This month we talk procurement with guest author Jeff Martin, a procurement executive with a Fortune 100 medical manufacturer recently named to Fortune’s Top 20 Most Admired Companies.
Purchasing and procurement are often used interchangeably and may conjure images of buyers sitting in the back room wearing green eye shades while poring over purchase orders lit by a dim a desk lamp. However, there are important differences between the two. Shifting from away from purchasing towards procurement can unlock earnings.
Briefly, the third term “shopping” is our characterization of unplanned, “we buy it when we need it” acquisition of direct or indirect material similar to how a consumer buys. No strategy or planning is involved, and it is driven by events rather than planning or strategy. “We ran out so we bought some more at the best price in that moment.” It doesn’t take much thought to realize this approach isn’t going to yield improved earnings. It may not even yield material or services that meet the need.
Let’s look then at purchasing and procurement and contrast the two. To help illustrate the difference, start by asking yourself these questions:
· Do we segment our supply base by categories, and do we view strategic suppliers as value drivers for our business? A common alternative is to view them as competitors in a win/lose negotiation.
· Does our procurement organization have a ‘seat at the table’ in the Executive Committee and understand our strategic priorities and challenges? Or are they task execution-focused, like requisition fillers?
· Is our procurement organization focused on maximizing people efficiency inside the department? Or are they focusing on maximizing business earnings for the whole organization?
Organizations farther along the procurement maturity curve will bucket their spend by category, and commodity where applicable, and will develop comprehensive strategies for those categories. They further segment their suppliers based on the nature of the relationship and potential value these suppliers bring to the business. Suppliers whose capabilities have the potential to drive competitive advantage receive greater attention from leadership to establish a trusting, collaborative relationship. Conversely, transactional suppliers are managed to cost, on-time delivery, etc. Procurement differentiates categories by their value impact rather than treating all categories as commodities.
Historically, purchasing has, to a large extent, focused on reacting to the immediate needs of the business and executing the tasks required to fulfill those needs. As the procurement function has evolved, organizations are recognizing the need for procurement to have a ‘seat at the table’ to fully understand the needs and strategic direction of the business, enabling them to harmonize their procurement strategies with the firm’s strategy. In turn, these strategies inform the selection of ‘Preferred’ or ‘Approved’ suppliers possessing capabilities to support the firm across business units or product lines, as opposed to more localized support. A side effect of making procurement strategic is that the planning horizon is extended resulting in fewer time forced transactions at unattractive terms. Or worse, unavailability which impacts earnings production.
Finally, purchasing often seeks to maximize the efficiency of its people in executing required tasks like Purchase Order creation, delivery tracking, and issue resolution. This leads to an organization having go-to buyers managing a large volume of requests, without much spare bandwidth to focus on strategy. Procurement, on the other hand, views business earnings as the goal rather than simple process speed. It seeks to maximize efficiency in its processes and reduce friction in the buying process. Procurement will establish robust contracts and competitive pricing with preferred suppliers and by partnering cross-functionally with sales, legal, IT, business leaders, and suppliers, enable efficient buying channels. These efficient buying channels could include IT-enabled catalog ordering systems, eliminating the need for signed work orders below a certain dollar threshold, or reduced approval thresholds for purchases from a preferred supplier ecosystem.
Famously, Steve Jobs tapped now CEO Tim Cook to lead procurement for Apple, which at the time was still very much a product-design focused company. Cook has been credited with introducing the procurement and operational discipline, including reducing the number of ‘strategic’ suppliers and extending payment terms,. that propelled Apple to the behemoth it is today.
As the COVID-19 pandemic has forced firms to look for more ways to optimize their spend, it is more important than ever to make the shift from purchasing to procurement.
Call To Action
Take stock of your current procurement posture with respect to its contribution to your earnings:
1. Assess your procurement function and understand the processes currently managed by that function.
2. Review the primary focus of the organization. Is it saving money or driving earnings?
3. Does procurement integrate well in seamless processes that cross functional boundaries with sales, legal, IT, business leaders, and suppliers?
4. Is procurement part of the strategic planning process?
5. Reviewing the last five years is procurement’s impact on earnings clear and significant?
I hope you found something to apply to your business in this MBR. Let me know either way.
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