CPOs Take Fresh Approach to Procurement

By Guest Contributor

October 27, 2011 at 11:02 AM

By Gregg Brandyberry

It’s a great time to be a Chief Procurement Officer or senior procurement professional. Never before have expectations been higher. CEOs are not only looking for year-on-year incremental savings that reach the bottom line, but also recognizing the impact procurement and the supply base can have on additional revenue generation.

Now some top procurement executives may find this uncomfortable but for those who have fought the long battle to be recognized as a strategic business partner this is a very welcomed challenge as the much heralded “seat at the table” arrives. 

Some may find the new expectations daunting as they think through how they can significantly improve their delivery, impact and overall contribution to the corporation they support.

Not only are new levels of performance expected, but also the rigor involved in validating real savings or revenue enhancements not to mention doing this with the same or even reduced staff and total budget. The good news is that a fresh approach (some like to call it “Procurement Transformation”) may be easier to achieve than you think. Here are some ideas to consider:

Start operating Procurement like it is a profit center - The best way I’ve seen to quantify your procurement performance and start treating it like a financial entity is to adopt a relatively new methodology called ROSMA© (Return On Supply Management Assets). Developed by A.T. Kearney Procurement and Analytic Solutions, it is a means to truly understand the drivers of savings (and procurement driven new revenue) versus the cost of operations. It’s a great way to quantify things like how much spend is being addressed (spend penetration), how fast and often spend is being competed (velocity), the savings generated (yield) and other benefits Procurement brings to the business. The resulting total benefits are then compared to the various period costs, e.g., wages and benefits, training, technology and other investments. Once the various costs and benefits are quantified, the ROSMA© calculation is quite simple with the numerator being the total benefits and the denominator being the total costs. A CPO can then understand if the procurement organization is making a “profit” and how many times annually the total procurement investment is being returned to the corporation. Needless to say, the better you speak the language of the CFO with financials to back up your statements, the easier the path and support to achieve transformation will become.

Maximize your total Procurement capacity - As a former manufacturing guy, I’ve always felt that Procurement should be run like a lean and efficient manufacturing plant is operated. Procurement needs to have a variety of skills, processes and technology organized in a way that optimizes the cycle time for various types of goods and services sourcing.  I laugh every time I think about folks who take months and even over a year to source office supplies or cafeteria services (although I do admit a total FM strategy will take some time to do right). The point here is that the better Procurement understands its total capacity and the better that capacity is managed, the more responsive and the better the overall results will be. There’s nothing not strategic about a well-executed plan to “sweat” the procurement assets.

Make strategic investments to drive higher ROIs and embed new skills -  More and more leaders are understanding when to use expert consultancies and how to get approval and support for the necessary investments. Gone are the days of spending large sums of money for fancy “consultant speak” slide packs. But what is extremely effective and impactful are strategic investments with expert consultancies for help with things like advanced analytics, complex category or supply chain optimization, rapid strategic sourcing of multiple categories and benefit capture, and, other engagements with predictable and almost guaranteed ROI’s that are significant and meaningful to a corporations’ profitability (5x - 20X). Most corporations don’t hesitate to make substantial investments in advertising and marketing campaigns, so why shouldn’t similar investments be made to reduce the cost of third-party spend or drive real collaboration with suppliers resulting in new revenue generation opportunities? And by the way, my experience says the likelihood of quantifiable and meaningful results is greater with a well planned and executed consultant led procurement engagement than with the average attempt at growing sales on the marketing side of the business.

Get more spend under management - I know many large companies that put policy in place such as “no formal procurement involvement for spends under $150,000”. And we all know why this is done (or set a threshold of $100K or $50K) …. there is simply not enough professional procurement resource to manage what is commonly known as the “tail”.  Most companies have a “tail” and it is equal to about 20% of a company’s total spend. It’s also where 80% of the suppliers reside. Some put in place the standard “3 competitive bid” policy, but as everyone knows the requests made by non-procurement professionals result in receiving and then selecting from three quotations with pricing that I like to call “what the seller wants”.

So here is an interesting and highly effective proven approach that has been growing in government procurement organizations for over a decade and is now being introduced into the commercial markets. It involves the use of a highly managed neutral marketplace that has over 46,000 (Certified Contractor Registered and debarred checked) approved sellers specifically designed for “spot buys” of common goods and basic services ranging from $3000 to $150,000. The marketplace is easy to use with its web browsers user interface, is full supported by a marketplace operations team, requires no upfront investment and carries a no risk guarantee. A small transaction fee is collected from the winning seller (only if the buy is awarded) by the marketplace operator 60 days post award. Buyers are averaging greater than 10% net savings from billions of dollars and tens of thousands of individual transactions, and, over 80% of awards go to small and disadvantaged businesses (a great example of how technology can “level the playing field”). The marketplace is operated by a company called FedBid.

Don’t be afraid of technology and outsourced service providers - We’ve seen some profound advancement the past few years from both technology and outsourced services providers. Where before there had had been a long list of costly suboptimal deployments (even complete failures), the list of successes is now growing for both technology solutions and those that provide outsourced procurement services.  Specific technology solutions that complement the major ERP platforms are now available that are extremely affordable and effective (e.g., subscription-based cloud applications) for a multitude of procurement activities such as spend cleansing, spend analytics, RFx, Contracts/Contracting, Risk Management, Supplier Quality/Performance and others.  Outsourced procurement services providers have also made great strides in offering solutions that really do create better returns than what can be accomplished in-house by even the leading procurement organizations.

Well I guess I’ll end where I started; while the new challenges for procurement are many the path towards achieving true transformation is there for all to take.  If anyone would like to continue the dialogue, I can be reached at greggbrandyberry@wildfirecommerce.com.


GreggBpicture.jpg

Gregg Brandyberry is the CEO for Wildfire Commerce Inc. Gregg is a seasoned supply chain veteran with experience in a multitude of industries and senior management positions. A former Vice President of Procurement for GlaxoSmithKline, he is a recognized pioneer in procurement technology. Today he spends his time helping other organizations maximize the value of their procurement efforts.

   

 



Tags: Strategic sourcing Procurement Technology CPOs
Category: News Article

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