Procurement is shackled to savings

Handcuffs businessman

This article originally appeared in PLQ. To find out more about what Procurement Leaders does click here.

 

Published in 1970, Purchasing pioneers is a fascinating account of the early years of the UK’s Purchasing Officers’ Association, the forerunner of today’s Chartered Institute of Purchasing and Supply.

 

Back in the early 1930s, its leading members – purchasing directors and senior buyers – looked enviously at the US’s own, much better-established, National Association of Purchasing Agents, and

remonstrated with each other about the narrow and restrictive corporate agendas they were obliged to follow.

 

In 1935, Charles Kelsey, a founding member of the London Electric Wire Company, wrote an impassioned plea for firms to allow buyers to visit suppliers’ premises to better understand the products they purchased and how they were made.

 

Alas, many companies viewed this as a poor use of buyers’ time: far better, they presumably thought, to have buyers stay in the office and focus on driving down costs.

 

Comes back to costs

Fast forward to 2018, and it is easy to think that little has changed. CPOs’ number-one priority remains cost savings while other aspects lagging far behind, according to Procurement Leaders’ CPO planning guide 2018.

 

“While many CPOs have said they would like to move their functions away from focusing solely on cost savings and instead prioritise more value-adding exercises...the majority of procurement chiefs clearly still have their minds and targets set on delivering savings,” the report noted.

 

Put another way, the tensions apparent in the 1930s are still very much present.

 

Although procurement chiefs may aspire to a more strategic role and focus on strategic issues such as supplier development, risk management and innovation, the day-today reality is dominated by cost savings.

 

That is not to demean the role of such savings, of course. The same survey makes clear, across industries, CPOs aimed for year-on-year cost savings of 6.6% in 2018, with a further cost avoidance goal of 6.9% – broadly comparable to previous years. That said, as the survey observed,

anecdotal evidence suggests CPOs find it challenging to generate savings over and above their targets.

 

Moreover, as David Lyon, procurement and supply chain director at managed learning services specialist Knowledgepool – a subsidiary of FTSE 100 outsourcing provider Capita – says, the logic behind CPOs’ strategic aspirations is well founded.

 

“No one is suggesting that strategic issues are somehow easier – far from it. But while achieving hard, tangible cost savings is good and to be welcomed, the reality is that it’s not where the greater value lies.

 

As a CPO, I want to focus on strategic issues because I can see the benefits of doing so outweigh the benefits of savings generation: savings generation is valuable and necessary, and the procurement function is best placed to deliver those savings, but not to the exclusion of

strategic imperatives.”

 

What’s more, eschewing a strategic perspective can result in very real risks, as well as missed opportunities, warns Richard Wilding, professor of supply chain strategy at Cranfield University’s Cranfield School of Management. “For the broader business, risk management, innovation, supplier development, sustainability, and corporate social responsibility are genuinely important. Get these wrong and the reputational risk and impact on the share price can be significant – just ask those firms that have been caught employing underage labour in Asia, employing people in dangerous conditions, or have experienced supply chain disruption following natural disasters. The constant pressure on ‘cost down’ has its own costs and consequences, which may outweigh the savings made.”

 

The downside of cost cutting

 

The public sector may be even more exposed to these costs and consequences, warns Christopher Bovis, a public sector procurement expert and professor of business law at the University of Hull.

 

“Public sector procurement systems are deliberately designed to focus on cost rather than strategic issues and now the chickens are coming home to roost. Again and again, we see large-scale projects running late, failing catastrophically, or going massively over budget. It’s easy for the European Commission or national parliamentary committees to lambast public sector procurement executives over these failures, but the fact is that their hands are tied by the processes they are obliged to follow.”

 

A strategic focus seems sorely lacking among respondents to a 2016 survey and associated white paper from consultancy provider APS Group, Putting a price on innovation: The procurement puzzle, which probed buyers’ attitudes to the importance of innovation when selecting a supplier.

 

Some 17% of respondents openly identified price as the dominant factor in supplier selection, with just 5% espousing innovation. Instead, a range of pragmatic, tactical factors dominated, such as the supplier’s track record, cultural fit and approach to business. Just one-third of respondents nominated innovation as the second-most important factor.

 

So why does this fixation with cost occur? Why do procurement executives perennially aspire to a strategic perspective, and yet somehow never quite achieve it? Perhaps more importantly, what can be done to change matters?

 

Those close to the problem believe there is no simple answer.

 

Reward offered

 

The metrics used to measure the effectiveness of procurement functions – and their leaders – play a role. “You get what you incentivise: bonuses and rewards are generally linked to cost savings and prices paid,” says Richard Gane, a former partner at PWC and a director at procurement consultants Vendigital.

 

“So, with rewards linked to cost savings, that’s what procurement functions are going to deliver. To get a strategic agenda, they’re going to need board-level representation that sees the value of strategic objectives – and sees it intelligently – with imposing, conflicting and contradictory goals.

 

It’s no good tasking buyers with attaining cost leadership and simultaneously being suppliers’ customer of choice.”

 

The structure of the organisation also plays a part, adds Jan Godsell, professor of operations and supply chain strategy at the University of Warwick. In executing its strategy, the organisation generally divides it up among the business’s various functions, which are again measured on their ability to deliver their part of the strategy.

 

Procurement is typically focused on taking out cost, both tactically and strategically.

 

Move beyond that and conflicts and silo based thinking may then arise.

 

“It’s not difficult to see how a procurement strategy could conflict with a manufacturing strategy, for instance. What is optimal for the overall supply chain function, or the business, is not necessarily the same as what is optimal for individual functions within the business.

 

There has to be greater clarity about what is best for the supply chain and what exactly that looks like from an organisational perspective. Rarely does the supply chain function embrace the full range of ‘plan-source-make-deliver’ activities – it’s often just logistics and purchasing,” she says.

 

Others worry about skills and competencies. Knowledgepool’s Lyon is hardly the first CPO to point to the lack of strategic content in many training courses. “Particularly in the early stages, procurement training focuses heavily on cost saving and the mechanics of buying.

 

It’s not until you get to quite advanced levels that you get a broader focus. Accreditation providers are delivering what the market is asking for, but the reality is that the market is often skewed towards the public sector, where procurement is very tactical and savings orientated.”

 

Moreover, he adds, a more strategic perspective – and a focus on delivering value, rather than just cost savings – requires abilities, skills and competencies that missing from both training provision

and the cadre of employees who are drawn to a career in procurement.

 

“Sitting down with internal customers and stakeholders and being able to influence their thought processes and decision-making calls for soft skills and competencies, not the application of rigid techniques. Such skills are difficult to master, accreditation providers don’t teach them, and people who naturally possess them generally don’t regard a career in purchasing as an outlet for their talents.”

 

Alejandro Alvarez of operations advisory and consulting firm Ayming agrees, especially in the context of mid-sized organisations, where buyers must often be generalists. “When a buyer is sitting in front of an internal customer, such as a marketing director and discussing an issue such as engaging a new advertising agency, they’re unlikely to have the soft skills and experience to engage constructively with that internal customer’s needs. It’s not about knowledge or even about category knowledge – it’s about engaging with people and drawing out of them the full set of their requirements. So instead, they’ll fall back on where they think they can add value, which is lowering the cost – and which may not actually be a major issue, especially when buying creative services.”

 

Automatic solution

 

While some of these roadblocks – incentive systems, skills and competencies, as well as conflicting goals – seem likely to prove intractable. David Food, associate principal lecturer, procurement, University of London’s Royal Holloway College, says automation and analytics, may provide the

function with a helping hand.

 

“As automation takes over a lot of the more tactical aspects of procurement and advanced analytics remove some of the day-to-day firefighting issues, the result is a greater ability to focus on the strategic dimension of the procurement role,” he says. “Ultimately, the strategic dimension of the role may be all that is left.”

 

But for old-school, traditional buyers, this change may not be altogether welcome, he acknowledges.

 

“The nature of procurement work will change, and not everybody who enjoys working in procurement now will necessarily enjoy working in procurement in future. The satisfaction will come from preventing tomorrow’s fire and the fire after that, rather than battling and putting out today’s fire. Different skills will be called for, with less emphasis on traditional procurement,

and more on project management and strategic thinking. Negotiations will focus more on adding value through innovation and different ways of working together, rather than on price and delivery.”

 

For decades, procurement professionals have yearned for a more strategic role.

 

Wanting it is one thing; enjoying it and excelling at it is quite another. Will the buyers of tomorrow yearn for the simplicity of the good old days, when all they had to do was drive down prices?

 

--------- Further reading ---------

 

Procurement learns how to make money

 

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This first appeared in PLQ, now available to members through the Procurement Leaders app, ready to download here from iTunes and Google Play

 

 

This article is a piece of independent journalism, written by an experienced journalist and commissioned exclusively by Procurement Leaders