Author: Tim Houghton, Former SVP & CPO with Bell Canada (see full bio)

7 Steps to Procurement Transformation

How good is good enough? Best practices, best-in-class, state of the art….what does this truly mean and how do you define success?

 

Cost transformation or sourcing transformation has gained significant traction over the past 24 months given the global economic conditions. Many CEO’s have looked to their procurement organization to assist in stabilizing or growing the net income line. I would like to share my thoughts on how to launch a successful cost transformation; the use of dashboards to monitor progress and some of lessons learned.

The most successful cost transformation programs have come from organizations that have had a “burning platform”, meaning traditional programs were not going to deliver the desired results. Aside from labor cost, external spend on goods and indirect services represent the largest expenditure at most organizations. My experiences suggest that all organizations should create a “center-led” procurement group that has accountability and responsibility for all external expenditures on goods and services. To formulate this strategy a new corporate policy or executive directive will be required. The executive directive will be required to help with change management, adoption and sustainability.  Resistance to change will be the biggest obstacle to success. Success will only be assured through adoption.  Long term returns need be  secured through sustainability via monitoring and adjusting the programs objectives with the needs of the business.

Communications

As the new structure of the procurement team is announced a communications program should be shared with all employees of the corporation. The announcement should share a clear and elevating objective, led by the CEO or a direct report of the CEO (for example: a cost reduction challenge of $xx million on a spend base of $yy million to be accomplished over the next xx months). The progress of the program should be shared with the Senior Executives on-going through the duration of the program.

 Institute Principle Lead Decision Processes Grounded in Facts

When the procurement organization is announced, there should be some guiding principles. I have encouraged my organizations to embrace and accept the fact that we must implement and institutionalize a fact based, analytical rigor, arms length sourcing process that will be adhered to on a consistent basis. There will be no short-cuts to the sourcing process; there will be no “sacred cows” (no sourcing categories or suppliers who are left untouched). The procurement group needs to be the analytical conscience of the organization. The objective is to introduce process rigor and execution discipline. The most important concept to instill within the procurement group and the corporation is that SPEED MATTERS.

Establish Baseline

The first step in launching the program is conducting a base-line spend analysis. This exercise will allow an organization to obtain visibility on what they spend, who they spend dollars with and question why they spend the dollars. Spend analytics will assist in structuring sourcing categories, which will lead to an organizational structure within the procurement group.

Build an All-star Team

In terms of the most effective procurement structure, an objective would be to realign the procurement organization to institionalize best practices, upgrade talent/skills and sustain the recognized sourcing savings. The Human Resources department should be able to assist with the skills assessment to align with the Corporations desired skills, attributes and behavioral assessments.  But make sure you have a strong blend of sourcing experience and industry domain expertise in those more difficult to manage categories.

Selection of Management Tools

Another consideration when building the transformation is what tools and technology should be deployed? In launching a sourcing transformation advanced sourcing techniques should be utilized. These techniques would include, but not be limited to:

• category analysis
• “should-cost analysis”
• strategic sourcing
• mega supplier strategies
• consumption/demand management
• e-sourcing tools

Unbiased Auditor

Control and tracking systems should be led by a resource in the finance organization that is separate from the procurement organization. Implement a business case review program, on a monthly basis. Align the ERP systems with the financial systems. The intent is to identify and capture all savings. The savings should be broken down into in-year and run rate savings (on-going, annualized savings). The finance organization should be held accountable to the treatment of the generated savings (budget impacting, gap closure, discretionary, etc). 

Conclusion

Procurement Transformation can be achieved with 7 key items in place:

1. Executive Sponsorship
2. Clear Communications
3. Principle Lead Decision Processes Grounded in Facts
4. All-star Talent
5. Speed Matters
6. Solid Technology Tools
7. 3^rd Party Validation/Certification

A sourcing transformation program is a corporate-wide objective and should be shared with all employees. The combined goals of the corporate-wide objective should be collaboration, speed and focused execution. Executive leadership needs to have active engagement and support the program. Leadership needs to remove the barriers and keep the focus on retaining savings.

Related Posts

• Sept – Will the real procurement/VMS integrated platform please stand up?
• July – Does Your Purchasing Policy Work? – Canda Rozier
• June – Indirect Services Successfully Managed with a Rate Comparison Tool – Kimberly Smokey

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Tags: 7 step procurement process, 7 step procurement steps, e-sourcing tools, global economic conditions, indirect services, indirect services procurement, procurement group, procurement organization, procurement transformation, procurement transformation program, procurement transformation project, strategic sourcing,

2 Comments »

1. 

   I have just exited from a company who would have greatly benefited from your article.
   Unfortunately the only executive buy-in was silence and a lack of resources. They wouldn’t even back us in spend analysis other than to send us to the AP department to manually review supplier payment stubs. They did opt for an eSourcing option (SaaS) but used reverse auctions for everything. I was told “Everything is a commodity”. This was in a Financial Institution…………
   There was no ERP backup and Excel spreadsheets ruled. Replacement staff were drawn from Admin staff from throughout the organization. I was the only one with a designation in the whole company.
   One KPI only….Cost savings were defined as the subsequent reduction in the next budget line. Didn;t report any savings for Marketing, Advertising, HR, Consulting and other catagories as any “savings” were used by the business head for more Brochures, print ads, personnel searches and projects for consultants. Subsequently I was left holding the bag for lack of “savings”. Again no Executive backup. My replacement was someone who had an MBA but no SCM experience at all. Subsequently both her and the Director left and I have no idea (or even care) what happened.
   You first point was Executive mandate. Without that to start you are just spinning your wheels.

   Comment by T R Volpel CPSM C.P.M. LSSBB — February 5, 2011 @ 8:47 pm

2. 

   Thanks for sharing… Isn’t it amazing how corporations can still be so “top down” driven. Many organizations strive to create an empowerment culture, but cannot do it and so much paralysis occurs as a result. We continue to see a lot of middle down management not acting on clear opportunities for many reasons. Fear of failure, no support to push through internal obstacles, etc. Executive Management has to be focused on centralized goals for the organization as well. Mixed agendas make for a very confused organization. I think it’s probably good that you have gotten out of your old company and can now set your sights on a more proactive, executive supported group of professionals.

   Comment by admin — February 7, 2011 @ 9:51 am

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