PurchTips edition #434

Traditionally the procurement function has been viewed as a cost center, or as a necessary evil or cost of doing business. The ramifications of this cultural mindset are that the true capacity is not realized. The fact is that the procurement function can be a center of innovation, prosperity, and just cost savings.

The procurement function can realize positive fiscal impact in the following ways:

1.) Leverage systems thinking-hone-in on value-added and non-value-added elements in the value stream. Value-added elements are those items that your organization’s customers are willing to pay for, done right the first time, and there is a physical transformation from one stage to the next. Whereas, non-value-added elements are those that do not add value, are wasteful and are very costly. Up to 60% of activities in an organization are non-value add. The ability to understand what percentage of that is procurement related would put procurement professionals in a very good position. The key is to quantify the degree of procurement related non-value-added elements and put in place cost avoidance tactics. The SIPOC methodology (suppliers inputs process output customers) gives a holistic view of where negative fiscal impacts could be concentrated. The idea is to determine if negative impacts come from suppliers, the inputs; including purchased raw materials, conversion processes, defective outputs being shipped to customers. If the determination is confirmed, the financial losses can be staggering. The procurement function can be instrumental in mitigating those losses, by ensuring the selection of capable suppliers who would ship high-quality raw materials to conversion processes. The output will be products that meet customer requirements.

2.) Leverage supplier business process capability – suppliers with strong process capability increase the probability of shipping high-quality inputs, at the right price points, with on-time deliveries. This proposition reduces the Total Cost of Ownership (TCO) and strengthens your organization’s financial position. The key here is to reduce the Cost of Poor Quality (COPQ) in your organizations. Failure to ensure the selection of suppliers with high process capability would lead to high rework, transportation, defects, material handling cost, and the erosion of profitability. If your suppliers have superior process capability you can request a transfer of this knowledge and reap the financial benefits from such collaboration.

3.) Leverage supplier innovation process – By selecting suppliers with world-class product innovation process capability you can transform your organization’s fiscal position. Such suppliers suggest robust conversion ideation, commercialization, and product design capabilities. Negotiating a sustained transfer of knowledge in this arena can yield tremendous financial benefit.

4.) Leverage a buy-in plan – Such initiative utilizes a spend analysis to target areas for cost reduction. Targets can be leveraged against your company’s financial requirements. An effective buy-in plan would set the optimal price parameters for your organization to be fiscally viable. The key is to share with your suppliers the proper projections on quantities, delivery, and service targets. A good buy-in plan would bring a balance between supply and demand dynamics.

5.) Understand customer requirements – Underpinning all the above points is meeting customer requirements and specifications, nothing more and nothing less! The only way to ensure this is by firstly understanding your customer requirements. This can be done through surveys, interviews, focus groups, and simple voice of the customer matrix.

6.) Leverage the procurement department skills set – The procurement department skills set must meet the requirements of the modern supply chain. Strict accountability must be leveraged to ensure a strong transfer of knowledge and a strong return on investment in training dollars.

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