There is one common, less noticed trait about all companies with successful supply chain operations; they know the value of an effective procurement organization, and have placed a great deal of emphasis in creating/transforming them around a strategic vision. However, only a small percentage of businesses globally can claim this success. Most companies lack the vision and thus have seen their procurement organizations evolve organically, developing around the needs of the time and constraints of supporting revenue growth. This blog post provides insights into what defines the second type of companies and how change at the top, supported by long-term vision, can help a firm change for the better. Businesses have developed practices of utilizing the resources and teams available to them to focus on their immediate needs. With top lines receiving a significant emphasis, procurement organizations have been asked to focus on getting the right material in time, but rarely on quality and best cost. Alternatively, when bottom line results are at risk, procurement teams have been asked to generate additional savings to meet quarterly or annual targets. It is only during times of extreme commodity price volatility and spikes in cost of goods sold (COGS), that teams are created to focus on managing commodity risks and price fluctuations. Competitive forces, lessons learned and recommendations from resources new to the firm or from consultants typically drive the situations described above. However, these are implemented as stand-alone projects and rarely translate to a long-term strategic vision. Procurement and Corporate leadership seldom evaluate a procurement organization from a holistic viewpoint. Many companies have not placed much thought into how procurement organizations must align with other organizations they work with (finance, engineering, marketing, sales, etc.) or how procurement should be structured to maximize the strengths of its resources, limit weaknesses and deliver optimal procurement processes and savings. A key first step to evaluating the strength of your procurement organization is to evaluate the leadership. While the procurement organization could be a cost center and part of the CFO’s responsibility, Procurement as a function is a ship in itself and needs to have a strong captain. Firms must have a procurement leader (Chief Procurement Officer, Vice President of Procurement, etc.) that is able to play the captain and utilize their resources better, re-evaluate and modify the procurement team to suit business needs and stay abreast of industry standards and trends. The title of the procurement leader is irrelevant, they simply need to be empowered to run the organization and must have the skillset, capability, and expertise to evaluate alternative structures, understand risks and benefits, manage change effectively and implement new structures. Without strong leadership in place, the organization structures will not mature and will not be effective or sustainable. Having the right leader in place is not the only prerequisite to establish an optimal procurement organization. The following recommendations will also help ensure that the team is enabled to be successful: Provide them with responsibilities that play to their strengths:
- Utilize resources that possess a strong strategic vision and enable them to focus on strategic sourcing and supplier relationship management
- Make sure they have strong category experience and knowledge, and are responsible for category management
Ensure that they understand the industry:
- Firms in manufacturing should have teams focused on commodity management to minimize risk of commodity volatility and have strong resources focused on direct materials
- Firms in the retail industry should have their strong resources focused on indirect sourcing, such as marketing
Give them the ability to manage effectively:
- Move resources that are strong on the tactical day-to-day and processing aspect of procurement and direct their efforts towards transactional management
- Focus on reporting and performance tracking
- Encourage collaboration with other departments and teams
Empower your procurement team:
- Provide clear lines of command and spans of control
- Offer well-defined key responsibility areas, along with the resources that are available to them to tap into
There are countless improvements that a firm can make to optimize its procurement organization, a capable procurement leader is the key to identifying and implementing these improvements. Having a strong leader in place is essential to ensure procurement is designed and functioning at an optimal level while also evolving to play a significantly larger role in the company’s business performance. A strong leader cannot just initiate and implement change, they themselves can be the change.
Samir Patel is a Director at GEP with over ten years of strategic sourcing, procurement outsourcing and procurement technology experience. He has broad industry knowledge and global experience with sourcing direct and indirect materials, procurement transformation and technology implementation. His areas of expertise include strategic sourcing, spend assessments, procurement outsourcing, procurement strategy and planning, procurement organizational design and procurement technology implementation. For more interesting thinking on procurement, visit the GEP Knowledge Bank.