The evolving Procurement function: How the risks are changing

I remember the old procurement function, which was mostly reactive; till the purchase requisition got approved the Procurement Officer hardly ever initiated any activity.

Today there is no purchase requisition in most developed set-ups, for all you know the MRO items are being managed by the MSC, Wesco or the Amazons of the world and at fraction of the cost. If you are buying online for your books, you could well be on-line for buying your industrial spares as well or you could potentially transfer the entire management to experts who have better knowledge of the spares management having done that for a large ensemble of industries. The question is however to create value out of it. That is where the Purchasing function steps in.

The Procurement Officer however is far busier with other things on his plate. He is part and parcel of a transformation program that has suppliers and customers, internal included, working together on improvement projects on future products, services or processes. Some of this is pure and simple cost reduction at a scale not ever dreamt before. It is like the Coke example of having anchored on the nickel coke price for 78 years.

The quintessential Procurement Officer was the one who had to start with a need based procurement activity, which normally got initiated when items were to be bought by different internal constituencies; some were raw materials or consumables, some were MRO (maintenance, repairs and Operations) related purchases or any service (professional or utility or anything).

Today the Procurement Officer for large supply chains are actually driving bulk of the costs in the supply chain and their decisions have bearings on where the costs are going to be headed in the future as well. The function stepped out of the confines of the procurement window and became an organization wide imperative.

The sourcing paradigm changed with globalization and with the advent of new technology. Globalization allowed the zero based costing to be expanded beyond the shores and borders of the country and all that mattered was value at a landed cost. Nothing was spared in this journey as long as the quality and service could be ensured; factories could be shifted from Java to Honolulu.

The Procurement function however got far more risky in the processes. When sourcing shifted to global level, there was not only smaller purchasing groups involved in it, there were far more cross functional activity to be steered towards a common goal.

The first challenge therefore was organizational and how to make these diverse groups work towards a common goal. It meant category management to evolve with a matrix structure that created autonomy within the confines of a shared responsibility.

The categories also started to move from the usual items like raw materials, spares, hardware or software to all kind of services. What could be done in-house with permanent manpower now could be outsourced, which meant that the function had to be far more strategic and operationally focused as well. If the entire professional services to be rendered by the firm in terms operations, maintenance, security or quality, etc., were to be executed effectively, the performance monitoring of that had to be far more diligent.

Contract management, which was the key purchasing function, now got changed to include performance based agreements that entailed every aspect of performance from safety, design, personnel, operations, logistics, quality, legal and environment aspects as well.

Procurement Officers slowly and steadily upgraded themselves to be business managers, taking decisions to make the business flow with the needs of the times.

If you pick any of the top brands, you will hardly find any of them focusing on things that they are not the best at. Apple is not best at producing, Coke is not based at manufacturing anything other than the concentrate, Zara is not the best in stitching, Amazon that sells almost everything in the world is not even making any stuff that it sells. All that these companies focus on is their core strength. Apple focuses on Innovation or Amazon focuses on logistics and network optimization.

So the purchasing function of these companies do an extraordinary amount of work to ensure that these companies can buy stuff that is needed to make them sell stuff on time; the spend categories could run into several billions of dollars.

Procurement therefore has many dimensions and the future of procurement is moving to an all- embracing core function that would tie up strategy with execution bordering many constituencies of the firm.

Let me start with the technology itself in buying. In most developed companies the buying decision is the most important decision which cannot be taken by any proven technology as it involves a large number of variables and probabilities and strategies. For even a simple item like buying paper, one would have to go through a planned arrangement (for all you know you could eliminate the buying if you could prove that it is redundant). But once the decision is made the execution of that in the future would be completely driven by technology, no documentation need, no involvement of various constituencies to forward or approve.

The "purchase requisition to purchase order" days we measure would be zero. It is the buying decision which would consume time, thereafter it should be instantaneous. The buying decision again is going to be aided by group work. If category teams are working together or if we could achieve bundling of category services as well through central functions, with the help of technology, times could be crashed enormously.

Going back to organization and metrics and how we measure the procurement function efficiency, is where the trick will lie. Those that prospered better actually increased the authority to decide, not make a DOA that creates a long list of well-wishers, who add very little value to the process.

But the risks are changing as authority is flowing to the places where it belongs. The ability to take out costs is far better ingrained now than before, if such delegation of authority is instituted.

When trade links are getting re-configured, the risks in the chain are bound to rise. The Procurement function must be agile to these events and must be proactive to create alternatives. With changes in tariffs, non-tariff barriers included, and with exchange rates that could be as volatile as possible, the procurement function is headed for interesting times. But the list of new initiatives is also long starting with service bundling across categories to performance based pricing models to a large number of innovation opportunities using technology.

Procurement has become more challenging than ever.

This is my third article in the series, "Risk Management In Supply Chains".