better PROCUREMENT

better PROCUREMENT

You do not really understand something unless you can explain it to your grandmother. (Albert Einstein).

Years ago, I told my grandmother (whose hearing wasn’t what it used to be) that I was working in supply chain.

 

“What? A chain-gang?” she said with visions of me in leg irons breaking rocks.

 

“No. procurement,” I clarified (…louder this time) going on to explain it.

 

When I finished, she looked up from her crossword. Putting her pencil down she turned to me and said,

 

“It sounds like you’ve got the easiest job in the chain-gang. Buy the best you can for the least you can. That means you’ve only two things to do, …and all day to do them in. Simple!”

 

She picked up her pencil again and carried on with her crossword. She was right. I only had two things to do;

          Minimise cost; &,

          Maximise quality

…but the ‘Simple!’ part was hard to take.

 

After all, PROCUREMENT means you need to walk both sides of the street at the same time. And there’s always traffic speeding up and down that street.

 

My grandmother’s ‘Simple!’ view of PROCUREMENT is shared by senior management. It’s always a case of;

 

“You’ve got to get the best quality materials & services!”; and,

 

“You’ve got to pay less tomorrow than you did today!”

 

Your job is to manage these simple views – both in their head, and reality.

 

How do you do it?

 

Here’s;

10 steps to take to move things in the right direction.

10 steps to keep it going that way.

10 steps to assure your grandmother that you’ve got your two tasks on the “chain-gang” under control

You’re aligning with the organisation’s strategy

Your decisions about the suppliers you need will depend on the organisation’s strategy.

 

If the organisation’s strategy is to become the industry’s low-cost leader. Your strategy will be to focus on the lowest cost suppliers.

 

If the strategy is rapid international growth, your procurement strategy will be to focus on suppliers with flexibility. They need to cope with your rapid, and often sudden, growth in demand.

 

If you have a low-cost objective, your procurement strategy will be to reduce procurement costs by a percentage amount.

 

If you have a growth objective, an objective will include shortening procurement lead times.

 

Once aligned, you need to look inwards. How can you collaborate with the other functions in the organisation to help them achieve the strategic objective? We’ll save this for the end.

Knowing the organisation’s objectives guides you in setting corresponding procurement objectives and KPI’s to track your progress.

You’re managing suppliers.

Clear communication is the basis of strong relationships. 

You share your needs, your expectations, and demand changes.

You’re always assessing your suppliers. When necessary, you’re selecting new ones, always driven to meet your procurement objectives.

• Do they fit?
• Do they help you meet your procurement objectives?

Management of supplier performance starts with setting KPI’s.

• They’re based on the needs and expectations you’ve shared of your organisation’s goals.
• They’re the basis of supplier scorecards. In turn, they’re the basis for your regular supplier performance reviews.

Do you need to set Performance Improvement Plans?

Or does the supplier’s outstanding performance warrant special recognition?

Strong supplier relationships and management of supplier performance is critical to procurement success.

You’re cutting procurement costs

Your organisation exists to make money – and always more.

 

Cost cutting is always the first, quickest, and easiest choice.

 

Where can you start?

 

a) Run a strategic sourcing project in reverse.

• Look at your current supplier base. If you were to start from scratch, would you choose them all?
• Are they the best suppliers based on cost, quality and reliability?

 

b) Can you negotiate better outcomes?

• via volume discounts?  (being aware of  higher inventory costs),
• can you rationalize suppliers?  To spend more across fewer suppliers is a means to renegotiate prices, and without increasing inventory.

 

c) A third way is to improve the organisation’s demand management.

• You buy materials to support the production plan.
• The production plan is set to support the demand plan.
• A poor level of demand planning drives higher procurement costs. It drives you to buy more or less than needed.

Cost-cutting is always the first, quickest, and easiest choice when an organisation needs to fix a problem.

You’re driving transparency and accountability

Procurement has always attracted fraudulent activity. This is why transparency and accountability are critical. You must champion this aspect of procurement.

 

• Can you point to your procurement policies, procedures and ethical guidelines? What about your procurement team? Do each of you know and apply them? If yes, great! But if not, you’ve work to do!
• If you’re spread over different sites, are you doing what you can to increase transparency? Can you centralise elements?

Are there any procedures you can standardise? Are there conflicts of interest that would give the impression of unethical behaviour?

• Is your process to select suppliers documented and followed? If you don’t have one, how can you prove there’s no bias in choosing suppliers?
• If these issues alarm you, do you need to audit your procurement function?

 

Audit gaps will show where you need to tighten up your procurement processes.

Procurement is fertile ground for fraudulent activity

You’re managing risk

List your risks.

What could cause you to falter or stop?

 

How do you start?

 

Map your supply chain.  

• What are the financial or operational risks you or your suppliers face?
• Do you need to run scenario planning?
• Are you over-reliant on one supplier?
• Are you single-material sensitive?
• Can you cope if a key material supply were to stop?
• Can you dual-source and split your key material supply?

Whatever you can come with, put them in a Risk Register.

Include their potential impact, likelihood, and contingency.

Review it and keep it updated.

If misfortune visits and one eventuates, you have a contingency plan in place.

There’s no such thing as smooth sailing.

You need to be ready for anything.

Murphy’s First Law of Procurement: “Anything that can go wrong will go wrong”.

You’re evaluating supplier performance

You must be on top of supplier performance from Day One.

• Do you have clear performance metrics in place? 
• Do they include the basics of DIFOT and quality?
• Is that performance easy to see on an up-to-date Supplier Scorecard?
• Are you sitting down with suppliers to review their performance?
• Do you have Continuous Improvement plans (CIP’s) in place where necessary?
• Can you benchmark your suppliers against industry best practices to feed into the CIP’s?
• Can you show that the supplier’s current costs are competitive?
• Do you have a Supplier Audit timetable in place? These audits cover safety, quality, ethics and compliance standard.
• How exposed are your suppliers to risk in their supply chains? Do they have mitigation plans in place?

There’s enough in keeping on top of supplier performance to be a role in of its own, but then, you know that’s your role…

A supplier’s poor performance reflects poorly upon you. 

You’re driving continuous improvement

Opportunities for improvement are everywhere. You must take a systematic approach to continuous improvement (CI).

 

Where do I start?

 

Go back to the first point in this list – the organisation’s strategy. That’s where you’ll find your objectives.

If the strategy is to be the industry’s low-cost leader, then your CI goal is to work on cost reduction.

 

• Benchmark – gather all the cost data you can.
• Where do they lie on the cost-competitiveness line from highest to lowest?
• What has been happening in their raw material industry?
• Have their costs been falling or rising?
• Draw up a list of supplier negotiation points that lead to lower costs.
• List ways to lower costs through collaboration.
• Seek their ideas on re-engineering. How can they take costs out (& maintain quality)?

CI is a field of endless opportunities which can seem overwhelming. Start with your organisation’s strategy.

Align your procurement CI with the strategy.

Your own organisation isn’t perfect. Neither is your suppliers.

You’re soaking up market intel

You must be wise in decisions you make when spending someone else’s money. Wisdom comes from observation. Observe and develop your market intelligence.

 

What do you buy, and from which industries?

 

• What industry websites can you Google?
• What’s discussed on those websites?
• What’s going well, and what’s not?
• Is one firm gobbling up others and concentrating market power?
• Is industrial action reducing supply?
• Is a potential change in government policy going to help or hinder?

 

Subscribe to your supplier’s industry mailing lists.

Develop insight into their issues.

Do they raise these issues when you talk to them?

If not, are they unaware of them, or hiding them?

Stay up to date and stay ahead.

You need to pay attention to what’s changing. You must develop your market intelligence.

You’re a cross-functional collaborator

Procurement is externally focused but needs to work with other functions within the organisation. Alignment with the organisation’s strategy is critical.

 

You’re aligned, but what are the other departments doing to deliver the strategy?

 

While working with the same strategy, their actions may not align. You need to understand their goals, their processes, and their challenges. Get involved to understand what’s required and where you can help. Understanding their requirements guides you on what you can and can’t do in procurement.

 

Conflicting priorities and a lack of understanding of each other’s situation produces corrosive conflict.

 

Collaboration crushes corrosive conflict.

 

Focus on collaboration to deliver a win-win that benefits everyone.

Collaboration divides the task, and multiplies the success

You’ve KPI’s that tell a story

Remember the Plan-Do-Check-Act approach to change?

 

This is the Check step. You’re working to deliver the most value for the least spend. You need to prove this by measuring your performance.

 

Spend Analysis:

You’re categorising and analysing spend data. This identifies opportunities for cost reduction and process improvement.

 

Supplier Performance:

You’re assessing the reliability and effectiveness of suppliers. How? Using DIFOT, quality levels, lead time adherence, and supplier responsiveness.

 

Cost Savings:

You’re measuring cost reductions through price negotiations and cost avoidance. This can be as a percentage of the total spend or as a specific monetary value.

Remember, without data, you’re just another person with an opinion!

Have you got all 10 under control?

When you have taken on these ten points, you’ll be heading for success.

 

• You’ll be aligned with the organisation’s strategy.

 

• You’ll be effectively and efficiently meeting the organisation’s needs.

 

• You’ll be purchasing at the
  • lowest possible cost,
  • the highest possible quality, and
  • aligned with the safety, ethical and regulatory standards required.

What are you waiting for?

If you’ve found and read this post, who’s to say your manager won’t find and read it tomorrow?

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