Positioning Procurement Department

Most important for a growing organization is how they position the Procurement / Sourcing department. Is your executive committee involving the procurement department as part of demand planning process or the annual operating plan (AOP)? Is the procurement department enabled with information on the company’s strategy for the next 3 years or 5 years? If the answer is NO, then your procurement department is barely working as a “getting department” and will be perceived by the business owners as a impediment than as a value generating team. The procurement department needs to be enabled with all the information so that they can elevate from a mere transnational activity with limited or “no value” add to a department that steers the organization to achieve their goal in a cost efficient and strategic manner.

Is your procurement team only responding to requisitions where most of the product / services that the business wants to buy are already predetermined? In some worst case scenario, the business also shares the quotes from the vendor(s). If this is the process in our company, then, your procurement department is merely a support group and will be tagged as a overhead since we are contributing little or nothing to the bottom line.

A world-class procurement department will always focus on strategic approach. Executive committee sees this department as their core competence adding value to the overall growth of the company. This team will be designing the supply chain determining where the supplier needs to be, how they relate to other suppliers vs how they relate to us. The world-class procurement team would be developing the strategies and ensuring the strategies are being implemented with their strong network of vendors. Instead of business recommending the supplier, the procurement team develops and manages alliance and has a strong network of vendors where Supplier Assessments are performed periodically. They take an active role in identifying the supplier risk, managing the supplier risk and developing the mitigation plan. The world-class procurement team is always focused on TCO than the initial cost of the product / service. Tail Spend should constitute less than 3% of the overall spend and instead of empanelling multiple vendors, we need to identify few integrators how will manage the risk with a little markup fee.

Procurement team should be focused on whole value stream by effectively managing the contracts and supplier relations. Did you know nearly 75% of the value can erode within first 18 months of signing contract? By using supplier relationship management (SRM) principles we can leverage value beyond the contract and prevent that value leakage. 

Finally, their needs to be a representation of the procurement team at a CXO level, top fortune companies have CPO as part of the executive steering committee to ensure they are involved in every decision making. CPO position is as important as a CTO, COO & CFO. This statement holds true not only for the product based company who manage the entire supply chain but even for the services industry. ~30-40% of our CapEx and OpEx spend can be reduced by diligently moving to a world-class approach vs traditional buying.

Author: Kushal Nagaraj