Ok, you’ve waited long enough.  I’m going to give it to you straight as that’s the only way I know how.  On my previous post I defined purchasing as the day-to-day tactical activity of a buyer acquiring goods or services for the organization with no real analysis, strategy or consistency.  A best-in-class Procurement Organization typically saves the enterprise 2-15% throughout categories on a regular basis (conservatively); translating into a dollar-for-dollar increase in profits.  Initially, and also by way of targeted projects, the results are typically much larger as formal processes are put in place and spend is analyzed, consolidated and leveraged.  I have personally delivered over 40% savings in a single category!   Any takers?  Of course, who won’t want those savings!

So what’s the problem?  Do you think leaders like me cost too much?  Maybe you think your margins are just fine and you are doing well enough and you really don’t think it’s worth any extra expense.  What if I told you I delivered a 400% ROI within the first three years, including systems and human resources.  Would that get you excited?  It gets me excited!  Let me show you some of the things that a Best-in-Class Procurement Organization will do for you and your organization.  Let’s start with some definitions.  By now you have a fairly good idea on what purchasing is.  I’ve also talked about Best-in-Class, Best Practices, and of course Procurement.  Best-in-Class are the organizations that do the things (best practices) that have been proven to work and have been widely adopted among other winners in the industry, e.g., IBM, GE, Intel, Cisco, Honda, Toyota, Motorola, Johnson & Johnson,  Deer & Company, and WalMart, to name a few.  What all these companies have in common is a Procurement Organization functioning in a Total Cost of Ownership (TCO) perspective and a Strategic Sourcing capacity to improve margins, increase efficiency and mitigate risk for the enterprise.  Wow!  That was a mouth full!  What happened to that plain talk?  Okay, Procurement, TCO and Strategic sourcing coming up.

Procurement is a comprehensive strategic approach to the procurement and payment (P2P) of goods and services (stuff) as well as a continuous process improvement approach across functional areas.  This approach drives the lowest TCO in all decisions.  And like I said in my previous post, this is one of your greatest competitive advantages in the market place!  So let’s take a minute to define TCO so we’re all on the same page.

TCO looks at the big picture, not just the discrete cost of a product or service.  The cost of your favorite pen is not the only issue here.   It’s the cost of getting it into your hand.  TCO considers numerous variables across the Enterprise.  For example:  What are your direct purchasing costs?  Most companies rarely look at this but a single purchase order can cost anywhere from $75-$150 depending on the efficiency of your systems and resources.  Are you combining orders or wasting money on multiple orders when you could be bucketing more efficiently.  Do you have inventory and do you know the holding cost?  Are you balancing bucketing with warehouse/distribution operating costs?  What is your shipping/freight costs?  Do you know if you, the Buyer, are paying or is the Seller?  Depending on the size of your organization it’s quite possible that you will have better leverage than the seller on shipping/freight and it will pay off big time to use your own accounts.   These are just some examples; they are real and will either drive margins up or down depending on whether you subscribe to Procurement Value-Add, or traditional purchasing costs.

Your other great competitive advantage is Strategic Sourcing, so let’s look at that now.  I’m a simple guy so in simple terms it means you have a defined method based on objective data that defends your decision making process.  Okay, what does that look like?

A Procurement Organization with a Strategic Sourcing Process consists of the following:

1. A detailed spend analysis that gives a clear picture of what you buy, who you buy it from and how much you spend with each Supplier.  This is the starting point.  You MUST have a system that accurately captures and classifies your spend or you will never get off the ground and will always be chasing your tail trying to figure out what you bought.
2. Procurement Professionals who know their business model, asses current and future business needs, and challenge internal customers to identify opportunities for consolidation that will leverage spend, reduce costs, and shorten cycle times while enhancing quality and service.
3. They understand the supply market and form category strategies that will deliver to your business model and optimize the supply chain.
4. They spend the time up front to research, qualify, and develop Suppliers who will be partners in business; ones that are open and willing to share information and want to help you grow your business as you help them grow theirs; ones who are in it for the long-haul and will accept process improvements that increase efficiency, eliminate waste and improve quality (Six Sigma/Lean).   They do this with formal objective tools, criteria, and scoring models across the supply chain that support your unique business model.
5. They actively manage key Suppliers; writing, negotiating, and managing contractual agreements, not only for pricing, terms and conditions but to mitigate risk and exposure across the enterprise.  They conduct business reviews complete with supplier scorecards that drive operational excellence and continuous improvements.  They develop and execute transition plans with minimal impact to the enterprise.

You might hear these points referred to as the 7-step strategic sourcing plan.  You can see I did it in 5.  Plain talk and simplicity works best for me.

I would also like to point out item number 4 above which clearly defines a “Supplier” as a “partner in business”, open and possessing all the outlined attributes that mutually grow business.  Unfortunately, Suppliers are not something readily available off the shelf, vendors are.  Suppliers are developed by someone like me leading a Value-Add Procurement Organization to your specific business model.

Stay tuned for my next post with more plain talk as we go around the ProcurementSCM Value-Add (P2P) wheel.

Let ProcurementSCM do the heavy lifting so you can do what you do best!

See you Soon…
Steve Hasbrouck, C.P.M

I’m sure you’ve heard the terms Procurement and purchasing, but do you really understand the difference the value one brings over the cost of another?  Maybe you’re saying to yourself Procurement is just a ten dollar word for purchasing.  Maybe you’re saying buying stuff doesn’t add value it just creates expenses.  Well, you’re partially right.  Buying stuff does create expenses if what you’re buying doesn’t help produce revenue (directly or indirectly) or you’re paying too much for it.  Procurement provides the expertise to ensure the right goods and services grow your business and save money that would have otherwise been spent.  These savings go straight to the bottom line; increasing margins, efficiency, and streamlining processes.  Sound good?  Keep reading!

It’s been my experience that most companies don’t realize the significant advantages that a Strategic Procurement Organization will make.  If they did, every company of size would be operating in that capacity.  In their mind a Procurement Organization, or should I say purchasing department, is a necessary expense to satisfy SOX, the Sarbanes-Oxley Act of 2002, or simply lift the burden off those who make or sell the stuff for the company.  So if companies don’t realize the advantages of Procurement over purchasing, it must mean that decision makers just don’t understand the differences between the two and how a Best-in-Class Procurement Organization directly increases the bottom line whereas a purchasing group is typically just another cost center.

Let’s take “traditional” purchasing first.  In simplistic terms, purchasing is the day-to-day tactical activity of a Buyer acquiring goods or services for the organization.  They are informed of a requirement, they determine who can provide it and they order it.  Very little, if any, analysis is done on the spend, the commodity/category, your business model, the market, or the VENDOR.  And you can bet there is no real strategy in place for consistency, savings, quality, or customer service.  More often than not the Buyer will come from somewhere else in the organization and lack the education or skill set to perform the necessary sourcing analysis as described above.  Now that’s not to say the Buyer won’t have any process at all.  Most often they get the requirement and contact their usual friendly vendor of choice.  And here’s the best part; if you ask them why they use this particular vendor they will say something like; “that’s who we always use”, or “they have great service and good pricing.”  Just don’t ask why the vendor is qualified or you might find out it’s because they provide doughnuts and Starbucks every Friday.

The Buyer can’t provide a better answer because they’ve never gone through a strategic sourcing process (more on that later).  However, they may quote the requirement against a couple other vendors to prove their point.  This is good, right?  Not so much.  Even if they do bid the requirement out they are doing one of two things and neither is cost effective or sustainable to the enterprise.  They are either taking the lowest cost vendor (which they can’t objectively qualify since they have no objective baseline or “should cost” to go from), or they are using the information as leverage against their “usual” vendor.  Let me make this perfectly clear… EVERYONE LOSES IN THIS SCENARIO!

The lowest cost vendor is usually the new guy trying to get in and establish themselves for a long term business relationship with you.  He’s usually willing to take razor thin margins or even a loss, at first, to get in and get more business.  This won’t last long as he recognizes this is your total strategy and he’s not gaining business.  After all, he has his own margins to maintain.  Prices will rise in very clever ways;  discreet increases, poor quality, shipping/freight expense increases, customer service declines, or they just don’t deliver when you need it…and you just missed a shipment to one of your best customers!

On the flip side, your “usual” vendor doesn’t want to lose business so he cuts his price to match the new guy.  Now put yourself in the “usual” vendor’s spot.  Every time a new vendor tries to get in and get a piece of the pie, the Buyer is hammering you for equal or better pricing.  What are you going to do?  That’s right, you’re going to find ways to maintain your margins elsewhere as discussed above.  You’re also not going to be very willing to do anything more than what is absolutely required to maintain your position as it’s very obvious that you aren’t all that important to the Buyer.  This game always costs more and can cost you customers!  If that’s not bad enough, you are also getting known for bad purchasing practices, questionable ethics, and probably running into regulatory and auditing compliance issues. Who can afford that?  Better yet, who wants to afford that?  But that’s traditional purchasing with “VENDORS.”

Just like it sounds, you put your money in and a bag of chips drops down, or it’s supposed to.  Sometimes you have to shake the machine because it got stuck.  Maybe it delivers maybe it doesn’t.  Maybe the chips are good, or maybe they’re stale and you have to toss them.  Either way you’re wasting time shaking the machine and gambling on quality and customers when you could have a reliable qualified partner helping you grow your business with documented savings and processes you can count on.  You, the business owner or decision maker, don’t see any of this because your purchasing department isn’t a Procurement Organization with a Strategic Sourcing Process and Total Cost of Ownership (TCO) perspective.  I can’t emphasize this enough!  TCO and Strategic Sourcing are two of your greatest competitive advantages in the market place!

Stay tuned for my next post on:  Best-in-Class Procurement (TCO – Strategic Sourcing with SUPPLIERS)

Let ProcurementSCM do the heavy lifting so you can do what you do best!

See you soon…
Steve Hasbrouck, C.P.M