by Sami Karling
The growing importance and complexity of procurement in business brings new expectations to manage procurement effectively. Managing procurement in the traditional way with spreadsheets and ERP systems is not enough to ensure good planning and execution as the world becomes more complex. Maintaining contracts, tendering, managing suppliers and various accountability tasks require good planning and seamless collaboration within the company.
In the past, in a period of stable economy, the supply chain has managed to respond to demand by simply putting pressure on suppliers. As the responsibilities of procurement have increased and the environment has become more volatile, the size of procurement teams has also increased, and it is therefore useful to assess procurement management from new perspectives.
The traditional role of procurement has been to manage contracts and orders, and the actual management has naturally taken place as part of other activities. As procurement has become more strategic, procurement activities have been transferred to a dedicated (often centralized) team of experts. This leads to a new situation in companies, the management of which is a difficulty in itself. It is difficult to manage just by taking on individual contracts. The operational processes of procurement need to be aligned with other processes in the company in order to be both efficient and meaningful. Assignments also need better planning and preparation.
The problems of procurement management can be perceived in different ways; one common problem is a lack of commitment to shared outcomes, and another is revolving around self-interest with no direct impact on improving the business. Procurement should not compete with other teams to make the best decisions, but should improve the quality of the information that supports decisions at the moment they are made.
The third typical symptom of management is the difficulty of communication between other teams, with procurement people doing something that is not clear to other teams. And, conversely, procurement people feel that they are surprised to be given tasks to do. The common denominator of these problems is the difficulty of communication, and the lack of clarity of roles within the company.
In larger organizations, procurement management can be split into different lines of responsibility; not all tasks need to be shared equally between the same experts. This makes it possible to manage and implement the tasks of different processes with different skills and resources. This makes the process more efficient, but also requires more from the management system.
There are two approaches to outlining and solving these management problems;
DIGITALIZATION OF PROCUREMENT
Digitalization of procurement brings an efficient and transparent way to manage procurement processes. Digital procurement systems streamline contract management, the processing of suppliers' bids and the tracking of numbers. When implementing procurement systems, it is important to understand that processes cannot be copied from other companies and interfaces with other systems need to be carefully designed.
The benefits of digitalization will quickly dissipate if information continues to be transferred manually between systems, or if management reporting is collected manually from different systems.
For digitization to be successful, the basic procurement processes need to be in place. For example, the new supplier checkpoint, contract approval, and purchase order creation are easy places to lay the groundwork for digitization with simple tools. Digitalization will help improve management, but it will not solve old problems.
Digital systems give management an incorruptible snapshot of what has actually happened in procurement; how many contracts have been updated, what changes have been made to the supply chain, or how well suppliers have performed. A good management system enables decisions to be made on how to negotiate future contracts and directs preparatory work to be carried out in a timely manner according to plan.
Digital systems range from large ERP-style packages to single point systems, such as contract management or auction management. One of the hallmarks of a good system is its ability to integrate seamlessly with other systems.
Larger procurement systems always need their own change and implementation project, where many of the details of the process are decided. These choices have a significant impact on both the practicalities and the management. More difficult than the technical details, is managing the change in people's behavior associated with digitalization. A new way of working and a new way of managing one's own tasks may not be perceived as a good thing by individuals, and digitalization started with the wrong attitude can easily run into major difficulties and/or be badly under-implemented. In the worst cases, we have seen the need to replace a system that has already been implemented once with another, because of mistakes made during implementation.
A common pitfall of electronic systems is to choose a lot of mandatory details to be entered, the meaning of which is difficult for users to understand and in a real procurement situation does not provide answers to the specified question. The system thus becomes a hated and work-limiting issue. It is easier to increase the scope of the digital system later than to explain to users at the beginning of a change situation why it is particularly important to enter what seems difficult.
The full benefits of digitalization will be realized when the second or third round of contract negotiations is underway. Preparatory work and information gathering is made many times easier when the system provides visibility of existing issues and parallel tasks in progress. This benefit will only be visible to users after a year or two of implementation, while the pace of work will gradually increase and so will the overall efficiency. Getting the system up and running is only the starting point for managing procurement in a new way. The benefits of digital systems are, above all, management decisions based on information, and improved quality in commercial matters.
Digitalization enables the automation of (some) tasks, and thus the correct allocation of resources in terms of quality and quantity. Pursuing these benefits is worthwhile but requires both skills and a determined effort to make the change happen.
THE ROLE OF PROCUREMENT IN BUSINESS PROCESSES
Setting procurement targets has long been a simple matter for senior management, the aim being to either save or reduce costs by a certain amount of the company's turnover. The targets have been measured by a metric that tracks the accumulation of savings.
However, with cost efficiency, procurement, and possibly finance, are too often alone in carrying out the actual business responsibilities.
In a customer-driven business, customer service and product development are easily the top priorities, and procurement's role is to retroactively correct things that have been done with austerity measures. This kind of management is a direct quote from the fool's habit of extending the blanket by borrowing material from the foot. Hastily made procurement decisions are corrected later by austerity projects. A smarter approach would be to get procurement management right at company level, and to plan so that there are no easy targets for savings projects.
With the professionalization of customer procurement, the scope for sales has already narrowed, and will only narrow further the more customers' procurement teams manage to develop their own operations. Customers are only willing to pay for things that are of real value. The ability of a good vendor to talk up a deal, or tactically raise the price, will diminish as procurement contracts and supplier management become more professional.
Aligning your own procurement role on an equal footing with other business processes is a good start to improving productivity. The pressure from your own customers should be shared across the supply chain as a starting point, while avoiding radical cost-cutting programs. Suppliers are also very happy to engage in difficult discussions, as long as buyers are sufficiently systematic and transparent. It is difficult for procurement to manage the supply chain successfully if its role in business management is not clear.
KNOWLEDGE IS POWER
In the supply chain, understanding costs throughout the supply chain also allows you to influence them. It is possible to decode the cost structure of almost any item being purchased to a level where the whole logic of the purchasing function can be changed. With a clever combination of market data and cost data, it is also possible to monitor market performance. How many companies have a clear picture of how well or with what delay changes in market prices are actually realized? There is a huge amount of market data available directly in digital format, the real bottleneck is to build an appropriate economic model of your company's acquisition costs and make the model so that it does not require a large manual update.
If a company is facing a problem related to procurement costs, the whole company should be involved in solving the problem. Savings measures driven by procurement alone will very quickly lead to internal disputes that will only make a difficult situation worse. We have seen a number of business decisions that have subsequently proved to be wrong, and where a quick solution from the supply chain would be desirable. It would have been many times easier to solve these problems with the right information at the time of preparation, rather than after the fact.
Digital procurement systems, contract signing and negotiation systems work well when other related processes are built around them in a smart way. There are solutions for managing projects and suppliers that make work much easier.
Modern IT procurement solutions are much more than electronic paper (Excel/Powerpoint). The digitalization trajectory is best achieved by first moving old processes into a slightly improved electronic and standardized format, from which they are only really digitalized. In digitized procurement solutions, information is not transferred via e-mail or Excel sheets. A good initial objective would be to manage the procurement process so that all the necessary material is on-line in digital form.
The introduction of digital procurement management is a reasonably large project, and experts who have worked on similar projects in the past will be of great help. There are a large number of situations along the way where you need to be able to choose the right options from a procurement management perspective.