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Transforming Procurement from Tactical to Strategic

Establish Inc. recently completed a procurement assessment for an industrial client with two business units operating disjointly. Establish analyzed and evaluated the purchasing practices of both business units. Through the extensive analysis of internal processes and spend data, significant opportunities were identified. In the area of processes, the procurement staffs of both units were relatively new and inexperienced, leading to a tactically-focused department rather than a strategically-focused one.

There were few attempts at leveraging purchasing spend across the enterprise, reducing the number of purchase orders transacted, creating value-added supplier contracts, standardizing the MRO materials purchased for both organizations, or monitoring and tracking supplier performance.

With regards to the spend data analysis, Establish found numerous examples of price differentials when comparing one unit’s prices to another. Common items bought from common suppliers cost more at one business unit. In addition, there were many similar items that were not standardized, resulting in SKU and supplier proliferation.

It was also determined from the data that one business unit was issuing excessively high amounts of purchase orders. There were over 70 items purchased more than 20 times in one year, yielding 1,400 individual purchase orders. There was also evidence that many buyers were not buying MRO items on contract. These items purchased off contract were purchased at prices 15 to 77 percent higher than the negotiated contract pricing.

It can be seen from the evidence above that this client is in the early stages of its procurement transformation. The senior managers realize there are benefits to raising the sophistication of its procurement staff but are unsure how to go about it.

Tactical Procurement

This client is currently in the tactical or transactional stage of the procurement transformation. This stage is characterized by the following activities:
  • Processing end user requisitions
  • Processing purchase orders
  • Following up on issued purchase orders
  • Resolving problem orders
  • Processing rush orders
  • Phoning suppliers to anticipate deliveries
  • Firefighting
Each buyer commented that they spent over 30% of their day on the above activities. These activities are considered non-value added and are oftentimes eliminated in most sophisticated procurement organizations. The need for improvement is evident but many organizations become stuck in their ways and are unable make the necessary changes. This is a common problem due to many structural obstacles.

How to Begin to Transform

To facilitate the transformation, there must be top management support. Procurement needs to be viewed as a value added player just as finance, manufacturing, marketing, and product development are. Once the perception is different, other changes are easier to implement.

The next step in the transformation is to review the current process and the individual activities to identify non-value added and value added activities. It is important to question why each activity is performed. Are activities being performed as work around solutions to a bigger problem? Are activities performed due to inefficiencies in the system? Can alternative solutions eliminate the activities currently performed?

Establish reviewed the client’s purchase order issuance process to associate a cost to each activity required to issue the purchase order. We surveyed each of the buyers to breakdown the process into individual steps. For each step, we requested information on the average process time and the wait time associated with each step. The labor time multiplied by the labor cost provided an estimate cost for each purchase order averaging approximately $39 per purchase order. Knowing the associated cost drivers, activities can be prioritized and evaluated through a financial lens. Buyers and top management can review the high dollar cost drivers and suggest ways to reduce the impact.

Strategic Procurement

High performing procurement organizations have successfully progressed through the transformation. Strategic procurement groups have eliminated the non-value added activities. This stage is characterized by the following:
  • Developing and utilizing longer term forecasts
  • Designing comprehensive Total Cost of Ownership (TCO) models
  • Leveraging enterprise wide spend for savings
  • Facilitating strategic supplier relationships
  • Involving in cross functional teams to select suppliers, develop new products
  • Measuring supplier performance in a formal, systematic manner
  • Realizing revenue generation gains rather than focusing on cost reduction
These activities reduce the need for the transactional activities prevalent in the earlier stages of the transformation. The role of procurement is now broader in scope and expanded into other areas of the business. Buyers are better positioned to influence business policy, product development, and revenue enhancement. Although the skills and personality types may be different for these strategic buyers and may require additional training or hiring, the value of this type of organization is significant.

Conclusion

Establish made several recommendations to set the client on the path of transformation. Recommendations included short term changes such reducing MRO spend and longer term changes such as streamlining the purchase processes at both business units.

Firstly, many of the issues identified could be reduced or improved with staff training. Establish recommended four to six training sessions in an effort to raise the level of awareness for strategic purchasing. In addition to training, Establish recommended an MRO Standardization Project and a supplier performance measurement system, and recommended a purchasing card to reduce the number of purchase orders.

Lastly, Establish recommended guidance in the development of leveraged volume contracts and annual contracts to lock in competitive pricing. With these changes, the two purchasing organizations will achieve significant savings and will successfully become strategic.

Christine Wong
Principal Management Consultant

Feel free to call Christine at 201-302-5932 to learn how Establish can transform your procurement organization to be high performing.



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