INSIGHT PLOTTING YOUR TRANSFORMATION

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46% OF BUSINESSES DON’T DISCUSS PROCUREMENT IN THE BOARDROOM*

It’s a pity really, because experience tells us that effective procurement and ongoing supplier management doesn’t just save money, they provide a valuable and sustainable boost to the bottom line.

Funnily enough, that’s just the type of insight the Board should be hearing about, isn’t it? Effective procurement that can act as a core strategic function throughout an organisation, across everything from insurance to logistics to payment processes to everyday office costs.

Are you ready to tackle the elephant in the Boardroom and put effective procurement on the agenda?

To find out how effective procurement can benefit your organisation please contact us on:

02380 829 737 or email info@erauk.net or visit www.expense-reduction.co.uk* Source: The Psychology of Procurement

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WHAT DOES the business really need? What’s out there in the supply market? How to formulate the tender? Which supplier is best? How to capture what’s needed in the contract? How to get the best price? Are we getting the best from our existing suppliers?

When trying to answer these questions the phone goes. Someone has locked themselves out of a remote office and needs to get in urgently. Suddenly finding a locksmith in Aberdeen becomes a priority. That’s not

the job of procurement, surely? It is in some organisations.

Procurement can be attached to facilities management, there simply to sign off contracts and do a bit of negotiation. Or it can be an annexe to the finance department, expected to pitch in at year end. In a small organisation everyone is expected to help out where needed, but when 70% of revenue might be spent externally, these are not the best circumstances to guarantee value for money.

Route to successThere can be no discussion about procurement without talking about cost savings. Being

defined by something as narrow as savings means that teams are often bound to transactional ways of thinking and the better they perform here, the more they become siloed, stereotyped and, perhaps, disregarded. This paradigm forces the savvy procurement chief to orchestrate change that can simultaneously deliver to expectations, but also demonstrate potential and open internal conversations that touch on value, the kind recognised by finance, treasury and even shareholders.

In a sense there is no roadmap for that kind of journey, but for every team that attempts to break out of that well-worn view of the function there are key changes that need to happen, both in terms of capabilities, communications, attitude and priorities. Individuals that can make that happen are worth their weight in gold.

Steve HallEditor, Procurement Leaders© A Procurement Leaders publication in association with Expense Reduction Analysts All rights reserved.

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INSIGHT

Proving procurement can do more than order stationery requires more than a mindset change, writes Lindsay Clark

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Commercial charity Crime Reduction Initiatives, which provides services for drug users and the homeless, found itself in this position before central procurement manager Julian Thompson joined in 2011.

“We have a small team,” he says. “As I joined, procurement was very transactional and conducted by people called

regional procurement co-ordinators, but basically they were a facilities assistant who placed the occasional order. If you want to achieve what procurement can achieve in terms of financial savings, process improvement, reduction in total acquisition cost, robustness of supply chains, and so on, you need to invest in a

proper procurement function. If they pick up a phone call from somebody who is locked out, and have to call a locksmith, they are not going to be able to focus on realising those achievements.”

Thompson quickly set out to make the case to senior management for transforming procurement. Although the £12m-turnover organisation has

CASE STUDY: CRIME REDUCTION INITIATIVES

Crime Reduction Initiatives is a social care and health charity working with individuals, families and communities across England and Wales affected by drugs, alcohol, crime, homelessness, domestic abuse and antisocial behaviour.

With £12m in turnover and locations all over the UK, the organisation had struggled to develop the procurement function, says Julian Thompson, central procurement manager.

“There was that perception that it was a support service and was a hindrance as opposed to something which could add value and support organisational objectives,” he said.

When he joined the organisation in 2011, Thompson says he found it difficult to change that mindset: “The first step was to win hearts and minds. We looked at the organisation’s wider objectives, the plan of where the business wanted to be in five years and we created a procurement strategy to support that evolution.”

This involved talking with key stakeholders and getting the

strategy signed off by the board. The strategy was designed to demonstrate how procurement could add value and reduce risk, as well as cut costs, Thompson says.

Meanwhile, there was a restructure of the procurement

function, taking it out of the regional offices where it sat with facilities management. Although procurement was made up of only three people, being centrally-led it was able to make a difference. It was tasked with creating a national contract for needles and syringes,

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a procurement team of just three, it now contracts nationally and has been able to achieve significant savings on one Æ

contract worth close to £1m, as well as being able to extract greater value from the supplier (see case study).

Thompson’s experience is shared by many procurement leaders, particularly in smaller organisations. A survey of 100 finance directors in the UK and Ireland, with revenues of between £10m and £500m, found that four out of five organisations do not have a specialist procurement team or individual, while more than one in three leaves responsibilities to individual stakeholder departments. The study, commissioned by procurement consultancy firm ERA, also shows that 52% of finance directors feel employees suffer from a lack of time, experience and energy when it  comes to securing the best  deals. Other research also shows that 50% of companies who find better deals fail to realise the savings due to a lack of supplier management or unhealthy buying habits by operational staff.

Buyers who are aspiring to achieve more face the challenge of getting broader recognition from senior management.

Small organisationsThe first step, says Simon King, director of procurement at food manufacturer Dairy Crest, is to recognise that small organisations can achieve the same sort of procurement transformation global businesses have undergone over the past ten or 15 years.

“Dairy Crest is not a large global organisation like HSBC or Ford. We have a £1.4bn turnover, but we are UK-focused and have a relatively small procurement team of less than 20 people,” he says.

To evaluate their own

to support its drug users’ needle exchange. Supply had been fragmented, with little consistency of product or price.

By putting a single contract in place the procurement team was able to save £300,000 on an £800,000 contract. Thompson

says: “By doing that we were able to ensure consistency and robustness of supply as well as reduce risk by ensuring that only accredited products were used across the organisation.”

Because of the size of the contract on offer, the tender process also built in criteria around adding value, which would form 10% of the evaluation. In this way, the winning supplier supported conferences and publicity material for the charity. It also helped boost procurement’s profile. “There has been recognition over the last 18 months that procurement can deliver some of the more strategic benefits to the organisation,” Thompson says.

With this new status, the team is working on a national contract for agency workers, including medical professionals, to improve contract governance. “As the organisation has grown, compliance and risk avoidance has become more high profile. Now it is not just about the bottom-line cost,” Thompson says.

“To evaluate their own procurement organisation, buyers need to make sure they get out of the office.”

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procurement organisation, buyers need to make sure they get out of the office and network with their peers to see how they have tackled similar challenges, King says. “Attend events to understand  the approach other organisations take. Use one-to-one benchmarking if you can and seek out professional networks. That can help you see where the gaps might be in your working.

“No one organisation has the   perfect answer for you, but   pick the best bits from a number of organisations that might be relevant to your business,” he adds.

There are also internal signals that procurement needs to do more. When the team is brought in at the latter stages of a buying decision, and is expected to get a better price, that is a bad sign, King says. “If the procurement team is consistently being asked to get involved only at the last minute – so is not involved in specifying the design or market

analysis and just asked to negotiate a better deal with the supplier – that would suggest they are not unlocking value in the wider sense as you expect from a modern, fully-effective procurement function,” he says.

Paramount in gaining the ear of senior management is analysing the business strategy and translating it into objectives

“You have to understand the business priorities and regularly talk to show you are supporting them.”

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Get help where you need it. It may be easier to network around a smaller company and understand the internal drivers, but supply markets for categories such as IT are huge. A little expert advice can go a long way.

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Become experts in business strategy. Study annual reports, interview the CEO and develop your knowledge of business values. Get to grips

with what is driving teams of stakeholders. What are they being measured on, and what are the challenges?

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procurement can achieve. “You have to understand the business priorities and regularly talk to show you are supporting them,” says King.

Procurement professionals hoping to lead the organisation’s transformation also need to consider how it is structured. King says: “In organisational design you should align your structure to stakeholders. You have to have people responsible for particular areas so they can work with those stakeholders and build a good relationship.”

Once you have that alignment you can begin to look at what stakeholders actually need, not just what they think procurement can do.

“That means talking about more than just the price of a product or service. It could be that the challenges they currently have are on service performance of the supplier, for example,” King says.

Buying decisionsIf strong relations with stakeholders are in place, procurement professionals should be able to challenge them on buying decisions. Stakeholders will say what they think they need, but procurement needs to work with stakeholders to facilitate an analysis of what the business actually requires.

King says: “When it is the company’s money at stake there is a role to play in offering a constructive challenge, which we should not shy away from.

“This is to ask: Is that product or service going to deliver in terms of genuine value?

“We are only able to do that  if  we understand what people’s needs and Æ

FIVE POINTS FOR PROCUREMENT TRANSFORMATION

Get a comparison with other procurement functions through formal benchmarking or informal networking. Get ideas form those who have tackled the same challenges.

Align to the organisational structure. It is no good if the way the team is built bears no resemblance to the outside business.

Get a comparison with other procurement functions through formal benchmarking or informal networking. Get ideas from those who have tackled the same challenges.

1Align to the organisational structure. It is no good if the way the team is built bears no resemblance to the outside business.

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requirements are, which involves strong  relationships, and good questioning.”

To gain influence in the   business procurement professionals need to guide the conversation away from cost and price towards an understanding of all the business priorities affecting stakeholders, which

will vary between business functions, says John Walker, global CPO at Bühler, a specialist manufacturer of equipment for food processing.

“Cutting cost happens to be the easiest thing to measure but for colleagues who have to deal with suppliers, seldom is cost the number-one priority. The trick for

procurement is to figure out what those priorities are and work with them,” Walker says.

Internal stakeholders are not always aware of what procurement can offer in influencing performance outside of cost and price, he says.

“You have to align the objectives. If procurement says: I

Swiss firm Bühler makes equipment and provides services to support food manufacturers around the world. With orders of approximately $2.6bn, it produces machines to help make pasta, cereals and baking products, to name but a few. But the breadth of its offering creates a challenge for the business. How does it cut the time it takes to get products to customers with such a complex supply chain?

Lead timesProcurement could see these lead times were a top priority for the business, rather than costs per se. A barrier to reducing lead time was complexity in the range of components ordered, says John Walker, global CPO.

“We have components that we procure and we have hundreds of variances of them – it makes it difficult for the supplier and makes it difficult for us,” he says.

“Everything we build has an electric motor in it, sometimes two, sometimes four, sometimes many more. We had 4,000 different types of motor we were

CASE STUDY: BÜHLER

buying. By having hundreds of varieties, we had to have a large inventory and the lead times were

long. They were custom designed and ordered.”

Procurement made its impact not so much on price but by reducing complexity from 4,000 to about 400 types of motor to reduce the lead time and improve

quality, says Walker. Procurement professionals who want to replicate this sort of success need

to be careful how they open the conversation with stakeholders and must avoid saying which suppliers or components they can and cannot use.

It helps to be able to speak from ‘high altitude’ to senior

“Everything we build has an electric motor in it, sometimes two, sometimes four, sometimes many more.”

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want to save 10%, and the development engineer says: I want to launch my product at twice the speed and with less complexity, those two goals are only ever going to intersect by chance,” Walker adds.

Procurement needs to understand what those other priorities are for the business Æ

and show it can play a role in influencing performances towards them. Walker says: “That could be a reduction of lead time. There are industries like ours where the difference between delivering the machine in ten days and delivering it in 60 days is very large in terms of business value, and more important than saving even 10%. If you can cut that resupply time by a factor of five or ten that can be more interesting than anything else and that can be dealt with by supply management.

“Procurement is responsible for finding out where those pain

points are and benefiting the business on the broader scale.”

Walker and his team have achieved better lead times by reducing the complexity and variety of components bought for systems the company produces. By slashing the number of different electric motors bought the business has been able to achieve a significant reduction in  lead times, he says (see case study).

Despite the benefits procurement can offer wider business objectives, the function is still underrepresented in smaller businesses.

Dairy Crest’s King says that in smaller businesses the job of understanding business priorities and aligning to them can be easier than in large companies, because there is not the huge

geography or large number of stakeholders.

“Lots of those complexities don’t exist in smaller businesses. If you can get really good alignment with your stakeholders and demonstrate that you can add value across all areas that are important, whether that is quality, sustainability or cost, then you can really get engaged early on.

“If you understand what business priorities are and regularly talk to those you are supporting then you can do [transformation of procurement] in any business.”

But procurement in smaller businesses needs to develop the mindset of the function in large organisations to take on this broader role, he says. This requires leadership from the top of the procurement team to help its members see their jobs in a new light.

“You need a leader to be very clear about the vision and mission of procurement. To say: This is what procurement in my organisation should look like. It needs to be made very clear to the whole team what behaviour is expected and why,” he adds.

Support and trainingIt might need regular team sessions to see if procurement staff understand how they are progressing, what gaps they need to fill, and where support and

“Procurement is responsible for finding out where those pain points are and benefiting the business.”

managers, and offer a simple message about how, by lowering complexity and reducing lead times, the business can improve customer service.

“A custom motor has an eight-week lead time. If you use one off the shelf, that goes away, you can have it in five days. You can deliver products more quickly and win more business. We have to send a simple message. If procurement goes into a meeting with 70 slides, no one wants that,” Walker says.

Data analysisThen it helps to show stakeholders the data about the number of components they are buying. “You go through the data analysis and they are shocked. We show masses of inventory and say: Are you aware of the impact of this?” he adds.

Finally, it is not about telling designers what to buy, but ensuring they specify the performance parameters of components they seek. This way, procurement can work with suppliers to offer a number of options, while at the same time keeping complexity down.

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training might be needed. King says: “In most cases the desire is there. Some don’t want to change or do not have the capability, but the vast majority, given clarity, come on that journey over time.”

But smaller teams do face one problem compared with their larger counterparts. Getting in-depth knowledge of categories of spend may be more difficult as a smaller team can be asked to buy across a range of categories.

Large companies have the resources to develop in-depth knowledge of a particular category because of their sheer scale.

When the procurement department is smaller, each buyer may be in charge of the same level of spend, but they naturally have to reach across a broader range of categories.

King says: “You don’t have someone who is an out-and-out warehousing specialist who can have a robust and detailed conversation with the warehousing manager about exactly how you are going to structure your procurement, but

you can still have the challenging discussion on what you’re looking for, what the alternatives are and what the suppliers can do.”

Neil Copland, ERA director of operations in Ireland, sees this with many of the clients he works with. “Category expertise is more than just knowing who the players are in the market. It is understanding how that supply market works. What is its operating model? What is its profitability model? How does it source? How is technology impacting that market?” he says.

In some cases, if an individual

is managing a number of categories, which reach across office supplies and includes IT, it can lead to real disadvantages for the buyers. He says: “People think all you need to do is phone up a few people and get them to come in. If you do that, the sales

people from the suppliers will slaughter you. That’s what they’re good at doing.”

Although small procurement teams align themselves with the organisational structure and business strategy, they may need external help with deep category knowledge, he adds.

Back officeWhile procurement teams in smaller organisations might find themselves in the back office, there is no reason for them to stay there. They can influence buying right through the cycle if

they get wise to business priorities and show how they can help the business reach its goals in areas beyond price reduction. With the right help, they can transform this back-office function into one which leads from the front. n

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“Category expertise is more than just knowing who the players are.”

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