Procurement – Leveraging value in your business
- Written by CP Staff
I have seen the good, the bad and the ugly regarding procurement in the concrete business, as well as in cement, aggregates, concrete products and building materials. But, before we throw stones, I also witnessed first-hand annual savings of tens of millions of dollars captured by a relatively small group of coordinators/facilitators in the U.S. and well over $100 million gained on a global scale.
Is procurement only a value creator for the big buyers in our industry? Absolutely not! More small to mid-sized companies are discovering ways to find additional value in their procurement process as well. It may be an essential component of the larger businesses, but it can benefit all. Before we delve into opportunities, let’s determine the difference between purchasing and procurement. One way to describe this variation is that purchasing is the act of buying or acquiring, whereas procurement is the full process, and encompasses a lot more of the total supply chain (vendor analysis, supplier and product quality, negotiation, supplier relationship management before and after the purchase, logistics of the material or service, and ultimately making sure you got what you paid for). Procurement is not just all about price, and value comes from a lot of different areas—each having potential.
Most large organizations have some form of procurement process in place, gaining value, yet having varying degrees of success related to implementation or acceptance. I have heard the comments from the field “those procurement people in corporate…,” and it only reinforces to me that they are unaware of the process. Establishing procurement practices sometimes tends to touch those who have a company's best interests at heart on an emotional level, as they truly believe this process will create a disconnect with the way they have operated successfully for years. This emotional connection is exactly why it needs to be defined as a process and understood from beginning to end to have the best results, no matter the size of company.
Yes, it is a little work, but if I were to identify the biggest reason for “procurement animosity,” it would be poor communication and a lack of understanding of the process. When clearly defined, it is easier to implement and to build supporters for ultimate success. This discovery does not happen in a vacuum, because there are a lot of things to consider, and price is only one component of the total value. By working both internally with various groups within the company (cross functional) and externally with suppliers, amazing results can be obtained and additional value found. The key is to define the critical components to any product or service and their relative weight in the decision process within your organization.
An example of this was a debate over diesel fuel and concern that the procurement process would alienate the local suppliers. Even though the “size of the prize” was substantial, the local relationships were viewed as more important from the field. This view was driven by the need for “just in time delivery” to multiple plants and additional lubricants, also supplied by the local vendors. The concern was how a “big global supplier” would be able to take care of our local plants effectively. Once the process was defined by a cross-functional team and it was understood, the local supplier would continue to source fuel and lubricants—coupled with the fact that the business would still gain the benefit from the global supplier—tensions were eased and the program implemented with success.
Awareness to who was on the team was also communicated throughout the organization so no one was left without a supported voice. This example reinforces the need to methodically move through your business tactually involving cross-functional teams from areas affected by the product and/or service and to let anyone internally affected know who is on the team. This method alleviates a lot of the hearsay and supports good decision-making.
There are times when the problem is plain-old resistance to change, relative to procurement. As an example, we had one manager fighting standardization of a vendor for office supplies (probably the most simple of set-ups). To prove us wrong, he went out and purchased a ton (2,000 lbs.) of paper on a pallet to prove a better price could be obtained. “After all, it’s just paper.” Needless to say, most of the paper was stored in a warehouse, exposed to the elements and didn’t make it to use; a tough lesson was learned that not all paper is the same. Ironically, even the pricing per ream—when factoring the pallet cost, delivery charge and cost to inventory—was higher than the established company would deliver fresh each day as needed.
The good news is that the manager did become a believer and was supportive going forward. This is a very simple example, but it shows the need to understand what’s important; in this case, having same-day access to supply to keep inventory levels down, top quality, free delivery and highly competitive costs all calculated in (not just the price). Additionally, an unhealthy resistance to change toward a procurement process approach has, in my experience, flushed out improper behavior, as the implementation provides transparency into the value of each step.
Going through a procurement initiative seems fairly standard with the more well-known targets of tires, fuel, utilities, communication devices, uniforms, and of course office supplies to name a few. But it truly can touch most of your business, and that’s typically when it becomes a little more challenging. Take for example raw materials. They too can and should run through a procurement process and in most cases do, but the potential for value is sometimes not defined clearly. For instance, a highly variable aggregate source may have a better price, but costs your business in increased cement content, customer claims or possibly even plant-related issues.
Or, an additive's performance/reactivity relative to a specific cement may not perform optimally, and even though it had a lower price, the dosage needed to maintain performance pushes costs beyond others available. The people closest to these particular operations (technical service, operations, etc.) need to be part of the process to provide input to the level of impact. Going through the exercise of identifying the critical factors in the procurement process and providing a weighting to each component from beginning to end may provide an excellent opportunity for finding value or, at a minimum, mitigating blind spots in your business decisions.
Procurement is more than just aggregating expenditures (pooling volume) for negotiation, although as a component of the process, it is an attractive lever and value driver. That being said, one could think only large companies with big volume in all categories can take advantage of procurement. This is not the case, and as learned from other industries, the potential to pool or co-op sourcing is working well. Clearly there are benefits gained from understanding the process, but when pooled with other businesses, a potential for leverage can be gained as well. It usually involves a third-party administrator/ coordinator, but the principles are the same, and you still need to define what’s most important to your business. What is interesting is that the procurement co-op can be made up of different businesses with common products/services—fuel, lubricants, or standard parts, for example—and does not necessarily need to be specific to your business.
There is a spectrum of ways to automate the procurement process, from a back-office system’s integration to sub-system maintenance and replenishment software tools, to something as simple as Excel worksheets in some locations. I have seen a lot of variation in practice, and a great deal depends on your conviction to the procurement process, your diligence with measures and your systems. Your system’s needs will become clear as you move through defining the process end to end. Like a throttle, procurement can accelerate through your organization as fast as you want it, but it all starts with understanding the process and defining the critical components to your unique business and looking where to find value.
Next month: Value Added Sales – Finding the true value in each sale