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How many different types of prawns are there? For one catering and hospitality company, the answer was 76. Nobody really knew why they bought so many different varieties; the specification had just grown with the business, unchallenged.
For that company’s procurement manager, Simon Atkinson, now a partner with consultancy Occumen, this example illustrates the forces creating complexity in sourcing. By reducing the number of prawn varieties, he helped simplify processes, source greater volume and get a better price. But to execute this kind of strategy procurement professionals need their stakeholders to co-operate in the process.
“Forget the number of specifications we buy, how many conceivable applications do we need?” he says. “We started with 76 prawns and found we only needed seven. The process that creates complexity is relevant to lots of industries. Purchasing can drive that out and create efficiency, but when you get into it, it can involve a technical understanding of engineering, for example, or in our case catering. You can easily get tied up in technical arguments.
“You have got to engage the business in understanding the problem and get them on board in creating the solution, otherwise they will resist.”
Identifying sources of complexity
In a career including senior procurement roles at Mars, Diageo and Pepsi, Atkinson has seen a number of factors that drive growing complexity in sourcing: globalisation, the legacy of mergers and acquisitions and changing internal product development programmes all play a role, he says.
This results in having to manage more categories of spend, often without additional time or headcount in procurement. Sourcing standards, if they do exist, are not evenly applied. Therefore, spend and supplier analysis and data aggregation, which are already complex, become even more time-consuming—and even more necessary. Atkinson says procurement can save the business money, increase supplier quality, and add value by standardising and simplifying processes, reducing the number of specifications and driving greater volume through fewer suppliers.
It can be the quickest path to lower costs and higher revenues. But, in some circumstances, this must be balanced against the business’s desire to capture market opportunities, he says.
Start with the outcome
“The conventional view of procurement is to try and simplify everything, and [take a] category management approach and then apply uniform judgement as to what the desired outcome should be and then constrain options,” Atkinson says.
“But there is an emerging approach that is about making market-informed choices, not constraining at outset, but starting from the outcome. You ask, how do those options further our competitive advantage? Sometimes you do not constrain choices, but take it all in,” he says.
In these circumstances, procurement should look to technology to help manage complexity, applying computer algorithms and iterative calculations to complex supply chain processes.
“The main thing is clarity of purpose. If it is complex, what are we seeking to achieve? The perennial challenge is getting people to understand that. But you need to keep complexity away from the stakeholders, and keep the discussion in layman’s terms, not procurement-speak.”
Appropriate sourcing for each category
However, Paul Jones, procurement and supply chain practice leader at consultancy KPMG, says that sourcing processes are difficult to simplify beyond a certain point. Although procurement has evolved as a discipline which creates generic sourcing strategies, whatever the category, in reality the process can be very different depending on what the business is buying, Jones says.
“It is always an eclectic mix. People now recognise that sourcing a multi-billion pound construction project is not the same as finding suppliers for a piece of software. You then have to have the agility and flexibility in process and technology to make sure the sourcing is appropriate for the required category.
“There is a danger in one-size-fits-all. It becomes procurement turning the handle on the process rather than being a robust supplier selection with the right sourcing and contracting strategy in place,” he says.
But there are ways of simplifying some sourcing activities to help procurement organisations manage the more challenging categories.
Using self-service automation tools, businesses can make sourcing of low value, non-strategic, but important, categories more efficient. “We are seeing clients making it easier for the internal customer with greater process automation – enabled by technology and shared-service operations,” Jones says.
Atkinson adds that online catalogues can also provide a route to managing complexity in some non-strategic items. Stakeholders get to buy the full breadth of what they want, but procurement acquires more visibility. Using spend analysis tools on the data acquired, procurement can persuade the business to reduce the sourcing options.
Jones then sees a middle ground of operational sourcing. “This is where you need to segment the requirements. If you have got commodity or category buying where cost and price and the supply market is competitive then it lends itself to having strong commercial and procurement processes to strike the right deal.”
In both camps, procurement can standardise sourcing processes supported by software, where the software acts like a sourcing handbook that explains and teaches the process. Software can also streamline the process from spend analysis to sourcing through contracts by integrating the end-to-end workflow. This standardisation and integration creates faster sourcing, so more categories can be managed, more deals implemented, and more savings can be delivered to the business.
To further simplify sourcing,, Jones sees technology and cloud service providers developing business-to-business marketplaces more akin to the platforms familiar to consumers, such as Amazon or eBay. “There are lots of marketplace providers using technology that allows organisations to tap into large pool of suppliers. They can offer great economies of scale.” Moreover, online bidding drives competitionand hence better deals and more savings.
Managing unavoidable complexity
Simplifying sourcing of commodity and operational categories can free up procurement, enabling it to help manage areas where sourcing is more complex and yet core to creating strategic advantage, Jones says. “When you are looking at the real business-critical categories, procurement must work very closely with the stakeholders.
“In life sciences, for example, it could be large and complex clinical R&D outsourcing. That is not just about getting the contract at the right price. That requires a business participation that understands the supply market and how to innovate. It needs to be managed by a cross-functional team including R&D and finance, technology and procurement.”
Michael Koch, Ariba director of solutions marketing, says while there are many tools to help the procurement process, a new breed of solutions is helping procurement teams expand and better understand their potential suppliers.
“Online auctions can certainly help you get a good price and there are tools for everything you need from the initial RFP to accepting the bid, but the real question is what suppliers are you looking for and how do you find them?” Koch says.
Ariba connects procurement teams with a network of qualified suppliers. It allows analysis of the market place to help uncover new suppliers that meet the business’s requirements, similar to the way LinkedIn helps businesses find candidates for jobs.
“If you are part of a network, like LinkedIn, and you are looking for a salesperson in the pharma industry you can find 500 people in companies that you’ve never seen before. In a similar way, we use category codes and industry codes to help buyers find new suppliers,” Koch says.
Enhancing supplier relationships
With a new source of suppliers, companies can analyse their spending and consolidate it into a smaller number of vendors able to meet the needs previously provided by a greater number of vendors, Koch says. In addition to driving down costs this can enhance long-term supplier relationships by pushing more volume their way.
Sourcing tends to become more complex with the passage of time, through business change, mergers and acquisitions, and globalisation.
Procurement needs to limit complexity but also learn how to manage it when it benefits the business’s ambition. Automation and new technology can help streamline and simplify low-value and operational sourcing, freeing up procurement to invest time in more complex, strategic sourcing. Meanwhile, a new breed of supplier network tools is also helping companies find new vendors and simplify sourcing processes.
This article has been written by an experienced journalist, commissioned by Procurement Leaders. It is part of a sponsored editorial product, published in partnership with SAP Ariba.