By Christopher Stacy
Far too often, procurement organizations have a reputation among their constituent business units as a low-value control function that exists for two purposes – cost reduction and policy enforcement. This narrow perspective often creates dubious working relationships and, moreover, marginalizes Procurement's value to the broader organization. So how can Procurement change this perception? The department should proactively study the business units it serves as well as work to help them understand the value Procurement provides – particularly through its most "leverageable" service, strategic sourcing.
Going Beyond Controls: How Procurement Can Add Business Value
A procurement organization's primary goals include reducing or containing costs, driving quality standards and mitigating risks associated with external suppliers. The department meets these goals by developing and disseminating controls, such as requisitioning processes, which ensure that appropriate processes and people are identified to review expenditures. While controls are arguably among Procurement's first principles, they would hardly be perceived as a "high value-add" by the company's business units. Accordingly, Procurement has sought other avenues for adding value, such as rapid purchasing, contract management and – perhaps most importantly – strategic sourcing, the process of managing suppliers through an objective transaction lifecycle, resulting in the selection of the supplier that provides the highest value to the organization.
However, sourcing projects must be conducted collaboratively to demonstrate Procurement's interest in selecting a supplier that provides the best overall value to the organization; otherwise, business units may ultimately perceive sourcing as just one more control function. Case in point: Procurement sourcing teams are often accused of rigidly applying prescribed methods that result in protracted timelines, ignoring the business unit's need for rapid transaction closure in lieu of a process that may yield marginal, noncritical benefits. Or Procurement may promote hard-dollar savings as the chief sourcing benefit, causing concern in the business unit that a suboptimal, low-cost alternative will be selected instead of a solution that yields the highest value.
In most cases, negative perceptions of Procurement and sourcing activities arise not from sourcing itself, but from poor execution of the sourcing process and from sourcing professionals who lack the operational context necessary to drive value. As a best practice, Procurement should customize sourcing projects and partner with business units during transactions. Below are five tips for driving a successful sourcing process, including suggestions for implementation.
1. Understand Your Internal Customer: Procurement must prioritize the business unit's critical success factors, including timeframes and schedule restraints. This will ensure that both the business unit and Procurement are on the same page regarding decisions such as whether to renegotiate an existing contract versus conducting a competitive procurement. Procurement should also study the operations of the business unit to glean additional insight into the value of the goods and services being sourced, as this helps sourcing staff understand how the goods or services will support corporate and functional objectives.
How to implement: Procurement should have a firm grasp of the business unit's budgetary goals, mission within the overall company and timeframes for key initiatives. Procurement might participate in collaborative planning and budgeting sessions and actively prioritize what should be sourced to meet business needs. Procurement should also maintain a supplier contract database to stay a step ahead in identifying timeframes for upcoming sourcing transactions. To indoctrinate staff into the business unit's culture and operations, Procurement leadership might rotate staff into physical locations shared with the business unit, or it may allow Procurement staff to assume some responsibilities related to the business unit's operations.
During a sourcing event, the business unit must be allowed to provide input on decision criteria and weightings for supplier selection to ensure that the supplier selection process reflects the priorities of both the Procurement organization and business unit. Finally, the business unit should be actively engaged in evaluating supplier proposals and in selecting a supplier.
2. Bring More Than a Process – Understand What You're Buying: Procurement needs to possess category expertise to successfully apply its standard sourcing process to specific categories. Therefore, the department must understand the cost drivers for a category in order to develop the appropriate bidding structure, be aware of the key contractual terms and conditions to negotiate, and anticipate behaviors of the suppliers competing for business. An understanding of the goods and services being procured, as well as how they are used within the business unit, allows Procurement to customize the sourcing process with tactics such as reverse auctions and multiple rounds of negotiation.
How to implement: Procurement should gather information from the business unit, including how the goods and services are currently used, how they will be used in the future, and historical and projected volumes. The business unit should explain which aspects of the goods and services are most important. This, in turn, should drive development of detailed requirements for the goods and services being procured – such requirements are critical to ensuring consistent proposals across suppliers of the exact goods and services needed.
Team member understanding of suppliers and the marketplace can be derived through prior experience sourcing the category, prior experience interacting with the suppliers or by hiring new resources into Procurement for long-term placement in category sourcing. Expertise can be maintained by continuously researching the category, attending supplier conferences and by meeting with key suppliers. As a long-term strategy, Procurement functions may choose to align sourcing resources by category, instead of by business unit, to develop this expertise over time.
3. Educate Your Internal Customer: Procurement should explain the purpose of the sourcing process and illustrate how the process can drive a logical and auditable selection of a supplier that can provide quality goods and services. A formal sourcing process ensures that marketplace alternatives are considered in a supplier selection and that evaluation of prospective suppliers takes place with minimal bias, according to predefined selection criteria that drive to the optimal solution for the business.
How to implement: Documentation of the sourcing process and its benefits should be presented by Procurement in kickoff meeting materials. Stated benefits can include obtaining an understanding of the latest goods and services available in the marketplace, as well as expected savings compared to current costs. Ideally, case studies should be provided to highlight Procurement's previous successes. The list of benefits must showcase Procurement's desire to drive both savings and quality. Savings should be a goal achieved through competitive pressures of the marketplace, applied against a clearly defined set of goods and services.
Procurement should help the business units learn about the sourcing process – the steps that will take place, key inputs required from the business unit, where in the process key decisions will be made and how strategy changes can be made based on information gleaned from the marketplace or from internal sources. The team should describe how a quantitative selection process that removes biases during supplier selection helps maintain the team's focus on project objectives, by preventing undue influence by supplier personalities or noncritical aspects of supplier bids.
4. Be Flexible: A sourcing project strategy and approach can be flexible while still adhering to a structured, objective selection process. Procurement should pay attention to business unit time constraints and show flexibility with respect to the sourcing approach based on the time available for the project.
How to implement: From the outset, Procurement should provide the business unit with a high-level project timeline. While changes to the timeline are likely, business units should understand the team's general expectations for project duration – for example, a project lasting six weeks versus six months. This, combined with an understanding of the process and key decision points, will enable the business unit to engage in decisions on moving the project forward given time constraints. For example, a project on a tight timeframe might move from opportunity assessment into an accelerated request for quote (RFQ), as opposed to a full request for proposal (RFP). Alternatively, for projects with sufficient available time, the team could iterate through RFP development to capture a full requirement set and engage in multiple rounds of bidding and negotiations with suppliers.
5. Bring Knowledge Capital into the Business: Along with driving supplier selection, a sourcing project presents an opportunity to gather information on marketplace trends and new product offerings. By issuing exploratory questions to suppliers early in the sourcing process, the team can add previously unknown, but important, requirements into an RFP.
How to implement: As prospective suppliers are identified in the beginning stages of a sourcing event, Procurement should ask them to describe their key differentiators. At this point, suppliers are incentivized to demonstrate new products or services and to show that they are marketplace leaders in order to be allowed to bid in the sourcing event. The information gleaned from these discussions may lead to new RFP requirements, and, as the full supplier pool responds to these requirements, knowledge capital from the marketplace will be brought into the organization.
By following these best practices, Procurement can develop a true partnership with the business unit. Over time, these practices can lead to an improved perception of Procurement by the business units as they realize that Procurement can act strategically, be flexible and drive towards their goals instead of simply being an operational hurdle. Furthermore, a partnership approach promotes successful sourcing, enabling Procurement to deliver high value benefits to the organization.
About the Author: Christopher Stacy is a senior associate with Pace Harmon, an outsourcing advisory, strategic sourcing and supply chain consulting firm based in Tysons Corner, Va. More information is available at www.paceharmon.com.