Making the best out of purchasing April 19, 2007
Posted by Esa Tihilä in : Procurement , trackback
Purchase Management, Procurement, Sourcing - whatever you like to call it - seems to have become a more and more an important subject in enterprise life recently. I run our businesses in Europe and the Americas, and active implementations are numerous compared to previous years. At marketing events there are lot of participants as well.
But still the question remains - how do we make the best out of purchasing, especially indirect, non-production or MRO purchasing?
Many enterprises have CPO and sourcing organisations which does a lot of good work putting this subject in the agenda of management. But still too often the behaviour of business units is not to care about getting the best deal on price because they need the good from a particular supplier in a hurry. This is an extreme example, but it gives an illustration of the challenges CPO’s facing – good strategy is not good enough, they have to find a way to get business units to follow the strategy.
One of the challenges in purchasing is that it involves lots of employees in the organization, and a single owner is hard to name. A purchase transaction could be done centrally by a sourcing team but the actual requisition, review and approval of it needs to be done in a business unit. According to my understanding, by combining business unit interests with a structured way of operating at enterprise level puts a tick in the box.
Too often we, and other software vendors, have been offering tools for fixing this issue. Most of the cases did not succeed thanks to us and also to customers own actions. In the last two years we have been running several workshops with our customers to identify pain points and how to solve them. There are few which need close attention from a CPOs point of view:
- How do I motivate business units to follow purchasing strategy?
- How do I control purchasing process and suppliers to gain best results for our enterprise?
- How do I keep selected / proven suppliers happy and serving us well?
Normally if a business unit is seeing direct impact on the bottom line they are not interested in guaranteed services levels. What we have done for several customers is to analyze each purchasing category calculated from incoming invoices for each cost center or business unit. This analysis will tell them exactly by the last eurocent or penny where money is spent and how many suppliers they use etc. From that analysis we also discovered that there are several agreements for one supplier with different prices of services as well. One customer discovered they had 50 different agreements for the cleaning of their premises, with a price variation of 150%. You can guess the impact of that for this customer when we’re talking about 1.500 office spaces across the country. They had sourcing in place but over the years business units had started to make their own agreements, with good reasons of course.
By consolidating these agreements they were able to save a significant amount of money by using their purchasing power, but also release resources from managing single agreements. Business units and corporation level could see the business case easily. That was a starting point for the corporate-wide implementation of procurement processes and system. This one case was enough to prove the case for everybody. But without spend analysis done from invoices segmented per category this case would not have gone anywhere. A previous business case example was very powerful, and it guided processes and system implementation to deliver the right results for the organization.
According to another customer case example, category management instead of supplier management is a very effective way to control the process, and provide a viewpoint for full expenditure for suppliers and the potential when renewing agreements and/or service level agreements. When an enterprise does have a tool to manage and view online what the spend is for each category and also take an action, there is a process to be used or the selected suppliers are not used. Based on this case more organizations use selected suppliers and their product / services catalogues more and they gain benefits because orders are more accurate and precise, the price of services / products are lower, deliveries are on time and invoices related to deliveries can be matched automatically.
Too often organizations do not want to take catalogues in - they would rather use free text ordering. Free text ordering is a good step ahead but it doesn’t provide best option considering the process and what the systems are capable of. Opting for free text is often used as a first step but the danger is to stay at that level. The main reason for staying at free text is that it’s hard to get catalogues into the system.
And to some extend this is still an issue. There are service providers offering catalogues from various suppliers. These services are not covering all categories or countries which forces businesses to make local solutions for it. Even if the world is not ready from one aspect, it still makes a lot of sense to enter catalogue information from the most important suppliers in key categories. It helps a lot when matching orders, deliveries and invoices for payments.
A category approach gives you, as a buying organization, a tool to communicate with suppliers in more detail, for purchasing and requirements for service levels in different business units. When a supplier knows the potential they can serve better – everybody wins.