Should Procurement Just Get Out Of The Way?

I recently read an article whose author stated that procurement “should just get out of the way” of stakeholders.

This is a surprise from my perspective. Articles over the past few years, and my personal experience, have shown that procurement and stakeholders need to work closer together. This article seemed to recommend the opposite.

The Idea

It may seem that, too often, procurement gets in the way of work being completed.

Procurement should provide information to the stakeholders, and ensure the procurement process is as smooth as possible. The result of a sourcing event should allow the stakeholder who requires the service/material to get what they need when they need it.

In the most recent project I worked on for vehicle parts for the Transportation Department of the company I work for, it was the stakeholder who told us what they needed. Then, it was my team and I that sought out current and new suppliers, set-up supplier workshops, and worked with the stakeholder to craft a detailed scope of work.

With the award to the now strategic supplier (the supplier who was awarded the business had been one of ten suppliers previously used), the stakeholder is able to order what they need online through the supplier’s website.

But my team and I aren’t stepping away. We are tracking supplier performance against agreed upon key performance indicators (KPIs), dealing with stakeholder/supplier issues, and conducting semi-regular benchmarking of pricing on small selections of parts to keep the supplier honest and competitive.

The Risk

The risk is that when procurement “gets out of the way” spend returns to the unmanaged state it was before. Instead of a handful of strategic suppliers, stakeholders go to whomever they see fit. The synergies and savings created by procurement are lost.

You want to avoid this situation.

So, while procurement should streamline things for their stakeholders as much as possible, procurement should never just “get out of the way”.

 

Communicating Change

You’ve completed the sourcing event. The agreement is awarded. The supplier begins full implementation next Monday.

And then the storm hits.

The employees on the line are up in arms. No one told them things were changing, and unbeknownst to you entire processes and policies needs to be changed. Their supervisors aren’t happy either.

With resistance from below, you go to senior management for assistance. But they only had a high level view of your sourcing event and the change it would bring, and have difficulty providing assistance.

What happened?

When Change Begins

News about change, whether good or bad, is not like wine. It does not get better with age. From the very beginning of your sourcing event you must craft your communication letting those affected within the organization know what’s going on.

Early Stages

The idea phase is over, and the sourcing event is in full swing. Suppliers are being talked to, stakeholders are being consulted as to what they want. Here, too, communication of what is going on must go up, down, and across the organization to those affected. A simple update may suffice. “We met with X and Y Suppliers on these dates.” Maybe that’s enough to keep people informed that change is moving along – and coming their way.

During Change Design

The agreement has been awarded. Now you, your sourcing team, and the supplier are sitting down to hash out the key deliverables and milestones. Who is in that meeting? Are all those affected there? Who from the executive level has provided their guidance, or is in the meeting to match the supplier’s executive team? Has that executive been updated on what’s in the agreement, and the desired end state so they can support your vision?

Implementation

Before and during the implementation of the new supplier, communication is even more key. Daily or weekly updates with the supplier, the employees on the ground and their supervisors ensures progress is moving forward, and any problems are addressed immediately. The executive level will be wondering as to the progress of implementation, and if the savings and added value promised through the agreement will be realized.

Post-Implementation

This is your time toot your own horn. This is where you show the progress made, the savings and added value realized. Both quantitative and qualitative measures of success should be used in your communication through the organization.

But it’s not a time to sit on your laurels. This is where you engage the executive level, managers, supervisors, and even people on the line to reinforce the change. How many times has change come around, only to disappear and things go back to the way they were? Not only do you need to reiterate the story of the gains made for the organization, but you must gain buy-in from all levels to ensure compliance. When individuals decide not to comply, you must also gain the buy-in of their management to deal with them accordingly.

Craft Your Message

Throughout this process you must craft your message. You wouldn’t provide granular details of the change to senior management, nor would you want to give a strategic, 50,000ft view of the change to the line employees. Ensure your message gives the “Why?” and “What’s in it for me?” at the correct level of detail.

Conclusion

There have been dozens of books written on change management and communication. A lot of it’s the same information. Why do they continue to sell? Because people in organizations continue to fail at it. Keep to the principals above and you and your organization will be better prepared for the change your sourcing event brings.

Hemp in the supply chain

The 2018 Farm Bill was passed on December 11, 2018, and hemp was legalized after decades of prohibition under marijuana laws. It’s estimated that hemp could be a $20 billion industry by 2020.

States, such as Kansas, had already passed their own industrial hemp legislation. With country-wide legalization, the opportunities for hemp and hemp products are taking off.

CBD Oil

The first thing many people think of when they think of hemp is CBD oil. The benefits of CBD oil are well documented, from pain relief, to relief for people with epilepsy, and even helping the elderly with Alzheimer’s.

While CBD oil from marijuana has up to 20% THC, the psychoactive compound that gives people a high, hemp oil has only trace amounts of THC, too weak to be psychoactive and in many cases too low to show up on a drug screening.  People can get the health benefits of CBD oil without the prohibited drug.

Hempcrete

A fraction of the weight of concrete, hempcrete is quickly becoming widely used in construction. Though it can’t be used for foundations, hempcrete walls can reduce the weight of a building, while its insulating properties can keep buildings around 60 degrees Fahrenheit even in colder months. The reduced weight and reduced utility requirements can save both the builder and the tenant a lot of money.

Hemp Fiber

Hemp fiber can be used for clothing. Hemp clothing is more breathable and even anti-microbial. But it’s the cost that makes it attractive. Hemp fiber is cheaper to cultivate and harvest than cotton or wool, and cheaper to produce than synthetic fibers while also having the benefit of not having the negative byproducts of synthetics.

Nutrition

Hemp seeds are known to be an excellent source of nutrition. They are full of protein, unsaturated fats, fiber, and several vitamins and minerals. Since hemp is so easy to grow, it makes it a ready and prevalent food source in a market where meat prices can fluctuate.

Paper

Hemp can also be used to make paper. This isn’t just an argument over the environment and deforestation, it’s also a matter of economies of scale. 1 acre of hemp can produce as much paper as 4-10 acres of trees in a 20 year period and hemp only takes 4 months to grow while trees take decades. Hemp paper is also stronger than paper made from trees since it has higher cellulose content.

The Supply Chain

I’ve talked a lot about the benefits of hemp in general in this post. The question is: how does it benefit your supply chain?

In my opinion, the answer is clear.

  • Lower cost of growth, harvest, and production
  • Greater sustainability over a long period of time
  • Reduced weight of materials
    • Lower fuel costs in transportation
  • Reduced risk due to reliability of the crop
    • Can reduce risks of tariffs on some products from outside the U.S.

The Supply Chain Questions You Must Ask

With these benefits, you and your organization have to ask yourself some questions:

  • How can we integrate hemp into our offerings?
  • What suppliers do we pursue?
  • How do we get involved in the supply chain at the source – the farmer?
  • When and how do we push our suppliers to integrate hemp into their offerings?

The future is looking bright for hemp in the supply chain.




 

In a tight labor market do you try to hire or automate?

Today (12/20/2018) the Omaha World Herald released an article on the labor shortage in Nebraska. This is in spite the population of Nebraska creeping up to 2 million people, and Union Pacific layoffs releasing workers back into the available workforce pool.

Nebraska isn’t the only place that has a labor shortage. The United States as a whole has a shortage of qualified workers in both white and blue collar jobs.

This may not sound like a supply chain or procurement problem, but it is.

Do you try to hire?

While human resources/human capital may be the lead on hiring, procurement professionals are sitting alongside them. Generally, it’s procurement professionals that work agreements with traditional hiring or head hunting firms.

In the 21st century the procurement professional can also reach out to other sources of hiring. Variable or contingent workforce companies and sites can fill a need that standard hiring can’t. Your organization may not get a permanent hire, but they may get the person or people they need for that important project.

However, some companies try to keep jobs within the states they are located in. Yes, they may be able to hire a contingent worker or two from Canada or South Korea, but those dollars are leaving the state, and perhaps the U.S.

Do you automate?

If your organization can’t hire more people, perhaps it’s time to automate more processes. AI and blockchain are the touted technologies that will change tomorrow, but many organizations, especially medium and small businesses, don’t have the money for that now, and may not have the money for that even in ten years.

Your organization has to ask itself what processes or reports can be automated with programs, either purchased or developed in-house. If in manufacturing or warehousing what machines or robots can be built or purchased – and can you afford – so your organization doesn’t have to rely on as many human workers?

Whether a program or a machine, procurement professionals will be there to lead the sourcing.

Conclusion

I didn’t address outsourcing here. Many companies already do so, and it is a consideration your organization may have to make. But if the focus is on keeping revenue and tax dollars in the state your organization is located in, and in the U.S., outsourcing may not be an option for you.

The same goes for variable/contingent workforce solutions. Your organization may put a requirement for workers located in the U.S. only. How will that effect the hiring process, and the project(s) those personnel are being hired for?

You will have to look at the total cost of ownership of the hiring or automation solution your organization is considering.

Will Amazon Be Your Sole Source Supplier?

(Image © Amazon Logistics)

The recent trend in procurement and supply chain is consolidating suppliers as much as possible. This gains the organization volume discounts for materials and services, increases the organization’s negotiating power due to the amount of spend, and it removes the administrative burden of managing and communicating. While not all companies can sole source with a single supplier, many work down to two or three in a range of categories.

But have you considered utilizing Amazon as your sole source supplier?

On October 23rd, Amazon announced new Business Prime Benefits for organizations in the U.S., Germany, and Japan. These new benefits include:

  • Spend Visibility
  • Guided Buying
  • Amazon Business American Express Card
  • Extended Terms for Pay by Invoice
  • Upgraded Shipping Options

Where many business may buy from a major distributor, Amazon is set to be that distributor and compete with companies like Genuine Parts Company (think NAPA Auto Parts) and Grainger. Customers don’t have to deal with a dozen or more different suppliers. They find what they need on and buy through Amazon, and can even set policies and limits for their organization’s buyers.

Amazon is looking to make it as easy and transparent as possible. From the Amazon Business blog:

“Amazon Business Spend Visibility allowed me to perform several functions that would otherwise have been manually performed and incredibly time consuming,” said Chris Vanderbilt, Procurement Director at Alterra Mountain Company, who owns and operates more than a dozen ski resorts across North America. For example, to identify purchases out of compliance, Chris would have to download a transaction list from their procurement card provider, request info from specific users, and spot check purchases. Now, using Amazon Business Spend Visibility, he can quickly run a category spend analysis and identify non-compliant purchases across multiple companies and users.

You can learn more about Amazon Business Prime here.

Many people know about all the different markets Amazon has entered, such as publishing, audiobooks, and cloud servers. But now Amazon isn’t just working to compete with bookstores or MRO distributors, they are also moving to compete with the likes of FedEx and UPS.

In 2016 it was reported that Amazon was quietly building its own shipping company. That escalated this year with Amazon’s announcement that it would help entrepreneurs start their own package shipping companies. For about $10,000 (and some vetting) you can start your own Amazon package delivery company with vehicles and uniforms to match, as well as Amazon technology to track your workforce and deliveries.

This move is two-fold: Amazon now has full control of its small parcel shipping, while putting it in direct competition with shipping giants FedEx and UPS.

What are the implications of all of this? Market shake-ups in MRO/tools/parts and parcel shipping. Suppliers on Amazon will be driven to be more price conscious in order for Amazon Business customers to choose their product and price over the competitor, driving down prices (unless a supplier markets more on quality).

And could it mean that one day your business or organization may use Amazon as a sole source supplier?



Procurement New Year’s Resolutions

It’s the New Year, and almost everyone has made a New Year’s Resolution; lose weight, get back to the gym, learn to play the guitar, learn a new language, talk to that girl, etc.

The problem is many of these resolutions don’t survive much past March, or even January for that matter.

In order for these resolutions to stick, we must have a plan, and make incremental changes that stick and become part of our habits.

While many of us, myself included, are working toward self-improvement goals (my fitness goals are year-round, not just tied to New Years), we should also be working on goals for our Procurement processes.

What New Year’s Procurement Resolutions should we make? Herein I detail just a few.

Communicate a Unified Vision and Gain Senior Management Support

You want to make changes the procurement area of your organization. But every time you present something and implement it no one listens and it falls through. What gives?

First, make sure the vision you have created is clearly and effectively communicated. Maybe the message is getting lost in translation to the rest of your organization. You could be using too much technical jargon, and the people you are trying to get on board are zoned out. Before you roll out changes make sure you have communicated those changes well.

Then, get senior management on board. Without the support of the right VPs and Directors your plans will be dead on arrival. Try all you might, if your senior management doesn’t support you, no one will. Communicate your vision to the SM’s of your organization, show them the data of savings and value added, and sell them on the changes you are proposing. With their backing, your procurement change initiative will go further.

Standardize Processes

Is everyone in your procurement group doing things the same way? Are purchase orders and contracts all processed with the same steps each time? Or, like many organizations, is everyone doing their own thing?

In the New Year, dedicate your organization to doing things the same way each time. Standardizing processes, as well as making checklists to follow, ensure that everything is completed right the first time in your organization’s ERP system. That way no pertinent information is left out and rework is reduced. Rework costs companies hundreds of thousands, or even millions of dollars each year. Preventing this rework with standardized processes and checks can significantly impact your organization’s bottom line.

Get Involved Earlier

Best case scenario you’re already part of your stakeholder’s annual budgetary meetings.

But what if you’re not?

In the New Year, get involved immediately. As a procurement agent in your organization you should be involved at the moment of ideation – the moment your internal customer comes up with the idea of a need. If you are involved the moment the the internal customer is ready to send out a bid package, you’re already too late.

Regular meetings with your internal customer can alleviate a lot of this and ensure that the moment a need arises, you’re immediately involved in the process.

Push Back!

There’s a right way and a wrong way in your organization.

Your internal customer is doing things the wrong way; providing incomplete scopes of work, not involving you early enough, talking to suppliers without procurement’s involvement, coaching their favorite supplier throughout the bid process.

The answer: push back.

The saying goes: the standard you walk past is the standard you accept.

The moment your internal customer does things the wrong way, you must push back. If you haven’t in the past, start now. Proper processes, and doing things the right way – and sometimes the legal way – is paramount to keeping your organization running smoothly and remaining in business.

Does the internal customer push back when you push back? Get support from your management and senior management. (See the first paragraph in this post.)

Prepare Better For Negotiations

A few notes and an “idea” of where you want to go no longer cuts it when walking into negotiations with suppliers.

What’s your target outcome for negotiations?

What’s your optimistic position (best case scenario)?

What’s your pessimistic position (worst case scenario)?

What’s your walk away criteria?

What’s you’re best alternative to a negotiated agreement (BATNA)?

How much time have you and your team dedicated to practice negotiations?

In the new year, commit yourself to improving your negotiations preparations.

Reinforce Regularly

All of these practices are great – unless your organization stops doing them. Have you or someone in your organization improved a process or changed the way you were doing things – only to have people in your organization slip back to the old, inefficient, ineffective way to doing things?

Let’s face it, generally speaking human beings hate change. It’s wired into our DNA after hundreds of thousands of years of surviving. In the modern age this translates into resisting change in the workplace where the worst threat may be a spreadsheet takes twenty seconds to load.

If you want better sourcing processes to take and hold in your organization, you and your senior management have to reiterate and reinforce these new habits over and over again. Sometimes you’ll feel sick of saying it, as you’ll be sure your colleagues will be sick of hearing it.

But reinforcing these new processes through training, oversight, and tying them to the key accountabilities in personnel annual reviews will make sure they stick for years, and your organization will continue to realize the external and internal cost savings and added value they provide.

Conclusion

I hope these few Procurement New Year’s Resolutions start helping you and your organization start on the right track, or get back on the right track, to realizing good change in your procurement area and its processes.

And if you need more help, Meybest Procurement Solutions is available with training and consultation to take your organization tot he next level.

Happy New Year!

Should You Should-Cost? (The Answer is Yes)

Your supplier says they’re giving you the best deal. They promise they are saving you tons of money compared to their competitors.

But something in the back of your head tells you otherwise.

The supplier didn’t budge in negotiations during your last RFP. Nothing was gained, and the supplier said they actually had to raise prices, regardless of your business with them. They were the lower bid compared to the other bidders, but you still think that you’re not getting the best pricing.

Enter the Should-Cost Analysis

A should-cost analysis is a detailed breakdown of what a material or service should cost compared to what a supplier wants to charge for it.

Once complete, companies can compare their analysis against the bids of potential suppliers, or the pricing of a current supplier.

While there are some programs out there that enable companies to do this, a spreadsheet can generally fill this need.

Dig Into the Details

Should-costing is an in-depth process, and can take quite some time.

We will use a hammer as an example.

In order to should-cost the hammer, you will need to find out what kind of metal is used to make the hammer head. By weighing it, you can determine how much of that metal is used. Is there a rubber handle? Strip the rubber off and weigh it to determine how much rubber there is.

With these weights you can now search online for the current price of the steel and rubber, and determine the cost of the amount of material used.

Was the hammer made in the U.S.? Or China? Include the base salaries of workers in the country the product is made.

How long does it take to make one hammer? How many people are on the assembly line for the hammer? Machinery is most likely used in the process, too. Using an internet search, you can find videos on how things are made to give you a general idea of cycle times and personnel on the production line. (This “How It’s Made” video is perfect for helping you should-cost hammers: https://youtu.be/7xHVyT5oEL4)

Along with this information, corporate overhead, shipping, and any warranties will need to be factored into your should-cost analysis. Many times you can ask the supplier – in supplier workshops or in the RFP itself – the percentage of overhead they include. Or, for publicly traded companies, they include this in their annual report.

 

Putting It All Together

Once all of your information is gathered, organize it and add it up in a logical format.

How does your should-cost analysis match the supplier’s pricing? Is the supplier’s margin close, and they actually are giving you the best pricing? Or is there a large delta that you need to discuss with your supplier?

This information is excellent leverage during negotiations. Calling out suppliers on too-high pricing gives your organization a major advantage.

Note: Do not show the suppliers your should-cost analysis! Giving them an idea of the difference in terms of a percentage is enough. If they ask for it – tough! They came up with their pricing, they need to explain it to you.

To give you an idea what this looks like, here is a rough example of a should-cost analysis for a mini-excavator that I did. Again this is very rough, and doesn’t include shipping and warranty data.

Should-Cost 2

Conclusion

A should-cost analysis can be time consuming, but it is a valuable tool to your organization. With a solid should-cost analysis you and your team can gain a great deal of leverage over the suppliers you negotiation with.

Remember, this can be done with services, too. And, the more detailed the material or service analyzed, the more time it will take. But it will be time well spent!

Managing Change in Procurement

These days it seems every organization is going through some sort of change. Companies are cutting levels of management, cutting headcount, adding headcount, reorganizing departments, changing processes, adding paperwork, reducing paperwork, and so on. Such changes can be small or large, but all come with some friction from all affected.

As things change, people within the company will begin to push back. It’s human nature. Change is hard for most human beings. Many times there are personnel, long in the tooth with the company, that have seen such “change initiatives” before, and are just waiting for this latest iteration to blow over before everything goes back to normal.

Change in procurement is no exception. As a company’s procurement organization and the way it does business changes, those within the procurement organization and people within the rest of the company can become frustrated with shifts in everything from new faces to new ways of doing things. It’s up to that Procurement or Supply Chain manager or director, and their team, to navigate these turbulent waters.

Organization

Many times the first thing to change is the procurement organization (usually interchangeable with the change in processes, talked about below). New faces from different business units or outside the organization show up with new titles and responsibilities. The scope of the work they are responsible for changes, and suddenly people within the company have no idea who to call to handle their material or service needs.

Communication is key when this occurs, and over communication is best. It’s important for the procurement organization to openly publish contact information, job titles and a basic description of their duties.

Procurement personnel should have regular meetings with their stakeholders, two or three times a week if need be at the beginning. Of course, face to face meetings are preferable if possible. Technology has made it possible for quasi-face-to-face meetings when being there physically isn’t possible or economical, though.

The Procurement director or manager must ensure that their procurement organization’s strategy and goals are clearly communicated to the organization, and that senior management is on board with their strategy, goals, and the changes occurring.

Processes

Change in processes goes hand-in-hand with change in organization. No longer can a requester create a request and approve it themselves. Now they are required to go up through their management chain. Instead of a crew leader or project manager overseeing a RFP and handling negotiations, the Procurement Organization will take care of all of that.

Again, communication here is key. The Procurement Organization must clearly lay out who has responsibility for which part of the procurement process, and explain why.

For example: “It’s important for the procurement specialist to handle the request for proposal and be the single point of contact for supplier questions so that all suppliers receive the same information. It’s important for the procurement specialist to be the single point of contact for the bids themselves so that they can be compiled and reviewed fairly and ethically, and we can make sure the company is getting the best total cost for what we’re sourcing. More money saved and value added to the organization ensures we’re competitive and people can keep their jobs.”

Explaining the reasons behind theses process changes is just one step.

The next step is showing the value of these changes. The Procurement Organization must balance quick wins with longer terms wins to show their internal customers the value of these process changes. If there’s one thing I’ve seen that brings a skeptical internal customer on board to a new procurement process, it’s dollars saved that directly impact their budget, both immediately and for years to come.

Suppliers

In every company there is a supplier that everyone loves. The sales rep stops in each month to say hi, asking about family members and the golf game coming up that weekend.

With change in procurement organization and processes comes change in suppliers.

Everyone’s favorite supplier is not the best total cost for the organization. After a multi-million dollar RFP, the business was awarded to some supplier that no one has ever heard of. How could the procurement organization do this? The favorite supplier took such good care of the company! This can be especially hard if changing suppliers means changing out a fleet of vehicles, or changing even more processes.

Did the favored supplier actually take care of the company, though?

Once more, communication is the key piece in changing suppliers. The procurement organization must mine historical data and forecasted spend from the company’s systems to clearly communicate and demonstrate the savings and value adds they are receiving by using the new supplier. Showing the savings now, and how much the organization will save in the future quiets many critics.

For those critics that remain, it will be communication of the new supplier’s processes, as well as communication with the supplier of the customer’s requirements. Again, this may be cause for frequent meetings between the procurement organization, the new supplier, and the internal customer to ensure implementation is going smoothly and any issues are hashed out immediately. If the procurement organization can accomplish this, they will most likely win over the last hold outs.

Conclusion

Communication is the corner stone of any change initiative, and changes in a company’s procurement organization, processes, and the suppliers are no exception. Senior management buy-in, and short- and long-term wins are also key, and the procurement director/manager must strive to achieve them all.

Not everyone in the organization will be won over. There are always hold outs. But if the procurement organization does their job and communicates with senior management and other departments in their company, they can work through these issues.

In closing, the final piece of achieving lasting change is to have a plan to continually reinforce that change. Having a five and ten year plan to reinforce and continually improve the changes in procurement ensure those changes remain, and that any gains made aren’t lost two or three years after the changes have been implemented.

Standardization In Processes to Reduce Costs

Go to any department in your organization. How consistent are the ways people are doing things? How consistent are the results in that department? Is everyone on the same page, each person executing their job by a set of processes? Or is everyone doing their job their own way?

If your company is like the company I work for, standardized processes are a near-term goal – or in some cases a far off dream. Each person in a department has their own way to do work, and feels their way is best. Their way has worked thus far, why change it?

Standardizing processes is key to streamlining a department, and in procurement it can mean money saved that directly affects the bottom line.

Purchase Orders

Purchase orders are a primary issue when working to standardize. Some procurement agents process purchase orders one way, some another way. Some buyers have a checklist they follow each time, while other buyers just run the PO through the ERP system and send it to the supplier without another thought.

Standardizing purchase order processing should include, at minimum, the following:

  • Check pricing against negotiated numbers.
  • Consolidate duplicate line items.
  • Confirm material need dates.
  • Confirm shipping method and carrier.
  • Receive order acknowledgement from the supplier.
  • Update expected/promised delivery date from supplier in the ERP, and notify the stakeholder.

Just these simple standardized steps can ensure consistent outcomes each time. Consistent outcomes mean dollars saved internally in time worked on purchase orders and externally in keeping supplier pricing of materials and freight consistent with pre-negotiated prices.

Contracts

Contracts may be more complex than purchase orders, but standardization can be achieved in the process. The procurement specialists that are responsible for RFPs and contracts should have a checklist of everything they need to do, from the moment they receive the RFP/contract from their stakeholder, up to award. This checklist may even include contract management.

Templates are another way to standardize RFPs and contracts. While stakeholder specifications and requirements may differ, the organization should have a single template for procurement specialists to follow with standard information that each RFP and contract must include, such as RFP timeline, milestones, and evaluation criteria. The organization may have two or three checklists and templates for different RFP/contract situations, but each should follow a standardized, enforced process.

Conclusion

Standardization has many benefits, and in an organization’s procurement processes it translates into savings that directly affect the bottom line.

In fact, the German Institute for Standardization, DIN, recently published a report on how standardization positively effects companies. In the report, they found that not only did standardization give companies competitive advantages, but also lowered transaction costs and had positive effects on the buying power of the companies surveyed.

Now is the time to begin process standardization in your procurement organization.

How Strategic Sourcing Can Improve Your Organization’s Processes

Originally posted on my other blog, The Red Renegade.

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Your organization is working to improve its sourcing processes and strategy. Like areas of spend have been grouped together to determine what the organization spends annually. The department or division responsible for sourcing has identified areas of spend where savings can be realized.

But, as the organization delves deeper, they find that reducing outside drivers of cost isn’t the only hurdle they face.

There are materials and services within the organization that people have been dependent on for years, perhaps decades. Leaning these materials and services, or removing them altogether, will be a major culture shock. Senior management is even wary of cutting off these materials and services.

Senior management wants to save money, but the sourcing group knows that changing how materials and services are sourced, what will be sourced, and when will have a major impact on the organization’s processes as well as its budget.

Sourcing the material and/or service is just one part of the larger sourcing strategy. A lot of work goes into transforming the rest of the organization and how it does business in order for the wins in sourcing to have their full effect – one more part of total cost ownership. Process improvement in other parts of the organization are just as important as improvements in the sourcing function itself.

Total Cost Ownership

As discussed in a previous blog post, Total Cost of Ownership is everything that goes into before, during, and after the sourcing of a material and/or service.

Generally speaking, this includes administrative processing costs, technology costs, overhead, freight, the cost of lead times, if items are damaged, and rework that needs to be done.

Rarely do organizations look at total cost of ownership in terms of what their own organization is doing.

Does each project manager or department use the freight carrier they like the best?

Is there a service the company uses, but could be eliminated if project managers were held to better standards of planning?

Do employees make parts runs because favored suppliers “don’t deliver”?

It’s internal processes like these that need to be looked at in tandem with the improvement of sourcing the material(s) and/or service(s) and organization buys. They are as much a part of Total Cost Ownership as overhead or lead times on materials.

How so?

Let’s use an example from my experience.

The company I work for uses a freight service that only delivers between facilities in my company in the city we’re in. This freight service costs about $300,000 per year for them to move material from one facility to the other. We love this external freight service so much, their drivers park their trucks at our facilities.

Why do we use them?

Because sometimes project managers cut work orders associated with one facility, only to draw the material out of another. So materials needs to be shuttled around to ensure the proper materials are in the proper place at the proper time.

We also junk out some of our larger equipment, and this service transports the junked out equipment (they’re rather large) to our central processing facility here in town.

On the face of it, this is $300,000 expended by my company per year.

Immediately some will note that, if PM’s were held to a standard, and their work orders assigned to the correct facility, this would eliminate the need for this service. And can’t we use internal personnel (we have personnel qualified) to load the equipment and drive it to the central processing facility?

But it goes deeper than that. PM’s not assigning work orders to the right facility forces them to draw from that facility, which causes work in the warehouse, and then those materials aren’t there for jobs that are properly assigned to that facility, creating wait times as items are shuffled between facilities. Sometimes its time sensitive jobs that are forced to wait as the warehouses figure out where material went and what needs to be brought in from other warehouses. Sometimes people get lazy, and instead they just put in an order to have it bought from the supplier, costing the District even more.

So it’s not costing the company I work for $300,000. It’s costing them hundreds of thousands, or perhaps even millions, in additional man hours, rework, opportunity cost of inventory, and delays on projects.

Why do we still use this “shuttle” service then? Because we’ve had them for almost twenty years. Because no one has pushed back on PMs and other internal business partners to assign work orders to the correct facility. Because our warehouse personnel are doing the best they can within this system and the shuttle service is a Band-Aid that people have become comfortable with.

In this case, it’s not just a process – it’s a part of the culture.

Where to Begin

So where does a sourcing professional begin?

Start with the sourcing strategy.

The sourcing group has identified a need, and then they go and gather their facts. But they don’t just gather the facts on the surface. They have to dig deeper.

  • What are like materials/services that can be grouped with the one being looked at?
  • What vendor(s) provide this material/service and those grouped with it?
  • What internal stakeholders use these?
  • Why are they using them?
  • Why are they using them the way they are?
  • Are they still needed?
  • What would need to be done to consolidate or remove materials/services?
  • If this is done, how will it affect the processes and procedures of the different divisions and departments of the company?

These are just some of the questions that must be asked to challenge the status quo, especially if that status quo is costing the company substantial amounts of money.

And it has to be the group responsible for sourcing in the organization that must do this.

While part of sourcing strategy is definitely cost savings and value adds, it’s also process improvement around what is being sourced, and how it will affect the organization.

I caveat this with the organization should not mold itself around its sourcing department. The organization should mold itself around its overall strategy, and the sourcing strategy should support this. But if there are procedures (low level/tactical) changed by sourcing that will help the company achieve its goals, then these should be pursued.

Buy-In

As the sourcing organization moves to change the processes – and perhaps even some of the culture – of the organization, they cannot operate in a vacuum.

Any change initiative needs a guiding coalition, preferably upper management, and buy-in from managers at all levels. It will be up to the Director/Division Manager of the sourcing organization in the company to win that buy-in, and to communicate with upper management for their support.

This isn’t unique to sourcing. Any change initiative requires this. I would argue that sourcing needs it more since most people view sourcing or supply chain management generally as order takers, and resistance to change coming from this area may be greater.

Conclusion

The processes surrounding and effected by sourcing strategies within the organization for different areas of spend are just as much a part of total cost ownership as external factors. Sourcing professionals must take this into account when sourcing materials and services from a strategic level. Some organizations call these individuals Category Managers, and category management is a discipline all of its own with that broad focus. It’s up to the organization to determine how they will conduct their strategic sourcing, and they must do so with an eye to internal process improvement.