We’re midway through what will probably wind up as a multi-decade transformation in the way that organizations procure goods and services. According to Katie Tamblin, Director, IHS Supply Management Solutions, this revolution kicked off about 10 years ago as procurement came into focus as a game-changer for companies with the potential to add direct value to the bottom line.
“We see a shift in thinking and a new recognition of the positive impact that procurement excellence can have on important performance indicators, like costs and spending,” said Tamblin. “Business leaders are able to get out in front of this shift and demonstrate that, when done well, procurement can transform the way an organization operates.”
This paradigm shift became even more prominent over the last few years thanks to a prolonged recession and the limited global growth that took place during the downturn. These two forces greatly pressurized margins and pushed companies to become more creative in extracting profits from their normal operations. “To grow profit in the current environment is seen as noteworthy,” Tamblin explained. “Many of the organizations achieving this goal are limiting costs rather than growing revenues spectacularly.”
As part of their quests to grow profits, organizations are focusing more intensely on procurement knowing that the best and most effective way to limit costs—without massive operational impacts—is to improve the way you buy products and services. Concurrently, financial analysts that track public companies are starting to ask more questions about procurement, said Tamblin, and paying attention to how firms are operating within certain roles, such as sourcing and procurement.
“In order to be able to analyze your procurement operation and think strategically, you must have good data, which is a foundational building block of procurement excellence,” said Tamblin, who sees large organizations save millions in annual spend by implementing procurement excellence initiatives. “These examples are making organizations sit up and take notice of the importance of procurement excellence as a driver of improved financial performance.”
Undertaking Transformational Changes
When undertaking transformational changes in procurement, leading organizations leverage internal and external data to shift focus to strategic buying vs. tactical procurement. When those elements are combined, organizations gain unprecedented visibility over their procurement functions and better leverage its role in increasing profitability. The goal, said Tamblin, is to use good, harmonized, accurate data to assess spend, understand supply markets and make better buying decisions going forward.
“Companies that have good, harmonized data around their spending tend to be the best performers when it comes to procurement,” said Tamblin. “Put simply, you have to know what you spend money on in order to improve the way you spend that money.” The manufacturer purchasing raw materials, for example, must gain an understanding of the change in spending year to year in order to proactively pinpoint (and address) any significant fluctuations.
More Strategic Buying Plans
Once equipped with a high level of detail around where procurement dollars are going on a daily, monthly, quarterly and annual basis, organizations can make significant strides toward procurement excellence. Analyzing data, for example, becomes easier, and issues like price discrepancies can be identified and mitigated quickly.
As Tamblin pointed out earlier, strategic focus is another critical component of procurement excellence. Unless team members are on board with the initiative—and until they are ready to use the data for more effective decision-making—traditional, tactical procurement habits will likely prevail. Tamblin said that, historically, buyers would receive a need from the manufacturing floor for X number of parts, for example. After putting the order out for bid, buyers would select a vendor, and procure the good or commodity. This tactic is often referred to as “three bids and a buy” procurement.
Today’s best-in-class organizations are taking a more strategic approach to buying. Rather than being reactive to internal needs, for example, procurement agents are reviewing what was spent last year, assessing budgets and planning purchases out at least a year in advance. By donning their strategic thinker hats, buyers can more readily make proactive decisions. In some cases, those plans may center on acquiring 600 widgets from a single supplier that offers bulk discounts. In other situations, it may pay to wait until mid-year to buy those widgets—based on expected price drops—often driven by fluctuating commodity prices that form the input costs to widget production.
“Rather than saying ‘I need 600 widgets for my production line’ and buying them from the cheapest provider,” said Tamblin, “procurement professionals are factoring in all of the widgets that the firm will need over the coming year, reviewing future costs and contract structures, and coming up with more strategic buying plans.” An integral part of strategic buying plans is focused on an understanding of where markets are going. According to Tamblin, reactive, backward-looking strategies are fundamentally limited in their ability to contribute to cost savings. However, proactive, forward-looking strategies, based on future supply market conditions, can transform procurement decision-making and contribute millions of dollars in savings to an organization’s bottom line.
Cycles of Improvement
Achieving procurement excellence sounds straightforward in theory, but these types of initiatives can quickly get sidelined in today’s rapidly shifting business environment. “The ground is constantly shifting beneath us,” Tamblin acknowledged, “and, to quote a chief procurement officer (CPO) who spoke at a recent procurement event, as soon as you complete a cycle of improvement, you need to start over and do it again. As soon as you think you’re done with that three- or five-year plan, you’re already behind the curve again.
”Often, the most difficult element of achieving procurement excellence is managing change. Just because senior leadership recognizes a need for new procurement practices, it does not necessarily mean that front-line buyers or facility/project managers appreciate the need. Many tactical procurement professionals can be reluctant to change and reticent to apply new, strategic principles to their existing buying practices. Tamblin recommended that procurement leaders recognize the need for extensive change management, and execute procurement excellence initiatives with relentless focus and discipline.
In this dynamic, unpredictable environment, Tamblin said that maintaining a consistent, but evolving focus on procurement excellence is the best way to overcome immediate and future challenges. In other words, you don’t just achieve procurement excellence and then stop the effort; you keep pushing on for more improvements and accomplishments to support long-term organizational goals.
Developing Procurement Teams
Having the right people on board and in the right positions also goes a long way in supporting long-term procurement excellence goals. The next step is to ensure that those professionals are well-equipped to not only manage supplier relationships, but also embrace and support the organization’s improved approach to procurement.
“Procurement is a very diverse department that many times includes buyers who were doing things their way for the last 10 years,” said Tamblin. “Buyers not only have to understand how to procure the widgets, but to truly support a culture of procurement excellence, they also have to understand how the price of those widgets behaved in recent months and what it will do over the coming months.”
Transforming your procurement practices will take time and require a shifting skill set for your colleagues. Building a strong skill pipeline is integral to creating lasting, positive change within the organization. Managing change includes training your teams and fostering talent at all levels within the supply chain organization.Tamblin said that, in some cases, buyers who are more tactical in nature can be paired up with strategic-thinking category managers who are charged with setting the strategy around certain sets of buys. When the latter sees that widget prices are on track to rise later in the year, he or she can suggest that all buyers procure the products at the best possible price right now—rather than later.
“Ideally, you want a centralized strategic thinker who can apply the market conditions, and his or her understanding of the market conditions, to a specific situation,” said Tamblin, “and then make the best procurement decisions around that information.”
Many organizations are implementing training and career path tools to promote skill set alignment and develop less experienced talent. By rewarding innovation and strategic thinking, the procurement team can evolve over time to foster effective decision-making at all levels.
With an increasing number of organizations focused on reducing costs and boosting performance, more and more of them are turning to continuous improvement strategies to achieve those goals. By combining information, analytics and expertise with best practices, companies can pinpoint their weak spots, and effectively address those issues on the path to attaining high-level goals like organizational profitability and overall corporate performance.