Procurement Excellence – What a high-performance procurement function should look like
No matter what sector, a high-performance procurement function will be striving for the similar outcomes, through similar processes and require similar enablers in order to do this.
In this article we consider firstly what a high-performance procurement function should be doing; the core processes that it should be executing efficiently, then the fundamental building blocks that are needed; what we call the “six enablers of procurement excellence” and finally the outcomes… what it is that the function should be achieving for the organisation.
The particular focus that an organisation will put on each area will vary; there isn’t a one size fits all, however nearly every procurement organisation, whether a retailer, technology developer or automotive manufacturer will require a blend of the above and, once set-up, can manage through a balanced scorecard.
The core processes for procurement excellence
There are multiple processes running through a high-performance procurement function. These processes have different focus and repeat on different timeframes. At Procura we like to think of them as a single “process house” as below.
We can think of these processes in two groups.
Firstly, there is a transactional purchasing process. This is the classic purchase-to-pay process (P2P) ; starting with a user requirement or requisition and ending with payment and management of any transactional issues to be resolved with the supplier. This process will be underpinning the very operation of an organisation. From a business perspective the process requires control parameters; requisitioner approval, budget control, standing financial instructions, supplier selection, product choice, purchase order coverage, invoice/receipt matching etc in order to apply control to the flow of expenditure. Of course, a user simply wants to get their requirement is the fastest, easiest way and the organisation must strike the right balance of control vs. ease and make the entire process as efficient as possible.
A key consideration is that (unless you are a very small business) a single P2P process is rarely appropriate, for example a low value, repeat, opex requirement order should be treated differently from a high-value, ad hoc, capex requirement. Thought should be given to streamlining repeatable catalogue purchases, using purchasing cards for ad-hoc low value purchases and applying the appropriate controls and sign-offs for higher-value purchases. Strangely, many organisations devote procurement capacity to low-value transactions whilst their largest capital purchases leave money on the table.
Strategic planning and Target setting
The second group are the procurement processes.
Starting at the top, the function should be undertaking what can be considered strategic planning and management activity on an annual basis. Organisations are familiar with annual budget and target setting cycles and procurement is no different. The function should have clear targets (SMART – Specific, Measurable, Achievable, Realistic, Time-based) for delivery and performance. Many functions have an annual savings target but high-performance procurement functions demonstrate a balanced scrorecard approach to target setting which include not just financial dimensions (such as savings, cost-to-procure and procurement ROI) but operations, stakeholder and employee dimensions.
Excellent procurement organisations demonstrate management of KPI’s such as spend under management, aggregate supplier performance, stakeholder satisfaction and team competency. However planning also needs to cascade down to objective setting and planning at supply and commodity level. Your business may have a large percentage of spend with one or two key suppliers; you should have plans in place to find, develop and bring on stream second and third sources of supply. Or your business may be exposed to particular commodities and should have commodity-specific plans to manage and mitigate supply risk.
Excellent procurement functions manage their entire supplier portfolio and work on specific initiatives related to their supply base. This could be reducing the number of suppliers, increasing the percentage of low-cost country sourcing, developing the SME supply base or local-supplier initiatives as well as Corporate Social Responsibility and Sustainability programmes.
Category and Supplier Management
There are two tactical, impact related processes running through an organisations supply base in two dimensions. High performing organisations demonstrate both. The first is category management; a systematic process to address each particular category of spend to lower total cost of ownership. The second is Strategic Supplier Management which focuses specifically on key suppliers – which could be high-spend but also long-term partner suppliers and also suppliers of critical goods/services. Both are periodic, project-type processes but repeating on an ongoing basis. These processes are the drivers of cost reduction and essential to make step-change impact in cost.
When an organisation has a requirement to be sourced, it should have a robust operational sourcing process to ensure it achieves the optimum value-for-money from every pound it spends. Of course, this process will vary according to the type of organisation, the nature of what is being bought and the value of the purchase relative to the organisation, but typically involves structured market interaction steps (Request for Information/Request for Proposal), rounds of supplier negotiations or e-Auction and supplier evaluation to ensure that the best supplier at the best value has been selected.
Too many procurement organisations neglect the core process of contract management; once a supplier has been appointed often the implementation and certainly the ongoing management of contracts is left to stakeholders. What happens then is that the planned value that the organisation should achieve following the sourcing process falls short of what is actually achieved. A good contract management process ensures that the organisation achieves what it set out to do in the first place and then improves compliance, reduces maverick buying, manages discounts and rebates, controls supplier performance and controls the contract renewal/re-tender lifecycle.
Forming the foundation of a high-performance procurement organisation are a number of what can be considered to be “backbone” processes.
The management of spend data forms a truly fundamental backbone for any function. Complete transparency of every pound of good and services spend and the capability to analyse, report and benchmark across the dimensions of supplier, category, and contract is essential.
Our experience shows that many organisations lack this basic enabling functionality and are therefore operating blind. It is from this basis we have developed our ProIntell Spend Intelligence Service, providing organisations with this capability on a subscription basis.
A second neglected backbone process is that of control. One which often has different names in different organisations but one which includes the ownership of policies and procedures, audit and compliance, risk management, reporting and the internal management of the procurement organisation itself.
Points to consider:
- Every organisation is different. Consider which processes and in which intensity are present in your organisation.
- Use the process house to map areas for improvement.
- Consider the importance of each process to your organisation against the amount of resource dedicated to each. We often find too much resource dedicated to transactional purchasing and very little on the impact processes of category and supplier management.
- Make sure the backbone processes are in place. These are key enablers of procurement excellence.
The first step in developing procurement capability lies in understanding exactly how the existing function is currently performing. Procura’s Procurement Performance Assessment provides a benchmark to current performance.
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