Procurement is behind the times

In Spend management by Michael Lamoureux10 Comments

As per Part I, project definition and management for sourcing has evolved considerably over the last 20 years. Speaking frankly, Sourcing has never had it so good—step-by-step guides, easy-to-use e-sourcing platforms, and processes that move at the speed of light.

In the majority of organizations, however, procurement can’t say the same. As per a classic AMR (acquired by Gartner) series in 2009 on Reaching Sourcing Excellence, 30-40% of every dollar of negotiated savings never hits the bottom line. Why? It varies from organization to organization, but the biggest culprits are usually off-contract / maverick spend, expedited shipments, failure to hit volume discount / rebate targets, and failure to ensure that the pricing agreements are honoured by both sides.

In an average organization, a contract is signed, filed, and oftentimes forgotten by the sourcing team, who believes the responsibility of implementation then falls to the category owner. While this sounds good in theory, in practice it doesn’t work at all. There are a number of reasons for this:

Category owners are not buyers.

They often do not understand how important it is to get orders in on time so as to prevent expedited shipments, or how important it is to not order from the supplier down the street, even if an order is needed quickly, as this can prevent rebates from being reached. They also sometimes don’t realize how doubly important it is to check the goods receipts and invoices carefully before approving payments to make sure overpayments are not an issue.

Category owners are not managers.

There is more than one buyer in many categories. Every buyer has to follow the plan, or the savings will not materialize. This means that every potential buyer needs to be informed of the contract, the process of placing orders and purchasing, and the process of checking and approving orders. In addition, these buyers have to be monitored, managed, and, in some cases, reprimanded when they go off contract. Unless the category owner is a senior manager, she will be in no position to reprimand. And unless the buyer is under her direct authority, she will not want to.

Category owners are not business owners.

Some categories, like telecom, office supplies, and MRO, span the entire business. It’s a big effort to get an entire business to change telecom contracts, office supply vendors, or MRO vendors, and requires a coordinated, process-driven rollout under the direction of a senior executive who owns the line of business.

In order for savings to materialize, the category has to be managed by a senior buyer with the support of the appropriate category owner and/or executive, from the initiation of the sourcing project until the final order is received.

This will not happen without an appropriate procurement management process and an appropriate platform to support it. Fortunately, modern platforms not only enable end-to-end procurement, they also support best-in-class processes to make sure every penny of negotiated savings hits the bottom line. We’ll discuss this in the third and final part of this mini-series.

About the Author
Michael Lamoureux

Michael Lamoureux

Michael Lamoureux is The Doctor of Sourcing Innovation and the founder and Editor-in-Chief of the Sourcing Innovation blog, one of the longest running independent blogs on sourcing and supply management. Focused on helping current and future supply management leaders identify the issues and trends that matter, Dr. Lamoureux writes and talks about topics that matter to sourcing professionals.