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In this guest post, the second in a series, Procurement Leaders invites Optimum Procurement’s Gerard Chick to look at procurement’s identity and where functions are breaking free of the constraints placed upon organisations by outdated concepts.
A great deal of focus and writing on procurement has been on the relatively simple context of a large and powerful buying organisation, procuring an uncomplicated product or service from an acquiescent supplier. However, things are not as simple as that and real-life procurement is a far more complex issue. Procurement managers have to manage for innovation, manage often well-established markets and be able to do this in the increasing complexity of our globalised business world.
In today’s business-to-business environment the complexity of the transactions made are reflected in the complexity of the business-to-business relationships required to support the procurement activity they are engaged in. Today, with the multi-organisational alliances often created to develop strategic leverage, procurement and supply management crosses many organisational boundaries – especially that of operations.
The contemporary procurement professional is engaged in optimising the balances of risk and cost in the context of the increasingly complex purchases they are making. Issues such as the adequacy of contractual arrangements, which as we are aware, can never hope to cover all eventualities and circumstances and, as a consequence, impinge on both governance and relationships.
Both of these issues – risk and cost – are business critical and procurement must play its part in the emerging debate on risk and cost management by means of the implementation of relational mechanisms, which will operate alongside traditional contractual mechanisms to support them.
A focus rounding on uncertainty and risk are central in establishing the rationale of any contemporary procurement strategy. Today the very core of the discipline centres around a tool developed in 1983 by German consultant Peter Kraljic. He devised the 2×2 matrix that maps profit impact against supply risk. Most procurement people use Kraljic’s tool to analyse their purchasing portfolio and to divide how procurement resources should be allocated. However, while this approach was fine in the context of procurement in the 1980s – where there was a greater degree of certainty in markets, and the impacts of offshoring and a globalised market were much less impactful – the commodity-led approach that this tool drives does not address some of today’s big issues.
For example, the political dimensions of contemporary procurement, where powerful interest groups will pressure for things that are not aligned to the economic efficiency of the commodity model – CSR being possibly the most obvious. This results is a complexity in the ’procurement’ of both investment and coordination across multiple stakeholders. This in turn leads to fragmented decision-making and an increase and decrease of focus on who is important – the customer or the project, depending on the external environment, typically in the form of media scaremongering or the career path or even the recruitment of specific individuals.
Many contemporary purchases are bespoke, especially those in sectors such as construction or the manufacture of civil or military aviation. Here, different skills and competencies are required as are different relationships between the customer and the procurer. Today many contractual and other relationships, especially those with strategic suppliers, need to be dynamic and in some cases iterative. Procurement professionals need to be able to align outputs and requirements rather than provide compliance. This demands a performance mind-set, which looks to spread risk and reward sharing across the entire supply network.
Traditional procurement has brought little if anything in terms of new practice. Kraljic’s Matrix was developed in the 1980s, before the shift in the global centre of economic gravity from West to East. Global procurement practice in the 21st century goes far beyond the mere compliance of the late 20th century; it must move towards the imperatives associated with long-term growth innovation and a closer and more strategic proximity to the supply base.
Today a difference is emerging in procurement distinguishing the ‘old’ from the ‘new’. Contemporary procurement demands that procurement activity is freer, less proscriptive and restricted, more interactive and certainly much more about the long-term. It is clear that a new set of challenges are facing procurement leaders today. They need to be able to forge and maintain relationships with suppliers with the capability to innovate and supply match the long-term requirements of the buying organisation.
Gerard Chick is chief knowledge officer at Optimum Procurement.
His new book, ’The Procurement Value Proposition: The Rise Of Supply Management’ is available from Kogan Page here.