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How to define procurement                                                                    

CSCPO motivated a debate on an agreed procurement lexicon. The following statements were proposed:

Procurement is the business management function that ensures identification, sourcing, access and management of the external resources that an organisation needs or may need to fulfil its strategic objectives.

Procurement exists to explore supply market opportunities and to implement resourcing strategies that deliver the best possible supply outcome to the organisation, its stakeholders and customers.

Procurement applies the science and art of external resource and supply management through a body of knowledge interpreted by competent practitioners and professionals.

The author offers two more definitions of procurement.

Procurement is a pro-active, strategic corporate activity to ensure a continuing supply of goods and services to enable world-class organisational performance.

Procurement manages supply chain risks through effective negotiation of contracts, cost and price models, quality and other essential supply characteristics.

How to define supply chain management (SCM)                                                                 

Investopedia² define supply chain management (SCM) as ‘Supply chain management is the management of the flow of goods and services and includes all processes that transform raw materials into final products. It involves the active streamlining of a business’s supply-side activities to maximise customer value and gain a competitive advantage in the market place.’ Techopedia³ define SCM as ‘The management and oversight of a product from its origin until it is consumed. SCM involves the flow of materials, finances and informa-

tion. This includes product design, planning, execution, monitoring and control.’

Strategic roles of procurement                                                                 

The strategic ability and contribution of procurement is the differentiator that sets the function apart from a transactional modus operandi. Boeing, in developing its 787 Dreamliner, expanded the role of procurement from outsourcing parts to outsourcing entire subsections. It has been estimated that nearly all of the jet’s design and fabrication, along with some 40 per cent of the estimated $8 billion in development costs, is being outsourced to subcontractors.

1.3.1    Due diligence

Due diligence is a structured methodology to help determine that a supplier has the necessary qualities to become a partner of the buying organisation. The term ‘due dili- gence’ is more usually associated with financial reviews in takeover situations. Within a procurement context it includes consideration of the supplier’s:

n  financial robustness, including working capital

n competence and availability of key personnel resources

n reliance and extent of sub-contracting

n history of legal disputes and litigious actions

n experience of partnering relationships

n existence of a robust 5-year business plan

n history of insurance claims

n IT system robustness.

Conducting due diligence requires specialist knowledge and skills. It also requires liaison and collaboration with in-house specialists in areas including finance, legal and security.

1.3.2    Risk management of the supply chain

Identifying supply chain risks and developing acceptable risk mitigation strategies is a hallmark of a strategically focused procurement operation. All supply chain risks fall into one of three categories:

1. Those risks that only the supplier can manage
   1. Those risks that only the buying organisation can manage
   1. Those risks that must be jointly managed by the supplier and the buying organisation.

Examples of risks that fall into category 1 are:

n  Having a robust business continuity plan

n Ability to match resource planning to programme deliverables

n  Contractual relationships with sub-contractors

n Design, inspection and testing

n Having available sufficient working capital

n Through-life product support.

1.3.3    Relationship management

The adversarial way of business life is an outdated concept, a fact that some procurement operations need to realise. The skill of managing relationships with key strategic suppliers necessitates attention to, for example:

n conducting regular blame free reviews of contracts n a joint commitment to continuous improvement n sharing long-term business goals

n active involvement of senior people at both organisations

n  negotiations based on genuine business objectives

n  the provision of accurate and timely business and contract management data.

1.3.4    Continuous improvement of supplier performance

All sectors of the economy have competitive challenges, sometimes from off-shore organ- isations. The procurement community have a strategic role to motivate suppliers to continually improve their performance. The performance on long-term contracts can be incentivised to reward the supplier’s investment and initiatives. The contract can require continuous improvement as an obligation. In some situations, the buying organisation may jointly invest in new technology, providing the supplier agrees to appropriate own- ership of intellectual property and perhaps licensing upon payment of a royalty on sales.

1.3.5    The supplier’s investment in ‘right first time’

An organisation’s reputation for quality is a prime business consideration. The law courts regularly try cases where non-compliance with the specification is at issue. Suppliers have expert knowledge, or should have, of the goods or services they provide. The supplier can add value to a procurement by ensuring that the specified quality can be satisfied or exceeded. The supplier can also advise on through-life costs, maintenance support, inspection and testing and continuous improvement. When the procurement specialist is engaged in pre-qualification processes there should be a penetrating analysis of the bidder’s quality management attributes.

1.3.6    The supplier’s investment in inventory

The rapid business approach to just-in-time has focused attention on who pays for inven- tory in the supply chain pipeline. Buying organisations are naïve to believe this is a ‘free of charge’ service willingly entered into by the supplier. There are costs involved,

including strategic warehousing facilities, distribution network costs, danger of product changes, working capital costs and so on. The concept of consignment stock is a proven concept in manufacturing, with some suppliers very adept of completely satisfying the buyer’s needs for line side stock.

1.3.7    The supplier’s investment in procurement expertise

It is a strange phenomenon that when buyers visit potential suppliers they often fail to probe the supplier’s investment in procurement expertise. When the author engages with clients engaged in a tendering exercise and the supplier makes a presentation, it is most unlikely that there will be a procurement specialist on their team. Why? It can only be concluded that their procurement operation is not seen as contributing to a competitive edge.

Procurement as organisational buying                                                                 

Organisational buyers have been defined by Marrian⁴ as:

Those buyers of goods and services for the specific purpose of industrial or agricultural pro- duction or for use in the operation or conduct of a plant, business, institution, profession or service.

Organisational buyers are those who buy on behalf of an organisation rather than for individual or family use or consumption. Organisational buyers can, as shown in Table 1.1, be considered to belong to one of four buying groups, each of which can be further subdivided.

Some of the categories in Table 1.1 may overlap. Thus, in the National Health Service, some supplies may be bought centrally by government agencies, regionally by health authorities and locally by hospitals themselves.

1.4.1    Procurement as supplier management

Supplier management may be defined as:

That aspect of procurement concerned with rationalising the supplier base and selecting, coor- dinating, appraising the performance of and developing the potential of suppliers and, where appropriate, building long-term collaborative relationships.

Supplier management is a more strategic and cross-functional activity than ‘buying’, which is transactionally and commercially biased. The relationship between procurement purchasing and supplier management is shown in Figure 1.1.

1.4.2    Purchasing as external resource management

The following is the view of Lamming:⁵

The new strategic function will probably not be called purchasing – that is much too lim- ited a word. The connotations of purse strings and spending money have no relevance to the setting up and management of strategic interfirm relationships. This task is con- cerned with ensuring the correct external resources are in place to complement the internal resources. Perhaps ‘external resource managers’ is a term that future purchasing managers will adopt.

The strategic scope of procurement                                                                 

The strategic scope of procurement will vary according to the nature of the organi- sation’s business activities. The author has consulted in, for example, a gold mining organisation and an international deep-sea communication cable laying organisation. The strategic variables were quite different. The principles of strategic scope are illus- trated by Figure 1.2.

Each of the key areas shown in Figure 1.2 is analysed and shown in tabular form in Tables 1.2 to 1.7. Table 1.2 provides indicative areas of financial strategic considerations including the corporate strategic relevance. All the considerations and relevance are pertinent to procurement decision making. Table 1.3 concentrates on the legal strategic considerations of important relevance to procurement decisions making. Table 1.4 exam- ines supply chain risks, including the corporate strategic relevance. All these consider- ations should be within the scope of procurement influence and action. Table 1.5 deals with operational strategic matters again emphasizing the areas in which procurement can play a major role. Table 1.6 raises the technology strategic considerations, outlining the potential scope and influence of procurement. Table 1.7 deals with managing obstacles to change and emphasizes the continuing potential influencing skills of procurement specialists.

1.5.1    Finance – strategic scope of procurement

Table 1.2 provides indicative areas of financial strategic considerations for procurement.

Managing

obstacles

to change