Yesterday we gave you a history lesson on how we got here, from the time it worked back in 1885 to now where it’s completely broken. The reason? You can’t understand how to fix it if you don’t understand why it broke. (The Short Answer: McKinsey and peers who echoed their thought leadership to break down functions, outsource staff, outsource production, outsource logistics, and downsize until there’s almost nothing left in the organization.)

Procurement was never meant to be divorced from Supply Chain or Logistics. It was all supposed to be an integrated function. Buy. Ship. Manage. Repeat. But it’s not, and because no one will give up a fiefdom, and because almost no one has enough cross-disciplinary training to understand the intricacies of most functions, yet alone manage them, it won’t become part of Supply Chain again (or at least not for a long time — at least not before the fall of the modern house of Usher).

So fixing the disconnect is going to be hard. The departments will remain separate. The business language will remain distinct. The goals and KPIs will be local and different. Procurement is going to want lowest cost from a supplier it believes can supply the necessary volume over the lifetime of the (contract) award. Logistics is going to want suppliers that are on lanes served by existing carriers they have contracts with who have excess capacity and from whom they can get a good rate.

Supply Chain is going to want to utilize warehouses, ocean routes, FTZs, and other networks they have in place that they believe are low risk and high performance — they have to assure supply to manufacturing. Each goal would likely select a different supplier — there will be one supplier that is lowest price, one that is lowest shipping, and one that fits in best with the current network with a high supply assurance rate. Furthermore, if you “work” with them and then select the supplier they don’t want, they’ll think you weren’t actually “working” with them.

But, fortunately, you don’t need to work with them to work with them. You just need their priorities and their data.

You can make the best balanced decision for Procurement, Logistics, and Supply Chain if:

1. You understand the competing objectives AND their relative priority

You sit down with logistics and ask them what their most critical criteria are in supplier selection, ask them to rank them, and ask them to relatively weight them. Then you sit down with supply chain and do the same. Then you take your critical (generic) criteria, rank them, and relatively weight them. Then you create an integrated list based on the relative rankings across your three departments, weight based on C-Suite priorities, and get the final, general purpose, rankings blessed by the CFO and COO.

2. You integrate into all of the internal AND external data sources at your disposal

When you go through this exercise, you’ll realize that multiple factors affect landed cost, supplier risk, supply assurance (and supply chain risk), quality, and other key factors. You’ll realize that the only way to evaluate all of this is to pull in key sets of data from the logistics system, supply chain systems, and external data feeds (so that risk analyses are done on complete, up-to-the-minute, data) and integrate them into a decision matrix.

3. You make a decision that satisfies the objectives subject to the data available

And you do this using modern decision optimization that balances all of the objectives relative to the weightings, hard constraints, soft goals, and supplier offerings. As per our prior article, thanks to the introduction of multiple “buy local” acts (US CHIPS, EU IAA, Chinese local content) , The Time for Optimization is Finally Here as it’s the only way you will be able to satisfy all of these requirements with a single multi-vendor buy as you have to match
procurement decisions with supply chain factory requirements as you have to buy for different requirements and produce to those requirements and produce where its most economical to get those goods to the countries they were produced for.

In other words, you fix the disconnect with:

1. shared priorities,
2. integrated data,
3. integrated decision optimization that takes procurement, production, and logistics requirements into account.

And if you don’t fix the disconnect, your organization’s entire existence may soon come into jeopardy.

First, a history lesson.

Back in the beginning, in 1885, Railroad Barons were building the nation during the Gilded Age, writing the first handbook on purchasing, and managing their logistics and vertically integrated supply chains in house.

But as technology advanced, so did the need for mass production and specialization, and production of components that could be easily, and more economically, produced by a third party started to be done by the third party so the firm could focus on more specialized production in house. But then the Panic of 1893 set in, the Guilded Age began to come to an end, and the Progressive era began.

The Progressive Era, which focused on social and political reforms, also saw continued technological progress as well which occurred as the railroad era gave way to the automotive era (symbolized by the Ford Model T in 1908), the introduction of the first production line, and the need for improved logistics (enabled by Autocar Truck, one of the first motor truck companies) as supply chains slowly lengthened and became more complicated.

These functions were still managed in-house as part of a single function, buying from American companies, even if the materials were coming from halfway around the world (as the American company would buy from the American importer), and everything worked well (unless unions got in the way — but that’s not the subject of this post). Then we saw the New Era, which lasted a little over a decade until the Great Depression happened, which was bad, but it led to the New Deal, which saw more political reforms, and then we got World War II, which, when it ended, led to the post-war economy which ushered in the American Dream for the Consumer and the rise of the management consultancy (and marketing agency) for the Business — where the former had just began two decades earlier.

During this era, we saw the rise of McKinsey that revolutionized corporate structures through the institution of professional management, performance-based pay, and strategic planning. This led to the introduction of downsizing (unnecessary middle management) in the 1960s, the 7S framework in the 1970s (that focussed on aligning strategy, structure, systems, shared values, skills, style, and staff) that introduced the importance of systems, and then the 1980s brought outsourcing of talent and offshoring of unspecialized supply.

This led to the split of logistics from supply chain to manage the transportation from global countries, and the split of Procurement from Supply Chain as that was a back-office function that could be outsourced, and the great divergence began. Once costs started soaring, we saw the introduction of the first dedicated Procurement software in the 1990s, the proliferation of platforms and the rise of Procurement in the 2000s, and the rest, as they say, is history.

Procurement became a completely standalone process, and purchasing became completely separate from supply chain and logistics. During the age of globalization where conflict was low, free trade flowed, and stagflation ruled, everything worked well. But then we got COVID, tariff/trade wars, global instability and increased conflicts, critical strait closures, and supply chains breaking on a daily basis. Decisions made by Procurement months, or years, ago in isolation don’t hold up any more. Neither do processes that assumed sourcing events could take months. Neither do risk mitigation plans that assumed you could just switch to the other supplier in the region (who you gave a volume minority contract to) when the region has been cut off.

The days of Procurement succeeding stand-alone are gone. It must operate in a supply-chain-aware, logistics-aware, and geopolitical aware context. But, for the most part, except for supplier selection in the seven-step-sourcing process of your choice, it doesn’t do any of this. So how do we fix the disconnect?