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How has Procurement become strategic?

Procurement

Lately some people have asked me about what interesting questions come up on the trainings that I manage related to supply-chain topics. So I decided take some time to share these experiences through this channel. I hope you enjoy.

A good topic to start – and not by chance this is something that I always mention in the beginning of any training – is that we should understand, before we evolve into any other topic, why does it make any sense to talk about supply-chain, or procurement.

Well, who is in that area knows, or has heard, or lives every day, the idea that Procurement has become a strategic topic. Also, that the head of the department has started to sit every day closer to top of the hierarchic pyramid of the organizations, whether as a CPO, head of procurement or supply-chain, VP, Executive Director, or any other name that the position has inside the company.

So the question is (or are): how did that happen? Moreover, currently what holds this from happening?

To answer the first question we’ll go through almost 100 years of history in some paragraphs. A good indication that there was already someone in the organizations dedicated to “purchasing” is the appearance of the first purchasing course in Harvard, dated 1917. From there until the 60’s, the so called “buyer” was merely responsible for putting out purchase orders that he was asked to, just being sure that he was paying an acceptable price for whatever product he was supposed to buy. The evolution seen in that period was due to the two world wars, which placed some attention to the buyer because of the shortage of some materials and of price variations.

Now on the 70’s, with the oil crises and the general shortage of raw materials, just paying an acceptable price was not good enough. No matter how much you could pay, what was needed was simply not available. Material Planning became strategic, and that lighted some more focus on to the purchasing function.

On the 80’s the academic world reflected what was going on. An important milestone was 1983, with the release of “Procurement Must Become Supply-Management”, by Peter Kraljic, published by the Harvard Business Review. The appearance of the “just in time” and the emphasis on supplier inventory , quality, quantity, and delivery control made purchasing shift from simply purchasing to something closer to the competitive strategy of business.

Coming to the 90’s, many companies had realized these concepts, and the term “supply-chain” would already substitute terms like “purchasing”, “logistics”, and “operations”.

Then we finally reach the decade of the 2000, more precisely 2008, when the pressure for cost reduction, efficiency, and doing more for less, left procurement area on the spotlight. This is when the top management realized that the Procurement function, a small group of people within the organization, managed big part of the cost, and thus, would contribute with millions to the bottom line result.

Now, every cent saved by Procurement is one more cent on the financial result of the company. One can easily measure it, whilst the contribution given by other areas might not be that straightforward and easy to validate.

Besides that, lots of the information needed for the decision-making inside any company are on the CPO’s desk, and he knows the organization in a cross-functional way. Who are our main partners? Where do the quality problems come from? Should we buy, rent, produce it in-house or outsource? Who is spending what, when, and with whom? What are the goals that each area wants to achieve, and how can we translate that into our specifications and contracting models? The important thing for the CPO is that he should be able to connect and interpret all of this data, and turn it into decision-making information.

That said, we should turn out to the second question: currently what holds this from happening?

I’ll focus on two main points. The first one, is that usually the people who are at the top management of the companies nowadays are professionals that have developed their carriers for some decades, and when they were on the lower levels, they saw purchasing departments that were purely operational, with that so called buyer that was just a purchase order placer. Thus, these top executives are not usually used to seeing the CPO participating on the organization strategy, don’t call him to do so, and don’t realize the benefit that they would have on doing it.

The second limitation is the typical historic profile that the Procurement professionals themselves have. It’s hard to find – not to say impossible – little kids that say they would like to be buyers when they grow up. The same goes for students, you won’t find them saying they want to be on the procurement department because they want a more aggressive, vertical carrier inside an organization. In other words, the better and more prepared professionals don’t usually end up in supply-chain in a natural, fluid, way. Turns out that when the CPO is called to participate in the strategy, it might happen that he’s not prepared, he does not have the right profile, and he just won’t contribute much.

Finally, I’ll leave you with what I believe is the best profile for a CPO, the one that sits along the decision makers and is able to contribute to the company’s strategy. That person understands what the different areas inside the company need and want, can identify the best solution available on the market, and is able to influence, “sell” this solution to its internal clients. That is, that professional must have the hard-skills to understand in detail the specifications of the products, or the scope of the services that the company needs, understand what the market offers, and what the differences between the main players are. But also, has to have the soft-skills of relationship and communication to lead and influence the decision making towards what he’s been able to observe and conclude

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