Procurement

Procurement Is an Ever-Evolving Function

Nov 26, 2014

Credit: dream designs at FreeDigitalPhotos.net

Credit: dream designs at FreeDigitalPhotos.net

The DNA of purchasing professionals is changing. There is paradigm shift happening at most companies and procurement is being seen as a strategic function. Not only has the focus shifted to standardization and managing suppliers relationships, there has been growing demand of category-specific value add that purchasing managers can bring to the table rather than being just the information carriers and gatekeepers.

Historically, the role of the procurement function was just limited to gathering purchase requirements from the operations departments, searching for the supplier, and buying the required item. It was very much an operational, administrative, and kind of back-office role. The focus was on accounting, and there was limited influence from the purchasing department in formulating the procurement strategies. In manufacturing organizations, production planning generally used to dictate the purchases, which were largely driven by the raw material consumption and reorder levels. Sourcing from nearby suppliers used to be the norm since logistics and communication methodologies were still relatively primitive. Moreover, average organization sizes were significantly more than what we see today and avenues of demand aggregation were limited.

Current Scenario

With the advents of kaizen, just-in-time, and business process reorganization and technology advancements in business operations, supply chain efficiency became a central piece of organizational strategy. The supply chain optimization projects primarily focused on bringing efficiency to production, logistics, procurement, and waste reduction. In the service industry, the topic of discussion is process efficiency and resource utilization. Procurement, being the first step towards execution, is gaining more importance, as all critical decisions need to get concurrence from the procurement function to ensure smooth implementation.

As processes become more efficient and organizations cut slack wherever possible, margins of error are very thin, and that puts immense pressure on purchasing managers. A small blip or oversight can impact production lines or service delivery, immediately escalating the issue. Senior management involvement is high and procurement is expected to deliver on time while balancing both quality and cost. The front-end purchase professionals always walk the tightrope of cost, time, and quality and work under stringent audit and control norms.

Another key shift within the procurement function is demand aggregation and supplier consolidation. Purchasing managers constantly need to keep looking for new suppliers and opportunities to save. They are tasked with increasing volume of managed spend over maverick spend, finding niche firms supplying better quality at lower prices, operating with diminishing geographical boundaries, dealing with an ever-increasing variety of end-products and services, and so on; we can keep talking about the evolution. Let's look at the paradigm shifts.

Increasing Role of Technology

Technology has evolved faster than many of us could have imagined, thanks to the increased power of computation and communication. The role of a procurement manager has changed from a management information systems person to a strategic advisor whose focus is to provide insights and keep gathering supplier intelligence. Purchase processes are getting automated, and information flow within the organization is getting much more streamlined.

Product Simplicity Versus Process Complexity

Organizations are always under pressure to innovate, the R&D spend is increasing, your favorite supplier of today may be obsolete tomorrow because of expectation mismatch, new variants will emerge, and existing resources will be leveraged to manage such changes. The increasing product complexity has brought three key challenges for the procurement manager.

1. The risk exposure has increased significantly, with multi-vendor and multi-location product development structures and just-in-time methods. Failure of one vendor on quality, delivery time, or any other aspect will impact the overall process negatively.

2. For certain categories, the level and scale of complexity had assured that there are fewer vendors eligible to compete for your business, trimming your choices to smaller vendor base. On the other hand, there are categories that are rife with options and the selection process needs to ensure quality is not comprised while getting the best price.

3. Intricate product specifications demand clear documentation and communication to ensure suppliers understand the product complexity properly and can judge their capability to deliver.

Speed of Procurement

While everything is becoming agile and just-in-time, the "procure-to-pay" cycle time has reduced significantly. A procurement professional has little time to understand the requirements, research the vendors, compare the quotes, etc, and everything is expected to be done in firefighting mode. This is especially true for commodity items where quality takes lower precedence. Moreover, there are reporting tasks that need to be complete to update all stakeholders on status of the project.

Vendor Spread

The traditional vendor buyer proximity as a prime factor in deciding vendors is not a norm now. Organizations are reaching beyond geographical boundaries to reach suppliers that can help them bring cost effectiveness, innovate, and provide strategic advantage. Most global organizations maintain multi-location vendor relationships, and a large part of discussions, dealings, and negotiations happen through through virtual communication channels.

Evolving Vendors

More than 80 percent of the organizations today are dependent on external partners to stay competitive, and this is going to be so for the foreseeable future. With the increasing role of the vendor, it's imperative that your vendor is in touch with the R&D departments and able to keep pace with the latest innovation trends.

Sourcing of Indirect Materials

Corporations with global operations have huge indirect spends, which go to setting up offices, hiring staff, managing global communication, IT infrastructure, travel, and other areas. A core manufacturing corporation with an active operation in more than five countries end up spending 5 to 7 percent of its annual budget on indirect categories. Most of the product/services acquired are standard in nature and the three objectives of e-procurement (consolidation of demand, economy of scale, and curtailment of maverick spend) apply to them.

Importance of Relationship Management, Cooperation

Technology has expanded human reach beyond physical boundaries; a procurement professional can reach out to a farthest-possible location in order to search for good quality and low cost. The situation offers a unique challenge of maintaining relationships, building trust, and getting real value from a person with whom you may never interact in person.

The Path Forward

While the current scenario itself is very mercurial, there are a few factors that are being viewed as game-changers and may take the procurement world by storm.

Big Data and analytics:

You have online procurement systems, large supplier networks, quality control mechanisms. It's time to think beyond these operational systems. The procurement function needs to get smart in understanding the pulse of the "4 Vs" of Big Data, i.e., volume, velocity, variety, and value. The focus has to quickly shift on making use of data to discover opportunities of reducing global procurement costs, tracking key performance indicators, and to introduce liquidity and mobility. But these insights come at a cost. You need to be patient and ready to invest in something which might give you results years later once you have logged enough data to model upon.

Internet of Things:

The Internet of Things (IOT) is an evolving phenomenon, and the next level of procurement will enable real-time tracking of interconnected material. IOT would make an interesting future for procurement professionals. While the impact on some categories may be low, for a few categories these interactions can offer as-yet undiscovered synergies or defects that are so grave, they may shift the paradigm to new horizons.

Think local, act global:

The real concern of procurement professionals is to merge the concept of global procurement with local efficiency. The world is passing through a turbulent time, and new threats are emerging, while a global economy offers lots of new opportunities for cost savings, innovation, product development, and end-user development. But the global procurement professional also needs to bear the looming threat of terrorism, triggers of recessionary cycles, slowing economies, the changing order of the world, environmental sustainability, and governance and policy shifts. A successful purchasing manager will be obligated to manage this milieu, spot trends early, and act fast on them.

Girdharee Saran is an e-procurement and vendor management professional with ProcurePack, a cloud-based procurement and vendor management system. For more, visit www.procurepack.com.