Podcast #57:
Procurement Series, Part 4 of 4
Transcript:
By Jim Tompkins, CEO, Tompkins Associates
Hello, this is Jim Tompkins President and CEO of Tompkins Associates/International. I am pleased to be with you today to present the final piece of our podcast series on Procurement. Joining me today is Gene Tyndall, Leader of our Global Supply Chain Services Practice. Welcome, Gene.
Gene I have asked you to join us today to provide us with some take-aways for our listening audience to wrap up this series by discussing questions we hear from procurement executives and other supply chain executives.
Gene
Thanks, Jim. I was quite impressed with your and Justin’s reviews in Parts 1 through 3, where you covered the 4 key processes of the mega process of “BUY” -- Strategic Sourcing, Purchasing, Information Technology, and Supplier Relationship Management, or SRM.
Jim
Justin and I spoke about procurement strategy in one of the earlier podcasts and one of the questions that we hear from executives is “what should be our sourcing and procurement strategy in today’s dynamic economy?” Gene how would you answer that question?
Gene
You and Justin addressed this in your review of Strategic Sourcing, by raising the topics of best supply base, commodity management practices, low cost country sourcing, and management of risks. I would add one point here -- that not all companies are set up to “copy” the generally accepted leading practice of global sourcing and robust strategic sourcing.
As you emphasized, while this practice has appeal, there are numerous barriers to conquer when “going global” in sourcing products, components, or materials. Each company should evaluate its capabilities before “following the leaders”. The best strategies are those that are developed and committed to by the executives and staffs that have to follow them.
Too often we find companies sourcing in China because it is “the thing to do” to get lowest piece price. They soon find themselves incurring way too much cost and discover quality problems with acquisition due to ineffective execution.
Anywhere from 50%--70% of a manufacturing company’s value potential is in Procurement. Most of what a company “is” is defined by the products, components, and materials it acquires. This argues for a unique Procurement strategy for each and every company.
Jim
That makes a lot of sense. Now for a question we hear a lot “How are we doing?” This is with respect to capabilities and competencies.
Gene
You and Justin discussed the enablers of sourcing strategies -- talent, technologies, performance measures, organizational structure, and business processes -- and these indeed do determine the effectiveness of the Procurement Process. To ask yourself “how we are doing?” is a best practice in itself. Whether or not you, your peers, and your customers are satisfied or not is a question should be asked regularly. It shows a willingness to improve, which is what executives should strive for.
There are,of course, different ways to evaluate the Procurement Process. It starts with defining and measuring the right performance measures -- “measures that matter” -- to include cost, speed, quality, and responsiveness. Procurement executives should always remember they exist to serve the company’s business strategy -- which exists to best serve its customers. The fact is that most products that customers buy today are not produced, they are assembled. An automobile engine alone has 400 parts. An i-phone has over 30, with most of these provided by competing product companies to Apple.
Executives can evaluate their Procurement Processes internally, apply industry benchmarks, ask their managers the tough questions, and/or obtain expert outside reviews. Operations performance assessments should be done regularly, to identify opportunities for improvements across the enablers.
Jim
Another category that we often hear and discuss with executives is on Organizational Effectiveness. What are some key take-aways you can provide on this topic?
Gene
As you and Justin emphasized, where a Procurement Process sits in the company’s organizational alignment can determine its effectiveness. Too often in the past the Procurement teams -- referred to as Purchasing -- were relegated to either a separated department, or reporting to a non-supply chain senior executive. This has translated into a corporate mindset that “purchasing agents” do not know the business, do not serve the business, have no visibility into customers, and care only about low purchase prices. As long as this mindset prevailed, purchasing received only limited attention, challenging cost targets, and orders to “save more with less”.
When Procurement sits within the Supply Chain organization, it has much more visibility into the “source to cash” process, into customer needs, and into what it takes to become world-class. At this point, resources can be more available -- information technology, for example -- which can enable better processes and better performance. Decision support applications exist today that help source, buy, track, pay, and evaluate both suppliers and transactions.
The question of centralization vs. decentralization is, as with procurement strategy, best determined for each individual company. The factors and criteria for these choices go beyond how buys are made -- and involve the other processes of the supply chain.
Jim
A major topic also is on Supplier Relationship Management (SRM). Justin spoke about this in an earlier podcast, but can you also provide us with your insight?
Gene
This relatively new way of working with suppliers is slow to catch on in some industries, yet it has produced major benefits where executives are serious about improving their key suppliers and not just demanding lower prices. In effect, this goes to the Procurement Strategy, as it is driven by the company’s view of the importance of quality suppliers, guaranteed supplies when needed, and joint operations improvement.
Toyota, for example, has proven the value of SRM, while the high-tech companies have been “pulled into it,” due to supply imbalances. The recent global shortage of cotton has many apparel producers in major problems with volumes.
Executives should definitely takeaway the idea that, regardless of whether there are any supply chain issues now, or that they can “switch out” suppliers readily on non-performance, the selective application of SRM can not only protect them in the future if that were to occur, but it can also improve their business today. Some of the best product design and operational innovations come from supplier-customer collaborations.
Jim
Gene, thank you. I agree SRM is a very important way of working and building relationships.
The last area I would like to cover to wrap up this series is on the overall Process of Procurement, what should it involve? What should it do for the business and the customers?
Gene
This type of question rises from the often narrow view of Procurement as being Purchasing. In fact, it should be viewed as “Supply Management” -- on an equal base with the company’s “Demand Management”. We often forget the most important goal of Operational Excellence is to match supply with demand. This means that executives should do much more than “spend less”. They should be finding and negotiating lower prices.
In order to transform Procurement into world-class status, all the sub-processes and practices should be defined, mapped, and improved. If an important activity that you and Justin mentioned is missing, it should be introduced. Above all, Procurement in 2010 and beyond is much more than purchasing, and executives should work to make that happen, based on the tips we have provided in this Series.
Thanks, Jim. I hope this has been helpful for suggesting the right takeaways that will make a difference to companies elsewhere.
Jim
Thank you Gene for being with us to wrap up this procurement podcast series.
As we close this podcast, I would like to wish everyone a very Happy Holiday season and look forward to speaking to you again real soon in the New Year.
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