How important is strategic procurement for Start-Up organisations?

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The beginning of the information age and the introduction of the internet has heralded a fundamental shift in how businesses operate and also the types and scope of businesses available. The type of business owner has also changed and now anyone has the opportunity to become a business owner.

Most modern businesses never progress further than small sole trader status, however there are a select few who start with a small venture situated in their basement or garage which soon becomes world changing.

A “Start-up” can be defined as a new or young business created to fulfil a need which may be seen as unique. Start-ups generally fall into three categories:

• A subsidiary of a parent company or joint venture between two or more organisations, this type of business arrangement is created to initially fulfil a very specific organisational or client led need. Subsidiaries or joint ventures rarely expand outside of fulfilling this defined need and once their usefulness has ended, they are normally wound up.
• Sole traders, originally this type of business was typically only used by trades persons and craft ‘boutique’ enterprises. However, with the increasing popularity of online platforms like Amazon, eBay and Esty and business practises including drop shipping and “fulfilled by “services, the growth in the number of sole traders is staggering. This type of business has become so popular as to spawn phrases and acronyms which now find their way into everyday language including FBA (fulfilled by amazon) and side hustle.
• Entrepreneur owned, this type of business has for a long time been the pasture of world change with businesses once viewed with ridicule and destined to fail now amongst the largest organisations in the world. To succeed in this arena requires a singular mindset focused completely on the idea and seeing initial failure as a step towards eventual success.

Entrepreneur owned start-ups can be quite radical in either their approach to business or through the solution they are attempting to bring to the market. Because of this nature, this type of start-up has a significantly high chance of failure. Start-ups which do succeed, however, often go on to fundamentally change our view of the world and how we interact with it. As a guide, some notable entrepreneurs who have become household names for their unique approach include:

All of the above names are instantly recognisable and the companies they spawned have all changed how we live our life.  Whether how we travel, shop or communicate, the impact entrepreneurs have on the world can be astounding.

Importance of Procurement for start-ups

In the beginning, when a business is starting up there are many different draws on the focus of the owner from designing the product and prototyping through securing finance and marketing the product to securing production facilities and building the production process. The one area which seems to blend into the background is purchasing, as long as the purchasing is completed within budget, focus needs to be elsewhere. This is a common scenario and can have lasting detrimental effect on the business and the wider supply chain.

During the “start-up” phase of a business there are many supply chain and purchasing related problems which can easily derail the progress of an organisation and if not managed effectively have the potential to terminally effect a start-ups fragile cashflow.

Some of the more common issues include:

• Over specification of components or products, within the fast-paced initial design phase it is easy to focus completely on function or aesthetic of a new introduction and be blinkered towards the potential cost impact of choices made.
• Limited supplier understanding or buy-in for the business, as a new customer, at the start of your journey the suppliers you work with will have limited understanding of your business and the path you are on. To begin with suppliers will trade with you in a limited capacity until you have had opportunity to develop a trading history with them. As a start up your business has no performance history to entice suppliers with.
•  Overspend against initial budget, during the prototyping and development stage it is very easy for costs to spiral out of control. This is primarily due to reduce quantities, frequent changes to specification, and utilising high-cost processes i.e., 3d printing. Without close control this can not only severely impact the cost of development but also unbalance the future budget cost of the first production runs of the product being developed.
• Lead time drifting, whilst developing the new product or process there will be requirements for components or manufacturing processes on an adhoc basis and generally of an urgent nature to maintain the development timeline. this can strain a developed relationship with a trusted supplier.  However, as a start-up the relationships will be new and untested with key suppliers, all trading will potentially be at the supplier’s discretion.
• Supplier imposed trading terms, without a purchasing history with a supplier, or a provable historic demand for a portfolio of goods, suppliers will tend to insist trading conforms to their preferred sales terms and conditions. These terms and conditions are weighted completely in the supplier’s favour and are intended to remove risk for the supplier in all areas of the trade.

Benefits of implanting strategic procurement at the start.

The importance of a robust procurement strategy early in a company’s development cannot be overstated. Incorporating a well-defined procurement strategy into a start-up’s integral make up have wide ranging benefits which can have a great impact on the initial success of the business venture and the future stability of the business as it grows.

A few of the more common benefits which can be experienced include:

Instil a best practise approach from the start

Strategic procurement relies of tried and tested processes and methodologies to build a strategic plan which can be seamlessly implemented, tested, reviewed and adjusted.  Providing a constantly evolving and developing structured approach which delivers consistent and measurable results. 

Building a strategic approach into the fabric of the business at the start allows for the business to access potential cost savings and risk mitigations.  These are available at a time when stability within the procurement function can be the difference between success and failure.

Organisations which grow with a simple and informal procurement structure find it much more difficult to accommodate the change to business thinking and culture required to allow for procurement strategy to be implemented successfully. By instilling a strategic approach from the start means the culture within the organisation grows and develops inside a more structured envelope making adaptation much easier to manage.

Obtain better price and payment terms when finances are at their most stretched

At the beginning of a trading relationship with a new supplier, prices paid, and payment terms offered are generally higher and favour the supplier more than with a supplier you have a long and trusted relationship with.

With a new customer, suppliers are potentially opening themselves up to financial risk. With no previous trading history to rely on, the supplier must guard against the customer defaulting on payment, requiring internal resource to chase and pressure payment. In the worst case, the supplier may be required to take legal action against the customer for outstanding payment. The risk faced by the supplier automatically adds cost through assigning internal resource or incurring legal fees.

Organisations which understand this relationship curve and invest time in developing the relationship with key strategic suppliers from the start,  often experience considerably better pricing and more favourable payment terms. Further benefits can be experienced including preferential delivery schedules, prioritising stock etc.

Build relationships with key suppliers to “sell the vision”

Building on the previous point, the initial relationship between a supplier and customer can be very difficult when the customer is a “start-up” with no previous trading history of any sort.

Suppliers are inherently suspicious of start-ups as there is normally a great promise of dramatic levels of trade which tend to be over sold and either be significantly lower or even never materialise. A supplier will be hesitant to invest resource in developing a potential customer with no history to draw upon to gauge possible levels of trade. In these instances, the supplier will inevitably prioritise existing customers over the needs of a start-up.

Embedding a professional strategic procurement function or manager into the business structure at the beginning offers benefits on a number of fronts in this type of situation:

• Providing a level of professionalism helps suppliers feel they will be trading with a more stable operation which will be consistent in how relationships are managed.
• One of the main tasks of a strategic procurement professional in the early phase is to “sell the vision” of the organisation, providing a human aspect to an otherwise faceless organisation. Building strong relationships with key suppliers and instilling the virtues and potential of the business as a long-term customer of choice.
• Allowing key suppliers an avenue to senior management and the potential benefits this offers including escalation for issues felt, opportunities to impact design and effectiveness with expert knowledge input, making the supplier feel they matter to the importance of the organisation and that their relationship matters.

Help to engineer cost out at the start instead of once the product is produced

During the development stage of a product or service, it is very easy for the cost to increase as the design becomes more complex or mature.

At this time, the role of a procurement professional is twofold:

• First, they act as a system of ‘checks and balances’ providing a justification process which ensures a new need or requirement is fully assessed and potential alternatives have been investigated.
• Second, they have the opportunity to develop Early Supplier Involvement (ESI) processes to help utilise expert knowledge and understanding from suppliers. Allowing access to key supplier knowledge pools in a structured and protected method, to encourage open and collaborative engagement which may promote development advances.

Define and implement a robust procurement strategy and policy to future proof organisational development

During the initial development and growth period of a business, processes and strategies quickly become outdated or restrictive and can negatively impact the growth potential of the organisation.

A strong procurement presence in the early stages can help to develop strategies and processes which adapt to the changing needs of the business and in essence, grow with the organisation. Well-developed procurement strategies can promote growth and further development by defining different incremental sourcing and operational policies which can be implemented at increasing levels as the organisation reaches key growth targets.

Help manage business cash flow, during the initial stages of a company’s life

Financial control is paramount to the short-term and long-term life of the business.  At this time there are many different draws on the organisations finances which are finite and in very short supply. Prior to the organisation selling its products or services, finances are generated in limited supply from the owner(s) or investors.

Potentially one of the most important roles of a procurement professional in any organisation, but more so in a start-up is as custodian of the company’s cashflow. As one of the “holders of the purse strings”, procurement are an extension of finance and as such have a responsibility to challenge the necessity of all purchase requirements, to constantly seek value for money in every purchase. This is generally managed through two avenues:

• The implementation of robust purchase approval processes minimising the opportunity for potential fraud or maverick purchasing whilst promoting clear decision processes and approval methodology.
• During the early stages of a company’s life, purchasing demand can be very erratic with demand for products fluctuating wildly. Constantly seeking value for money at this stage and providing visibility of budgetary requirements and progress ensure all parts of the business buy in to the cost awareness requirements.

Working with a specialist procurement resource

Accessing the required procurement knowledge and experience required to build a robust procurement strategy which will minimise risk and maximise potential for a start-up can be a immense drain on finances at the exact point when those finances need to be protected. 

There are two main options when looking to bring onboard the services of a procurement professional:

• Option 1 – employ a person on a permanent basis, to ensure the correct skill and knowledge base is engaged the organisation would need to attract a professional of senior standing with extensive experience to ensure the person is suitably equipped to deal with any situation which may arise. This option would place a long-term burden on the finances of the organisation and to obtain the best person would require significant investment in salary package and benefits.
• Option 2 – Utilise the services of a consultant or procurement specialist on a short-term contract basis. Although on the surface this option may appear to be a bigger drain on finances than option 1 (mainly due to the higher price paid for the services of a consultant). These perceptions may be incorrect, although a higher rate is paid for services, the period over which the services are conducted is considerably shorter than employing a person on a full-time basis. Given a consultant would be engaged to perform specific tasks encompassing weeks of requirement and the benefit received from the high level of knowledge and experience offer a significant saving over option 1.

Some of the most successful start-ups have understood the benefit of engaging with specialist advisory services as required.  Having the opportunity to utilise specialist services only when required helps to plug gaps in the organisations capability when required whilst allowing the organisation to focus closely on the core functions which add the value to the business.

Benefits for start-ups who engage with specialist consultant services are wide ranging, tangible and can add real impact to the organisation:

• Accessing expert knowledge and experience gained in many areas, when engaging with an external expert or consultant-based organisation you are able to utilise the knowledge and expertise of multiple consultants within the one company developed over a wide range of business sectors and environments. When selecting a specialist to work with it is important to identify options with transferable experience from similar situations.
• Ability to build strong evidenced based strategies and policies, it is vitally important in the early stages of a new company for a procurement strategy to be robust but flexible enough to accommodate the erratic nature of any early demand and supply chain ramp-up. Understanding this and having the ability to implement a strategy which will flex and evolve with the business future proofs the supply chain, maximising potential growth whilst managing the associated risks.
• Able to add a professional face to sourcing activities to help engage with suppliers, one of the main problems start-ups face when engaging with potential suppliers is their non-existent history. This can be perceived as a potential risk to any supplier, instantly placing the new relationship at a disadvantage. Enlisting the services of a purchasing professional provides an element of professionalism to the task of sourcing new suppliers. Using a specialist who has extensive experience opens up the potential of engaging with trusted suppliers the consultant has previously developed a relationship with, allowing the start-up to essentially trade on the consultant’s reputation.  A strong purchasing structure can reduce the perceived risks associated with start-ups, through ‘selling the vison’ a consultant can create greater supplier buy in and engagement. If suppliers feel valued and ‘part of the adventure’ they are often keen to work with the organisation through Early Supplier Involvement to produce a better solution.
• Ability to guide and support staff, in the early stages of an organisation there is normally a steep learning curve for all stakeholders as the business begins to form into a cohesive organisation. it’s important to quickly and effectively increase the knowledge and experience of staff and build a strong co-ordinated team within a short period. Engaging with a consultant for this purpose can help to guide and train staff in the most effective and professional methods and processes whilst helping to build a robust team dynamic which utilises the strengths of each team member.
• Only accessed when required and for a short period, to transition an organisation from the initial start-up phase to a more established and stable footing requires a set of distinct skills and expertise which is not normally required or evident in the everyday operation and strategy generation. Employing a professional with this skill set on a permanent basis with a view to later transition them into a normalised procurement management function would be very cost prohibitive and may not be the best use of resource in the long term.  Engaging a consultant or expert for this initial stage allows for the increase knowledge and cost associated to be condensed to short periods effectively reducing the potential cost impact. As the organisation transitions into a more stable position, the use of a consultant becomes less prevalent in favour of a permanent management position.
• Can use experience to source and pre-approve the right type of supplier for the organisation, Sourcing the right suppliers to help grow a new business supply chain is a difficult task due to the vast number of variables which need to be considered including location, capability, capacity, potential buying power, synergy with the clients ethical and business requirements etc. Utilising the skills an expert has developed in this area can have significant risk mitigation and cost benefits, consultants will build a career on selecting the right type of supplier for the given solution. The chosen consultant will also likely maintain a database of trusted suppliers they have traded with previously, these suppliers will already have a relationship with the consultant and may be more accommodating of a start-up with which the consultant is associated.

How to cheat the system when working with an external procurement expert

Although as highlighted above, the use of a consultant or an expert can be a more cost-effective option than employing an individual to manage the initial supply chain requirements and then transition into a more standard management structure. The cost of engaging with a consultant can be high and difficult to justify when the financial constraints on the organisation are so restrictive during the start-up phase.

However, there are a few tricks which can help reduce the cost and maximise the effectiveness of the services employed:

Be specific about the tasks you need support with

It may be difficult to understand the scope of requirement you need to employ the services of a specialist for. The very nature of the implementation of a new start-up requires a great deal of flexibility to manage the many unforeseen problems which seem to occur on an hourly basis. 

However, if you are able to provide a clear outline of the nature and focus of the role you need support with you will be better prepared to define the parameters of the distinct projects the consultant will support. The more detailed you can be when providing a brief for the purpose of engaging a consultant, will transfer into a more focused cost structure for the services.

Consider different payment structures

There are a number of different ways to financially structure a project undertaken with a consultant or specialist. These include:

• fixed cost, the consultant will provide a price for the completed project based on their interpretation of the brief, based on their understanding of the time and complexity of the task to be undertaken and market value. This option can be useful for start-ups as it provides a fixed constant which can be factored into the existing budget.
• Hourly/Day rate, this potentially contains the most risk for the organisation as there is limited visibility of the final cost. However, this type of work provides the best opportunity for periodic engagement and can be allocated against the budget as a monthly expenditure.
• Retention based, with this structure the organisation would agree a monthly fee for a structured ongoing service provided by the specialist. This can be useful for providing training and support on a progressing basis with specific tasks completed each month.
• Gainshare, this structure is normally associated with sourcing projects where there is a defined cost saving target.  The consultant agrees to be paid a percentage of the saving achieved for a specified period of time i.e. 12 months. Although this may not seem suitable in a start-up setting, it can however provide a useful method of engaging with an expert whilst offsetting the cost for a period of time.

Consider setting an extended timeline

During the manic beginnings of a new organisation, it is easy to succumb to the need to have everything in place quickly. It is important to understand the priorities you have at a macro business wide level but also at a departmental operational level. Not all projects suggested by a consultant will need to be undertaken as a matter of urgency, it is worth working with a specialist to identify the priorities, the projects that will add the most value and a suitable timeline for completion.

You don’t always get what you pay for!

 It is an adage for life that “you get what you pay for” or “if you pay peanuts you get monkeys”, these are also very much true in most aspects of business as well, however it is also worth understanding how consultants and service providers structure their business to appeal to certain types of clients. 

Large consultancies will attach large restrictive rates to their services primarily to appeal to multi-national organisations where the consultant will be expected to field a multi person team to address very complex business transformations. Other consultants like SCB Procurement Solutions aim their services at the smaller end of the market and structure their finances accordingly, offering lower rates and multiple payment structures to assist the client in achieving the best return on investment.

It is important to identify the correct consultancy for your purposes, just because their rates are low does not mean they offer a sub-standard service.  On the contrary smaller consultancies are better positioned to provide a more bespoke service for the needs of the individual business.

How SCB Procurement Solutions support start-ups 

Now for a very small sales pitch (sorry).

At SCB Procurement Solutions, we understand the pressures felt by entrepreneurs during the start-up phase of a new organisation. We can sympathise with the feeling that there simply are not enough hours in the day.

When we engage with a client, we initially review their requirements and identify priorities which can either add greatest value at that moment or are time sensitive i.e. maintain legal compliance, meeting wider company deadlines etc.

We have built a reputation of working collaboratively with companies both established and start-up to provide solutions which are tailored to your individual requirements and situation. We know one size never fits anyone, so our proposals are designed to suit your needs only.

To best support our chosen market sector which encompasses small to medium organisations and start-ups, we offer a wide range of project and financing structures to maximise your return on investment and minimise your risk.

For further information on how we can support your business needs, please contact us to arrange a time for one of our consultants to spend time understanding your needs and how we can support.