What a high performance procurement organisation should look like
The journey to procurement excellence
High performance procurement functions across all sectors share common practices and characteristics that define their approach. They have similar goals, embrace similar processes and require similar enablers in order to achieve similar outcomes.
This three part series takes a closer look at what high performance procurement involves, the processes that constitute best practice, the fundamental components that underpin procurement excellence, and what the organisation should expect to achieve from adopting this approach.
Within these areas, the focus for every organisation will vary, but with the right drivers in place, every organisation can navigate their way to high performance procurement.
Part 1: Establishing and optimising core processes
There are multiple processes running through a high performance procurement environment and each one has a different focus and repeats on different timeframes. Think of them as a single ‘process house’, as shown below;
Strategic planning and target setting
Firstly, there are the planning and target setting processes. Synchronised and correlated with the overall organisational strategy, these should be informed by senior management through annual strategic planning procedures that set clear targets (SMART – Specific, Measurable, Achievable, Realistic, Time-based) for delivery and performance.
The balanced scorecard approach to target-setting used by high performance teams includes both financial goals, such as savings, cost-to-procure and procurement ROI, alongside broader organisation, stakeholder and employee objectives. These organisations demonstrate the management of KPIs like spend under management, aggregate supplier performance, stakeholder satisfaction and team competency.
Strategic plans needs to translate into goal-setting and planning
at both supply and commodity level.
Ideally, these should look at areas such as on-boarding alternative suppliers to cover for important categories where you are reliant on one or two key suppliers, as well as plans to mitigate supply chain risk, particularly for the supply of commodities.
Excellent procurement functions manage their entire supplier portfolio and are focused on continual improvement – from evaluating the quantity and quality of existing suppliers and developing SME or local supplier bases, to increasing the percentage of low-cost country sourcing and CSR initiatives.
Category and supplier management
Category management is a systematic process that addresses each specific category of spend to lower total cost of ownership, while strategic supplier management focuses on relationships with key suppliers – usually high-spend but also long-term partners, or suppliers of critical goods and services. High performance organisations demonstrate excellence in both areas, using the processes to drive step-changes in cost reduction.
A robust operational sourcing process is essential to optimising the value of procurement spend. The process will vary according to the type of organisation and nature of the purchase but typically involves structured market interaction steps (Request for Information or Request for Proposal), rounds of supplier negotiations or e-Auction and supplier evaluation to ensure selection of the best supplier at the best value.
Organisations often neglect the core process of contract management, resulting in contract under-performance. A good contract management process ensures the organisation achieves its original, planned objectives by enabling you to closely monitor supplier performance and address any issues in contract delivery. It should also allow you to improve compliance, reduce maverick buying, control discounts and rebates, and efficiently manage the contract renewal lifecycle.
Backbone processes are key enablers of procurement excellence and the foundations of any high performance procurement function. A crucial but often neglected backbone process is control, which includes the ownership of policies and procedures, audit and compliance, risk management, reporting and the internal management of the procurement function.
But perhaps the most important backbone process is the effective management of your spend data. Complete transparency of expenditure on all goods and services, and the ability to analyse, benchmark and accurately report on suppliers, categories and contracts is essential, yet many organisations still lack this core capability. Our own subscription-based spend intelligence service, ProIntell, has been developed to help address shortfalls in this area.
Finally, there is the transactional purchasing process, or purchase-to-pay (P2P) process, which underpins an organisation’s operations. It starts with a requirement or requisition and ends with payment and resolution of any transactional issues with the supplier.
The business will manage expenditure through controls such as requisition approvals, standing financial instructions, supplier selection, product choice, purchase order systems, and invoice/receipt matching. These controls should support business efficiency and be balanced with the needs of the user, who simply wants their requirement delivered in the fastest, easiest way.
For most organisations, a single P2P process is insufficient, as, for example, a low-value, repeat opex order should be treated differently to a high-value, one-off, capex requirement. Streamlining repeatable catalogue purchases and using purchasing cards for ad-hoc low value items will allow you to devote appropriate procurement capacity to optimising spend on higher-value purchases.
Three points to think about for improvement…
- Consider which processes exist in your organisation, their relative strength and the contribution they make to your procurement performance. Then use the process house to map potential areas for improvement.
- Assess the importance of each process to your organisation against the amount of resource required to manage it. You might find that areas such as transactional purchasing are over-supported compared to powerful drivers of change like category and supplier management.
- Make sure you have the right backbone processes in place – particularly in the area of spend intelligence. These processes are key enablers of procurement excellence.
If you would like to discuss transforming your procurement function, please call: +44 (0)203 693 7275 or click here to email us
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