Podcast #54:
How Procurement Connects to Every Supply Chain Link:
Procurement Series, Part 1 of 4

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Transcript: 

By Jim Tompkins, CEO, Tompkins Associates

Hello this is Jim Tompkins, President and CEO of Tompkins Associates and Tompkins International. I am pleased to be with you today to kickoff a new 4-part podcast series on Procurement. I think it is very important, regardless of where you sit in the supply chain, that you grasp the importance of procurement on your end-to-end supply chain.

This four-part podcast will be structured first with an introduction today by me. In the next episode, we will welcome Justin Brown, our procurement service line leader, who will be with us for two podcasts on how Tompkins can help you optimize your procurement component within the supply chain. Then we will finish up with Gene Tyndall with an executive perspective on procurement.

Now we all know that our mega-supply chain processes are plan-buy-make-move-store-sell or maybe sometimes to emphasize the cradle-to-grave nature of the service supply chain: plan-buy-make-move-store-sell-return. In reality, return is a part of the mega-process sell, but I sometimes include it as a separate point to emphasize the total end-to-end nature of our practice.  

Nevertheless, the question for today is: Where does the procurement function fit within the plan-buy-make-move-store-sell mega-processes?  

The naive answer to this question is that procurement is the buy mega-process. Well of course procurement is in the buy mega-process.  But guess what? Procurement is also a key element of all supply chain mega-processes. For example, let’s discuss each mega-process.

PLAN: The role of procurement in strategic sourcing has a huge impact on the planning process, such as supplier location, lead times, agility and performance.  It is also a major part of the ability for these processes to fulfill the link responsibility to the overall supply chain.

BUY: Of course the purchasing element of procurement has involvement in the execution of the buying function. This process travels from requisitioning to purchase order to order receipt to PO fulfillment to settlement. So, as I have previously said, procurement is in buy.

MAKE: Procurement has the role in make of providing direct materials, indirect materials and packaging materials that are required to make the product.  This also includes supplier relationship management, with respect to these materials as well as to the procurement of all outsourced manufacturing and service function required to support the make mega-process.

MOVE: Procurement here has the role of strategically and tactically purchasing the transportation services that provides the movement between the links of the supply chain. This is a fairly obvious role, but not necessarily always one that is accounted for.  Its role in procurement is to de-couple inbound transportation on all inbound materials.  By doing this, the right buy decisions can be made as well as help to assure that the total delivered cost to the end user is optimized for the overall supply chain.

STORE: Once again, procurement’s role is both strategic and tactical in assuring that the right in/out sourcing decisions are made in the store function. Specifically, in today’s global supply chain, the rationalizing of logistics service providers is a key role of procurement with a significant impact on a company’s profitability and customer service.

SELL: The role in the sell function of procurement spans from having the right products for sale at the right place at the right time to the proper disposal of returned merchandise to the strategy and processing for handling aftermarket sales/service.

So, what we see is that the procurement process impacts the end-to-end supply chain and we all need to think about the role of procurement throughout the supply chain.

In fact, let me use the overall Tompkins Supply Chain Value Creation Framework as a further illustration of the importance of the procurement service line to our clients. Our value creation framework presents three objectives for us to increase value for our client’s shareholders and investors.

These three are:

• Profitable Growth
• Margin Improvement
• Capital Efficiency

Let’s consider the role of procurement in each of these three objectives:

1. Profitable Growth:
1. Selecting suppliers of good and services that perform according to plan
2. Selecting suppliers of goods and services that have sufficient flexibility to address uncertainty
3. Selecting LSP who provide excellence customer service
4. Through SRM tapping into the innovation and creativity of our suppliers to bring to market innovative products and services
2. Margin Improvement:
1. Selecting suppliers who provide high value and minimum total delivered cost
2. Selecting service providers that minimize outsourced costs while providing great service
3. Minimize the cost of the procurement function by applying the right processes-people-technology
4. Performing strategic sourcing to assure that procurement supports the corporate strategy (own operations, M&A, joint venture, outsourcing)
5. Applying the proper procurement IT to facilitate sourcing, purchasing, supplier performance, contract compliance and online auctions and negotiations
6. Through the application of spend analysis reducing the cost of purchased goods and services
3. Capital Efficiency:
1. Sourcing products from the best locations to support and optimal network
2. Through the application of SRM to partner with our suppliers to reduce inventory throughout the supply chain
3. To negotiate better payment terms to reduce the cash-to-cash cycle and increase free cash flow
4. To reduce working capital by more closely synchronizing supply and demand and by negotiating a better return policy to reduce excess or obsolete inventories

So you see, it is our view that procurement is a portion of the total end-to-end of the supply chain having a major impact on enhancing shareholder and investor value.

We see procurement as:

1. An integral function within an enterprise that facilitates multi-department participation in supplier performance and the overall enterprise value of the supply chain.
2. Four basic functions:
1. Strategic Sourcing
2. Purchasing
3. Procurement IT
4. Supplier Relationship Management

I guess the last point I would really like to make in this introductory section is to point out that these four basic functions are all global in scope. When you think about strategic sourcing, it is obvious that global discussion is relevant here, in that we are talking about low cost countries or high value countries in which to work our strategic sourcing. The same can be said about purchasing and procurement IT, in that we need to look into considering the global implications or procurement IT and purchasing.

Lastly, the topic of SRM -- supplier relationship management -- also must be viewed from a global context.

In fact, in the U.S. we even spell SRM differently than we spell it in China. In the U.S. we spell it Capital S, little r, Capital M: Where what we are really talking about is supplier management.

To the contrary, in China we spell SRM, little s, capital R, little m: Where what we are talking about is relationships. So SRM is clearly a global subject, in that we really understand how we manage suppliers and how we really develop effective relationships.  

So this ends Part 1 of this four-part podcast. Next will be Justin Brown sharing with us the essential elements of procurement excellence. Look forward to speaking to you all real soon.

Visit Jim's blog, GoGoGo!, at http://gogogosupplychain.tompkinsinc.com/

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Additional podcasts are available - see the list here.