PURCHASING has always been part of business operations and, over the recent years, has developed into key a function in many MNCs (multinational corporations), evolving into procurement, which covers the processes, and the support required to take the right decision of what to purchase, how much, when and where.
Most organisations today still see procurement and purchasing as an execution function and not a value creation function. In most companies, there is no structured procurement function, as there is limited focus on capturing total costs or total value of ownership — this is driven by shareholders as the savings figures do not show in annual reports.
The focus on procurement only turns important when an organisation realises that it has either overpaid, bought something that did not meet its needs or in worst-case scenarios entered into “conflict-of-interest contracts”. These scenarios not only impact the profit and loss of the organisations but, more importantly, they have a negative impact on their brand or reputation.
Even though procurement is not the primary focus of senior leadership teams, good practices and processes need to be in place to support an organisation to be competitive in value created by products and services procured.
In SMEs (small and medium-sized enterprises) procurement / purchasing has normally been split between direct sourcing of, for example, material and services for production and indirect sourcing, for example, facility services, pens/paper, etc.
In SMEs, the direct sourcing is normally taken care of by the operations department and the indirect sourcing by the administration department. In many cases, both types of sourcing in an SME can cause key issues, as in both cases, they are a function performed by untrained buyers.
This occurs when companies grow the roles of procurement that have never received the required focus. Hence the existing buyers are doing their best to deliver what the businesses need. To achieve this, the conventional wisdom is to maintain the status quo and have a good relationship with the current suppliers.
The key things for the buyer to understand are the market drivers of the product being procured as well as, and more importantly, to understand the needs of the customer and stakeholder management.
If the buyer can indeed understand the “whys” and “drivers” behind what the customer needs, he would be in an extraordinary position to provide the additional value of the procurement function.
To understand the “whys” and the drivers to take the buying to another level, these six steps come in handy:
Set the team, set the goals;
Collect and analyse internal data;
Collect and analyse external data;
Develop a sourcing strategy;
Execute the sourcing strategy; and
Implement and manage.
For a long-term perspective of the procurement function, both Coca-Cola and Toyota are two well-known brands that have taken their procurement functions to the highest standard by both integrating for innovation as well as diversifying for the resilience of the supply chain.
So moving forward, stop looking only at the dollars saved. Instead look at the long-term value created for both the customer and the supplier. The total value of ownership approach obtained by large MNCs has already given them a long-term competitive advantage.