Too Often Procurement Resources Most Heavily Applied where They Add the Least Value, Consultant Says

There is an on-going mismatch between where the bulk of resources from procurement are applied and where they can add the most value.

So says Guy Strafford, chief client officer at Proxima Group, a procurement outsourcing firm, writing recently on the UK's SupplyManagement web site.

Supply Chain Digest Says... "If there is no supply management involvement after a deal is done, then the value leaks away due to market movement and supplier avarice," Strafford says. What do you say? Click here to send us your comments Click here to see reader feedback

Before getting to his main point about the imbalance between procurement effort and value creation, Strafford starts by noting five rather provocative points relative to the procurement function.

1. Every time a company saves money through procurement, it is quantifying how much the market has moved and how badly the business has managed that supplier by not keeping up. The goal should be to move with the market. "Success is a tender that saves nothing because you have been adjusting continually. Functions that are exclusively focused on savings usually end in disappointment and marginalization. Those that help mobilize suppliers to achieve the strategy of the business last because they focus on aligning with it," Strafford says.

2. Not all suppliers are cheaper as they get bigger – companies should not assume economies of scale.

3. Procurement is a skill with many elements to it. If the supplier's team is smarter than the company's buying capability across all these elements, the company will continue to fund its suppliers with excess profits.

4. Great supplier sales teams have great data and run rings around data-blind procurement professionals.

5. Businesses under invest in procurement because different Return on Investment (ROI) criteria are applied between procurement and other internal functions. Procurement's role should be to help the business to be consistent. The ROI of better buying is greater than anything else, other than raising prices, so companies should invest more in procurement.

Well.

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With that interesting introduction, Strafford then goes on to discuss what he calls the "DNA of Procurement," as illustrated in the graphic below.

Source: Guy Strafford

At first, this chart is very hard to understand. It turns out the black line represents the level of procurement resources that are typically applied across a three-stage procurement lifecycle of engagement, process, and management.

The blue line represents the potential value of procurement across those same three stages.

The point, as should now be clear with the explanation, is that few procurement resources are typically applied in the first and third stages, where the value creation could be greatest, and the vast majority are instead applied in stage 2, the mechanics of selecting a supplier and doing the negotiations, where the value created is often relatively low.

Together, the two lines have the basic shape of DNA strands.

"With all choices available at the start, procurement can achieve the maximum change and have the most positive impact," Strafford writes, noting that the later a supply management function is involved in the buying process, the less value it can add.

That said, "If there is no commercial [procurement] involvement after a deal is done, then the value leaks away due to market movement and supplier avarice," Strafford adds.

Procurement should be involved at the very beginning to shape stakeholders' thinking about the options (engagement), and should ensure that there are structures to make sure suppliers are managed (management), Strafford observes.

The challenge or problem is that often times procurement initially has less specialist knowledge than their stakeholders about a market. As a result, procurement only is engaged late in the process, Strafford says, and then spends its time completing RFIs and RFPs, negotiating and contracting (process), playing catch-up on the knowledge held by the stakeholders.

"Procurement then has to move onto the next supplier or category, and is not able to stay abreast of the market," Strafford notes.

In the end, supply managers need to engage more up front, stay around to manage the value, and make the process phase as efficient as possible, Strafford says, noting that "Resolving this is the challenge of every procurement function."

How is your company doing managing this challenge?

Do you agree with Strafford on this as a key procurement challenge? If so, how can it be addressed? Let us know your thoughts at the Feedback section below.

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