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Six steps to effective procurement (Part I)

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Establishing the strategy and supporting disciplines

Procurement can play a strategic role as a key enabler of the business, driving both profitability and sustainability. It has the ability to influence a large portion of a company’s cost base, so can deliver value across the entire supply chain and contribute significantly to the organisation’s competitive advantage.

Unfortunately, many procurement teams have a limited scope of influence within their organisations. They struggle to move beyond being perceived as a ‘transactional function’ which enforces rules, simply there to purchase goods and services at a competitive price.

However, some procurement functions have successfully evolved to become a value-adding business partner to the organisation. They work hand-in-hand with stakeholders to develop solutions and collaborate with suppliers to capture shared benefits.

How did they achieve this transformation? They changed how their procurement organisation delivers value and performs.

To change how an organisation performs and help it to deliver sustainable change, execute faster, capture value and/or innovate further, it is necessary to change how the organisation is ‘wired’. This is essentially the systems, processes, skills, staff, habits and behaviours within the business. These factors combine to influence how people behave within the business, how the business as a whole performs, and therefore what the organisation is able to deliver and achieve.

Within procurement, there are six essential components to success:

1.  Procurement strategy – Are we focussing on the right input and output key performance indicators (KPIs)?
2.  Procurement disciplines – Do we have the processes and systems to deliver agreed targets?
3.  Alignment and motivation – Does everyone understand their accountabilities and is the structure in place to deliver what is expected of them?
4.  Sustaining disciplines – Have we instilled adequate disciplines to check that agreed actions are completed and results are delivered?
5.  Continuous improvements – Do we have the skills and processes to drive continuous improvement within the organisation?
6.  Visible leadership – Is the procurement team visibly leading the rest of the organisation to deliver results?

In this first part of our three-part series, we explore the first two components – how organisations can develop effective procurement strategies and establish the required disciplines.

1.  Procurement Strategy

To effectively execute its strategy, procurement needs to ensure each level in the organisation is correctly incentivised. This requires the definition, measurement and reporting of appropriate KPIs to drive the desired outcomes and behaviours to deliver agreed results. While cost is one lever, procurement’s strategic focus should be on total value. It is critical to understand that if procurement’s performance is measured solely on its ability to reduce costs, rather than creating total value, procurement will be hard-wired on a crash-course with other parts of the organisation. For example, while engineers and operators may wish to reduce costs, they also need to improve reliability and minimise downtime. Once the input and output KPIs are understood, targets can be developed through a regular road-mapping exercise across the procurement function.

2.  Procurement Disciplines

Once the KPIs, strategy and targets are defined, procurement disciplines are needed.  They convert the procurement strategy into procedures and systems that people or machines execute to deliver that strategy.

For example, procurement could optimise the ‘Procure-to-Pay’ and ‘Source-to-Contract’ process with digital tools. These processes and systems must be easy to use, well communicated, understood and owned throughout the business. Without this clarity, roles will be unclear and processes cumbersome and inflexible – reinforcing the perception that the procurement function is a roadblock, rather than an enabler.

In the next part of our blog series, we will explore how to drive the right behaviours by establishing clear accountabilities and processes to ensure that benefits are captured and sustained on an ongoing basis.

Read about how we have helped clients improve the effectiveness of their Procurement function by clicking  on the icon below.

Learn more about creating an effective procurement function

 

Click through to read other blogs in this series:

Part I - Establishing the strategy and supporting disciplines

Part II - Optimising the organisation structure to support accountability 

Part III - Instilling disciplines and management systems to capture benefits and drive sustainable change

Part IV - Driving continuous improvement to deliver sustainable change

Part V - Demonstrating visible leadership to deliver sustainable change 


 

Tom Sonnen


Tom Sonnen leads the global Procurement Practice and the Singapore business at Partners in Performance, having successfully led major operations improvement and business transformation efforts for global companies in a large variety of industries.

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