PROCUREMENT AS PART OF THE STRATEGY
by Sami Karling
Keeping a company's procurement function in good shape requires continuous improvement in methods, tools and organisation. Once the procurement team has been upgraded, it is quite common that after a few years the results are less than desirable. In this situation, it is easy to point to shortcomings in implementation or capabilities, but the cause may also lie elsewhere.
The company's strategy is regularly refined, and at least annually the status of selected issues is reviewed. But, how often are procurement activities reviewed as part of a strategy update? If procurement's role is defined to support the chosen strategy, rather than actually being part of the strategy, poor performance is a foregone conclusion.
The upstream end of the supply chain is heavily driven by existing business opportunities, and the best suppliers may not have the desire to flex to customer demands in the same way they did in the past. External costs are also often the largest cost item for a company. It would therefore be natural to treat procurement issues with the same weight as other issues traditionally associated with strategy.
The changing environment has brought a significant number of new requirements for procurement to deal with in order to improve corporate responsibility, risk management and financial position (e.g. payment terms). However, the main role of procurement is to ensure that the company's purchases are made in line with its strategy. It is easy to become so engrossed in the new challenges that the core function starts to slip. The strategy implementation projects supported require a significant stretching of the procurement function beyond its normal tasks, leaving little resources for the procurement function's own strategic planning.
The big question is, where to start with the strategic development of procurement? Good places to look are at the organisation, whether procurement has become its own silo within the company - and how procurement objectives support the business. If the main objective of procurement is mainly to lower the purchase price, is this the path that makes the company most attractive to customers?
There are now a huge number of digital tools available, more than ever before. Improving procurement results also requires much more than a new IT system. New technology offers a huge number of benefits worth pursuing, but these benefits are not just realised through a simple system upgrade. What is needed is a good, realistic view of the proper role of procurement and the state of the procurement market as part of a company's strategy.
Either the procurement organisation may be severely under-resourced, or gradually a large number of irrelevant tasks have accumulated to become procurement's responsibility, or the main focus has changed to improving the company's own procurement silo. Aligning new priorities with the procurement market takes too much management attention, with the result that the results of basic tasks remain modest over time. A regular assessment of the procurement situation helps to understand the issue in time. The assessment is most useful when a strategy period is being planned or implementation is just starting.
An assessment of the state of procurement is rarely successful on its own, too many internal interests will influence the outcome of the analysis. Finding good benchmarks is very difficult. Market situations change so rapidly that at best a direct comparison with muh companies is very rough. It is better to use information on what is actually being done in procurement and how it is being received by stakeholders. Comparison thus provides a better signal of success and the need for further development. An example of the content of the review could be how the company manages the maintenance of the business relationship with key suppliers; whether the role of key suppliers has been identified - and what has resulted in practice, and who has been involved in maintaining the relationship.
When considering upgrading procurement, it would be good to start with an open discussion about what role you want procurement to play in the business. There are a number of options, and the one chosen should also lead to the adaptation of other company functions to support the chosen role.
Updating the procurement strategy is a reasonably long programme, lasting at least a year or more. Changing a single tool or process is considerably quicker - but without changing the way the business operates, the results will be superficial or incomplete. Too often, for example, the introduction of a new procurement system has led to poor satisfaction and increased workloads due to confusing procurement processes.
Several different models exist for looking at the current state, typically these models compare the state of procurement either against a desired state, or against the best peers. The areas covered by the analysis are, as a general rule;
- strategic procurement planning,
- supplier management,
- business collaboration,
- operational activities, and
- people issues.
The best part of the models is stopping to think about where you are and where you want to be.
By following a contract-to-pay process (S2P), it is useful to conduct an assessment of the current capabilities and gaps. Quite a few companies do not have a comprehensive description of the S2P process. In practice, however, the process exists undocumented and is followed in one way or another. By following the S2P process, it is possible to clarify for management the obscure operational details, and thus to reflect on whether the current situation is adequate.
It would be desirable to include the assessment of the procurement situation and the potential for development as part of the normal strategy process of the company. The amount of money spent on procurement is still increasing, and the strategy-making phase is the most natural place to assess which choices would bring the best value from the supplier market. The rapidly changing nature of supply chains is likely to continue for years to come, and without good planning you cannot rely on the necessary availability to emerge on its own.
Outside expertise is a clever way to re-energise your thinking and bring new options and perspectives to your strategy work.