Category Archives: Procurement Innovation

Good Public Procurement Recommendations from the McClelland Report, Part I

It may have been written five years ago, but the recommendations from the McClelland Report, which inspired Scotland Public Procurement to new levels of efficiency and performance, are as poignant today as they were then. These recommendations include:

  • The optimum reporting line for the Head of Procurement is directly to the Chief Executive but at a minimum he or she should report to an Officer or Executive who reports to the Chief Executive. The Procurement Function should not have a less senior reporting line than this minimum.
    Procurement must have visibility at the highest level.
  • Contractual commitments on behalf of all organizations should be executed by a “Procurement Officer”. The Procurement Officer should have the sole authority to make these legal commitments on behalf of the organization.
    Large procurements must go through the Procurement function.
  • Procurement activities and transactions should be conducted by the appropriate staffed and skilled procurement function and its procurement officers. It should not be undertaken by non-procurement staff located either in central structures or employed in other (e.g. operational) sub-sections of the organization.
    Procurement must be done by procurement personnel with the skills.
  • In some cases internal business practices inadvertently facilitate the ease of unofficial buying. All organizations should review controls and practices with this in mind.
    Processes must be reviewed to insure that they do not facilitate maverick buying.
  • Where the procurement of low-value goods or services creates anomalies in administration cost versus value procured, then alternative methods such as payment on receipt should be developed and introduced within the principles of full procurement and financial controls.
    A buy that costs money is not a good buy. A buy should reduce costs.
  • A business conduct guideline document should be developed and issued for all of the Public Sector.
    Standard procurement processes should be developed, clearly documented, and distributed.

Procurement Mastery in 2015

While far from a complete picture of what Procurement Mastery will look like in 2015, Accenture’s outlook for 2015 in their recent “Compulsive Contributors” report, identified three areas of emerging excellence which are among the foundations of Procurement Mastery for any organization that wants to make it to Next Level Supply Management. In brief, they were:

  • Excellence in Risk Management
    Disruptions are becoming more common by the day as supply chains increase in length and complexity. If there was ever an appropriate use of the term “the new normal” (there isn’t, by the way), this would be it. Masters have to be very adept at identifying, predicting, detecting, and mitigating risks before they turn into full blown, costly, disruptions.
  • Closed Loop Spend Management
    Leading Procurement organizations work closely with finance, manage supply and demand, and “close” the loop on the end-to-end spend cycle.
  • Analytics
    Using data to understand what you are spending, with whom, on what, from where, what is being obsolesced before it is used, and what might not even be needed in the first place. Using data to understand supplier performance. And using data to predict what might happen next. The masters will embrace, and get value from, predictive analytics long before the contenders.
  • A Transformed Workforce
    There is a talent management process in place that manages the full lifecyle, from recruitment through development to retirement. And the caliber of the talent, as a result of this program, is above the norm.

What Defines a Procurement Master?

In their recent piece on “Compulsive Contributors”, which reported the results of their 2011 Procurement study, Accenture defined their hallmarks of procurement mastery. Briefly, they were:

  • A formal procurement strategy integrated with the corporate strategy.
    77% of masters have this, 88% have procurement governance processes in place, and 90% provide innovative value above cost savings as a key element of such strategy
  • Effective integration with supply networks.
    66% of masters look beyond first-tier suppliers for collaboration opportunities (and 60% of masters actively monitor supplier performance)
  • Sourcing and category management excellence.
    Coupled with a push for better demand management as part of a long-term category strategy that drives continual cost improvement. Nearly 75% of masters have resources and processes in place to ensure compliance and nearly 70% of masters have structured sourcing processes.
  • More spend under management (SUM).
    And better visibility to boot (by way of a melding of process and technology). (81% of masters have an integrated end-to-end source-to-pay process and 73% have a master data strategy.) In fact, they manage 15% more indirect spend and 12% more direct spend.
  • They do more to retain and attract the best talent.
    While they need to do more, and recognized this, masters are ahead of contenders in terms of talent development programs. In addition, 67% of using balanced scorecards and KPIs.

These insights, which echo what many Procurement thought leaders have been preaching for some time now, are good as they validate what the experts know. Talent-focussed masters go beyond three-bids-and-a-buy. Taking the strategic approach, they look for value across the board — and deliver that value like no other function can.

Are You a Procurement Master?

Leave it to a Big 5 Player, and Accenture to be particular, to decide we need yet another set of terminology to describe the same old Procurement goal. In their recent piece on “Compulsive Contributors”, they focus on Procurement Masters and Procurement Contenders, differentiated by TCO vs TVO (no, not TiVo, but that was my first take too . Picking up on the Total Value Management (TVM) concept that leading bloggers like yours truly have been preaching for five or so years now, they have decided to embrace it as a cornerstone of Procurement Mastery, but relabel it Total Value of Ownership (TVO). This is good, because TVM is necessary for mastery, while simultaneously annoying, as we don’t need new acronyms for established concepts. (I know, I know. You can’t use someone else’s acronym as then you can’t take credit for the idea.)

However, I must say that I like the fact that they state that masters, who go beyond simple TCO in their award considerations, also take into account the need to:

  • enhance materials sourcing and labor
  • reduce fixed cost structures
  • optimize processes
  • eliminate non-value add activities
  • increase working capital efficiency
  • eliminate unnecessary demand
  • accelerate new product introduction
  • increase revenue
  • reduce risks to supply and brand
  • reduce the carbon footprint

Even if they re-invent the language wheel, it’s important that the big firms (with the big marketing budgets) get the word out that Procurement Mastery is

Remember the Dangers of Centralized Buying

In an effort to combat the inflation across the board, I’m hearing a number of consulting firms emphasize the need to leverage your spend across the board, which is good advice. However, I’m worried about how some firms might be interpreting this advice. I’m getting signs that some firms, not yet as advanced in Supply Management as they need to be, are interpreting this as a need to “centralize”. While this has been the common historical response when a firm needs to obtain spend leverage and Supply Management for the categories in question are decentralized, it’s usually the wrong one. What needs to happen is the firm needs to move from decentralized buying straight to center-led buying and skip the centralization step and the growing pains that will result.

When you centralize, you lose:

  • local opportunities
    while a national temp labor agency can offer you better rates across the board, sometimes a local agency that is 10% more is actually 40% cheaper because you don’t have any travel expenses for local resources
  • local knowledge
    and sometimes a local buyer has a better understanding of the ups and down of commodity or service pricing in a region than a buyer on the other side of the globe and knows that she can spot buy a better price 80% of the time
  • (some) control over supplier performance
    as a centralized buy will typically be with one or two international suppliers who will not only have a lot more weight and leverage, but distributed production; in comparison, if buys are more local, they are typically with smaller suppliers where the buyer has the dominant position in the relationship and more control over quality and the production schedule

In addition, when you centralize, you can pave the way for organizational conflict as a result of:

  • the divergence of subunit goals
  • conflicts of preference between the central units and remote units
  • the lack of subunit inclusion
  • higher costs of certain purchases on the corporate contract as compared with local costs from a local supplier

However, a center-led purchasing organization will work with each subunit to insure that the best buy is made every time. Sometimes that will be through amalgamation of volume to obtain leverage through a larger contract with an international supplier (where costs are high) and sometimes it will be through the provision of best practices to each unit, which will secure the best rates in their region. You only get leverage where it exists to be found.