While the recession was certainly not desirable, its arrival did herald the rise in prominence of procurement as a factor in business operations. However as the recovery has ensued, the question begs as to whether it will remain high on the management agenda. Tony Lockwood of Xynergie argues that the rightful focus on procurement in new economic times is a chance to truly transform its function through a total reengineering process.
With clients and customers seeking better value, declining growth prospects and the impossibility of raising prices, many firms are being forced to find and focus on areas within their business that can save their eroding margins. But crises bring with them opportunities and, in the current business environment, a procurement function ripe for re-engineering offers organisations a last frontier in which to find hope and to seek opportunities.
Rethinking and redesigning business processes can achieve dramatic improvements in critical performance measures. Procurement process re-engineering is the analysis and redesign of the procurement function of a business to mine hidden strategic value and to bring about dramatic improvements in performance. Far from an incremental approach, procurement re-engineering is a total reinvention aimed at improvements that are more likely to be 10 fold than 10 percent.
Who needs procurement process reengineering and why?
Many businesses claim that they want to be an organisation flexible enough to adjust quickly to changing market conditions, lean enough to beat any competitor’s price, innovative enough to keep products and services technologically fresh, and dedicated enough to deliver maximum quality and customer service. The truth, however, is usually far from that.
What does procurement process reengineering entail?
Procurement re-engineering can be delivered in three key stages:
1 Realising savings from a review of historic spend
2 Optimising existing contracts to create immediate saving opportunities
3 Transforming future purchasing and procurement processes
Realising savings from a review of historic spend
Usually a comprehensive review of historic spend will uncover profits lost to duplicate payments, over payments and VAT anomalies. It is also an opportunity to ensure that historic transactions took place at the correct price levels. Post-audit reports can help implement process improvements and eradicate future errors. A risk free way to forensically review your account payable spend, the review begins with an audit of accounts payable in order to uncover system, process and human errors within the procure-to-pay cycle. Most businesses are surprised that the average error rate in the UK is around 67p per transaction. The typical firm can expect to recover in the range of 0.04-0.1% of their total spend over the last 5 years. On average the whole review process will take between two to four months.
Optimising your existing contracts
Even when undertaking strategic improvements in procurement function, procurement reengineering can also reap immediate benefits just from undertaking the exercise. Quick wins can be obtained while reducing spending profiles and stopping leakages within the procurement function.
Changes effected during the quick win process can include standardising supplier charge rates across all areas of the business, reducing maverick spending through implementing an e-procurement solution and improving the availability of timely management information. Engaging all levels of the business and its supplier network early in the process is essential for energising change. Typical savings generally average between 1-3% percent of the total spend and this stage can be completed within three to six months.
Transforming future purchasing and procurement processes
Long term benefits are achieved through a programme of change that integrates structured procurement processes in the business and essentially includes setting up improved systems of governance and contract management.
Implementing solutions will require significant change within the business but once the long term solutions are in place, the typical business stands to gain a cost saving of between 10-15% of the total spend. Significant direct and indirect cost savings can also be achieved through a partnering approach to supplier management. Usually, the integrated programme of change can be completed within 12 months.
With the objective of implementing a programme of strategic change, the procurement function can be analysed along the dual axes of control and innovation. The typical “as-is” position is one where there is a large procurement function operating on higher cost options, there is both a low level of process control and low level of innovation. It is common to find a large number of suppliers and a high volume of ‘maverick’ spending when analysing businesses that fall within the low-control, low innovation quadrant.
On occasions where there is a high level of control but low level of innovation, there is often a large procurement function, escalated costs due to ‘out of scope’ items with a strong governance focus around spending. There will, in most cases, be a large number of suppliers, potential for disputes and a culture of managing suppliers through contracts.
In some cases procurement functions can be high in their level of innovation but with relatively low levels of control. In these businesses it is normal to see a large procurement function with high levels of maverick spending. They are more likely to have a small number of partnerships with suppliers.
The ideal situation is where there is both a high level of control and high level of innovation and this is the position that can be strived for through procurement re-engineering so that the business will have a reduced procurement function with a strong governance approach and spend control mechanism capable of meeting business needs. This necessitates adoption of best practice in financial controls, putting in place robust processes and adopting consistent contract management with improved service level agreements.
If you’re wondering if procurement process reengineering could bring value to your business, you could begin by asking yourself these questions regarding your procurement function:
1 How big are procurement costs in your business, and in your industry?
2 Do procurement costs take up a significant proportion of your costs?
3 Have you benchmarked your procurement function against businesses operating in your industry?
4 Is your procurement function providing strategic value to your business? Do you even know?
5 Does management view the procurement function as a ‘necessary function’ within the business rather than a value added service?
6 Does procurement have board level representation within your business?
7 Does the procurement function appear disjointed and overly focused on internal efficiencies or getting the best price?
8 Do you occasionally end up with maverick spends due to poor controls over spending?
9 From your vantage point and experience, do you feel the procurement function is capable of making a better contribution, especially in terms of improving quality, lead time and a better level of service to both internal and external customers?
10 Do you believe your procurement function could contribute to achieve the same quality, lead time and service at a lower cost than at present?
11 How up-to-date and modern is your procurement function?
12 Is it bloated, clumsy, rigid, sluggish, non-competitive, uncreative, inefficient, disdainful of internal customer needs, and losing money?
Obviously, there are no yes or no answers in relation to the above questions, but answering them honestly should naturally illuminate whether or not you are mining the value that is available from your procurement function at the moment.