Tag Archives: Procurement

The Role of Procurement & Supply Chain Management

The Role of PSCM

In our first blog in this series the overall structure of the IIAPS Masterclass in the Principles of Category Management and Strategic Sourcing was outlined.

Module ListThe overall structure of the 24 modules in the Masterclass is replicated in the image to the right.

The remainder of this blog will briefly explain the content of the six modules in Part A of the Masterclass. These are available through the IIAPS YouTube Media Channel.

Part A deals with The Role of Procurement and Supply Chain Management organisationally, as well as its strategic and tactical competencies.

Module 2: The Role of PSCM and the 8-Step Sourcing Process

Module 2 This section of the blog briefly explains the content of the second module – The Role of Procurement & Supply Chain Management and the 8-Step Sourcing Process.

In this Module the operational role of Procurement and Supply Chain Management competence within organisations is outlined – the strategic and/or tactical roles of the competence is explained later in Modules 4, 5 and 6.

Put simply, the operational role is the functional sourcing process through which organisations acquire the supply of outsourced goods and/or services for the best value for money possible, given their current scope for leverage over suppliers and supply chains.

8-Step ProcessAs the diagram demonstrates this sourcing process has a pre-contractual (Procurement or Purchasing) phase with 6 Steps, and a post-contractual (Supply) phase with 2 Steps.

The diagram shows that there are 6 pre-contractual Steps:

  1. Category Segmentation and Team Selection
  2. Specify Business Requirements
  3. Supply Market Analysis
  4. Sourcing Options Selection
  5. Tendering and Market Test
  6. Negotiation and Contract Award

In the post-contractual phase there are 2 Steps:

  1. Contract Start-Up and Supplier Performance Management
  2. Iterative Transition to New Strategy

The accompanying YouTube video (Module 2: The Role of PSCM and the 8-Step Sourcing Process) provides a basic introduction to what managers are expected to be able to do operationally during each of these 8-Steps in order to attain advanced competence in Procurement and Supply Chain Management (PSCM).

In the next module in this series, Module 3: Managing the PSCM Process, we discuss the structural options, between aggregated centralisation and disaggregated federalism, which are available for organisations when deciding on how to manage this process internally.

Module 3: Managing the PSCM Process

Module 3This section of the blog briefly explains the content of the third blog – Managing the PSCM Process.

In this Module the three major ways in which organisations normally choose to manage the overall procurement and supply chain management process and its competencies are outlined.

Put simply, organisations have to decide who should have the Role, Responsibility, Authority and Accountability (RRAA) to manage either the whole of the 8-Step pre- and post-contractual Sourcing Process, or how it should be managed by individual Functions, or, ideally, cross-functionally.

Although one function might have centralised control of RRAA across the whole process, normally this process is not managed by one Function on its own, but by a variety of Functions at different stages of the 8-Step process.

In resolving this conundrum, as the Module explains, that there are 3 broad choices available from which organisations can select:

  • Centralised (HIERARCHY)
  • Hybrid – Part Centralised/ Part Decentralised (CLAN)
  • Decentralised (FRAGMENTATION)

Organisational Structure OptionsThe accompanying YouTube video (Module 3: Managing the PSCM Process) explains that, while larger organisations tend to adopt CLAN solutions, there is no correct approach that organisations must take when seeking to identify the most appropriate management structure for allocating RRAA at each of the 8 Steps in the process. Rather organisations must identify which of these choices is the most effective given their overall strategic and operational approach.

Nevertheless, whichever management structure is adopted, if only the Procurement and/or SCM Function are trained in best-in-class procurement and supply chain management competencies, then sub-optimal sourcing is inevitable. This lack of joined-up training across ALL Functions is identified as a major issue in most, if not all, organisations.

In the next module in this series, Module 4: The Academic Debate About the Role of PSCM, we discuss the debate amongst academics and other writers about whether the PSCM Function is of strategic or only tactical importance to an organisation.

Module 4: The Academic Debate about the PSCM Role

Module 4This section of the blog briefly explains the content of the fourth module – The Academic Debate About the PSCM Role.

In this Module the debate amongst academic and practitioners about whether the PSCM role and competence is of strategic or only tactical importance to an organisation is outlined.

Three major arguments are presented, as follows;

  • The Role is only ever of Tactical Importance
  • The Role is always of Strategic Importance
  • The Significance Depends on the Specific Circumstances Facing the Organisation

Strategic or Tactical ImportanceThe IIAPS view, outlined in the accompanying YouTube video (Module 4: The Academic Debate About the PSCM Role), is that the third argument is the most appropriate way to think about the importance of the role and competence. Our view is that, if it can sometimes be tactical and sometimes of strategic importance, then this will have profound consequences for how the Function is managed and resourced within specific organisations.

It also means that the general circumstances that determine whether the role and competence is of strategic or tactical importance must be fully understood (these are explained in Module 5: The Strategic and Tactical Roles of PSCM), but also the specific circumstances under which the PSCM role and competence becomes of strategic and critical importance to an organisation (this is explained in Module 6: When is PSCM Critical and Strategic?).

Module 5: The Strategic and Tactical Roles of PSCM

Module 5This section of the blog briefly explains the content of the fifth module – The Strategic and Tactical Roles of PSCM.

In this Module the general circumstances that determine whether the PSCM role and competence is of strategic or only of tactical importance are explained. The discussion focuses initially on the contribution of Cost Reduction to the profitability and overall strategic goals of an organisation.

Cost DownThe IIAPS view, outlined in the accompanying YouTube video (Module 5: The Strategic and Tactical Roles of PSCM), is that achieving Cost Reduction targets is not the only factor that should be pursued by PSCM Functions and that Value for Money from the supply (see Module 13: Value for Money for Buyers) is a much better indicator of strategic impact.

VFM ImprovementDespite this, it is true to say that most organisations tend to measure the PSCM role and competence primarily against cost-down targets, and this is why is it is normally used as the key performance indicator of the Functions contribution to the strategic goals and bottom-line performance (profitability) of an organisation.

Given this, the discussion shows that while a significant % cost reduction can have a strategic impact in some organisations and circumstances, it may not in all. Similarly, while a small % cost reduction will normally mean a limited strategic impact, in some organisations and circumstances a small % reduction can, however, have a strategic impact.

This leads to the conclusion that the impact of Cost Reduction varies by type of organisation, economic circumstance and industry sector. Furthermore, in some complex and large organisations the impact may vary across Business Units and Divisions operating within very different industry sectors and circumstances and over time. In such organisations the effective management of the PSCM role and Function is extremely challenging, and especially if both a strategic and tactical roles have to be accommodated within one PSCM Function.

The final conclusion is, therefore, that practitioners need a way of thinking about when the PSCM role and competence is of critical and strategic importance to the organisation. This is explained in the next module in this series – Module 6: When is PSCM Critical and Strategic?

Module 6: When is PSCM Critical and Strategic?

Module 6This section of the blog briefly explains the content of the sixth module – When is PSCM Critical and Strategic?

In this Module a methodology is provided to allow practitioners to identify when the PSCM role and competence is likely to be of strategic or tactical importance to an organisation. Using the matrix below, which segments % of outsourced spend against profitability, the module explains how the PSCM role and competence can classified into the four different categories of:

  • World-Class Sectors Chart (Revised)Transactional
  • Operational
  • Cyclical
  • Critical

The accompanying YouTube video (Module 6: When is PSCM Critical and Strategic?) explains that, only when an organisation is operating in the Critical quadrant is the PSCM role and competence of strategic importance to an organisation. In all other quadrants the PSCM role is likely to remain primarily of tactical importance, although how it should be managed and resourced will vary across each of these three quadrants.

In the next module in this series – Module 7: Key Conclusions and Learning Outcomes about the PSCM Role are outlined.

Module 7: Conclusions and Learning Outcomes about the PSCM Role

M7-A6This section of the blog briefly explains the content of the seventh module – Conclusions and Learning Outcomes about the PSCM Role. In this Module key conclusions and 10 learning outcomes are summarised.

Perhaps the most significant conclusion is that while there are many organisation in which the role of PSCM will only ever be of tactical importance, even in these there may well be some categories of supply/spend that are of strategic importance to the organisation. This is discussed within our accompanying YouTube video (Module 7: Conclusions and Learning Outcomes about the PSCM).

Future ImprovementGiven this, our overall conclusion is that even practitioners operating in organisations in which the Function will only ever be of tactical significance must understand what advanced world-class approaches to category management and strategic sourcing look like. This is because they may well have to use these advanced skills and processes in some, if not all, of their categories of supply/spend.

These advanced skills and processes are the subject of the remainder of the Masterclass.

This concludes Part A of our Masterclass about The Role of PSCM. In Part B there are two modules about World-Class and Best-in-Class Category Management & Strategic Sourcing approaches.

To access this, and all of the other 24 Modules about the Principles of Category Management & Strategic Sourcing please access and subscribe to the IIAPS Media Channel.

What Procurement & Supply Chain Professionals Need to Know

YouTube1 - What PSCM ProfessionalsIIAPS Masterclass in ‘Principles of Category Management & Strategic Sourcing’ is Free on YouTube.

In a recent blog I explained what the CEO needs to know about World-Class Procurement and Supply Chain Management (PSCM) and how to implement it in their organisation.

In our experience, while most CEOs do not really know what this is, or understand how to implement it, there are also many practising PSCM professionals who are not fully aware of leading-edge thinking or practice (see the blog on Competence Development & Value Delivery for more details). To rectify this IIAPS has recently decided to offer a free Masterclass, explained briefly below, to aid competence development in the profession.

Why is there a need for the IIAPS Masterclass?

Many current practitioners, while fully qualified to basic professional standards, do not fully grasp the more advanced tools and techniques that have been developed to assist managers with the development of category sourcing strategies.

book-rtThis should not be surprising because in a recent study of 122 organisations world-wide, and across many sectors, it was discovered that the uptake of 65 PSCM tools and techniques, created to aid competence and decision-making, was severely limited.

This study revealed that while 42 of the 65 tools were in use in at least one company or other, most managers tended to rely only on the use of 10 traditional tools. There was only limited evidence of the use of more advanced tools and techniques, with less than 1% of companies demonstrating any awareness or use of these more advanced approaches to category management and/or strategic sourcing.

This leads to two fundamental questions:

  • Why is this limited awareness and usage occurring?
  • Why are most managers still reliant on tools and techniques (like Kraljic’s Positioning Matrix and the Purchasing Chessboard) that have been shown to be seriously flawed guides to action?

book-spaIn our view the reason why this malaise is occurring is largely due to the following factors:

  • A lack of adequate resourcing to finance advanced training and competence development – largely due to the low status of the PSCM function within many organisations.
  • A lack of knowledge and understanding of the utility of all currently available advanced PSCM tools and techniques by many senior PSCM managers organisations.
  • A tendency by some senior PSCM professionals to only train their staff in what they have historically been trained in themselves.
  • A tendency to focus training on basic competencies that limits most activity to the short-term tactical market test, negotiation and contract award phases of the category management and strategic sourcing process.
  • The necessity for all advanced tools and techniques to require cross-functional engagement and participation in training, creating additional problems of internal buy-in and resourcing

The IIAPS Masterclass in ‘Principles of Category Management & Strategic Sourcing’

Given these problems IIAPS has decided that advanced competence in PSCM will only be achieved if more and more managers cross-functionally are made aware of the latest tools and techniques that are available to improve the delivery of value for money from category sourcing strategies.

To this end the Institute is launching a free YouTube Masterclass explaining the ‘Principles of Category Management and Strategic Sourcing’. The structure of this 24 Module Masterclass is shown below.

Consolidated-ModuleBreakdownAs the structure to the right shows the aim of this Masterclass is to explain:

  • Introduction (1 Module)
  • Part A (6 Modules): The Strategic and/or Tactical Role of the PSCM Function
  • Part B (2 Modules): How to Understand and Benchmark World-Class/ Best-in-Class Approaches to Category Management and Strategic Sourcing
  • Part C (1 Module): The Key Activities and Tasks in a World-Class Category Management and Strategic Sourcing Process
  • Part D (14 Modules): The Principles of Buyer and Supplier Exchange Pre- and Post-Contractually

Each of the modules can be watched and studied individually, but it is advisable to take the full set of modules sequentially to obtain the maximum value from the experience.

For those interested in advanced professional accreditation studying these Modules is the starting point for enrolment in, and subsequent award of, the Institute’s International Green, Red and Black Belts in Advanced Purchasing and Supply.

Belts

Potential candidates must study all of these 24 free Modules before entering into additional training and examination with the Institute. Further details are available from our website or by contacting us.

Finally, since the Masterclass is free, we recommend that far-sighted PSCM managers encourage their cross-functional colleagues to also study this material in order to stimulate cross-functional engagement and understanding in their organisation.

How to Access the IIAPS Masterclass on YouTube

The 24 IIAPS Masterclass video modules will be provided on YouTube, and are also supported by a short blog, explaining the thinking behind each of the 24 modules as they are uploaded throughout 2017.

M1-Intro

To access Module 1 – Introduction to the Principles of Category Management & Strategic Sourcing and the other Masterclass Modules please access and subscribe to the IIAPS Media Channel.

For more information on IIAPS thinking please visit the IIAPS website.

Competence Development and Value Delivery

Why Traditional Procurement & SCM Qualifications and Training Fail to Deliver ‘Real Business Value’

AdvQualMost organisations fail to see much ‘real business value’ delivered after they have undertaken extensive competence assessment and then internal and/or external training to improve the competence of their staff in Procurement and Supply Chain Management (PSCM).

The reason for this is because most of the training received is either too theoretical and/or completely unrelated to the delivery of value within the ‘real-life’ and ‘real-time’ day-to-day operations of the organisation. Why is this, and how can this malaise be resolved?

Problems with Current Training & Competence Development Offers

Most organisations have a limited number of choices when selecting the most appropriate PSCM training courses for their staff when pursuing competence development initiatives. They can either undertake internal training (normally through the use of their own staff and the creation of their own internal Training Academy) or they can use external providers (some of which offer certified Professional or University/Academic qualifications).

In practice most organisations use a combination of these two approaches. Normally, a segmentation is undertaken of the PSCM staff during the initial competence assessment programme, in order to identify which staff should receive basic internal training (sometimes supported by external trainers); and which should receive more advanced external training and qualifications.

When undertaking external training the choices are normally between Professional Bodies, that award their own Certified Qualifications based on their national standards, or postgraduate academic qualifications offered by Universities and Colleges, based on nationally regulated and accredited standards.

Having benchmarked hundreds of organisations globally it is clear that whichever of these internal and/or external routes to competence development is selected there is considerable disquiet amongst those funding these programmes. The major concerns appear to be about the effectiveness and efficacy (value for money) of these approaches. The following major issues recur:

  1. Too much theoretical rather than practically relevant training
  2. Too much focus on best practice in industries/sectors that are not relevant to the issues facing the funding organisation
  3. Too much focus in training on case studies that are irrelevant to the needs of the funding organisation
  4. Limited evidence of heightened skills and capabilities relevant to the funding organisation amongst staff after training
  5. Immediate loss of the most able staff after advanced training, with no real tangible value for money or ROI benefits being provided to the funding organisation from the training

All of this adds up to a major indictment of current training and competence development offers due to a clear lack of ‘real business value’ being delivered, with limited tangible Return on Investment (ROI) for funding organisations.

The IIAPS Solution – Delivering ‘Real Business Value’ Through ‘Real-Life’ and ‘Real-Time’ Competence Development

Given these serious issues with current training and competence development offers IIAPS has developed a unique and novel approach to the award of its own International Green, Red & Black Belt In Advanced Purchasing & Supply Management qualifications.

Belts

In order to ensure that all students deliver ‘real business value’ to their funding organisation all participants in the Institute’s Belts courses will in future have to undertake their training by delivering a category sourcing strategy for their funding organisation. This means that all training and mentoring support provided by the Institute during the training and certification process now takes place in the context of the ‘real-time’ and ‘real-life’ development of a sourcing strategy with a cross-functional team within the funding organisation.

Furthermore, while IIAPS trains the staff member to become the equivalent of an expert IIAPS consultant in strategic sourcing and category management, this competence development work is continuously focused on delivering significant improvements in the quality, cost and delivery performance of a particular category of supply/spend within the funding organisation. The student can only qualify for a particular Belt if they are able to develop an effective sourcing strategy, and also then take it to market and negotiate and deliver a successful sourcing strategy with suppliers in the ‘real-world’.

Finally, the funding organisation is continuously involved in the process because it works with IIAPS and the staff member being trained to select the sourcing strategy to be developed and then taken to market. The funding organisation must also sign-off that significant value for money has been achieved before the student can qualify for certification.

In this way we believe that a new approach to competence development is now available that overcomes the problems with current offerings. It is an approach that delivers ‘real business value’ in the context of ‘real-time’ and ‘real-life’ sourcing strategies. It is, therefore, the only course offering that offers a guaranteed ROI so that the course of study should always be self-funding for participating organisations.

To find out more about the IIAPS approach visit our website.

Are Aggressive Buyers Stupid or Guilty of Segmentation Errors?

200938132350607This blog by Andrew Cox (originally posted on Spend Matters) continues the debate on procurement practices in the retail industry that have come under recent scrutiny and criticism.

In a recent blog (Spend Matters, 21st January) I explained why I disagree with Peter Smith’s view (Spend Matters, 12th January) that food companies should be condemned as ‘unethical’. I also do not think food companies have been ‘stupid’.

Nevertheless, I do agree with him (and with David Atkinson) that, when developing more aggressive sourcing strategies to extract extra value for themselves, these companies—in the face of increased competition and declining profitability—may have been guilty of some serious power and leverage segmentation errors.

It would appear that the some food companies may have rushed into decisions without fully segmenting their power and leverage positions across their entire supply base. By doing so they have appear to have developed a ‘knee-jerk’ and ‘one size fits all’ approach to sourcing.

Perhaps the gravest error that any buyer can make is to fail to properly segment their supply base, so that they can fully identify the range of power and leverage scenarios that exist (see diagram below), both within their categories of spend, and also in relation to each and every supplier within them—currently and potentially in the future.

The Power Matrix Figure

Only by understanding the current and future potential power position of each and every supplier in a category of spend, does it become possible to identify two things:

  • Which categories are likely to be the most amenable to particular types of sourcing strategies?
  • Which suppliers (if not all) within a particular category are likely to be the most amenable to successful leveraging successfully, given a particular sourcing strategy?

To put it at its simplest, if a supplier is dominant (i.e. they have a monopoly over a product/service which cannot be easily competed away, and this is highly valued by the buying company’s customers) then it is likely to be a serious error to try to leverage them aggressively within a contractual term, or before awarding a new contract. If the dominant supplier has many alternative options they can either walk away or impose unacceptably high costs on the buyer for their aggressive behaviour.

Conversely, if a supplier is operating in the buyer dominance (few buyers/many suppliers/low switching costs) or independence power positions (many buyers/many suppliers/low switching costs) then the scope to use more aggressive leverage successfully within or before contracts are signed is much greater for the buyer. This is because the buyer has many alternative sources of supply and the supplier must continue to pass value to the buyer if they wish to retain the relationship in the future.

It follows from this that buyers must be extremely careful about analysing the power position of each and every potential supplier, both now and in the future. If they do not, then they may well fall into the trap of adopting a ‘one size fits all’ strategy that can lead to serious supply consequences in the future.

In this light, although we cannot know for certain without analysing these sourcing strategies in detail, the adoption of universal approaches that demand more money for simply being a supplier (Premier Foods’ pay and stay approach), or continually asking for increased discounts after agreeing contractual prices (Tesco), are evidence of overly-simplistic sourcing approaches that have not been informed by a sophisticated segmentation of the power and leverage positions of each and every supplier.

That said there is nothing wrong with adopting a universal approach to supplier leverage in the future, but this is only likely to be safe if the power position favours the buyer both now and in the future, and all of the suppliers are operating in a relatively weak bargaining position (which of course never happens).

Given this, it could be that Sainsbury’s strategy of delaying payment terms for all of its construction and fit out contractors is a sensible strategy. But this would only be the case if all of these suppliers are highly dependent on working with Sainsbury’s, with few alternatives, and none are able to use counter leverage in the future.

It is not clear, however, whether or not food companies have fully thought through this last point—namely, the need to fully understand and segment the time dimension in power and leverage.

Obviously, while power can move between buyers and suppliers over time, it is important to recognise that this power shift does not occur in all categories of spend in the same way. Sometimes, buyers may be at risk of it, but at other times they may not. One must be careful, therefore, about claiming that suppliers will always be able to take advantage of buyers in the future if they abuse their power now, and vice versa.

Once again this forces us to recognise that a ‘one size fits all’ strategy is normally an error, and that the sophisticated segmentation of power and leverage scenarios is at the heart of successful sourcing strategy development and subsequent supplier relationship management.

Indeed, it is interesting to conclude with the thought that power segmentation within supply chains also demonstrates that the use of aggressive ‘within-contract’ (this is post-contract if deemed after contract award) and ‘post-contract’ leverage may be much easier for some companies than others.

There is another power-related factor—sourcing strategy brand impact—that buyers have to consider, and one which may be much more problematic for B2C retail companies that sell to end consumers (like Tesco and Sainsbury’s) than for B2B companies (like Premier Foods and 2 Sisters) selling to retailers. Arguably, B2C firms have to be much more aware of the impact of their sourcing strategies on public opinion and customer behaviour than others (and particularly if these are likely to be aired in the press and media).

The problem for Tesco and Sainsbury’s is that their brand reputation is a key factor in their overall business strategy, and this is because they operate in an increasingly competitive market, with new lower cost entrants challenging their historic market shares and profitability. In such a market, where the switching costs for consumers are relatively low, food retailers must jealously protect their brands.

This means that any consumer perception that a sourcing strategy is a form of ‘unethical bullying’ is likely to have a significant impact on customer behaviour, and potentially on market share and profitability. Arguably, this issue is much less likely to be a constraint for B2B companies (and especially multi-product) companies in the food supply chain.

While we have only focused here on a few power resources (and there are many more that need to be considered when developing an effective sourcing strategy), these examples highlight the fact that some food companies are evidently not fully competent in understanding power and leverage when developing their sourcing strategies.

This reinforces the view that one of the greatest weaknesses in the procurement profession today is the lack of competence by buyers in fully analysing their current and future power positions, leading to a failure to fully understand the appropriate sourcing options that are available to them to leverage improved value from suppliers.

How this competence gap can be eradicated will be a subject for the future.

8 Major Barriers to Effective Internal Demand Management

Demand ManagementBuyers are frequently faced with significant obstacles before the appropriate sourcing option can be pursued. As is often the case, internal demand constraints act as effective barriers to the appropriate choice of reactive or proactive supply management.

1. Product or service over-specification
In many organisations, the buyer’s internal client often seeks to over-specify the product or service required. This is often referred to as the “gold-plating” of requirements, where the product or service is specified in a way that exceeds the organisation’s requirements. This can be in terms of technical requirements and/or commercial considerations. Subsequently, the internal client’s (and buyer’s) requirements are far more difficult and/or costly to service.

2. Premature establishment of the specification
If internal clients build a supplier’s offering into their design before the organisation has had an opportunity to negotiate with the supplier, the buyer may become locked into the supplier. If the buyer’s purchasing team starts to negotiate with the supplier after the organisation has accrued significant sunk costs in their solution, then it will be negotiating with a supplier that effectively has a monopoly position.

3. Frequent changes in the specification
Organisations that procure complex services often experience a problem associated with the potentially high level of specification change because of the level of uncertainty that surrounds such purchases. However, these pre- and post-contractual problems may be exacerbated by internal client behaviour. The resulting frequent changes to the specification, again after it has built up significant sunk costs in the supplier’s solution, will leave the organisation vulnerable to opportunistic behaviour, even at the pre-contractual stage. Furthermore, the supplier may have to make costly, last-minute alterations to their processes in order to accommodate the changes, thus increasing the nuisance value of the customer to the supplier.

4. Poor demand information
A significant demand management problem relates to the inability of the organisation to access (and analyse) accurate demand information. Poor demand information leads to supply chain players keeping high levels of inventory as insurance, which is against the principles of lean supply. Furthermore, the late placing of orders due to poor demand information makes it difficult for the supplier to pre-plan its production activities and may require the supplier to pay a premium for its own inputs, which it will seek to pass on. Poor demand information clearly puts the organisation in a poor negotiating position in relation to the supplier.

5. Fragmentation of spend
This is a very common demand management problem. Most organisations buy ‘equivalent’ products from a large pool of different suppliers, often through small quantity orders placed at frequent intervals. This situation is often due to internal clients having their own personal preferences for certain products and having their own favourite suppliers. Each separate transaction is of limited value, thus increasing product costs, and the multiple interactions will also lead to higher transaction costs. Leverage opportunities are not possible and the attractiveness of the buyer to the supplier is significantly reduced.

6. Maverick buying
In most organisations, there is a fairly high incidence of internal clients, either buying outside the contracts that have been set up, or buying using procedures that are not compatible with optimising value for money. Therefore, the maverick buyer is unlikely to have access to the requisite supply market information and will not possess the necessary competence in contracting and negotiating. As a result, there will be a further fragmentation of the organisation’s spend, resulting in loss of commercial leverage and the organisation being faced with higher prices. Maverick buying diminishes the relationship between volume and value that underpins the agreements with approved suppliers, thereby destroying the credibility and relative power of the buyer.

7. Inter-departmental power and politics
Individuals or departments will have power resources, which can be drawn upon to either help, or hinder, change within an organisation. At the heart of this is the concept of the principal-agent problem. Managers within departments may have conflicting loyalties when working within organisations. They have loyalty to the organisation, which pays their wages, but also to their department, themselves and their careers. When these loyalties are in conflict, most managers will take action that favours the latter. Internal clients will often, therefore, make sourcing decisions that will secure their own personal advantage rather than furthering the wider interests of the organisation. When the person or department has a high level of intra-organisational power, they will have the ability to obstruct any drive to improve internal demand management, if they so desire.

8. Risk adverse nature and culture of an organisation
The very nature and unique culture of an organisation may act as a further barrier to more effective demand and (subsequent) supply management. Organisations, which tend to be highly risk averse, may find it difficult to adopt the necessary organisational changes required to overcome some of the internal demand problems highlighted thus far. Although not necessarily a direct cause of ineffectual demand management, an organisation’s overriding culture can still act as a serious barrier to change.

In summary, the existence of these barriers often reduces the attractiveness of the buyer to the supplier. Depending upon the specific market conditions, the existence of these barriers can increase the leverage that the supplier has over the buyer. Subsequently, the buyer may be unable to achieve the desired outcomes (value for money) from the relationship.

In order to maximise value for money, organisations must first overcome internal demand problems discussed and then select the appropriate sourcing option to maximise their ability to leverage suppliers.

IIAPS uses the QV® Strategic Sourcing Methodology, which is focused on challenging existing ‘real-life’ category strategies. Integral to this approach is effective demand management, as it brings together internal clients (who design and specify requirements) and PSCM strategy leads to identify the key demand and supply factors impinging on current VFM performance.

To Be or Not to Be Ethical – In Defence of Food Buyers

GroceryThis blog by Andrew Cox (originally posted on Spend Matters) discusses procurement practices in the retail industry that have come under recent scrutiny and criticism.

Peter Smith (Bullying Suppliers – Unethical and Stupid on Spend Matters) raises some interesting points about the ‘unethical and stupid’ behaviour of food buyers. He reports the recent supplier leverage strategies of Tesco, Sainsbury, Premier Foods and 2 Sisters as evidence of ‘bullying tactics’.

While this may explain Peter’s own ethical position, which he would also like to see CIPS (and presumably other Purchasing Associations?) institutionalise (or at least take a position on) as unacceptable behaviour, my view is somewhat different.

For something to be ‘unethical’ it must be contrary to an agreed set of moral/ethical principles. It is not clear at all, however, what set of business practices by food companies Peter is suggesting are in breach of ‘ethical’ behaviour—unless he (and others of a similar disposition) mean that buyers and suppliers must never seek to change the terms of a contract during or, in some cases, even after a contract has been terminated?

Clearly, if a food buyer asks for a rebate, or finds a legal mechanism to delay payment terms, or asks suppliers to provide a financial payment to remain as a supplier, they are attempting to use more aggressive leverage.  It is not clear, however, why any of this is ‘unethical’?

The uses of ‘within-contract’ and ’post-contract’ leverage’ by buyers is a common practice (and not just in the food industry).  It is normally brought about by an unexpected change in the power position of the buyer. A typical example is when there is an unanticipated increase in its own market competition, undermining the buying company’s financial position. This obviously explains a great deal about the causes of recent and apparently more aggressive behaviour by food buyers.

The problem with calling these practices ‘unethical’ is that suppliers are not averse to doing exactly the same thing when power shifts in their favour during a contract. When customer or market demand unexpectedly outstrips supply many suppliers will often ask for price increases to ensure the same level of quality/service previously agreed contractually.

Calling these practices ‘unethical’ serves little purpose because history shows that buyers and sellers always tend to be opportunistic in the face of unanticipated shifts in demand and supply. There is an old aphorism that is perhaps helpful here; “First comes food, then morality.”

Since business relationships are not (nor could they ever be) governed by any nationally or even internationally agreed set of enforceable ethical/moral principles, the major protection for buyers and sellers in markets is that their agreements are protected and governed by legally enforceable contracts, that assign rights and responsibilities to both parties. These can be defended and ultimately challenged in the courts if either party is in breach of the terms of the initial agreement.

Therefore, if a buyer attempts to leverage suppliers more aggressively during, or after, a contractual term, a supplier is completely free to either challenge it (and take the buyer to court if they are in breach of contract), or accept it, and get on with the job.  The same legal rights are afforded to the buyer if the supplier leverages them during, or after, a contract.

Presumably, if either party to the agreement tolerates increased leverage it is because—lacking sufficient power and leverage resources—they do not have any better alternatives, and must provide better value to the buyer or supplier in order to retain the relationship.  This has nothing to do with ‘ethics’ but, as Peter intimates, everything to do with power in business relationships.

It is worth concluding with the thought that if food buyers are able to use ‘within-contract’ and/or ‘post-contract’ leverage to extract more value from suppliers, then are we not really witnessing more effective (competent) negotiation by buyers who historically (in the good times) had ‘left something on the table’ with their suppliers?

In this light it could be argued that the current press and media blitz on ‘ethics’ in food supply chains is really nothing more than a skilful attempt by food suppliers to provide themselves with an ‘ethical’ bargaining chip (power lever) in their negotiations with buyers. This is surely nothing more than ‘the rules of the game’.

Unfortunately, whatever one thinks about these practices ethically, what they actually demonstrate is a failure by some food companies to fully appreciate the power and leverage circumstance that they are in, thereby leading to the pursuit of potentially misguided (and ultimately ineffective) sourcing and relationship strategies.

In this light the aggressive short-term sourcing strategies condemned by Peter and others (Four Pillars’ David Atkinson, 2 Sisters, Tesco, and now, beans and beer giants Heinz and AB InBev) are examples of buying companies that have failed to fully understand some of the key factors that must be considered when using power and leverage with suppliers. Such failures—rather than ‘unethical’ behaviour—are more likely to put at risk the search for improved value for money, that is likely to be necessary if food companies are to remain competitive in the future.

How these competence gaps can be eradicated will be subjects for the future.

How to Manage Sourcing in Declining Markets – Will It Be Any Different in Oil & Gas This Time Around?

KONICA MINOLTA DIGITAL CAMERA

Buyers often struggle to deal with radical short-term changes in their power and leverage position. One of the most dramatic problems experienced by buyers is an overnight fall in demand for their products/services. This normally leads to the immediate ‘knee jerk’ response of an immediate realignment in their sourcing strategies with suppliers.

The Oil & Gas industry is facing this problem today with the oil price falling from around $120 to a recent low of $46.6 (highlighted in a blog by Evan Kelly ‘Oil Majors Taking Ruthless Measures to Survive’). It is, however, a recurring problem—in 1998 the oil price fell to below $12 a barrel.

Oil Price Fluctuations

In 1998 a number of Oil & Gas companies asked me and my colleagues to help them with their sourcing response to this challenge. The emphasis in the industry then was (after having begun a brief flirtation with partnering relationships in the mid-1990s) on how to quickly improve leverage by the adoption of aggressive short-term cost reduction exercises.

Given this, and the highly fragmented approach to sourcing that many Oil & Gas companies then adopted (with decisions being made normally without any centrally coordinated Procurement or Supply Chain Management function), the obvious short-term solution was to end fragmentation and consolidate all similar spend into one bucket at the category level.

Once this had been achieved it was then possible to quickly organise RFPs with a small number of preferred suppliers—although the frequent lack of rigorous category segmentation methodologies and processes, or readily available and robust demand and spend management data at the category level, made this exercise somewhat hit and miss.

The speed with which some Oil & Gas companies were able to implement market tests using consolidated spend, and then implement aggressive cost-down strategies by awarding consolidated volumes over 3-4 years to the winning bidders, was quite phenomenal. In one case an Oil Major in one region was able to take over 40% out of its internal and external costs of sourcing within a 2-3 month period.

While this strategy was extremely successful in meeting, and some cases exceeding, the cost-down targets required by senior management it came at a significant price in relationship terms. Many ousted suppliers were shocked by their loss of contracts and by the breakdown in former partnership relationships. This led to heated meetings between some CEOs from buying and formerly supplying companies.

The upshot eventually was, of course, that as the oil price began to rise, and the power dynamics in the industry began to favour suppliers rather than buyers, these formerly disgruntled suppliers were very happy to teach the aggressive buyers a lesson. They either denied supply or priced aggressively when demand was high and supply was limited.

At that time, while assisting the Oil & Gas companies with the development of this emergency short-term strategy, my colleagues and I were concerned by this possibility. We explained that this ‘reactive short-term’ cost down approach should not be seen as the end of the process, but merely the beginning of the development of sourcing competence in their companies.

To this end we recommended that all of the major organisational sourcing weaknesses that were evident within these companies at that time should be eradicated, and a much more sophisticated and professional ‘proactive’ sourcing approach should be developed.

When benchmarking the Oil & Gas companies at that time 10 key weaknesses (that are also common in many industries) were identified:

  1. Excessive fragmentation of spend, with short-term project management and outsourcing philosophies dominating organisational sourcing thinking
  2. Lack of rigorous and robust current and future spend management data
  3. Lack of segmentation methodology to identify categories of spend
  4. Lack of cross-functional buy-in by Line managers to early engagement and a co-equal role for Procurement professionals in the sourcing process
  5. Lack of embedded performance management culture using rigorous and robust KPIs for all categories of spend
  6. Endemic maverick spend, with a lack of mandate for Procurement staff to be involved in the whole of the sourcing process pre- and post-contractually
  7. Lack of embedded and on-line processes/systems to manage categories of spend, and to undertake sourcing strategy development and/or supplier relationship management
  8. Lack of use of sophisticated power and leverage positioning analytical tools to develop sourcing strategies
  9. Lack of knowledge management, leading to staff reinventing the wheel
  10. Lack of fully competent staff, and especially in relation to the possession of ‘proactive’ sourcing skills

Our view was that in the future a more sophisticated and ‘proactive’ approach should be developed. This would seek to establish longer-term relationships with key suppliers (whenever feasible). It would also be based on the principles of ‘open-book’ collaboration, to improve value for money (not just cost reduction) for both parties to the relationship, and operate throughout the business cycle and any short-term movements in the oil price.

This would obviously require the removal of all of the structural weaknesses identified above, as well as the rigorous segmentation of spend at the category level to identify where a more ‘proactive’ approach to supplier relationship management can be adopted. It would also require the creation of a fully integrated and cross-functional category management process for all strategic sourcing, and the creation of a core team of cross-functional experts in managing relationships based on the principles of ‘open book’ collaboration.

Since that time there has been considerable improvement in the approach to category management and strategic sourcing by many Oil & Gas companies, and by some of their suppliers, as our benchmark data below indicates.

PSCM Index Scores by Sector

Despite this, when benchmarked using our PSCM Index methodology against world-class standards in category management and strategic sourcing, the Oil & Gas Industry still lags somewhat behind best practices in other industries. As the diagram shows, while the leading benchmarked Oil & Gas company is 4th overall (with a score of 78.7%), the average score of 52% places the industry as a whole only in 8th place.

This means that, while much has been done since 1998 by some Oil & Gas companies to remove the structural impediments listed above, many of these barriers still remain, and few companies have fully embraced the need to develop a more ‘proactive sourcing approach’ with key suppliers.

Because of this continuing lack of organisational and individual competence the fear is that many Oil & Gas companies will once again simply react to the current very low price of oil, and use the same ‘reactive sourcing’ strategies based on aggressive short-term cost reduction that were evident in the late 1990s.  This will have significant consequences for future supplier management in the industry, just as it did after 1998.

If the Oil & Gas companies do repeat themselves as the price of oil falls, it will be a very great pity and testament to the wasted opportunity in this industry during the ‘good’ years when oil prices were high. In this period the opportunity existed to segment categories to identify when it is sensible to work with suppliers to create continuous improvement in value for money using ‘proactive sourcing’ techniques.

It would appear that the industry (like so many others) may once again ‘miss the boat’. Karl (not Groucho) Marx once said: “history repeats itself; once as tragedy and twice as farce”. Here we go again….