A critical area of any organization’s spend and, ultimately, its ability to operate successfully is in procurement management.
The larger a company is and as it grows, procurement is a critical area that will increasingly become an integral component of managing and controlling costs and the sustainability of its operation in the long term.
As most companies mature so does its structure of a fixed and robust purchasing management functioning department.
Additionally, there are two very important and relevant factors:
- The pandemic created a greater role in importance in most organizations in any business vertical related to the supply chain, for which procurement is a critical silo.
- Global sourcing is both a necessity and growing challenge as more companies seek alternatives to foreign purchasing in general and with China, more specifically.
Procurement must focus primarily on developing and managing supplier relationships. Keep in mind that suppliers can be a very important ingredient to your company’s overall business model and therefore greatly impact—both adversely and positively–your potential for sustainability, growth, and profitability.
Most companies have a supply chain that is a foundation for their operational profile. Typically, procurement runs in tandem with the supply chain and is sometimes the most important aspect in a supply chain, particularly in organizations that have a global presence where products and services are sourced, manufactured, or operated in overseas.
Procurement primarily impacts risk, spend and business processes. Depending upon a company’s gross sales volume, a 5% reduction in spend can be compared to several million dollars in sales.
Procurement is an internal servicing function that works on behalf of business owners and stakeholders who utilize the materials, products, components, and services purchased by the procurement group.
A robust procurement initiative keeps the supply chain open and the business model working successfully. Conversely, a poorly managed procurement operation causes delays, disruption, and additional expense to a company’s operation.
The best run procurement operations not only keep the supply chain running but they continually add value and benefit through their sourcing, purchasing and supplier/vendor management practices.
Procurement can be divided into three separate functions: sourcing, purchasing and vendor management.
Sourcing is the function that finds supplier and vendor options, both reactively and proactively to the internal needs of business owners and stakeholders in a corporation.
The successful sourcing manager has a corral of business contacts and will know who to call when an internal purchasing need is required.
Sourcing managers are responsive to internal “fires” when they ignite and often come to the rescue as imminent supply needs develop.
Great sourcing managers are engaged in the strategic planning process in an organization and will often proactively find sourcing options before they are called for, positioning them to be ready as needed.
Sourcing managers are “state of the art,” contemporary and utilize leading edge technologies and business processes to find and develop raw material, product, components, and services, anticipating future demand and need.
Often, they can add significant value in several ways:
– Lowering acquisition costs
– Negotiating better supply deals
– Finding supply options that offer competitive advantages
– Develop vendor/supplier relationships that assist your operations to be viable, productive, and sustainable
Once sourcing options are found it is the responsibility of purchasing personnel to transition the vendor/supplier into the organization. This transition process can often be convoluted and arduous and will often determine the outcome of a successful vendor relationship.
Purchasing managers need to be excellent negotiators as they will be the front line in finalizing a vendor/supplier relationship.
Some of the negotiated areas are:
– Payment terms
– Warranty and return policies
– Insurance requirements
– Dispute resolution
– Cancellation wording
– Responsible parties
– Scope of work
– Agreed deliverables
– Performance specifications
– Contract period or tenure
– Signing officers
These relevant and salient points get transferred into a Statement of Work (SOW), Master Services Agreement (MSA), or simply a Service Agreement (SA) or contract between the parties.
This dimension of responsibility for the purchasing officer adds another required skill set: legal prowess. An attorney still may be required to review and finalize any contracts, but the purchasing officer must be able to negotiate the basic terms and bring it all the way past “third base.”
This brings us to an interesting and important aspect of the purchasing function: It requires an array of management skills:
– Ability to communicate well, both written and verbal
– Be organized
– Understanding people’s behavior
– Product knowledge(s) in the company’s verticals
– Team and project management
– Conflict resolution
The purchasing manager is the conduit between all operations in a company to organize and execute their spend. Primary responsibilities are:
– Reducing risk
– Reducing spend
– Business process improvements
Secondary responsibilities include:
– Creating internal controls on procurement
– Creating standard operating procedures (SOPs) and protocols in the purchasing functions
– Internal resource for all operating and business owners in an organization
– Vendor management
– Strategic planning for future purchasing needs
– Managing requests for proposal (RFPs)
– Developing long-term sourcing options
– Market intelligence
– Collaborating with demand planning initiatives
– Managing various projects
– Transactional and enterprise solutions
– Technology and its utilization throughout an organization
– Diversity inclusions
– Sustainable practices
– Disruption management
Purchasing managers need to learn that managing RFPs is a principal responsibility and as they master the requisite skills they will have more successful RFP outcomes.
RFP management is a process often taken in methodical steps that become a “defined process” that in turn lead to more favorable results.
It is critical for purchasing managers to make sure they understand what the expectations of the RFP is to assure all deliverables are achieved.
The purchasing manager has numerous personnel and personality challenges while trying to bring responsible procurement practices into their organization, namely:
– Silo protectionism
– Resistance to change and improvement
– Disbelief and suspicious motivations
– Internal leadership and cultural issues
– Lack of effective working relationships
All these challenges must be overcome and managed successfully if the purchasing manager will have any opportunity to move forward successfully with any procurement initiatives and improvements.
Relationship building with business owners and company stakeholders will go a long way in creating more effective opportunities for successful collaboration.
Mutual respect and trust are paramount and foundation characteristics of good working relationships within an organization.
Trust will help a purchasing manager move company personnel into a better scenario for procurement initiatives and betterments.
Though ultimately, trust only goes so far … performance that delivers consistent and frequent successes will also greatly help relationships build and sustain.
The pandemic created a greater importance for critical suppliers and their overall critical nature in a buyer’s business model. This has raised the profile of vendor management within most organizations since March of 2020, when the impact of the pandemic began to raise its ugly head.
A process, with protocols, SOPs and consistency must be achieved to successfully bring on and manage sustainable relationships with key vendors.
We strongly recommend “tiering” suppliers so you can rank their importance, relevance, and supplier risk. Most companies have hundreds, if not thousands of suppliers and vendors. By tiering them you can than successfully prioritize where you spend time in managing and negotiating.
Tier 1 suppliers make up 20% of your supplier base that represents 80% of spend. It is also likely that you will want to include a supplier where the spend may not be significant, but the importance of those vendors’ products or services are considered critical.
It is in that Tier 1 supplier/vendor base where vigorous, disciplined, and robust management is focused.
Once a new supplier/vendor is on-boarded into an organization, the practice of “vendor management” is triggered, consisting of the following:
– Successfully transitioning the new vendor/supplier into the organization
– Taking ownership of the maintenance of that vendor/supplier and their well-being from an oversight perspective
– Taking responsibility for the vendors’/suppliers’ performance in the delivery of their product or service into the organization … to the benefit of senior management, business owners, stakeholders, or any of the other business beneficiaries.
– Coordinating with internal stakeholders any activity with the vendors/suppliers that may impact on operations now or in the future.
– Conducting vendor risk assessments and managing any areas of risk to assume, mitigate or transfer.
– Managing the system that “tiers” vendors by amount of spend or the critical nature of the product or service they provide to your organization.
– Maintaining a robust relationship with the vendors and suppliers, so that they continually add value to the alliance between both organizations.
– Continually benchmarking price and cost to make sure that your “spend” is “in order”–that you are continually receiving value for your spend.
– Handling a proactive system for renewing vendors as their contracts and agreements reach expiration.
THE RFP TOOL IN MANAGING THE PURCHASING FUNCTION
A valuable tool for those in sourcing, purchasing and vendor management is the request for proposal or RFP. Often also referred to as RFI, RFQ, etc. … this business concept allows those in procurement to create a process to:
– Identify potential vendors and suppliers
– Keep favored incumbents “sharp”
– Vet potential providers
– Maximize favorable results in any bid initiative
– Establish a consistent and responsible means of managing spend with both existing and potential providers, vendors, and suppliers.
– Develop a favored and professional relationship both within your organization and with outside vendors/suppliers, of which will establish better working relationships and a greater opportunity for successful and consistent procurement.
The management of RFPs is both an art and science. Managing successful RFPs can be learned. Schools inside of organizations include AMA (amanet.org), NIWT (niwt.org), ASCM (ascm.org) or ISM (ismny.org).
Continual learning is the key to mastering the management of RFPs and being a “top-notch” procurement professional, well respected and with a robust career … and accomplishing successful purchasing for your organization’s benefit.
RISK MANAGEMENT IN PROCUREMENT
Purchasing managers need to understand that vendors and suppliers, just as any aspect, activity, or person in your organization, carry risk.
These vendor risks must be evaluated, assessed and a determination made on one of the three options to manage same:
– Assume the risk and set up a contingent liability
– Transfer the risk to a third party, such as a surety or insurance company
– Mitigate the risk through actions sometimes referred to as loss control, loss prevention and other related options.
Managing the risks of vendors and suppliers can be a heavy percentage of work hours of those engaged in vendor management. But it is considered a necessary component of a successful vendor management program. This initiative will prevent occurrences from causing damage and financial losses within or to your supply chain when the vendor fails to perform.
Some of the risks might be:
– Financial failure of the vendor/supplier
– Missed deliveries or delays
– Quality Control issues
– Intellectual property right concerns
– Inability to compete
In vendors/suppliers that provide critical raw materials, parts, components, finished products or services, their failure in anyone of the above outlined sample risks could cause a serious blow to your operations and even be catastrophic. With respect to the overall risk management of vendors and suppliers, those engaged in vendor management need to coordinate a continuous search with those responsible for sourcing to always have options in the pipeline and creating “Plan Bs” with alternate vendors and suppliers.
In the world of procurement this ties into the debate about “single source” versus “multiple source” strategies utilized by various companies to leverage spend and at the same time reduce risk. Some would argue that multiple options clearly reduce vendor/supplier risk. Others would argue that single sourcing allows you to focus spend in one entity to leverage your purchasing power. Both are correct strategies. A purchasing manager should always be assessing the risks in both options and making decisions where consensus and compromise provide viable choices. This must be done in concert with senior management to understand their tolerance for acceptable risk levels.
Procurement is clearly a vital and growing function of relevance and importance in every organization. Senior management must consciously recognize this fact and allocate funds and resources to the procurement structure within their organization. Since the spring of 2020, when the COVID-19 pandemic became troublesome is when the more serious relevance of procurement was raised.
Senior management must give the authority to procurement managers who will set up SOPs, protocols, and business processes in the sourcing, purchasing and vendor management verticals to assure that both risk and spend are completely managed on all goods and services acquired from third party entities.
Senior management must create a culture within the organization that brings both the quantitative and qualitative disciplines of procurement into every nook and cranny of your business model and the organization overall, understanding that the success of the company’s business model is now more than ever dependent upon the procurement management function.
Thomas A. Cook is a seasoned global supply chain professional, author of more than 20 books on global trade and managing director of Blue Tiger International. He can be reached at email@example.com or (516) 359-6232.