Daily Archives: April 25, 2008

It’s Time for Procurement to Take the Helm

The recent issue of CPO Agenda has a few good articles in it, including At the Helm or All at Sea by Dick Russill that starts off by noting that to steer into more strategic business waters, CPOs must abandon the cost savings myopia and service mentality that tarnish procurement’s image.

The article has a number of good points, which include the following:

  1. success at managing external costs must be measured relative to the cost and cash-flow forecasts in the financial plan, not by isolated savings
  2. purchasers must change – if they don’t, then emphasis will be shifted to legal (to cut better contracts) and finance (to help the company make better investments)
  3. it’s a self-harming paradox for procurement to define it’s importance by the huge percentage of the budget it consumes and to define its success by how much it can reduce that spend
  4. the businesses that fail are those where the principles of the business are to make money; the businesses that succeed are those where the principles set out to deliver outstanding quality of goods and services to their customers
  5. suppliers need to be regarded as a source of value and goodwill, not as a source of cost and overpriced material goods
  6. ultimately procurement’s business role is to contribute strategy, distill out its supply implications, and then act to make the strategy happen

Why is this important? Let’s take it point by point.

  1. if savings are isolated, then they are the exception and not the rule; furthermore, companies that tout isolated savings are usually those that have just started to implement strategic sourcing and do not realize that negotiated savings are not realized savings (as this requires tactical follow-through to capture the strategically negotiated savings)
  2. Purchasing’s time to shine is now … if you let the opportunity pass you by, then the CEO will look elsewhere
  3. It’s not total savings, or even total cost of ownership, but total value
  4. a business focussed on making money is focused primarily on sales and secondarily on cost cutting – neither is a formula for success
  5. not all innovation comes from within – your suppliers are an excellent source of innovation
  6. again, it’s about total value management, and this starts with a strategy that guides procurement throughout their sourcing and procurement activities

Procurement needs to move up the value chain – and the article has a great table that outlines the evolution of procurement from tactical cost reduction to strategic value creation, that it defines as Route 42, presumably after the M42 Motorway.

The Route 42 roadmap is the following:

Cost Savings
1. Push harder on existing deals
2. Aggregate similar deals
3. Acquire approval for more profound changes
4. Standardize and go after larger deals

Cost Management
5. Improve contract management
6. Evaluate deals against total lifetime cost
7. Develop supply strategies
8. Enhance the view of procurement
9. Improve specifications

Value Creation
10. Create a cross-functional team
11. Develop collaborative supply relationships
12. Increase influence over monopolies
13. Penetrate non-traditional purchasing areas
14. Develop strategies, including ‘forensic’ procurement