Podcast #55:
Procurement Excellence
Procurement Series, Part 2 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 for Part 2 of our procurement podcast series. With me today is our Procurement Service Line Leader, Justin Brown. Welcome Justin.

Justin

Thanks for asking me to join you to discuss Procurement Excellence, Jim.

Jim

On our last podcast, I talked about the importance of Procurement on the
end-to-end supply chain. Specifically, how Procurement can help grow a company’s profits, improve margins and help achieve the most efficient use of capital. 

I also defined Procurement as having 4 functions:  Strategic Sourcing, Purchasing, Procurement IT and Supplier Relationship Management. Justin did I leave anything out in defining Procurement and answering where Procurement interacts within the Supply Chain?

Justin

No Jim, that sounds pretty comprehensive. The four functions you described make up what we call Procurement.  And as you stated, Procurement stretches the length of any supply chain and can be used as a powerful lever to impact growth, margins and capital efficiencies.

Jim

Great! With that as a foundation, can we look at the first two, Strategic Sourcing and Purchasing Today, and decide what their primary functions are and the steps we should take to ensure we are achieving the most benefit from them?

Justin

Sure. Let’s start with Strategic Sourcing.

We define Strategic Sourcing as the process where internal requirements and external market capabilities are evaluated to identify a source of supply that will best achieve the Enterprise’s Business strategy. This has been known in procurement circle for years as product/service sourcing.

However, in recent years the word Strategic has been added to stress the importance of expanding this activity from just finding a company that can provide your desired good at an acceptable price, to considering how the supplier fits into the overall supply chain foot print, what is this supplier’s capability to react to changing demand, and what innovation can this supplier contribute to the evolution of the supply chain.

To ensure you leverage Strategic Sourcing to the fullest you must first make sure there is a clear Procurement Strategy that supports the Enterprise Strategy.

Step 1 - What is the purpose of your company and how do you plan to achieve it? (The Enterprise Business Strategy)
Step 2 - How should we support the enterprise strategy with your procurement practice (the Procurement Strategy)
Step 3 - What type of qualities of my suppliers are important to enable my Procurement Strategy and thus my Enterprise Strategy (then essence of Strategic Sourcing)

Jim

Those steps are very beneficial to our listeners. Can you give an example to really help our listeners relate?

Justin

Sure, here’s an example: Your Company is a high fashion garment designer/retailer that outsources manufacturing. Your Procurement strategy is 2 fold, procure the most innovative and unique fabrics that are suitable for garments and identify and contract a high quality garment manufacturer at an acceptable price.

You now have a clear procurement objective of identifying innovating high quality fabrics for garments. You can rely on local companies to bring you product that fits your requirement, you can build a team that searches the globe, you can focus on academic innovation…There are hundreds of ways to achieve innovative and high quality garments.
 
Jim

And it is these hundreds of ways that answer the sourcing strategy question that often overwhelm many companies.  Can you give our listeners some guiding questions to help them through this thought process?

Justin

Sure Jim. In answering “what should be the sourcing strategy”, you should ask yourself:

1. What is the supply base and what should my Supplier Strategy be?
2. Are there certain natural product structures for my raw goods/services and what should be the commodity management strategy
3. From a labor prospective, should I be pursuing low cost sourcing and what impacts does this have on the length of my supply chain, management of it and quality of products or services
4. What risk is inherent in this business and how can suppliers help to mitigate/manage this risk

And once you have an answer for the sourcing strategies, we then flush out the other enabling components by asking very targeted questions.

1. What are the processes to help you achieve the strategy?
1. How do you build a bid package
2. How do you solicit for an RFI or RFQ bid.
3. Who participates in selection
4. What are judging criteria
2. What type of sourcing talent exist inside your current organization?
1. Do they know the market, the trends the fundamentals of the business
2. Can they identify the right pool of supplier to evaluate
3. Can they pull the right people together to evaluate an RFQ
4. Do they have the negotiation skills to achieve an optimal agreement
3. What type of technologies are you currently using to support your sourcing activities?
1. Can your sourcing experts get to Business Intelligence/Market information
2. Do your sourcing experts have access to past experience with suppliers
3. Do you utilize e-auction and how is your bid process administered
4. What performance measurement metric do you use to ensure success?
1. How do you measure success?
2. At what frequency, with whom do you review
3. What are the type of actions taken from measurement indicators
5. Last we look at organizational structure
1. Is this a stand-alone organization
2. Are the sourcing experts a part of local operation or a part of a central corporate structure
3. Is the Strategic Sourcing group integrated sufficiently with its internal customers to understand internal requirements

By answering these questions, you can get a sense for how well your Strategic Sourcing group is prepared for their role, enabled for success by process and technology, and if they are situated appropriately to bring the best value to the enterprise. 

Jim

So once you’ve set the path forward with a clear and decisive Procurement Strategy, all the enabling components are focused on helping achieve the strategy?

Justin

That’s right Jim. The Strategic Sourcing  strategy needs to enable the Procurement Strategy, the processes enable the sourcing strategy, the people execute the processes, the technology enable the people and processes, organizational structure is set to facilitate communication and ownership and all the activities are measured to ensure you are achieving the sourcing strategy that will enable your procurement strategy.

Jim

Does the same hold true in Purchasing?

Justin

Yes it does. But before I get into the specifics on Purchasing, let’s define it first. Purchasing is the execution of the buying and settlement transactions and associated logistics. Often Purchasing is used, I believe incorrectly, as a synonym for Procurement, when it really should be called Procurement Operations … and yes, similar to Strategic Sourcing there are enabling components to Purchasing: Strategy, Process, People, Technology , Organization and Performance Measurement that all work together to enable the Procurement Strategy.

Let’s think about achieving the most out of Purchasing in the context of our previous example, the high-end garment design/retailer. The Procurement Strategy of procuring the most innovative and unique fabrics that are suitable for garments drives selections of suppliers that are in all corners of the world. How do we get a purchasing order to these suppliers, how will we track the goods for delivery and how will we pay the supplier upon delivery? These questions highlight help define the strategy of our Procurement Operations that will support the Procurement Strategy.

Jim

Justin, as you did with Strategic Sourcing, can you tell us the questions you should ask regarding Purchasing enabling components?

Justin

Yes, again we’ve started with answering the strategy question first and then we turn our focus to the enabling components.

1. What are the processes to help you achieve the strategy?
1. How are requisitions created
2. How are PO’s generated
3. How are Suppliers paid
2. What type of talent exists inside your current organization?
1. Do they understand  International trade transactions
2. Do they have the business savvy to manage suppliers, banks, customs
3. What is the ability to multi-task
3. What type of technology are you currently using to support your operations?
1. Do you have a large ERP, do you use it effectively
2. Do you have access to video conferencing
3. Do you track expenses in excel, is that sufficient
4. What performance measurement metric do you use to ensure success?
1. How do you measure success
2. At what frequency, with whom do you review
3. What are the type of actions taken from measurement indicators
5. Last we look at organizational structure?
1. Is this a stand-alone organization
2. Are these executing personnel a part of local operations or a part of a central corporate structure
3. Is the group integrated sufficiently to understand the sense of urgency or impact of slow response

The answers to these questions are, at times, not straight forward and it can be hard to draw black and white conclusions. However, one thing is for certain, evaluating each component and how it does or does not enable the Procurement Strategy will highlight the effectiveness of your current Purchasing function.

Jim

Can there be a point where organizational structure is a part of the strategy? For instance, centralizing transactional operations in a low cost geography is popular for many companies today. That’s been a strategic choice to minimize cost.

Justin

Yes, I think you are right, centralized organizational structure can be part of your strategy. However, I think in general “form follows function”. So, if you decide to centralize you processing operations and then place this operation in low cost country geography to minimize the cost, I would propose that this is really the result of a strategy to minimize redundancy and the organizational structure to support this is a central team. Regardless of whether organizational Structure is a standalone enabling component or a consideration in Strategy, the important aspect is that you think about what role it plays in achieving the Procurement Strategy.

Jim

Agreed… Well that is all the time we have for today’s Procurement Excellence Podcast. Thank you Justin for describing the first two of the four primary functions, Strategic Sourcing and Purchasing.

Please join us in two weeks for the third in a series of four podcasts, when Justin and I will discuss the Procurement primary functions of Procurement IT and Supplier Relationship Management as well as the steps we should take to ensure we are achieving the most benefit from these two functions. Thanks a lot, look forward to talking to you real soon.

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Additional podcasts are available - see the list here.