Sat, Aug

Spend, spend, spend

Is your procurement practice what it should be? Walter Hale points out ways to improve your purchasing strategy.

Many PSPs were founded by street traders who made good, who instinctively knew how to buy and sell. Those skills are still important but as commerce has become more complex and fast moving, with cost bases and cashflow becoming more important, the business of buying - procurement, to use a posh term - is no longer as straightforward. Even in smaller companies, the stereotypical street trader will no longer be in charge of every aspect of buying. Here are a few tips to help you make sure you’re not wasting money or hurting performance.

1. Softly, softly

Computers don’t buy things, people do. Technology, strategies and Powerpoint presentations all play a part but ultimately a person actually does the buying. Yet too many businesses don’t invest in the people who have such a direct influence on their cost base.

The key here isn’t just training them to do the obvious back office stuff, like processing, but to develop the soft skills they need to work more closely with suppliers (negotiating, listening to and collaborating with them) and to influence colleagues. They might, for example, be able to suggest savings, efficiencies, processes that could make a difference to your bottom line, but do you encourage them to speak up? Many people in procurement believe they are undervalued and misunderstood and this mindset does not encourage them to speak out. Yet they, more than anyone, know what’s really going on in the business. For example, they can tell you how much value you really added to that job - which may differ from the value you thought you added.

2. Cost isn’t everything

The traditional view of procurement as a function is that it buys x number of widgets for y per cent less than it did last year. Yet as Sisi Osage, author of ‘Procurement Mojo’ (Management Books, 2000), says: “Cost is important but value is king and value isn’t just about financial benefits.” In the wider context of the business, buying cheap can be more expensive – especially if it interrupts production flow. Don’t take a narrow view of cost on a transactional basis and question whether the cost savings that look so tempting will actually be realised.

3. Don’t be a dedicated follower of fashion

There are many best practices that are guaranteed to transform your procurement function overnight. Don’t be fooled. Few of these innovations stand the test of time. In many companies, the secret of successful procurement is underlying effectiveness. It isn’t glamorous but it’s essential. As Osage says, without that foundation, “companies will discover that you can’t hold water in a sieve.”

This doesn’t mean that companies should just do what they’ve always done. Technology is changing so fast that businesses need to keep abreast of its potential to make procurement more effective, but they should resist the opportunity to slavishly follow the latest fad.

4. There’s life after the contract is done

Old school procurement was all about the deal. Once that was sorted, there was a natural temptation to sit back and assume the job was done. In reality, the job has only just begun. You still have to manage your supply chain robustly and efficiently, recognise the risks that may threaten that and, most crucially, track the process to ensure that you’re getting the return on investment you forecast – or the savings you expected. So, for example, if you bought a press on the grounds that it was 25% faster than the previous machine and you could increase your sales volumes accordingly, you need to know if that extra capacity doesn’t quite materialise for some reason.

5 Watch out for maverick spend

Traditionalists would argue: “Do we really need all this paperwork? What’s wrong with me ringing my mate at the supplier and placing an order?” If everyone takes that approach, how do you know how much you’re spending – or, for that matter, how much you’re saving? Which probably means you’re not saving as much as you’d like to think.

People like buying stuff. ‘Retail therapy’ is not a joke - it’s real. Neuroscience tells us that shopping gives us a high because it encourages the release of dopamine. Some of that pleasure remains even if you’re at work, buying some notebooks or fancy software. Doing deals makes us feel powerful and important. So we are virtually hard-wired to go off piste when it comes to buying goods and materials for the business. The difficulty for procurement – but also for senior management who need a clear picture of what is really going on in the business – is how do you manage this?

The first thing is that procurement needs to do its job better. If the systems required to initiate a purchase are too cumbersome, complicated or time-consuming, people will find a workaround. Ideally the purchasing process should be as simple as using a smartphone app. Most systems aren’t, but that is the direction in which they are heading.

It doesn’t help that procurement and purchasing managers, like IT and HR, are often seen as process-obsessed jobworths. One way to counter this is to involve users in designing the system. One British media company recently spent a year fixing the most egregious flaws in its purchasing system at a significant cost in wasted time and money because no one from middle management who actually bought anything was invited to see the system before the spec was defined and it was purchased. The inevitable result was a massive backlash from managers, complaints from irate suppliers who were waiting longer for payments (some of which just fell off the system altogether) and the creation of a task force (completely unbudgeted for) to improve the system. Even now, three years later, there are still glitches.

Research from the UK’s Chartered Institute of Procurement & Supply, suggests that it is not uncommon for 80% of a business’s purchasing to be made by what it calls “maverick spend” and calamities like the one described earlier exacerbate the issue. This is a real credibility problem for procurement – why should the board trust them if they can’t even control their own function? – and it can be a financial drag on the business.

The sales manager who buys his own business cards and puts them on expenses (because he can’t be bothered to order them electronically), or the department head who insists on buying from x because he’s used them for years), these all sound minor but they can add up and have a significant impact on the bottom line.

To change this requires buy-in from the very top (especially the managing director and the finance director), training, clarity and the right systems. Clarity is key. The question employees need answering is: am I allowed to spend or not? And if I am, on what and how much?

For example, every order should have a purchase order and a trail – either online or on paper – of information so you can interrogate the data. Procurement managers can’t manage spend in a particular category (let’s say stationery) without that information. And the company’s leaders may be in the strange position of knowing what they’re spending but being able to say why and on what.

Not all maverick spending is bad. The maverick who flouts due process to call a supplier and get some more ink in, pronto, because an accident is threatening to stop production is doing the company – and its customers – a favour. 

6. Buy ethically

Sounds obvious but PSPs to certain sectors – notably retail and consumer brands – have to be specially vigilant. Retail giants will not be amused if they discover that one of your suppliers is using slave labour, contributing to deforestation or polluting the environment. Even the amount of water suppliers use is being monitored by groups like the alcoholic drink giant Diageo who encourage their suppliers to declare usage and targets to reduce that.

7. Encourage procurement

There are times when they are going to have to say to a user, who wants to know why the company is not buying a product or service they requested, “I am the purchasing manager. You are not. Deal with it.” And they need to know that, assuming they aren’t being bloody minded, that they’ll have your backing

8. Think strategically

Ask whoever does your buying different questions. A bit less focus on “Why did we pay that for that?” and a bit more “If you had your way, how would you quicken our time to market?” would be a good place to start.

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