The global economic crisis is not entirely bad news, if only because it is forcing many businesses to take a closer - and long overdue - look at procurement, and adopt a more proactive approach. Lesley Meall, FSN contributing editor takes a look at how turning attention to this neglected area can pay handsome dividends.
“In the past, people have been very lax when it comes to procurement,” reports Tony Morris, the principal business consultant at Coda’s Procurement Centre of Excellence, “so a lot of senior managers don’t understand the power that a proper procurement function can bring to an organisation,” – even though some of the possibilities may seem startlingly self-evident.
“Procurement can help you to use the credit crunch to your advantage,” suggests Morris. “At the moment there are lots of suppliers clamouring for business,” he explains, “and if you invite tenders for a five-year contract of any type, suppliers are going to bite your hand off.” So procurement is a place where a lot of organisations can save money. But using the economic conditions to negotiate from a position of strength can be easier said than done, in the very many organisations where the procurement function is hard to identify, let alone manage.
“There are a lot of places where procurement has not generally been either formalised or properly managed,” reports Morris, who has spent decades specialising in this area. Although procurement gets its fair share of attention in larger entities (courtesy of Enterprise Resource Planning systems), and has a high profile in the public sector (though there is always room for improvement), there are plenty of medium-sized private sector businesses where the procurement function is so poorly defined that even the difference between direct and indirect procurement isn’t well understood.
With direct procurement, goods and raw materials end up in products, while indirect procurement involves energy, goods and services, such as travel expenditure, maintenance materials, office supplies, and more. Direct procurement tends to involve relatively few (specialised) stakeholders, while myriad stakeholders can influence indirect procurement, and hail from numerous (functional and geographical) areas. Personal preference is less of an issue in direct procurement; but in many categories of indirect procurement people can, and do, buy from whoever or wherever they like.
Economies of scale
As on-demand resource planning options and scaled down ERP systems have become more widely available, some of the benefits of managing direct procurement have filtered down into medium sized organisations, so procurement efforts (and cost-cutting initiatives) have traditionally focussed on this area. But the recession means that organisations of all shapes and sizes are now keen to better manage their indirect procurement – and for good reason. Small individual spend categories may seem trivial in isolation; put together they soon mount up.
Establishing policies, guidelines and processes for the purchase of indirect goods and services, and forcing budget-holders to comply with them, can have a significant positive impact on the bottom line, and businesses are increasingly aware of this. “Two years ago when life was good and we were all fat and happy, people weren’t too focussed on costs,” observes Morris, “now they realise that they need to change in order to survive,” and paying closer attention to the entire procurement function is one way of doing this.
This growing awareness has resulted in services such as Procure 360° from Coda (part of Unit 4 Agresso NV). “It’s a response to demand from customers,” says Morris, along with the Procurement Centre of Excellence the company introduced in 2008. “Procure 360° offers a complete diagnostic review of an organisation’s approach to procurement, by measuring its effectiveness across the many areas it can touch on,” he explains, adding: “In a very short time, the review can provide a report, showing where the organisation is and what needs to be done to improve things, so it is a good first step.”
Xerox Corporation has also introduced a range of new Xerox Procurement Solutions, aimed at mid-sized companies, after one of its suppliers asked the company to “do for us what you do to us.” These solutions include a procurement diagnostic service (not unlike Coda’s Procure 360°), they support direct and indirect procurement, and range from consulting to (the increasingly popular approach of) outsourcing – with Xerox sharing its extensive procurement expertise (especially in Asia and on the sort of materials and components it uses in its own products) and its vast economies of scale.
Xerox Procurement Solutions uses a cost modelling database system (developed 15 years ago) to facilitate “target pricing” for parts and components in low cost regions of the world, and exploits its expertise at providing its own offices (in 160 countries) with a variety of indirect goods and services. “We have the size and scale to help some companies be more competitive and more effective at sourcing,” says Ken Syme, Xerox chief technology officer, “which will improve efficiencies and remove costs from the supply chain.”
The global emphasis on cost containment means that even large organisations, with a history of well-defined direct procurement functions, are keen to identify areas where there is room for improvement. The Universal Music Group, the steel maker Corus, and the communications company Nokia are among those changing their expectations of, and increasing their focus on, indirect procurement in response to the recession. “We could have been a little bit smarter in the past,” reflects Mikko Kivisto, vice-president of indirect sourcing at Nokia.
Earlier this year, when he spoke at ProcureCon Indirect, Kivisto acknowledged that the indirect sourcing function had become “a little bit expensive”. During 2009, however, Nokia expects to double its usual level of cost-savings (to €300 million), despite a reduction in the head count from 460 to 410, by re-prioritising projects, exploring new options such as e-auctions, sourcing in collaboration with sister firms, making the focus of procurement more consultative and cross-functional, and adopting a best practice approach. But defining best practice can be challenging.
“It’s a phrase we try to avoid,” explains Coda’s Morris, “because best practice is about the ideal approach for each individual organisation.” Though other specialists, such as the Hackett Group (a global strategic advisory firm), benchmark the activities and achievements of thousands of the world’s biggest and best companies and use them to define “best practice” through “proven, repeatable, documented techniques that deliver measurable performance improvements” in areas including procurement, to potentially great effect.
According to Hackett, procurement operations that it identifies as “world-class” can turn every dollar that an organisation ploughs into procurement into eight dollars in spend saving (and you can learn how with the help of its Procurement Capability Model). But as recent Hackett research highlights, even organisations that have taken a “best practice, world class” approach to procurement can find ways of doing things better – and this can be as simple as enforcing existing procurement policies (something that’s on Nokia’s self-improvement list).
When Hackett polled procurement specialists and budget holders in some of the world’s largest organisations it found some neglected areas. Apparently, although project-based spending represents up to 35 per cent of total procurement spend, only 17 per cent of project-based spending is supported by the sourcing resources and processes of purchasing departments, and this creates a “lose-lose” situation where procurement best practices are not applied, and everyone involved becomes disappointed with the results.
“A disturbing amount of ad-hoc spending, for projects ranging from IT infrastructure through trade shows to executive search and recruitment, is slipping through the cracks, and established procurement practices are simply not getting applied,” says Pierre Mitchell, research director at Hackett, and this has an impact on non-recurring indirect expenditure in areas ranging from capital equipment and services, through finance, HR and ICT, to sales and marketing. So procurement is an area where there is always room for improvement.