Discovering and Creating Value in Procurement through Continuous Assessment and Innovation
Written By: Rajib Saha
Published On: July 17 2006
About a decade ago, the procurement function was viewed primarily as a cost centre and a routine operation. More recently, it has been considered as a revenue-generating centre because of value-adds in the function. The procurement function now plays a key role in terms of improving the organization's performance, and any improvement in procurement operations can bring tremendous results in a firm's financial results. The procurement function's scope is not limited to purchasing, but covers the entire process, from source determination until the material reaches the required destination. Structured frameworks help in improving the operational efficiency of the procurement function by giving an understanding of the needs for improvement.
The key features of structured frameworks lie in their defining characteristics: they are step-by-step processes (meaning that they are sequential in nature), and they are flexible enough to take process constraints into account such as size, resources, and business functions.
Inherent to all organizations seeking procurement and process improvement are the aspects of innovation, continuous assessment, and process enhancement. A structured framework of analysis and execution will help create value across the three dimensions of process, technology, and organization.
Benefits of Structured Frameworks in Procurement
By implication, and practically by definition, a structured framework involves assessing the current state of the process, measuring the efficiency drivers for the process, and continually innovating to plug sources of value depletion. However, such a framework, if it is to bring best-in-class solutions to a problem-solving exercise, must be characterized by several elements and goals. It must
- be robust and simple;
- be highly systematic in its approach;
- determine non-value-added activities;
- drive innovation in process execution;
- drive measurement on process goals and objectives; and
- have a good governance mechanism in place.
Such an approach will help drive benefits such as improvements in supplier collaboration; consolidation of specific functions; optimization of supplier performance; reduction in procurement costs through efficient analysis; and improvement of customer satisfaction.
Even though procurement problem-solving can be undertaken without reference to a standard process or approach, the results obtained can well be haphazard, and the time taken for completion of the entire improvement process will also be significantly higher. By means of a structured framework that is used consistently and iteratively, one can pinpoint the areas of value depletion or value leakages and work towards eliminating them. This approach thus highlights the benefits of improving procurement function in a strategic manner.
The Process and the Framework for Improvement in Practice
To drive the procurement improvement program, it is imperative to form a project team with a clearly defined governance mechanism, in order to determine areas to work on. Also needing to be considered is the percentage of team time being spent, particularly in the case of a highly decentralized procurement function being coordinated from different groups and locations and from different units. This is in fact often the case for companies who have expanded globally without an organic understanding of the need for their processes to evolve
We'll turn now to the process for implementing a structured framework. In the first step, the problem statement is established and discussed. This is the foundation for the entire process. A detailed assessment of the processes through a structured framework, with a focus on the determination of value leakages, can help determine multiple problem statements. For this reason, it is vital to accord the time and resources necessary for this step. Establishing clarity in thinking will bring clarity to action and thus measurable results in the improvement process. Thus, some fundamental questions will drive the shape of the process as a whole:
- What does past data reveal?
- Are there pain areas identified by the users?
- What are the effects and future trends of the particular industry?
- What is the present status of the supply market?
- Is benchmark data available, and has it been evaluated?
- What are the present strengths, weaknesses, opportunities, and threats in the particular industry?
Based on the answers to these questions, strategic decisions can be taken, and a fair idea will be obtained of the direction to be taken for improvement. There are of course many other questions which can and ought to be posed: it all boils down to a considered evaluation and articulation of the "as-is" as contrasted with the "to-be." This is where the real (and huge) value of a structured framework will appear: it can help organizations generate a systematic approach towards problem-solving, and therefore gain substantial benefits, such as centralized procurement activities, improved supplier relationship management (SRM), and innovative ideas coming from all levels of the organization
Once these questions have been defined, considered, and addressed, the next step is the generation of ideas by means of interactive discussions within the team, and between the team and external resources. The inclusiveness of this aspect of the process must address the stakes of the internal team, management, suppliers, customers, and competitors, so that decisions can be taken as to what ideas can be taken forward and how the process should be conducted. This phase is essentially a process of clarifying the "drivers." All too often, however, organizations fall into the trap of vague, grandiose generalizations about value, so it's important to emphasize that each and every driver must be related to one or more product groups. This will help in identifying the focus area for process improvement. For example, applying this thinking to the "indirect materials procurement" function may reveal that the potential sources of improving performance should include areas such as contract labor and office supplies.
After thorough investigation and further detailed analysis, some pilot implementations can be carried out to determine the business impact of the proposed changes. If the results of pilot implementations show satisfactory performance, then these trials can be extrapolated across the organization, and procedures can be established to make those part of the system. If the performance is not satisfactory, it is time to demonstrate commitment to the improvement process by returning to the investigation and analysis stage.
Best Practices from the Application of the Structured Framework
Procurement has emerged as a competitive differentiator in the last few years, and companies are making efforts to leverage procurement as a strategic differentiator. This is even more pronounced with the advent of the Internet and related ubiquitous technologies, along with the recent wave of outsourcing. Companies have therefore taken initiatives to find improvement in performance, and to transform the procurement function as whole. These initiatives are multi-faceted with respect to process, technology, and organization. Companies have re-engineered old processes; invested in technology applications; and changed their organizational structure, though of course at different scales and paces. But all these initiatives have a common link from an objective perspective, which is to have a significant bottom line impact. This can concretely be achieved in several ways:
- by reducing spend for procurement of goods and services, while improving or maintaining quality and availability;
- by improving the process key performance indicators (KPIs) in terms of reliability, responsiveness, and flexibility; and
- by improving return on assets.
All those companies who have been able to drive excellence have realized that a structured approach to these transformational initiatives, along with a deep focus on sustaining compliance to processes, technologies, and organizational approaches, are mandatory for unlocking significant business value. We'll turn now to some of the best practices for a structured approach to procurement processes and enabling technologies, and investigate the pointers that should be kept in mind to minimize value leakage and attain best-in-class procurement performance.
Several processes interact at different levels to perform the functions of procurement. High-level processes can be segmented as "strategic" or "operational," so as to determine the right approach for the right process. The processes involving data analysis and tactical approaches are strategic, whereas the processes related to functional execution are operational.
|Strategic Procurement Processes
||Operational Procurement Processes
||Ordering and fulfillment
|Supplier determination and assessment
||Receipt and return
||Invoice and payment
|Supplier performance management
At the process level, in order to achieve incremental benefits, several factors should be considered when aiming for excellence:
- The organization needs visibility of the spend in terms of category, vendor, and location, for all their units. This means seeing how their money is spent across different units and different vendors, for different goods and services.
- In turn, consolidated spend information and analysis of spend data from different dimensions enables determination of the low-risk, high-return categories that are candidates for initiation of strategic sourcing (through the collaborative and structured process of critically analyzing spending by category, and by using this information to make decisions about buying more effectively and efficiently). Analysis provides pointers for the company for savings opportunities, such as spend consolidation across units, vendor rationalization, reductions in price variance, and so on.
- Another key area is new supplier determination, and the assessment of their capabilities before committing to them for sourcing. This requires a combination of information gathering and validation processes, through a framework that can objectively rate and score suppliers across parameters like supply reliability, financial capability, reference feedback, quality levels, location, and so on.
- Better performance from suppliers enables companies to deliver higher performance levels in terms of supply chain responsiveness and reliability. It is thus imperative for companies to set performance levels for suppliers every year, based on these metrics (percentage of on-time deliveries, rejections, stock-outs, and so forth). These metrics must be measured and discussed with suppliers to bring about improvement.
Until recently, procurement was a manual process for the majority of organizations. While some of them invested in legacy applications, improvements were not significant. But with Internet-based technologies, the improvement opportunities are tremendous. The most significant opportunity is that it allows companies to connect with their suppliers and collaborate with them. On one hand, it allows them to automate the complete transaction process with the supplier (from requisition to payment). On the other, it allows companies to publish forecasts with suppliers, and to implement an exception-based collaborative workflow that results in better service levels with lower inventory.
The approach of technology enablement for excellent performance includes several elements:
- an e-procurement platform that automates processes for indirect item procurement
- a catalog-based buying solution for maintenance, repair, and operations items, or the ability to leverage a marketplace-based solution
- an exception-based collaboration application for direct materials
- specific custom applications for managing complex services procurement such as contract labor or travel
But the most important requirement for success is a detailed assessment by an expert who can understand the current process and technology landscape, and suggest best-fit technology applications that complement the future to-be processes.
Improvement is not simply an idea: it is a process. And a process without a framework is a recipe for chaos (at worst), or for underachievement (at best). For this reason, the move towards procurement excellence must be approached in a progressive and incremental manner, and commitment to the process must be demonstrated across the organization, at all stages. This leads to the all-important step of formalizing implementation procedures—which not only sends a message of commitment to improvement, from the highest levels of an organization, but also leverages the full capacity for innovation from all elements of an enterprise.
About the Authors
Murali Krishnan Sundararajan and Rajib Saha is a business analyst for the manufacturing and supply chain domains. He has nearly six years of industry and consulting experience. Krishnan has been associated with leading pharmaceutical industries in their supply chain functions and has ERP implementation and supply chain consulting experience. Krishnan is a chemical engineer with operations management qualifications. He can be reached at Murali_Sundararajan@infosys.com.
Rajib Saha is a consultant for the manufacturing and supply chain domains. He has eleven years of consulting and industry experience. He has deep knowledge in the areas of procurement processes, strategic sourcing, spend analysis, supply management, sales processes, order management, and so on. He has consulted for many large enterprises in the areas of procurement and supply management. Saha holds a bachelor's degree in engineering, and has completed the post-graduate certificate program in management at the Indian Institute of Management, in Kozhikode (India). He can be reached at Rajib_saha@infosys.com.