Introduction

In 2005 CIPSA, the Australasian branch of the UK based Chartered Institute of Purchasing & Supply, published a short research paper on the Top 3 issues facing the procurement profession. The issues they identified were as follows

Internal issues – i.e. those identified by procurement professionals

1.    Stakeholder buy-in. How do we go about getting true buy-in from internal ‘clients’?
2.    Performance measurement. Are our measurement efforts appropriate & adequate?
3.    Training & education. Are the current education standards producing world class procurement practitioners?

External issues – i.e. those articulated by CEO’s & business leaders

1.    Value generation. How am I getting true value from our professional procurement effort and are these efforts aligned with our organisational goals?
2.    Risk reduction. How can we further reduce risk in our commercial processes?
3.    Outsourcing. Are our outsourcing decisions rigorous enough – is this fundamentally a strategic or commercial question?

This paper sets out to address both the #1 issues from each group as, in reality, they are very much inter-related. If, as procurement professionals, what we are doing and how we are doing it is seen by the business to under-pin its goals, then we will receive full support in our initiatives.

The key question thus is “how do we go about determining and implementing the most appropriate strategies, tools & structures which do see us truly aligned with the business?”

Corporate strategy & structure

{sidebar id=2} The traditional commercial business goal put most simply is “to make money for our owners”. How businesses go about doing that is where they differ. Most larger companies will have a Vision and/or Mission statement and one or more goals. These define in what market(s) the organisation will operate in and how it will go about differentiating itself from its competitors. They also help the organisation prioritise its limited resources.

There are many dimensions in which a company may chose to compete depending upon what they perceive to be the factors most important to the customer base or market they are targeting. It is not possible to excel at all of them at the same time. Some will focus on being the cheapest. Others however will focus on quality, innovation, reliability, responsiveness or growth. Such strategies require quite different management and investment approaches in provision of resources, skills, capacity and planning. These need to be matched by the choice of external resources which is the responsibility of procurement.

As well as commercial entities, there are others such as not-for-profits, voluntary or welfare agencies who can have quite different drivers as far as measuring their success is concerned. Similarly the approaches taken within the public sector may differ as they can be driven by specific legislative requirements and regulations.

Organisations can also vary in terms of their culture and values.

While recognising these differences, there is an equally important one related to how an organisation is structured in terms of governance, management and accountability. Often size and range will be a major contributor here.

At one extreme is the highly centralised corporate, controlled from the centre and usually functionally segmented in terms of management  eg sales, marketing, manufacturing, HR, administration etc. Profit accountability is held at the centre. At the other end of the spectrum is the federal model of semi autonomous business or business units. Each business unit has its own complete set of functions and is responsible for its performance. Such units can be structured along product or geographic lines. Responsibility and decision making with respect to procurement can therefore be quite diverse.

Similarly Procurement has options as to how it structures it’s influence, control and operational activities. For small organisations this is straightforward. However for larger organisations the choice is similar to that outlined above for the overall organisation.

More and more companies are however moving towards a centre-led procurement organisation. Policies and procedures and some strategic sourcing is mandated centrally, but execution is push out into the operating units.  The goal is to gain the benefits of leverage and efficiencies from central resources while supporting the unique and specific requirements of each business unit or geographic location.

3 years ago, Fonterra made the decision to pursue this approach.

The role of procurement

While there are many definitions of procurement and purchasing, in a simple phrase, procurement is the profession of external resource management. It is about ensuring the organisation maximises the value it gains from the resources it needs which are outside its direct ownership and control. To quote CIPSA again, “working both upstream and downstream of the purchase decision, a professional buyer can facilitate the business process, help capture the business benefits of the project, protect the business from risk and reduce lifetime costs.”

Procurement is a key business process since, if it is not done well, costs can escalate, the business be exposed to unnecessary risk and customers let down through lack of supply. It is much more than chasing simple cost savings.

The benefits of good procurement include
-    Security of supply
-    Lower total cost
-    Reduced risk
-    Improved quality
-    More added value
-    Greater efficiency
-    New innovations

Procurement strategies

Research undertaken by the Aberdeen Group in the USA [The CPO’s Agenda March 2005] identified five primary strategies that procurement leaders are adopting to move from a focus on cost containment to one of value generation. These strategies were:

1.    improve supplier development and collaboration
2.    enhance and integrate procurement automation infrastructure
3.    adopt low-cost country supply initiatives
4.    transition to a centre-led procurement organisation
5.    increase the amount of spend under management while improving spend compliance

Another set of research has been undertaken by The Future Purchasing Alliance which is a team made up from leaders in research, education and professional practice, and published in a briefing entitled “Connecting Purchasing & Supplier Strategies to Shareholder Value” .  The research examined ways in which initiatives with 3rd party suppliers can be aligned to maximise total shareholder value in a sustainable and ethically defensible manner. It notes that purchasing has been treated as a backwater of business, but this is now changing as the potential impacts of purchasing as a lever for maximising shareholder value are more clearly understood.

The research indicates that whether or not purchasing is significantly aligned with overall business requirements appears to be the critical factor for purchasing’s future progress and development. It is more important than organisation type, organisational structures or the level in the business into which procurement reports.

Organisations were categorised into 3 groups depending on whether they were considered to be Purchasing Improvers, Purchasing Leaders or Purchasing Pioneers. They identified various strategies and initiatives associated with each group.

The initiatives associated with Purchasing Improvers were focused on functional improvement and including such approaches as price benchmarking, supplier rationalisation, collaborative buying and volume leverage. Broader process change characterised the Purchasing Leaders initiatives which included standardised sourcing, supplier management, e-sourcing, offshore sourcing and lean supply. The initiatives perceived to be about radical business change (Purchasing Pioneers) included integration of suppliers in product development, sourcing for innovation capability, supplier alliances, controlling intellectual property and technology standards, executive governance of top relationships, and control of critical assets in the supply chain.

Clearly the initiatives associated with high financial and business impact depend upon a high level of strategic alignment.

Achieving goal alignment

Below is a suggested 5 step process to developing your procurement strategy in conjunction with your stakeholders

1.    Assess your current situation including your company’s culture, organisational structure, people, organisational maturity together with knowledge of your key stakeholders and your current credibility with them
2.    Develop a draft based on the assessment results ensuring links to company strategy and stakeholder needs. In collaboration with stakeholders, set goals which address their requirements, uses their language and ensure there is  internal ownership within procurement
3.    Build buy-in with senior company leaders through workshops and presentations. Document the plan, circulate for final revisions and gain demonstrable commitment
4.    Execute your plan ensuring that you gain some quick wins. Measure your progress.
5.    Communicate the strategy and progress widely. Share credit with the business and keep marketing internally.

Maturity cycle of procurement

Procurement is an organisation within an organisation which is there to optimise the acquisition of goods and services. It is a relatively new profession and will follow a maturity cycle over time. The initiatives and level of involvement within the organisation will be driven by where you are positioned on this cycle.

Initially you need to pursue respectability so achieving savings targets (low hanging fruit) is an early approach. Then the focus can turn to increasing the proportion of spend under management and contract. Negotiation skills and other tools will be developed. Risk avoidance and surety of supply together with financial control frameworks then follow. Placing a greater emphasis on innovation and strategies which support company growth will lead to your becoming involved at a higher and more significant level of the organisation.

In your assessment phase, it is crucial to establish where your procurement organisation is at in terms of its maturity – don’t attempt to run before you have proven you can stand tall and walk with your head held high.