In an earlier article, we introduced the three key components of modern day Procurement, Management, Sourcing and Purchasing. We covered to a large extent the aspects of Management and Strategic Sourcing, and now we turn our attention to Purchasing. The Purchasing function is often overlooked by many organisations, and is perceived as a back-office function that lacks the strategic content when compared with Sourcing. Moreover, the performance of Purchasing in terms of savings achieved (often a key measure on the success of Sourcing) is negligible and pales in comparison with the achievement from sourcing initiatives. It is the author’s opinion that the perception of Purchasing as a lesser function is due mainly to the fact that Purchasing operations need a management approach that is far different and probably unfamiliar to the majority of Procurement professionals who are skilled in the art of sourcing.
As a back-office function, Purchasing is about achieving process efficiency in the downstream activities of the Procurement value chain. The approaches to organise and manage Purchasing operations have more in common with the manufacturing and production environment than with the consulting approach usually associated with Strategic Sourcing. The results from Purchasing should be viewed as complementing Strategic Sourcing and not any lesser in importance. It is not difficult to imagine a situation where a supply contract concluded by hard negotiations is wasted due to inadequate or non-optimised ordering practices in Purchasing. Hence, we continue to emphasize that Purchasing together with Sourcing and Management form the three key components of a professional Procurement function.
Successful Procurement organisations with optimised Purchasing functions have enjoyed the following benefits:
- Higher level of compliance with stated policies, procedures, codes of conduct and other standards;
- High degree of automation and consistency in the payment processes;
- Enhanced level of transparency and granularity of spend data; and
- Full control of expenses and cash-out situations exercised by business managers.
How are these benefits achieved? We will highlight some of the more notable approaches for Purchasing operations in this and the next articles.
The Purchasing process is more commonly called “Purchase-to-Pay” (P2P), to associate the act of purchasing with payments made to suppliers. Keep in mind that that this process is an expansion of the last activity (Ordering) of the Strategic Sourcing process; see our article Strategic Sourcing II. When combined together, the end-to-end process is popularly known as the “Source-to-Pay” (S2P) process.
A typical P2P process takes the form:
This generic P2P process has been used extensively to manage and control Purchasing activities of a number of organisations, including the design and setup of ePurchasing systems. It should be noted that Invoice Reconciliation and Payment activities typically fall within the scope and authority of the Finance and Accounting department of an organisation. Hence, the output from Purchasing will interact and interface with the Accounting function, preferably in a seamless manner. And likewise, the Accounting function’s authority and criteria may need to be implemented and exercised upstream and within the Purchasing tasks. A continuous and integrated P2P process will ensure:
- re-entry of data and information is avoided;
- full process transparency and accountability for processes and tasks; and
- maximum leverage on technology to automate high volume of transactions.
Prerequisite to Efficient Purchasing
For ease of organising and managing Purchasing operations, a clear delineation of Sourcing and Purchasing is required. From an organisation perspective, this involves assigning and allocating resources to either of the two functions, and ensure that the resources have maximum focus on the tasks and activities at hand. For most resources, this delineation would not be an issue. But for resources who are performing or supporting mostly Tactical Sourcing activities (3 or 5-quotes prior to ordering), the choice needs to be made as to consider the activity as part of Sourcing or Purchasing.
To address the Tactical Sourcing situation, let us recall the definitions introduced in our earlier article (Strategic Sourcing I, 17-Jan-2017):
There is no doubt that Tactical Sourcing involves making decisions on the choice of suppliers prior to processing or fulfilling the purchase requisitions. However, unlike Strategic Sourcing (with a high number of sourcing strategies and levers to contend with), the considerations for Spot-buying are mostly driven by end-users and the decision criteria are rather limited (price, availability of supplies, delivery schedule). Such considerations can be summed up in a decision matrix such as this:
Other forms of decision matrix or evaluation criteria can be drawn up to support the Spot-buying task. When such decision branches are defined and documented, the Tactical Sourcing or Spot-buying activity becomes a routine workflow that can be replicated, scaled up and even automated to a certain extent. From this aspect, it is clear that Spot-buying should be considered to be within the scope of Purchasing operations and not Strategic Sourcing. Once an organisation recognises this fundamental concept, the complete delineation of Sourcing and Purchasing is achieved.
Performance of Purchasing
With the Purchasing function delineated, appropriate objectives and performance indicators can be set for the function. It should be clear that savings which is a common measure of Sourcing, is and should not be the main performance indicator for Purchasing. Other more appropriate measurements are required to steer the performance of Purchasing. Among these are:
- Transactions that are contract compliant – Measures the proportion of order transactions that are made against sourced contracts, as opposed to transactions that are made via Spot-buying. This is a good measure to encourage the Sourcing and Purchasing functions to collaborate and improve on the use of sourced contracts that bring tangible benefits to the organisation.
- Catalogue-based spend – Measures the extent of which purchases are made from standardised commodities made available through catalogues (electronic or likewise). The use of material catalogues is one of the more effective means of standardising commonly used supplies, and directly supports the sourcing strategy of ‘Volume Concentration’. If an ePurchasing system was used, catalogue-based transactions can be automated, ensuring such transactions to be processed ‘touch-free’, ie. transactions carried out without any human or operator intervention. More insights into the use of catalogues in our future article.
- Transactions per resource – A productivity indicator that aims to improve the output from each resource deployed within the operation. Similar measures are used in production environments to the same effect.
- Cost per transaction – A financial measure that is useful in comparing the overall operating costs with plans. In estimating this measure, it is important that all costs associated with the operations is included and used on a consistent basis.
Other performance measures may be used to gauge the efficiency and effectiveness of Purchasing. And such measures may need to be adapted as the Purchasing operation matures and evolves.
In future articles on Purchasing, we will reveal the intricacies and workings of ePurchasing systems and their advantages over manual processes.