Leading Procurement Strategy: Driving Value Through the Supply Chain

Leading Procurement Strategy: Driving Value Through the Supply Chain

Mena, Carlos; van Hoek, Remko; Christopher, Martin

Part One Procurement strategy

 
Chapter 01 Introduction: the strategic role of procurement 

• Procurement and its impact on the bottom line

The spend is around 50% of sales revenue for external resources. The total spend as percentage of sales: 60% Chemical Manufacturing, Engineering and construction, Pharmaceutics

• Procurement and sustainable competitive advantage

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• The changing role of procurement

1. Transactional procurement (no strategic involvement, decentralized, contribution is very limited, basic skills from personnel)
2. Cost-driven procurement (has strategic intent, strategic approach on minimizing the costs, using tools like spend analysis, TCO, contribution in terms of savings, analytical skills of personnel, good negotiating and contracting skills)
3. Integrated procurement (clear strategy that is aligned with organization vision, focus on alignment strategies and processes with stakeholders, portfolio of relationships with different stakeholders, creating value for the customer, additional revenue for the organization, emotional and relational skills of personal)
4. Leading procurement (transformation of organizational and leading supply chain in the search for sustainable competitive advantage, procurement professional required to have wide range of skills)

See table 1.1 from the book

 • The context of strategic procurement

Strategy procurement is a process that connects organizational strategy with day-to-day procurement operations.

Activity for formulating and delivery a procurement as a three cycle processes

-Business strategy cycle (creating vision, goals, implementation and learning)

-Strategic procurement cycle (articulate mission, vision and goals, situation analysis, develop procurement strategy, implement and continuous improvement)

-Procurement sub-processes (sourcing, managing supplier relations, ordering cycle)

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Chapter 02 Procurement and the organization: organizing for the future 
• Procurement’s fit within the organization

-Reporting. Head of procurement department reports to various parts of C suite. To chief financial officer, due to procurement goal to drive costs down and support P&L improvement efforts. Into supply chain or operations organizations, to CEO

-Organization structures

        -Decentralized (procurement is not as separate function, no leverage across business functions, and no spend management, but local visibility and knowledge of demand)

        -Coordinated structure (buyers placed locally, but small entity is coordinating between buyers, and look for areas to coordinate and pool spend)

        -Hybrid (local buyers with corporate team that leverages spend, create best practices, reporting)

        -Centralized (single reporting structure, central procurement, maximize corporate leverage, creating corporate expertise)

• Three typical procurement teams and the road to maturity

-Ordering cycle (Formulating request, Ordering, Handle invoice, Negotiating, Payment). Automation is need via ERP or e-procurement. The aligning procurement process via electronic data interchange to reduce errors.

-Managing Supplier Relationship (contracting, measuring performance, governance)

-Strategic sourcing (Spend analysis, Tendering, gather market intelligence, business alignment, develop strategy, joint improvement planning)

• Internal links as a prerequisite for effective supply-market impact

-Alignment requires from procurement professionals: the ability to identify potential levers for alignment, service focus around peers needs, flexibility, the ability to sell the ideas, standing on business values such as customer first.  

-Alignment can be achieved: using metrics of business to evaluate performance, studying business plans, getting invited to business meetings,

Alignment triad:

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 • Leveraging external links • Talent of the future for the future of procurement

Chapter 03 The strategic procurement cycle 

•Articulate procurement’s vision, mission and goals

Develop the mission, vision and goals, setting the long-term direction for procurement and ensure alignment with organizational strategy

When goals are determined, to identify KPI’s to measure if goals are achieved.

Using Balanced ScoreCard that helps to translate strategy into operations, facilitating the processes of communication, implementation and learnings. By focusing on different perspectives such as financial, customer, internal and learning and growth. Linking goals of function with the performance metrics.  

See table 3.2

 • Analyse the situation

• Environmental analysis (PESTLE and SWOT)
• Supply chain

         Supply market analysis

-Category profiles (product descriptions, market sizes, product classifications)

-Structure of market (Five Forces model by Porter: Buyer and Supplier power, Threat of new entrants, Threat of substitute products, competitive rivalry)

-key market indicators (economic indicators, production indicators, pricing inflation indicators, retail price index, purchasing Manager’s index) that help to identify trend such as seasonality

Spend analysis (how much did you spend on category, with whom and for which part of organization), make versus buy, category management strategy, collaboration and partnership)

Supplier analysis (Kraljic Matrix)

• Process. The procurement take part in processes: definition of requirements, category management, contract management, order processing and supplier relationship management). To create a map for current state using tools such as simple flowcharts (actors, flow of information and materials) or value stream maps (quality, time, inventory).

• Develop the procurement strategy

Producing a strategic plan that will guide to achieve mission and goals. Developed in cooperative way.