In a recent blog, 12 Causes of Sub-Optimal Category Management & Strategic Sourcing, we outlined some of the key factors (identified during our benchmarking and consulting exercises) that explain why organisations often do not perform as satisfactorily as they might.
In this first of two inter-linked blogs we focus on what we believe to be the issue that has the most significant impact on all of the 12 causes of sub-optimality. This is the problem of a lack of cross-functional involvement and buy-in to what the Procurement/Purchasing/SCM function is trying to do, and especially when it tries to develop an effective organisation-wide approach to category management and strategic sourcing.
In this blog we explain, by use of a number of indicative case studies, why achieving effective cross-functional involvement and buy-in can be so difficult. This blog is followed by another that outlines the IIAPS approach to resolving this dilemma.
Evidence of a Lack of Cross-Functional Involvement & Buy-In
In our experience there is considerable evidence of a lack of cross-functional involvement and buy-in to what the Procurement/Purchasing/SCM function is trying to do, and across all of the organisations we have worked with.
The following four typical case examples of this endemic problem help set the scene:
The ’Close the Door On Your Way Out’ Case
In this case the Head of a major Business unit in a multi-Business Unit company told the newly created CPO seeking to operate a category management strategy that as far as he was concerned the function only added time and cost to his production operations, and to quote the individual concerned:
Given the power of this BU Head in this company it is hardly surprising that the CPO was unable to implement a best practice Category Management & Strategic Sourcing approach.
The ‘Snake in the Grass’ Case
In this case the Head of Operations organises a meeting for the CPO and his Category Management & Strategic Sourcing Transformation Team, and with all of the Heads of the Business Units. Everyone agrees that category management is a fantastic idea to help reduce costs, and everyone agrees to support the initiative.
On attempting to organise workshops to discuss how costs can be reduced through better cross-functional engagement the Transformation Team discovers that most (if not all) of the Business Unit Leaders are unwilling to provide the resourcing for their staff to take an effective part in the discussions. The following exchanges are normal:
It is not easy to develop an effective Category Management & Strategic Sourcing process when Business Units leaders are not prepared in practice to provide the resourcing necessary, whatever they may say in meetings with senior managers.
The ‘You Are Just the Hired Help’ Case
In this case a Business Unit agrees to develop category strategies with the Function and agrees to send some of its middle mangers to cross-functional workshops to help identify cost saving opportunities.
During the discussion on one strategy the Procurement team ask the BU team for early sight of their demand planning and forecasting data to enable to them to understand the demand and supply optimisation opportunities that might be feasible in the future. The BU team flatly refuse to provide the data on the grounds that it is confidential, secret and only for the eyes of those who develop business strategies. When challenged they state badly:
It is quite difficult to develop an effective Category Management & Strategic Sourcing process when middle managers are not prepared to provide the necessary information to allow one to challenge current design and specification or demand management practices.
The ‘Post-Contractual Myopia’ Case
In this case a company agreed that all Business Units would participate in a cross-functional team to develop a category strategy with the Procurement team to identify cost savings opportunities. In the process a new sourcing strategy was jointly developed.
In the past the engineers in all of the Business Units had a preference for one supplier. The new, jointly agreed, strategy provided framework agreements, both for the incumbent single source supplier and also for two major competitors. This was based on the understanding that the other two suppliers would help to drive lower costs, because their pricing was lower than the incumbents. There was an additional potential cost reducing bonus agreed as well, because further volume discounts were negotiated if any of the two new suppliers achieved more than one-third of the volume each year.
While not involved in its development we happened to review this strategy with the company two years after it was initially devised, and to our surprise we discovered that the initial single source supplier was still receiving 100% of the work, with no discernible cost savings of any kind. When confronted about the lack of work being awarded to the two lower cost suppliers the engineers in the Business Units basically told us:
“We award work to the best supplier not to who the Procurement function would like us to, so that they can make their cost reduction targets. We have far more important issues to worry about than their targets and bonuses!”
Obviously, it is not easy to develop an effective Category Management & Strategic Sourcing process when the Procurement function is unable to understand the relative importance of their own targets and goals when set against those of their cross-functional colleagues in the business.
So What Key Conclusions Can We Draw From These Cases?
The reason for providing these short case studies is because they exemplify many of the common issues that organisations have to face when they try to implement category management, and especially when they attempt to develop a cross-functional approach to sourcing strategies.
Each of the four cases also helps to identify the following 5 key conclusions we have drawn about the effective implementation of category management and strategic sourcing:
- It is more often internal, rather than external, factors that thwart effective implementation.
- Effective analysis and corrective management of current and future internal stakeholder power and leverage positions is critical to success
- Mandated cross-functional early involvement (and with appropriate staff time and resourcing) is an essential requirement
- Understanding the relative criticality of cost reduction in relation to other sources of corporate value improvement is a prerequisite of being able to communicate and engage with cross-functional partners, so that they buy-in to category management and strategic sourcing
- If you do not possess a methodology for understanding Value For Money, or for how to undertake Value Flow Management, it is not possible to implement category management and strategic sourcing successfully
The reasons for arriving at these 5 general conclusions are outlined in much more detail in our next blog (Tactical Solutions to the Lack of Cross-Functional Involvement & Buy-In). This explains how we transformed the four cases outlined here to deliver considerable value for money improvement for the organisations concerned.