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Today’s guest post is from William Dorn, Director of Operations at Source One Management Services (who bring you Why Abe), and Kathleen Daly. William is a regular contributor to The Strategic Sourceror.
As companies continue to cope with the current economic conditions, Purchasing Departments, equipped with fewer resources than ever before, are expected to deliver continuous savings. Task lists lengthen due to internal and external pressures, and it becomes increasingly difficult to produce results in the form of cost reduction, cost avoidance and increased supplier value. The requirement of accomplishing more with less may be an overwhelming responsibility; but with the proper toolsets, resources and solutions available in the marketplace, Purchasing Professionals can begin to position their companies for growth as the economy recovers.
Before taking any further action, Purchasing Managers must first assess the situation in which they may find themselves. What internal and external pressures are influencing my productivity? Is my company able to withstand a supply chain disruption without serious repercussions? Do I have a risk mitigation strategy in place? Can I realistically reach my company’s goals with the resources I have available to me?
Internal pressures may be coming from many different directions. Executive Management asks for results in the form of costs savings and stable supply chains. The Finance Department requests extended payment terms. IT Departments may perceive the Purchasing Department as a cost center rather than a profit center, creating the impression that no technological investment is needed. Sales and Production Departments need inventory availability in order to deliver a product in a timely fashion. HR is not able to allocate more resources. Each department is focused on fulfilling their own responsibilities which often leads to additional constraints placed on other departments, namely Procurement.
The external environment and its increasing complexity have created additional burdens for Purchasing Departments. Let’s sum up what is taking place …
- Suppliers are refusing to agree to longer payment terms because they simply cannot afford the impact this would have on their cash flow. Also, many suppliers may no longer exist, and this requires buyers to invest time in forming relationships with new suppliers.
- Fuel prices are also starting to increase again, which will lead to rising commodity prices as well.
- Buyers may also experience reluctance from suppliers to participate in reverse auctions; and some are even refusing to respond to regular RFP events.
Whether Purchasing Professionals can relate to some of these pressures or, unfortunately, to all of them, the reality is that their supply chains may be unstable and action is required to bring them back to solid ground.
Now that we have covered some of the stress that Procurement Departments have been facing, Procurement must look internally to determine what efforts have been made in the past, what is working and what needs to be reevaluated. Procurement must reevaluate old strategies before implementing new ones. Slight modifications to legacy purchasing or sourcing methods could lead to more efficient processes and lower costs. You should not focus strictly on new categories; revisiting categories you have recently sourced may lead to drastically different results with a new approach. Markets change constantly and your company’s spend in a certain category may have increased, or perhaps the market demand for the product or service has decreased, enabling you to possibly leverage better pricing. Your past just may be the key to your future.
Alternative methods to what have been used in the past should also be explored. A recent study, published by AMR Research, found that organizations that rely heavily on technology could experience the same or greater inefficiencies and missed opportunities than their not-as-heavily tech-invested competitors. Procurement must reevaluate their existing methods and adoption of technology. Are you paying for an expensive, feature-rich procurement and sourcing suite, when in fact you only use 20% of the capabilities. If so, you must reevaluate the cost of deployment and take advantage of the other components, or eliminate the costs of the software by seeking out lower-cost alternatives that fit your organization’s individual needs.
Fortunately, the market for e-sourcing and procurement technologies has significantly expanded your options over the last few years. Low cost providers have emerged that often offer equivalent features to the largest tool providers. In fact, in the last several months, completely free toolsets, such as WhyAbe.com and ThomasNet.com’s Purchasing Manager, have seen a significant increase in adoption by not only companies that are new to procurement technologies, but by large organizations that are abandoning expensive toolsets in order to adopt free alternatives that serve the exact needs of their organizations. Moving to a lower-cost technology will not only help your company’s bottom line, it could help eliminate the idea that Procurement is a cost center, and could potentially allow Procurement to allocate funds into investing in new human resources.
However, regardless of which solution you adopt, be careful to use the tools properly in your organization. Purchasing and e-sourcing software solutions must be used as tools and not answers. No tool provider has the exact answer for any vertical market. Find a solution that best fits your organization’s requirements, don’t allow a technology dictate how you do business. Tools can facilitate project communications, shrink project timelines and retain templates and analysis for future use, but should not be used as a replacement for true strategic sourcing. Keep in mind that over-reliance on purchasing technology tools and processes may only automate the inherent problems with the existing processes in place. Before investing in new technology, be sure to put existing processes through a thorough analysis to identify opportunities for improvement. Whatever you do, be sure that your organization does not become an “RFP Spammer“.
Moving beyond technology, Procurement must evaluate other non-conventional options that it has available to it. Pre-negotiated contract websites (such as Master Negotiator), group buying organizations, and solution providers (such as Source One) can provide additional resources that help Purchasing Professionals accomplish goals without adding to a company’s cost structure. These resources enable buyers to let someone else manage the sourcing process for them, saving time and resources. Service organizations can provide low-risk solutions for companies of all sizes. These engagements allow access to market data, best practice processes, domain or category expertise, on-demand resources, effective tools, negotiation experience and insights, alternate sources of supply, and the establishment of long-term supply relationships.
Adopt the right blend of sourcing strategies for your organization. Many Procurement Service Providers can obtain better pricing than a GPO. Many companies excel at sourcing their strategic spends. Many purchasing departments have subject matter experts in particular categories that are considered market-leaders in their own rights. However, NO COMPANY is the best at every category. A GPO may work for you in several tactical spend areas, and can help reduce the overhead costs associated with sourcing and category management. Some spend categories are better served without the use of technology tools and require good old fashioned thinking, creativity and supplier interaction. Understand that a person who is incredibly familiar with a technology or product does not necessarily make them into a procurement guru or master negotiator. Using the correct blend of strategies in your organization can produce results far superior to sticking with one sourcing/procurement process across all of your spend areas.
One positive of this difficult economy is that it is opening the eyes of many Procurement Professionals. In the past, many Procurement departments would only seek out external help or external strategies if they were required to by executive management. In this day and age, Procurement is determining on their own that they need help and they are actively looking for it. Procurement Professionals have already realized the need to become more resourceful and proactive in their efforts in navigating the changing business climate, in many cases, much faster than the rest of their organization. Some have taken the initiative in identifying outsourcing services that provide low-risk solutions or temporarily help them increase their human capital. Adoption of contingency based sourcing consultants has seen a significant uptick, as it allows Procurement to expand their resources and tools without assuming any additional costs or risk to their businesses. With a contingency based service organization operating as an extension of a company’s Purchasing Department, there is no need to be concerned with whether or not the soft costs of an initiative will pay off in hard costs savings, as the right providers will agree to only get compensated on hard-dollar cost savings. With certain solution providers, implementation and all expenses are included in a pay for performance model and fees are contingent on achieving hard cost savings results. In the past, executive level individuals and finance departments have pursued these types of engagements. Now, the drivers of these engagements are Procurement Professionals as they reach out for help on their own. These proactive efforts will deliver improved results for a Purchasing Department.
The majority of an Organization’s internal resources should be allocated to optimization of the company’s strategic spend. If a certain product has a high supply risk and high value, it is essential to establish a secure and responsive supply base with the capabilities of meeting current and future business needs. Agreements with suppliers should be established so that both parties can share information and closely integrate systems to obtain operating efficiencies. This should result in reduced costs for both parties.
When faced with many challenges in this dynamic environment and accelerating expectations from within their organizations, Purchasing Professionals must take full advantage of the resources available to help them begin their climb out of the recession.
Thanks, William.
