Procurement – now critical for business success

Procurement - now critical for business success

We are living unprecedented times , with very little predictability of what’s coming next both at business and at personal level. Agility and Adaptability became the daily routines if a business or an individual want to sail through these times and succeed! And this applies to Procurement function too, as it is becoming an increasingly critical function for the overall business success.

I share below my thoughts on what Procurement MUST DO now, in these times of crisis and uncertainty, in order to add significantly MORE value and become critical for business success.

1. Procurement MUST become now, more than ever, a reliable and trusted business partner, both internally and externally. This means that a company must ensure that its Procurement managers have a very strong business acumen, so they can contribute to the development of the business beyond the “normal call of duty (= reaching the typical Procurement KPIs).  I have seen many Procurement managers that were acting as “slaves” of their KPIs, without understanding the real business needs, which might have called for other approaches. As a consequence, all their actions were aimed at reaching their targets, even if that was not the best thing for the business. To give you just one example, I have seen not long ago, a Procurement Manager of a large multinational company that sent an email to the key advertising agencies working for his company and requested additional year end rebates because “he did not reach his yearly cost saving target”. I was speechless! What audacity! He used the dirty “hot potato” tactic and passed the problem caused by his incompetence in reaching the targets, to the company suppliers! Unethical behavior to say the least! If he would have put the best interest of his company first, he would have not done this, because this request not only damaged his own image, but also shed a negative light on his company too! In the same time, internally, in the organization, Procurement must act as counselor and advise the business owners on the best solutions for their needs, even if this means less cost savings, for example. In my department, we did several times projects that we knew upfront that would not help us with our yearly targets, but we knew that they were right for the business. 

2. Procurement MUST ensure flawless and uninterrupted supply of goods and services (a.k.a. “Supply assurance”). I can vividly remember my Vice President of Procurement Europe telling me: “Procurement’s first and most important mandate is to ensure the supply of the goods or services that are critical to the business. All other financial benefits like the cost savings, cost avoidance, etc. while important, are of secondary importance when compared to the supply assurance!” This is of particular importance in these days of crisis, because, while a very good price for what you buy is important, even more important is to have it supplied! I have seen recently situations of supply scarcity when the providers chose to deliver to those clients that had a fair deal with them, not to those that “squeezed them dry”. And in such situations you realize that a slightly more expensive product, but DELIVERED, is much more important than the cheapest product, NOT DELIVERED! Here are some suggestions how to achieve a strong supply assurance:

  • have an internal commitment and buy-in of ALL Purchasing and Supply managers to work against the objective of supply assurance.
  • for each material / good that you use in your production, keep a permanent stock monitoring at each supplier. This will enable you to foresee any possible out of stocks caused by suppliers not doing their proper planning.
  • keep a close and continuous communication with each supplier, making sure that you are aware of any issues that might cause supply issues.
  • get deeply involved in your company’s forecasting process (a process frequently named S&OP = Sales & Operations Planning) and also in the commercial planning. This will help you be up to date with all aspects that might influence the need of raw materials & packaging and will enable you to react in due time to the commercial changes.
  • find and qualify alternatives for all critical suppliers. This is particularly important these days, when many companies suffer due to the fluctuations in the demand for their goods/services. As a result, some companies may close down all or part of their operations, leaving you uncovered in critical areas of supply.
  • run frequent Due Diligence, including monthly Dun & Bradstreet (D&B) scoring to monitor the business health of your key suppliers. Pay special attention to D&B scores of 6 and above, which signal companies with high instability and short term risk of failure.

3. Procurement MUST preserve and improve the VALUE of what’s being purchased. Procurement Managers must guide themselves based on the VALUE of what they purchase, not only on the absolute purchase price. VALUE is defined as the ratio of “What you get” to the “Price you pay”. Many factors influence this equation, among which I would mention “Total Cost of Ownership”, “Actual Cost per Use”, “Potential Hidden Costs”, “Working Capital Benefits”, “Cost savings”, “Cost Avoidance” and others. Looking at VALUE is particularly important in deep crises like the one we are going through now. Let me give you one real example: when the Corona-virus pandemic started, there was a huge demand for protection masks and disinfectants, a demand that was beyond anyone could have anticipated. And given the urgency of the matter, VALUE actually meant BEING FAST in buying whatever quantities you could find on the market (the demand being significantly higher than the offer, suppliers sold all their stocks in a matter of hours). PRICE was of secondary importance, because not having masks and disinfectant meant risking the health of the people working in the company. And in such critical situations, I have seen companies that asked their Procurement to file reports with particularly thorough analyses on whether the price they were recommending was truly the lowest on the market. In my point of view, the problem was not that Procurement had to justify the price (this is normal), but the depth of such analysis and the time needed to get the approval (several days for such critical purchase!). To nobody’s surprise, with such slow reaction time, that company failed to ensure timely purchase of masks and disinfectants; they ultimately bought what they needed, but in several days and at higher prices because the initial suppliers sold their stock to other, FASTER buyers.

4. Procurement MUST ensure improved cost efficiency of the company spend by acting in 3 areas:

  • ensure better cost for purchasing the needed goods or services (achieve hard cost savings). During a crisis, the demand for certain goods and services might drop, therefore the price can be negotiated stronger. And companies having a strong financial power (and stability), have stronger negotiation power too!
  • get more goods/services with the same budget (cost avoidance). If a supplier cannot decrease the price per unit, buying more units can qualify you for a higher discount threshold or some free additional quantity, therefore overall you get more for the same money.
  • help the company improve its cash-flow. I remember a very old saying: “Profit is great, but CASH IS KING”. Procurement must help the company improve its cash position (cash-flow) by negotiating extended payment terms. This, however, must be done wisely, because if over-done, it might backfire by triggering cash-flow issues (and potential solvency issues) at suppliers’ end. If this happens, Procurement gets into trouble because they cannot ensure supply once a supplier goes “belly up”.

5. Procurement MUST help suppliers survive this unprecedented crisis. I know that this last point might raise many eyebrows because it is not so custom that Procurement cares too much about suppliers. When I was working in an advertising agency, I went to negotiate a collaboration contract with a very large multinational company. My counterpart was the company’s Commercial Procurement Manager. He was very arrogant and kept on telling me that they are the client and they “dictate” what the contract will look like. It looked like one of those (in)famous retailer-producer negotiations, in which you are allowed to negotiate the color of the ink you use to sign and nothing else. He even tried to mislead me by asking for “90 days payment term”. The only issue was that he added one additional word in the contract: “working”. So, he was in fact asking for 90 WORKING days payment term, which means 120 calendar days! I share this story to underline that this is the WRONG approach! Procurement must partner with the suppliers and via this partnership, THEY HELP EACH OTHER GROW! Therefore, in the crisis that we are sailing, it is important that Procurement meets all key suppliers and understands their issues and how they can help those suppliers in need. A supplier that goes out of business is definitely not something anyone wants, especially in crises.

The 5 MUST DO’s above reflect the personal perspective of someone who spent most of his business life as a business owner, but was deeply involved (formally and informally) in Procurement and Purchasing for over 20 years. And from this perspective I can see clearly that in times of crisis, Procurement is indeed critical for business success. I strongly feel that any Procurement organization “ticking” all 5 MUST DO’s will bring a disproportionately positive contribution to the business (and not only in times of crisis!)

BUT, it all boils down to the culture of the organization: does the company truly put people first, and walk the talk, not just write some nice people-related words in its “Mission-Vision” statement? If yes, then the company is set for success! The “Triangle of people success” is very simple, yet I have rarely seen it fully applied in companies. The “triangle” is made of the “3 People High’s”: “High Quality of recruitment + High Motivation + High Level of Skills/Training”.

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