Category Archives: Procurement Innovation

World Class Procurement Organizations Are Beginning to Align with the Business

A recent publication from The Hackett Group for Procurement Executives addresses “How Procurement Organizations Are Reinventing the Stakeholder Experience” that looked at world class procurement organizations, which continue to outperform their peer group by a wide margin (by up to 5M in cost savings for a typical company), and found a surprising result.

We’ve known for quite some time that world class Procurement organizations, also known as The Hackett Group Top 8%, outperform their peers. We’ve known that some of these generate savings up to 41% higher than other (laggard) organizations. But we did not know that almost twice as many world class organizations (83% vs. 44%) have dedicated resources that act as liaisons between Procurement and the rest of the business.

As the authors state, raising stakeholder satisfaction levels builds trust and helps procurement gain the organizational permission to take on higher-value work. This is confirmed by the Hackett Group’s database of thousands of benchmarks across hundreds of performance studies which found that organizations that continue to invest in activities that elevate their role to that of a trusted advisor are taken more seriously, especially when they communicate that activity appropriately to the other departments in the organization. Furthermore, when these Procurement organizations are seen as a valued business partner, they generally report 68% higher savings! (This comes by way of an average cost reduction of 3.5% vs. 2.1% and an average cost avoidance of 1.2% vs 0.7%.)

Simply put, world class Procurement organizations have climbed to the top of the hierarchy of supply (which the doctor and the maverick discussed in their piece on “The CPOs Agenda I: Availability and Delivery”), having mastered supply assurance, cost reduction, and demand management. They listen and engage the internal customer, understand the customer’s needs, manage the relationship, offer them a superior service experience, and get better results. They follow all of the best practices the doctor and the maverick have been, and will be, discussing* over on the spendmatters.com/cpo site, and are seeing the return.

* The Agenda series has been broken up into three series:

  • the Conundrum# serieswhich discusses the outside-in issues putting pressure on, and shaping, Procurement
  • the Agenda serieswhich discusses the most pressing objectives on the CPO’s plate that are required to respond to the outside-in issues
  • the Value Drivers serieswhich discusses the primary actions that a CPO can take to realize the objectives on their journey to master the hierarchy of supply

# the doctor‘s terminology

The Ten Commandments of Procurement, Atheist Style

Earlier this month, on Canada Day, while LOLCat was proactively learning the pledge of allegiance (which LOLCat will need when Canadians re-elect Harper), Mr. Smith on Spend Matters asked what were “The Ten Commandments of Procurement” that you adhered to that were absolutely, unarguably, true under all conditions.

To get your creative juices flowing, a few weeks ago, Sourcing Innovation gave you the Ten Commandments of Procurement, Christian Style. And in case that wasn’t enough, two weeks ago SI gave you the Ten Commandments, err, Precepts of Procurement, Buddhist Style, and then last week, we gave you the Six Commandments, err, Philosophies, of Procurement, Hindu Style. But we’re not stopping there — not everyone is religious. So today’s post is for the atheists as we give you the ten commandments of Procurement, atheist style!

1. Be open-minded and be willing to alter your processes and practices when better ones are presented to you.

Even if you are using the best practice that is out there, that is only the best practice that is out there today. A better way might be discovered tomorrow. A good professional recognizes when something better comes along and strives to make use of it.

2. Strive to understand what the market situation really is, not what you want it to be.

Even if the market situation went unchanged for ten years, that doesn’t mean it hasn’t changed in the last few days. Consider the recent avian bird flu crisis. Like the dairy market between 2000 and 2006, the price of eggs stayed within a narrow band for years years until the recent avian flu crisis.

3.Supply Chain Mapping is the most reliable way of understanding your supply chain.

Not spend analysis, not (internal) customer surveys, not best guesses, mapping. To truly understand your supply chain you have to sit down and map it. Nothing except a complete raw-material source to finished product sink map for your primary product lines will allow you to get a full picture of the complexity of your supply chain.

4. Every category manager has the right to be in control of their spend.

You might be responsible for sourcing the category, but it is not your budget — it is Engineering, Marketing, HR, or Legal’s, etc. Not only is the budget owner a key member of the cross-functional team, but should have the final say on event design and final award.

5. A rigid set of rules is not necessary to be successful at Procurement. Only a desire to do the right thing is.

Procurement success is not driven by process, it is driven by passion. A passion to be the best Procurement professional you can be.

6. Every decision has consequences and you must be prepared to accept them.

There are tradeoffs between every option presented to you as a Procurement professional. Costs can only be reduced to a certain point before quality or reliability are affected. Outsourcing a function may save money, but could cost the organization valuable skill and knowledge in the long term.

7. Treat your customers and suppliers as you want them to treat you.

Just because Procurement is the Rodney Dangerfield of the corporate functions, that doesn’t mean it should be nonchalant in its dealings with the other functions. It should treat them the say way it wants to be treated.

8. Sustainability is not just important to corporate sustainability, but to our sustainability. We should leave the planet as good as we found it.

Environmental responsibility is not just a means to insure corporate sustainability by increasing the brand reputation, not just a means of insuring a continuous supply of raw materials by switching to renewable resources, and not just a means of insuring a continuous supply of fresh water and energy for production by going lean and using renewable energy, but it is a way of insuring our future and insuring that those that come after us will not only have a job they can love and look forward to, but a life they can love and look forward to. And the happiest worker is the most productive worker.

9. There is no one right way to source.

Every category is different, every product is different, every supplier is different, every market is different, and every professional is different. There is no one right way. There are conditions that make certain types of sourcing methodologies more appropriate or easier, but there is no hard and fast rule and it is up to me to work with the cross-functional way to identify a way that works best for us.

10. The ultimate goal is that, after, a sourcing event, the overall situation is better for everyone than before the event occurred.

You’re not just there to source a product or a service, but a solution to whatever problem your (internal) customer is having. Savings is good, cost avoidance is better, a new revenue source is better still, but solving their problem is what is truly priceless.

The Six Commandments, err, Philosophies of Procurement, Hindu Style

A few weeks ago, on Canada Day, while LOLCat was proactively learning the pledge of allegiance (which LOLCat will need when Canadians re-elect Harper), Mr. Smith asked on Spend Matters what were “The Ten Commandments of Procurement”  that you adhered to that were absolutely, unarguably, true under all conditions.

To get your creative juices flowing, two weeks ago, Sourcing Innovation gave you the Ten Commandments of Procurement, Christian Style. And in case that wasn’t enough, last week SI gave you the Ten Commandments, err, Precepts of Procurement, Buddhist Style and told you that SI was going to tackle at least one more style, because everyone deserves equal opportunity. Today we’re going back to the third most followed religion on the planet and give you the six commandments, err, philosophies, of Procurement, Hindu Style.

6. I will not make assumptions on prices, demands, or needs before collecting the appropriate information and market intelligence.

We all know the saying about people who make assumptions, and what they make of themselves. I know this to be true so I will always select categories for sourcing events, estimate demand, and negotiate, based upon research and fact and not upon gut feeling or inflated GPO claims.

5. I will take a holistic logical view of cost and return and use the appropriate tools to understand the true costs and build a realistic picture of the expected value of a product, service, or supplier relationship.

Cost is more than just the price. It’s the transportation. It’s the import and export duties. It’s the temporary storage. It’s the utilization. It’s the reclamation and return (under warranty). And the value of each product is not just limited to the cost I pay, but the quality, reliability, and other intrinsic value in the mind of the consumer. I will understand both before pursuing a product, service, or even a supplier relationship.

4. I will not be vain or assume that just because I am the expert, I am always right. I will listen with an open mind and continuously seek to learn and better myself.

I am the expert in Procurement process, and will generally know more than my peers, but I am not necessarily the expert in the product being bought, the market being bought from, the market being sold to, all of the transportation options available, or the intricacies of production or utilization. Moreover, I recognize that the market research I acquired may not be fully up to date or take into account unusual characteristics of the organization’s needs, the suppliers capabilities, or sub-markets. I will listen to others in the organization who have this knowledge and consider all relevant input before making any decisions.

3. I will be socially responsible and only work with suppliers who have the same views.

I am not just a lone Procurement professional in an ivory tower, I am a human being and a citizen of this planet and every decision I make will have a ramification on others that could go beyond just my coworkers, my suppliers, and my customers. Moreover, every effect I create has an effect on me as well and I will have to live with the effect I create on others and my self, so I will endeavour to create the best effects I can.

2. I will not succumb to pressure and make hasty Procurement decisions because any mistake I make will cost the organization in the long run.

All organization suffering results from mistakes made in the past that were produced by activity that was the result of insufficient knowledge or a lack of (social) responsibility. As a result, I will not rush a sourcing decision and cut a contract or make a buy without adequately considering all of the facts and options available to me in order to make sure I make the best decision for the organization that can be made at the time I make it.

1. I will not act without forethought and planning for what I do dictates what I will get.

The effect I get is pre-existent in the action I take. So not only will I make the best sourcing decision I can, but will also ensure that all of the actions I take with respect to contract management, performance management, supplier management, and risk management are carefully considered and made in line with the organizational goals and carried out with responsibility, respect, and an open mind.

Ten Commandments, err, Precepts of Procurement, Buddhist Style

A couple of weeks ago, on Canada Day, while LOLCat was proactively learning the pledge of allegiance (which LOLCat will need if Canadians re-elect Harper), Mr. Smith asked what were “The Ten Commandments of Procurement” on Spend Matters that you adhered to that were absolutely, unarguably, true under all conditions.

To get your creative juices flowing, last week, Sourcing Innovation gave you Ten Commandments of Procurement, Christian Style. However, since the statistics say only 30% of you are Christian, SI is going to tackle a few other styles as well because everyone deserves equal opportunity. Today, we’re going to jump to the fifth most followed religion on the planet and give you five commandments, err, precepts, of Procurement, Buddhist Style.

5. I will abstain from being socially irresponsible.

Not only do I respect all people, but I respect the right of all living things to live and I will do my best to make sure that I do not endanger their lives in any way. Not only do I respect my coworkers and their rights and treat them fairly, but I will ensure all suppliers in my supply chain treat their workers the way I treat my coworkers. And I will make extra effort to ensure safe working conditions. I will also focus on minimizing harm to the environment, using renewable materials whenever possible, and doing my best to insure that those renewable materials are protected.

4. I will abstain from being driven by greed.

I realize that a business exists to make money and that my job is to find savings wherever possible, but I will not pursue savings at the expense of harm to my supplier, customers, or partners. Everyone deserves a fair profit. Suppliers should not be at risk of financial insolvency or have to borrow from the local mafia, putting themselves at risk of not only financial, but physical, harm to make payroll. I realize that there are other ways to extract value from the supply chain, such as joint innovation, bundled services, etc. and will pursue these instead of pursuing savings that are not sustainable.

3. I will abstain from collusion or back-room negotiations.

I will not collude with my competitors and form cartels with the intent of keeping prices down in my supply chain, nor will I mislead the supply base by holding an (e-)Auction when the intent is to simply collect market intelligence to renegotiate with the incumbent supplier regardless of the outcome of the auction. I will be open and transparent in my dealings with suppliers and partners at all time.

2. I will abstain from speaking falsely about any supplier or customer.

Even if a supplier performed poorly and cost the organization hard dollars, I will not overstate the poor performance, and be fair and factual in my discussions. Similarly, even if a supplier performs well and saves the organization more dollars than expected, I will not overstate the performance. And I will definitely not talk ill of a good performing supplier or good of a poor performing supplier. Integrity is integral to good procurement and I will aspire to be the best person I can be.

1. I will abstain from ego and vanity and be objective at all times.

While I know more about Procurement than my peers, because that’s my job and expertise, I respect that my peers know more about Marketing, Design, Sales, Risk Management, Compliance, etc. because that is their job and expertise. I will work with them and take into account all of their input when designing and executing an event, using the best ideas and data presented to me. In a true cross-cultural collaboration, the whole is greater than the part and the wisdom of the many will exceed the wisdom of the few, or one.

Ten Commandments of Procurement, Christian Style

On Canada Day, while LOLCat was proactively learning the pledge of allegiance, Mr. Smith asked what were” The Ten Commandments of Procurement” on Spend Matters that you adhere to that were absolutely, unarguably, true under all conditions (and offered a prize for the best set of commandments submitted).

Now, this is a challenge, because your commandments are, inevitably, going to depend on your Procurement religion. Just like a Buddhist is more concerned with the five precepts than the Christian ten commandments, a Procurement professional overly concerned with supply assurance in CPG is likely going to implicitly follow a different set of commandments than a Procurement professional overly concerned with risk management in Food and Beverage where contamination results in more than a costly recall. While someone is unlikely to get lead poisoning from a single model train covered in lead paint, someone is very likely to die from a severe salmonella contamination.

That being said, if you are a devout Christian Procurement professional, there is a set of Procurement commandments you likely follow on a daily basis, and to get this topic going, SI is going to define them.

10. You shall not covet status or budget you do not have.

While you may deserve the status and the budget, coveting it does you no good. Instead, you work to find ways to reduce costs and save money so that you can work out deals to jointly apply savings against against new tools and platforms to help both parties perform better in the future. By doing right, and succeeding, budget and status will come.

09. You shall not bear false witness against any supplier.

Whether the supplier performed well, performed poorly, or performed average — the truth is never obscured and all the data is laid bare, regardless if this is a supplier recommended or selected by Procurement. And Procurement works with the organization to lean why the supplier performed as it did, what the organization did well and what the organization could have done better, and what the supplier could have done better and uses that knowledge to improve its next set of supplier interactions.

08. You shall not allow or enable fraud.

Fraud costs an average organization 1% of its revenue, but some organizations lose even more. A recent study by Oversight in 2014 found that about 1% of 10 million transactions filed during a three-month period in 2014 on corporate expense reports proved fraudulent, amounting to $13.7 million in losses. Moreover, a study by the ACFE found that in 75.6% of their cases involving expense reimbursement fraud, the perpetrator was also engaged in at least one additional form of occupational fraud. Procurement will actively work with Accounts Payable to identify systems and processes to identify, and stop, fraud and will insure that no one in its organization is committing fraud to set an example.

07. You shall not support corruption.

Procurement shall not deal with third parties that engage in corrupt activities — including bribery, money laundering, or dealings with denied parties and terrorist organizations — and will do its best to identify systems and platforms that will prevent and detect any attempts at bribery and corruption within the organization.

06. You shall not allow unsafe working conditions or unfair worker treatment.

Not only will Procurement make sure that all of the organization’s workers (full time, contingent, etc.) are treated fairly, but that the organization only deals with suppliers who also adhere to the same principles. Every supplier will ensure that each worker’s rights are honoured and that its suppliers also do the same.

05. Honour the wisdom of your elders as the platform is the enabler, not the full solution.

Old timers that did Procurement before modern internet enabled platforms and actually succeeded at reducing cost and identifying value have a lot of wisdom about the right way to go to market, the right way to qualify a supplier, negotiation techniques that work, gotchas to look for, and processes that can be made even better with new tools and technologies and they should be listened to and respected.

04. Remember the organizational strategy, and adhere to it.

Procurement’s mission is to support the organizational strategy, not to set or change it (without consensus of the C-Suite). Everything it does should be aligned with the chosen, and agreed upon, strategy.

03. You shall not take the name of the Stakeholder, your Customer, in vain.

Without the Stakeholder and its needs, Procurement would not be needed and would not exist in the average organization. It is there to meet the needs of the Stakeholder, needs which are derived from the needs of the organization’s customers. It must respect those needs, no matter how strange, and not take the name of its reason for existence in vain.

02. You shall not make idols of preferred suppliers.

Personal feelings have no place in Procurement, only performance does. If the supplier performs poorly, it performs poorly — and Procurement will not hide that fact, even if it was Procurement’s recommendation. But more importantly, if the supplier performs (exceptionally) well, the supplier performs (exceptionally) well and that will be taken into account in the next sourcing event. However, Procurement will not give itself accolades or try to convince the organization of the supplier’s greatness. The supplier will be allowed to rise or fall on its merits (and performance).

01. You shall have no process before The process.

Procurement will have a process for sourcing organizational goods or services, and will always follow that process, even when sourcing goods and services for itself. Procurement is not above the process.