Finding opportunities in procurement

Opportunity 37Procurement is a function that has gained in prominence over the years and has become an increasingly important strategic link for many organizations. The general stages of purchasing sophistication are:

1. basic buying to operate
2. unit cost optimization
3. consolidated purchasing
4. supplier cooperation

Each stage represents an opportunity to lower the overall relative spend for an organization.

When looking for opportunity in procurement areas, we first try to get a handle on the actual amount spent annually on goods and services. This sounds simple but is sometimes harder than it seems. Many organizations don’t really know the total annual spend in part because many people are actually making purchasing decisions across the organization. Which leads to the second area of investigation: Who actually makes the buying decisions in the organization and how is this managed? Is buying centralized or decentralized, or both? As a quick example, we worked for a hospital which on paper had centralized purchasing but in practice operated in a decentralized manner. The actual buying decisions were made in the field by physicians. If you can figure out how much is spent on what, and who is making the decisions, you can start to understand what purchasing stage the organization is presently operating at (based on the general classifications listed above). Each of these stages require fundamentally different ways of thinking and operating (and different skills sets).

From a practical operating point of view, here are a few of the opportunities we often find in procurement areas:

  • Order processing lead times are too long. As a result, safety stock is higher than necessary to compensate.
    • Missing or incorrect information on purchase requisitions delays purchase orders being issued.
    • Order review processes are cumbersome.
    • Purchase authorization levels are too low, too high, or not well defined.
    • Large workload imbalances exist from not “leveling” negotiations through the year.
    • An excessive number of purchase orders are generated due to small order quantities of low usage value items.
  • There are few identified alternate sources for critical services, materials or parts.
  • There is no program in place to identify and standardize parts. This increases the number and frequency of purchase orders.
  • The MRP system is considered largely unreliable. Inventory control parameters may be inaccurate.
  • Buyer performance is not effectively measured.
  • Supplier performance is not tracked, even though it is a buying criterion.

Because of the frequent “process” issues in procurement areas, it’s easy to start focusing on the group’s productivity (e.g. orders processed and cycle times) but this is usually a mistake. The real organizational value in improving the performance of a procurement group is to reduce the organization’s overall relative spend on goods and services, so we try to frame opportunities within that context.