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Strategic Procurement

Strategic Procurement

A Dynamic Field

Procurement’s increasing importance is being driven by two economic changes:
•Increasing competitive pressures are forcing companies to look at procurement as a means of helping boost the bottom line. CEOs are looking for areas to cut costs, and streamlining procurement processes is a viable solution.
•A lot of companies are doing more outsourcing. This makes procurement decisions increasingly important to business vitality.

There are numerous ways an effective procurement strategy improves performance, including:
•Eliminating maverick spending.
•Streamlining operations.
•Improving supplier relationships.
•Increasing bargaining power with suppliers.
•Strengthening supplier relationships.
•Aligning purchasing decisions with corporate goals and objectives.

How Mature Are You?

Measuring an organization’s procurement maturity involves assessing how close it is to achieving each of the aforementioned results. There are four levels of maturity: novice, intermediate, advanced, and expert. There is no relationship between company size and procurement maturity. Companies of all sizes are at various stages in the development of their procurement functions.

Maturity Assessment Guide

1.Evaluate maverick spending in the IT department. Talk to supervisors and find out if unauthorized purchases are being made. If so, what kind of purchases? You may be shocked by the number of purchases occurring outside of formal procurement protocols. On the other hand, with no protocol in place, expect excessive amounts of maverick spending. Procurement maturity is typically characterized by the following levels of maverick spending:
oLevel 1: Significant maverick spending.
oLevel 2: Minimal maverick spending.
oLevel 3: Virtually no maverick spending.
oLevel 4: No maverick spending.

2.Examine your procurement processes and procedures. Find your written set of procedures detailing the procurement processes for your company. If there is no documentation, does your company follow repeatable procedures? Or does each purchase result in an ad-hoc patchwork of steps? Procurement maturity is typically characterized by the following levels of procurement procedures:
oLevel 1: No processes or procedures.
oLevel 2: Processes and procedures exist, but are not documented.
oLevel 3: Processes and procedures are documented and implemented.
oLevel 4: Major procurement decisions are determined by a multi-function team.

3.Evaluate your relationship with suppliers. Look beyond your internal procurement processes and focus on how well you know your suppliers. Typically, the more information you have about the people you do business with, the better the relationship. With no purchase information on hand, you cannot develop a partnership with suppliers and service providers. With proper information, you can evaluate and rank suppliers.
Your procurement maturity level relates to your supplier relationships as follows:
oLevel 1: No purchase information on record; need to ask suppliers for it.
oLevel 2: Use supplier information to evaluate price, quality, and delivery.
oLevel 3: Rank suppliers and develop strong relationships with select suppliers.
oLevel 4: A supplier’s percentage of business correlates with performance ranking.

4.Assess your bargaining power. Information also provides you with purchasing leverage. To what degree do you leverage information about suppliers to increase spending power? Do you coordinate purchases to increase leverage? Does your company possess strong negotiating skills? Your procurement maturity level is characterized by your ability to leverage spending power:
oLevel 1: Company spending power is not leveraged.
oLevel 2: Major purchases are negotiated and coordinated to increase leverage.
oLevel 3: All purchases are coordinated and leveraged.
oLevel 4: Supplier’s cost-reduction ideas are brought to your company first.

5.Determine procurement’s strategic alignment. Experienced buyers understand the overall corporate strategy and the procurement strategy. How many of your buying decisions are viewed as strategic decisions? Do you have a strategic plan in place? Procurement’s strategic alignment relates to maturity as follows:
oLevel 1: No strategic plan governing procurement.
oLevel 2: Although no strategic plan exists, purchases are strategically relevant.
oLevel 3: Virtually all purchases are aligned with corporate strategy.
oLevel 4: Perfect alignment with company goals and objectives.

6.Evaluate your buying experience. Do your buyers receive training? Do they understand the strategic relevance of buying decisions? Do they know how to apply cost accounting to a negotiation? For example, do they know the difference between direct and indirect costs, as well as overhead? Your procurement maturity level with respect to buying experience is characterized as follows:
oLevel 1: Limited buying experience; no training.
oLevel 2: Buyer training program is in place.
oLevel 3 & 4: Buyers understand strategic buying and the importance of cost.

In Summary

A strategic approach to IT procurement can help cut costs and improve efficiencies. The first step to taking a strategic approach to IT procurement strategy is assessing your current procurement maturity.

Strategic Procurement Part Two

Many enterprises have gained a strategic advantage by treating their procurement as a strategic function. Map out your procurement process and make sure it encompasses these best practices.

Strong procurement processes align purchasing decisions with corporate strategy, increase bargaining power with suppliers, and increase the value obtained from investments.

The key is determining when to put procurement through a detailed process. The dollar value of the purchase is always a strong indicator of strategic relevance. For example, ordering all of office supplies from one supplier at predetermined intervals can increase purchasing leverage. More obvious examples include replacing 50 CRT monitors with LCD monitors, purchasing 30 handheld devices, investing in a storage area network, or establishing a wireless local area network. To achieve maximum value from purchases such as these, a procurement protocol must be followed.

Best Practices

Add the following best practices to your current procurement procedures to minimize maverick spending, maximize operational efficiency, achieve substantial bargaining power with suppliers, and align purchasing decisions with corporate goals and objectives.

1.Establish the procurement goal.
oDefine the target consumer and the borders of the area impacted by the purchase as precisely as possible (i.e. dependencies on other projects, items and systems, the effects on business processes, etc.).
oDetermine whether the purchase is aligned with corporate goals and objectives. If the argument for the purchase cannot be justified along strategic lines, save yourself a lot of work by aborting the purchase and turning your focus toward more strategically relevant procurements.
oInterview stakeholders and analyze their stakes in the procurement.
oAnalyze costs and benefits.

2.Define procurement requirements. The most important part of the procurement process is planning out the details of the purchase. Keeping in mind that even good plans are susceptible to change, it is essential to ensure thorough version management of the goal and plan during the whole process. The list of requirements demands completion of the following activities:
oDetermine scenarios for receiving the product or service from the supplier.
oAnalyze the risks involved in the purchase.
oPlan the procurement within a risk management framework.
oIdentify the main decision points, including timelines, type of supplier, type of tendering, flexibility of contracts, and project requirements.

3.Tender the offer. The objective of tendering is to select a supplier, and agree with a chosen supplier on a contract that defines deliverables and the responsibilities of both parties. The following activities are required to complete this step:
oEvaluating the previous performance of suppliers (if the information is available).
oPreparing a request for proposal (RFP).
oEvaluating the suppliers’ response proposals.
oSelecting the supplier that best meets the strategic needs of the organization.
oPreparing a supplier contract for the delivery of products or services.

4.Monitor supplier deliverables. This step aims to monitor the procurement objective as defined in the contract, i.e. to ensure that the deliverables conform to the requirements. Therefore, a defined number of contract status reports should be prepared during the project. The purpose of these reports is to minimize the risk of unfulfilled contract obligations, and to build a performance knowledge base of the supplier.

5.Complete the procurement. This task ensures that all outstanding issues regarding the procurement have been concluded to your satisfaction. Activities to perform include:
oEnsure all contracts are completed.
oAssess the achievement of the procurement goal.
oEvaluate the results for future procurements, including supplier quality and areas to improve the procurement process.

In Summary

A strong procurement strategy aligns purchasing decisions with corporate strategy, increases bargaining power with suppliers, and boosts the value obtained from investments. In order to develop your procurement function, focus on processes and people.