Building a first-class procurement function

Few companies know how to develop a premier procurement department, essential to maximise efficiency, buy the best products and profit from new ideas in the marketplace, writes Leo King

Since the recession hit in 2008, procurement has focused on helping companies cut costs. But, as a potential economic upturn appears, it is becoming an area where businesses can reap major benefits.

Procurement impacts on the whole organisation, according to Duncan Brock, director of customer relationships at industry body the Chartered Institute of Purchasing and Supply (CIPS). He points out that in order to preserve a company’s reputation, goods or services must be appropriate and fit for purpose, the right quality, and arrive on time.

Putting in place the right skills is arguably the most important foundation for maximising the procurement function’s success. A procurement operation must ensure it has the skills needed to deliver results in areas such as cost, innovation, resilience, quality and flexibility.

Employing and nurturing the right talent, while fostering good communication throughout the company and with suppliers, is important “because procurement in most organisations spends more than 50 per cent of business revenues”, says Carlos Mena, a supply chain expert at Cranfield University.

A large proportion of businesses struggle with this, however. “Assembling a strong procurement team is difficult because the function is not ‘sexy’ compared to marketing or finance,” says Dr Mena. In addition, there is strong competition from other companies for talented staff.

Increasing numbers of executives are recognising the importance of having their head of procurement sit on the board

The issue has become the number-one challenge for chief procurement officers (CPOs), according to Bill Huber of analysts TPI and Bob Bruce at outsourcer Capgemini. In a procurement staffing study, they say departments must develop staffing strategies in part to help fill an information gap resulting from many companies failing to have centralised financial and contract management.

There are ways to solve the staffing problem. “We have to start with remuneration,” Dr Mena says, warning that CPOs themselves tend to be paid less than their counterparts. Additionally, interesting aspects of procurement, such as the development of collaborative relationships, innovation and sustainability, need to be better communicated to potential employees.

One way of bringing in reliable skills is to select staff with strong qualifications. “The right skills are absolutely critical, especially at the senior end of the profession,” says CIPS’ Mr Brock. Specialist degrees exist in supply chain management and CIPS offers its own professional diploma.

But “softer” abilities, not strictly limited to the supply chain, are also vital, according to Dr Mena. “Traditional procurement teams tend to have good analytical, negotiation and contract management skills. However, a strong procurement function needs a broader skill set, including influencing, leadership and change management,” he says.

Tony Colwell, executive interim manager at specialist firm Acuity Consultants, encourages businesses to allow staff to change roles within their organisation. “Companies can let skilled staff work in other departments temporarily. It’s this kind of movement within an organisation that enables a broader skills base to exist in procurement.”

Gatwick Airport is one company that has done this. After splitting from operator BAA four years ago, it reconfigured its procurement function, placing a number of staff in other areas of the business to ensure the unit was fulfilling wider strategic aims.

“A great procurement organisation serves the whole business,” says Lora Cecere, founder of research firm Supply Chain Insights. “It’s important for it not to become so structurally encased that it works on functional initiatives, failing to align with the greater organisation.”

Part of this alignment comes from procurement ensuring it has the support of the board and the chief executive. Increasing numbers of executives across the business, Mr Brock explains, are recognising the importance of having their head of procurement sit on the board.

An internal marketing effort is key so that every area of the business knows what procurement can deliver for them, according to Dr Mena. This should even go as far as developing a brand that people in the organisation recognise, he says, while documenting and sharing success stories.

Such awareness can lead to procurement being allowed to operate in a much more effective way, says Mr Colwell. “One of the great problems companies have is a basic misunderstanding: they approach procurement in the wrong order, starting with cost. Instead, when they understand the function, they can begin with value creation – how they can optimise the supply chain, work well with suppliers and make use of suppliers’ capabilities,” he says.

Procurement organisations must also excel in their communication with suppliers to build long-term, strategic relationships as the economy shows signs of improvement. “Now is the time for the hard work at the relationship level,” says Ms Cecere, arguing that the first step is introducing meetings with senior executives at suppliers and “clearly stating the goal of the supply chain, as well as the role of the supplier within it”.

Jaguar Land Rover has worked extensively in this area. In recent years the car maker found it was rejecting up to 65 per cent of components based on poor quality. The company cut from sixteen to one its quality-control monitoring providers to improve how it works with component suppliers and ensure that reliable goods arrive.

The procurement organisation must align its own corporate initiatives with those of suppliers, including corporate social responsibility (CSR), Ms Cecere adds. She warns that only 20 per cent of companies’ CSR programmes extend effectively to the supply chain.

Risk mitigation is also vital and supply chains need to structure programmes that ensure the health of the supply base, she says. Among companies working in this area, Johnson & Johnson and Intel both do a great job with procurement organisations that sense and resolve issues, says Ms Cecere, while Cisco buys from a large number of suppliers, enabling it to compare and negotiate prices, and Nokia works with manufacturers in different territories to ensure supply in the event of a natural disaster.

Mr Brock at CIPS says that when companies communicate with their suppliers, face-to-face discussion is always going to be preferable, but is not always realistic. With many businesses working with manufacturers around the world, technology is vital in reaching them and some organisations will have developed dedicated websites for their suppliers to access. Many organisations, Ms Cecere says, also have a freephone call centre for buyers to get answers to questions on specifications.

Business social networking is a newer way of improving this communication. According to Adrian Gonzalez, president at consultancy Adelante SCM, there is a notable rise of supply chain operating networks. These mimick the functions of consumer social networks, enabling buyers and suppliers to collaborate better, discuss their needs and stay up to date with any changes on the buyer or seller’s side.

When a procurement function brings in and nurtures the right skills, allows strong communication and works efficiently with suppliers, a real strategic gain is achieved. A first-class procurement operation can only exist with these factors in place.