In our previous article, we highlighted the difference between Direct and Indirect Procurement. Professionally managed indirect procurement has grown in importance in the last 15 years or so. For organisations who implemented such an initiative, the result was a convincing one. In this article, we introduce Procurement as a business function for organisations who have yet to embark on the journey. It is best to keep in mind that the Procurement function should act as the focal point for an organisation to interact and work with the supply or selling markets; synonymous to the Sales and Marketing functions who act as the channel to the customer or buying markets.
Reason for Change
As with all business functions, top management support is crucial to the success of Procurement. Here, the management team should define the objective(s) of Procurement, usually based on a “burning platform” to introduce change to the organisation. Those who successfully implemented procurement had the following among their key reasons:
- Improve or maintain the profitability of the business amidst challenging economic environments.
- Achieve the economies of scale from a larger organisation, usually following the acquisition (or merger) of businesses.
- Rationalise the supplier base or de-centralised purchasing functions to improve the efficiency of internal processes.
- Safeguard the company’s brand and reputation by avoiding suppliers with questionable ethical business practices.
With the burning platform identified and clear Procurement objectives established, a strong mandate can now be given for carrying out the changes. Such changes affect the processes, organisational responsibilities, expected standards and possibly enablers (systems and tools). The following highlights the potential changes that could affect an organisation in implementing Procurement.
- Procurement function entrusted to source and negotiate supply contracts and reduce end-users’ interactions (and possible collusion) with suppliers.
- End-users specify their product and service needs and support Procurement in evaluating supplier offers.
- Team based approach involving end-users and other internal stakeholders in evaluating and selecting suppliers.
- Department or team leaders approve purchase requisitions before placing orders with suppliers, eliminating the need to sign on supplier invoices to certify payments.
- Purchasing and ordering processes driven by the organisation and not by the supplier, including the use of documented orders instead of verbal orders over the phone.
- Timely processing and approval of orders to avoid urgent transactions that potentially incur higher-than-market prices.
Enabler & tool changes
- Purchase ordering system integrated with accounts payables to automatically trigger payments to suppliers.
- Harmonised and common master data to drive various information systems and avoid the re-entry of pertinent data.
- Employ data analytics to drive fact-based decisions and negotiations with suppliers.
- Budget prepared with the “ground-up” approach, by using fair and current market values instead of relying on historical data alone.
- Financial accruals established based on actual orders placed (but not delivered) with suppliers.
- Broader based sourcing and identification of new suppliers on electronic marketplaces.
As with all management programs, a structure for Procurement needs to be put in place to maintain focus of the impending change. A common structure among the organisations who successfully implemented procurement is the following:
This simple structure highlights the four pertinent and critical elements of Procurement. More details of each element will be covered in future articles. For now, it is important to note that the speed and extent in implementing the procurement structure needs to be considered and tailored to the organisation. Corporations who operate on a broad geographical front may require tiered structures to maintain efficient control of the function. Smaller local organisations may implement a simpler structure, where more than one element of procurement is entrusted to a single resource. Regardless of the size and complexity of the organisation, it is best to prioritise the elements based on the burning platform defined by the organisation’s management. It is always prudent to implement a limited structure and use it to demonstrate the result and value of Procurement first, before expanding the scope of the function.
In our following article, we will highlight some measurement and performance metrics which can guide the Procurement function. Insights into sizing of the function will also be covered, providing you with an insight on how to initiate and justify the Procurement function.
Chee Kin has extensive experience in developing and implementing business strategies to transform business practices. In his career, he held responsibilities in the structuring and operation of strategic procurement in a logistics company both on the global and regional levels.
ThunderQuote is the “Gebiz for businesses” and most comprehensive business services portal in Singapore, Australia and ASEAN , where hundreds of thousands of dollars of procurement contracts are sourced every month by major companies like Singapore Press Holdings, National Trade Union Congress and more.