useful level and the perceived burden this would put on business administration.

However an alternative has existed for some while that effectively sidesteps these issues and for any organisation seeking an extremely cost effective way of delivering long term savings the following link is very well worth exploring
http://lime-associates.com/articles/view/34

Posted @ Friday, August 24, 2012 5:38 AM by Kevin Edgar

The article has clearly prompted debate as intended, I would make a couple of points to focus the attention back on the CEO, CFO and Investor perspective. Firstly, Procurements' primary role should be to focus on working with Finance to ensure savings and related activities are reflected in the monthly financial reporting cycle (i.e management accounts) ensuring cost savings rather avoidance are transparent. Secondly, Procurement professionals need to be able to engage stakeholders (internal and external) as business people if they are to earn a seat at the table. Thirdly, a robust savings' approval methodology is one of the cornerstones of a credible Procurement function which in my experience is often lacking. Interested to hear further comments, Mike

Posted @ Monday, August 27, 2012 6:03 AM by Mike Lander

As a core member of our supply chain, I feel compelled to not only consider cost containment, but deliver the utmost quality to our production efforts. I've dealt with a plethora of colleagues who believe cost savings is king - but without quality all others seem to fail. We (supply chain managers) need to get back to the basics once in a while - 5 P's of Marketing Mix to truly understand our function within our company.

Posted @ Wednesday, August 29, 2012 4:23 AM by Mike deLorimier Jr.

Never forget the basics while exploring the opportunities.
You're quite correct in that Mike.

Posted @ Wednesday, August 29, 2012 4:25 AM by Stefan Ek

Purchasing departments buy stuff. Specifically, they buy the right stuff and the right quality levels at the right times. The only factors that is a variable is the stability of the ongoing buy and the waste involved in the purchasing. Waste is expensive. If you are buying from a company that has wild inefficiency, you will overpay even if they are making very little margin. So, understanding benchmark costs is the supply chain manager's most powerful tool. The old goon tactics of "negotiating" a lower cost without understanding the lowest cost to produce the product you are buying just means you overpaid at the beginning or you talked the supplier into operating at a loss, which blows up stability, eventually.

Posted @ Wednesday, August 29, 2012 4:28 AM by Tony Pashigian

I see it in a similar way. Procurement in advanced companies is on the way from a cost base manager with negotiation focus to a mediator between the own comapny and the supplier base with the target to create maximum value. That sounds like heaven but is doable - given management commitment. It starts with giving the procurement manager end to end accountability for the full performance of the supply base - not only cost but also quality, technology and logistics. With this a procurement manager grows from a negotiator to a supply line manager with an end to end approach. Next and very close step is to leverage on the technological knowledge of our supplier base. Too many times we all still design by ourselves and then give the spec to our suppliers to manufacture it - too little dialog before the design is frozen. Thinking further on that path is then working with suppliers on long term technology and cost roadmaps, which are committed from both sides. Negotiations are then a side phenomenon, the real work of procurement is to bring suppliers and own R&D/product management at one table, make them to open their kitchen and work together as partners.

Posted @ Thursday, August 30, 2012 8:44 PM by Michael Kalweit

Savings are still a relatively easy to accept performance metric, especially if used to demonstrate an above 6 ROI and get attention, funds and resources, for which we all compete. Clearly they can not be the only or leading indicator since the role of procurement is to manage a given spend in the most optimal and intelligent way, which is very different from cutting prices. The focus should be really on the metrics which can drive correct behaviors to ultimately maximize the bottom line. Metrics are a way to get attention on specific elements and therefore need to be different at different stages of the organizational development. Some metrics are a qualifier for procurement functions, some are bread winners.

Posted @ Tuesday, September 04, 2012 2:45 AM by Marianna Zangrillo

Have we overlooked the critical ingredient of customer satisfaction?
Focusing centrally on this fundamental aspect of why the business survives is key to the strategy of all its components.
In all functions - deliver what will delight your customer - and you have potential for growth.
Do it in a balanced economic framework and you have a world winner.
But never lose sight of what keeps you in business.

Posted @ Tuesday, September 04, 2012 2:46 AM by Roger van Greune

When cost reductions are directly linked to profit margin and potentially the increase of market share, that must be the number 1 focus. But If getting those savings, stop your factory due to other problems as non-quality, delivery time delay, etc...That's no more a cost reductions project but a burden for the company, time to change of supplier.

Posted @ Thursday, September 06, 2012 5:11 AM by Joce Herry

Savings will ALWAYS be a critical metric, but you're doomed (or at least pigeonholed) if it's your ONLY metric and you box yourself into a one-trick-pony role.

Determining the KPIs and their weightings is determined by the stakeholders (budget owners, c-level, etc.) and procurement must help them build a 'balanced scorecard of supply' and help them set/realize goals that are important to THEM... and then Procurement can report out how much of that is savings as needed.

Procurement must be an objective arbiter of supply performance improvement, not a piece player relegated to moving an isolated player for its own self interests. This is not so much its own fault as a failure of the overall system, but when the system is broken, Procurement needs to highlight that and change it, else it will indeed be boxed into a losing game.

Posted @ Monday, September 10, 2012 3:36 AM by Pierre Mitchell

This may be of interest to those anyone following the comments

<a>http://trustedadvisor.com/articles/the-role-of-procurement-as-trusted-advisor-to-management

Posted @ Thursday, September 27, 2012 4:52 AM by Bill Young

I completely agree with this view. If a procurement professional soley focuses on delivering savings, what sets them apart from software or cloud programs that can perform the same function with the same data to determine the lowest cost. True procurement professionals are not indispensable as they strategically source to improve process and ultimately TCO.

Posted @ Friday, October 05, 2012 6:35 AM by Sheniqua Bamberry, MIBA

Savings in procurement should be measured by last purchase price Vs present price and not from first cut proposal to final negotiated proposal or from budget approval . Procurement team should be concentrating in managing the master of last purchase price against each category of product or services . The best option is to create awareness among all requesters or project leads the importance of procurement team by meeting them on regular basis and presenting the data on cost spent Vs cost saved.

Posted @ Friday, October 05, 2012 6:38 AM by wasim azeez

A number of Procurement organisations have recognised the savings trap and are trying to move beyond it. They are developing higher level, consulting skills in their Procurement teams. They have been telling internal clients (ICs) how important purchased services are and, when the ICs recognise this, they don't want them to be managed by one-dimensional buyers. Procurement's motive for moving beyond savings is fear of redundancy.

Posted @ Friday, October 05, 2012 7:26 AM by Bill Young

Personally I don't believe that anyone is doomed if savings is the corner stone of procurement,quite the contrary in my opinion. The approach on how to address savings is the issue and a completely different "ball game". If one limits savings as a simple task to reduce or cut costs based uniquely on negotiating with your suppliers then I would be compeled to fully agreed, you're doomed, but the pursue of savings goes way beyond the simple math of a budget spread sheet. When you resort to tools such as i.e. Lean Manufacturing, distribution cost optimization,material analyses just to quote some of the most efficient, common,much discussed but incredibely not so properly used, you're adding value to the supply chain, adding value to operations,ultimately adding value to your customers/clients...what do you know...achieving savings in the process!!! The "waste cost" that's being paid is eliminated or drastically reduced and without going after suppliers profit (we're all in it for the money, like it or not...), which is ussualy where the problems start and end. Savings is the reason why we exist, the problem in my opinion is when procurement is reduced to simply going after supplier margins of profit at any cost and this is the major reason why so many "budgets" are never achieved or dramatically underperform.Savings isn't the issue, it's how you go after them that is.

Posted @ Friday, October 26, 2012 9:52 AM by Francisco Cascais

I agree with Francisco. Savings is a component, an IMPORTANT component, of the value that procurement brings. But it is not the only one. At the inception of a new procurement program, savings is the entry card (low hanging fruit, if it really exist). But the more mature the program becomes, the more difficult is to bring value through savings exclusively (it is not very probable to bring 10% Y-o-Y on realized savings over 10 a decade). Procurement needs to focus on other venues to bring value on the organization (SRM, value chain analysis, spec rationalization, risk management, contract management, etc.).

Finally, if the question is to how to measure value, we are entering a very different universe. I would risk to recommend REALIZED value (not identified, awarded, implemented) is the ultimate measure for ROI of the procurement department.

Posted @ Friday, October 26, 2012 9:53 AM by Alejandro Gusis

Perhaps savings (or should we say improvements) will be a result of an optimisation of the procurement function, but should be measured through different perspectives, according to what the company values the most, for example: savings in time, in cost, improved efficiency, improved quality, improved quantities, etc?

Posted @ Monday, October 29, 2012 6:30 AM by Frederico Barreto

Savings have to be a key component of how the procurement function is measured within an organisation. However, that said, there is a pressing need for procurement to move beyond cost savings initiatives and into innovation, collaboration with suppliers and internal key stakeholders. Procurement should be represented as a business asset with multiple ways of measuring it's success - innovation, value for money, brand/reputation, brand protection, compliance. The use of cost savings as a single measurement of success is one dimensional when in reality procurement touch all parts of the business.

Posted @ Friday, December 14, 2012 8:04 AM by Steve North

Lots of opinion to indicate that Procurement should contribute more than saving. Nothing to make that less of a fluffy concept with zero chance of competing with headline savings during the CPO's presentation to the executive board

Posted @ Friday, December 14, 2012 8:22 AM by Bill Young

I agree Bill that savings will always be a key measure and the CPO presenting to the board that the procurement have better engagement with key stakeholders is but have not delivered on the savings target is likely to get shot down. Historically, procurement has often been positioned within the realms of finance, driving tactical short term savings as opposed to working collaboratively with key suppliers to deliver better value for money. That said at the end of the day, those SRM projects or innovation programmes have to deliver a tangible benefit, a number. I worked in a large communications organisation where there was a significant savings target, but at the same time there where multiple SRM projects delivering benefits beyond the next 6 months (eg. Reducing the cost of managing multiple applications across iT estate, improving durabity of frontline uniforms).

Posted @ Friday, December 14, 2012 8:37 AM by Steve North

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