Fixing strategic procurement


The current approach to strategic procurement (or sourcing) might be outliving its usefulness in many companies. The original idea was to bring disciplined buying policies and formalized supplier management to the procurement function in order to improve operational and financial results. Like many well-meaning initiatives, however, its implementation has been a mixed blessing. To achieve its potential, managers should rethink and enhance how strategic procurement is executed.

Penny wise, pound foolish

The promise behind strategic procurement was to reduce input and administrative costs, minimize risk and increase supplier collaboration by employing a variety of practices, including: reducing the number of vendors to maximize negotiating leverage and cut the cost of procurement; insisting that suppliers pitch their services through formal request for proposal (RFP); and centralizing buying authority to prevent ad hoc purchases. For numerous firms, the reality has not met expectations, for many reasons:

1.  Barriers to cost reduction

Many private and public sector organizations have not realized long-term cost savings and, in fact, are seeing higher costs. Cost stickiness traces to numerous factors, many of which were unanticipated: using a small number of approved vendors can incite them to engage in oligopolistic pricing behaviour; suppliers end up passing along their higher administrative and pitching costs, and; excluding lower cost providers from an approved vendor list limits price competitiveness.

2.  Reduced innovation & choice

The initial approach to strategic procurement was developed for a relatively stable business world. Yet, today’s economy is anything but that. Yesterday’s approved vendors (chosen because of their size, pedigree etc.) may not be the highest value suppliers today if they have not kept pace with new technological and business model developments. As a result, the client may not be exposed to cutting edge insights and technology. Moreover, incumbent vendors have a vested interest in restricting the amount of innovation that drives down pricing (read: their profits) or is outside their core competence. One of our packaged goods clients revamped their entire strategic procurement strategy after they got tired of watching their competition get to market first with new technologies and a steadily improving cost structure, all generated within their supplier network.

3.  Hamstringing operational performance

Forcing suppliers to engage through a poorly crafted statement of work or bidding process can inadvertently increase the risk of bad operational performance. In one high-profile example, many of the problems with the launch of the Healthcare.gov portal were blamed on the U.S. government’s procurement processes as well as requirements definitions. This is not solely a public sector concern. We have seen many expensive initiatives go off the rails because the original RFPs were focused more on satisfying the requirements of the procurement team than with meeting critical business needs like quickly getting to market or maximizing quality.

Gaps in implementation

According to our experience and research, procurement problems trace to missteps in program execution rather than business model design. The issues vary and could include: focusing on purchase price rather than total, long-term cost; relying on negotiations and supplier leverage strategies rather than broader ‘win-win’ collaboration opportunities; under-investing in procurement capabilities, and; over-involving purchasing in every supplier interaction.

Reinvigorating the model

Strategic procurement needs to evolve into a more bespoke capability. “Historically, strategic purchasing has been used to drive costs down by leveraging economy of scale along with the hope that being a significant customer carries clout,” says Mitchell Lipton, operations manager at auto parts supplier CTS. “In today’s economy there is still a place for strategic purchasing but it is no longer a one-size-fits-all solution.”

Senior leaders should realign their procurement organization to business needs and look for opportunities to add value across the entire design-sourcing-manufacturing continuum. They can do this by asking four important questions:

  1. Where can procurement work more effectively with other key functions — without getting in the way — to ensure strategic alignment?
  2. How can buyers expand beyond a short-term cost-savings mindset to include an emphasis on long-term value such as greater collaboration, continuous learning and innovation creation?
  3. What is the right mix of local and specialized versus national and generalist suppliers?
  4. What tools, processes and skills are needed by the buying organization to improve its performance?

Twenty-first century procurement is no longer just focused on cost or guaranteed delivery. According to Lipton, “In business today the key is speed and staying ahead of the value curve. When dealing with suppliers the most important attribute is flexibility and a philosophy of continuous improvement. You need a supplier that can respond to your changing needs plus has a culture of finding how to do it better.”

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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