Focus on Costs: Day 7 – Procurement Fundamentals: The Building Blocks

Focus on Costs: Day 7 – Procurement Fundamentals: The Building Blocks

So far, in this Programme, we’ve described how to segment and approach your cost base to drive savings and optimise supply chain resilience. In many people’s mind procurement is about cost savings…and at its core, that’s what it is. But, besides savings it’s also able to deliver a lot more, such as competitive advantage, innovation, headcount reduction, right-sourcing, CSR, governance, compliance etc.

Today we look at the Procurement building blocks you need to get savings & resilience delivered initially, then ensure that this good practice becomes business as usual and finally that you embed Continuous Improvement. 

We call these building blocks the Procurement Fundamentals and, in our experience, installing them will deliver more savings and resilience than individual spend category initiatives.

However, many, many businesses don’t appreciate this or implement the Fundamentals half-heartedly. Over the years we’ve concluded there are two main reasons for this:

  • Firstly, more expertise and more investment are required, to address the Fundamentals, than for simple cost saving initiatives.
  • Secondly the benefits are often indirect and/or very difficult to measure e.g. how to identify the savings from improving your Source-to-Pay process?

However, there’s a further truism which makes their need even more compelling. It’s this… if you don’t tackle the Fundamentals any direct savings you do make will disappear in a short space of time (12 months to 2 years is the accepted norm) as suppliers win them back (and possibly take more for future insurance!)

We classify the Fundamentals as:

  • Policy & Strategy
  • People & Structure
  • Process & Systems
  • Supplier Management & Measurement
  • Benefits tracking

In terms of the Why should you do this, think of it this way. If you get the Fundamentals in place, you’ll be able to positively answer the following questions; if they’re not in place then the answer’s a negative:

  • What am I buying and how much it is costing? (As an aside – we’re often shocked by the difficulty many business’s answering this.)
  • Am I buying at the best possible price, all the time?
  • Am I sustaining best pricing?
  • Is my Procurement activity aligned with and supporting my business strategy/plans?
  • Is my Procurement activity helping me get ahead and stay ahead of the competition?
  • Do I know how who in my organisation is doing the buying, do I measure their performance and am I confident in their ability?
  • Is my Source-to-Pay process efficient and effective?
  • Are my Procurement Systems fit-for-purpose, integrated with my enterprise systems and do they make best use of technology?
  • Are my supply-chain risks identified, managed and mitigated?
  • Do I know who are my key suppliers? Do I manage, meet with and listen to them?
  • Do I know that I’m getting the benefits my suppliers have promised?

Overall, it can boil down to one question, am I exploiting all of the available opportunities in my supply chain?

Strategy & Policy

Procurement is a support service, it’s not complex but there has to be some strategic thought to ensure there’s a vision for the people practicing it and that the vision ties-in with the businesses overall strategy. Out of that strategy come policies which translate the strategy into practical steps. Adherence to policies supports governance and compliance with laws/regulations.

Disjointed procurements practices
Maverick buying
Uncertainty over performance
Issues around governance, CSR, ethics 
Procurement fully supporting the business’s goals
Improved & consistent performance
Compliance with regulations 

Structure & People

A business needs a procurement structure that suits its sector, its goals and its culture. On a simple level, think centralised versus de-centralised and variations in between. The structure needs the right people and they need proper training and suitable experience.

Unstructured & unclear responsibilities for procurement in the business
Knowledge constrained within silos
Unstructured & unclear responsibilities within procurement 
Minimal training / communication
Procurement integrated within the business
The right people in the right roles with clear responsibilities
Procurement’s advice sought by the business

Process & Systems: 

The Source-to-Pay process should be efficient, effective and controlled. The systems should support that process.

No proper, new-supplier approval
No purchase order placement/recording
Inefficient and/or manual processes inconsistent across the organisation
Unwieldy systems not integrated with other enterprise systems e.g. finance
Easy-to-use, controlled & efficient process for procurement
Strong governance and controls framework
Proactive information management
High data quality on spend analysis from ongoing monitoring

Supplier Management & Measurement: 

Do you know the type of relationship you want with each supplier and does your business practice it? How well are they performing? We’ve explained in previous steps how to determine your approach to each spend category and supplier. It’s also important to analyse and measure supplier’s contribution to your business. In our experience your suppliers often know their part of your business better that you do. Listen to their ideas. Sure, they’re not altruistic, they want more business from you, but if they’re good what’s wrong with that, after all it’s what you do with your customers?

Suppliers treated all-the-same irrespective of importance to business, spend etc.
Service level agreements not defined
Suppliers performance not measured
Supplier ideas ignored
Suppliers treated according to risk to business, spend etc.
Regular meetings with key suppliers
Supply markets monitored & understood
New/potential suppliers identified and met
Supplier ideas sought and innovation welcomed

Benefits Tracking: 

Track to see whether individual suppliers are delivering the benefits (savings) that they promised you when you awarded them the work.

Suppliers’ promises and/or contractual obligations not monitored  
Suppliers’ performance measured, fed-back to them and rewarded/penalised based on performance

In Practice it’s a rare client that will tackle Fundamentals without linking them directly to savings initiatives. So, we often link them to direct category savings initiatives by implementing them in parallel and/or recommending the client uses the savings generated to invest in the Fundamentals.