How can businesses with limited procurement resources ensure that they are deployed in the most efficient and effective way? Dave Nellist offers advice on building a scalable procurement framework.
In organisations where procurement expertise is limited there will be issues to resolve around how and when precious resources should be deployed. How should procurement staff maximise their contribution? What steps could be taken to promote consistent relationship and matter management approaches? How is ownership of actions and accountability for progress and outcomes established?
This article discusses a model for ‘scalable’ procurement – essential considerations and its implementation. It is more relevant in smaller businesses in which scale is typically a limiting factor, or less mature businesses in which the size of the procurement function is below a level of critical mass.
A procurement framework
Because we know that commercial enterprises rely to a greater or lesser extent (depending on their level of vertical integration) on supplied goods or services in order to perform their core business purpose, it follows that the approach to acquiring these products and to managing supply-side activity should strive to achieve best practice for the business (the definition of which will vary with individual circumstances) and be consistently applied within the enterprise and across its supply base, regardless of who is performing the activity.
A scalable procurement model needs also to deliver on these goals. It is necessary to have published standards, methods, guidelines and policies that direct and inform procurement activity. We might call these collective documents, along with tools and data, the procurement framework.
As this framework must apply across the whole organisation it needs to be accepted and understood by non-practitioners, and clearly communicated and accessible to all who will use it. Making this happen is essential in helping to maximise business performance and requires strong input from the procurement function, even if the team is small. Securing support from appropriate senior management in the development, promotion and maintenance of this framework is invaluable. Time spent here is worthwhile even for smaller functional teams as the existence of the framework makes it easier to achieve quality outcomes, manage procurement consistently and mitigate against risk in its multiple forms. The framework is a required foundation for a scalable approach to procurement.
A sound procurement framework should seek to include the following:
• Procurement code of ethics
• Gifts and hospitality policy
• Delegated authorities
• Procurement risk and fraud management procedures
• Supplier due diligence process
• Sourcing guidelines
• Supplier relationship and performance management procedures
• Preferred supplier protocols (who the preferred suppliers are for particular categories and why, engagement and compliance)
• Procurement’s role in terms of corporate social responsibility (where relevant)
• Sustainable procurement policy.
So, scalable procurement is not just about what the function devotes its professional skills to but about giving others in the organisation the means to manage the balance of supply-side activity. The conceptual diagram above illustrates the relationship between whole-of-enterprise procurement activity, the framework, and the variable involvement of the function.
Framework and enablers The established and embedded standards, policies, procedures and guidelines that serve as the reference for a consistent approach to procurement management across the organisation irrespective of who is undertaking the activity, along with the so-called ‘enablers’ (e.g. tools, systems and data) that aid in carrying out the tasks. These should apply and be available across the whole enterprise.
Procurement’s scope (breadth) The supply or spend responsibility assigned to the function, usually described in terms of supply categories. In many organisations there are categories that the function is not (yet) expected to support.
Governance This would include monitoring functional activity and its alignment with the wider business goals. Governance by procurement would include monitoring other functions in the use of appropriate tools, understanding of policies and standards, and reinforcing compliance in the use of preferred supplier arrangements.
Area of maximum procurement involvement The theoretical outer limit (breadth and depth) of procurement functional involvement. The maximum area would represent a function that was mandated to work across all spend categories and be able to take a lead or be fundamentally accountable in the management and delivery of supply management related to those categories.
Operational activity ‘Operations’ in this discussion means broadly any function or department within the organisation that has a supply requirement, develops a supply specification, or receives the supplied goods or services.
Operational interface (depth) The area of procurement involvement that is varied case-by-case and category-by-category due to a constraint in the level of procurement resources. Procurement might variously either lead, provide support, or simply facilitate, and in some cases there may be no procurement involvement. Whatever pertains there should still be a framework and procurement involvement should always be on a ‘best return’ basis.
Degrees of involvement
There are many considerations for procurement involvement. In any procurement there are certain characteristics relating either to the product/service, supplier, or market that, if present, will immediately point to greater involvement of the function in order to provide maximum benefit to the business from the use of its technical skills. For example:
• An outsourced service is part of the delivery of the enterprise’s own core purpose
• The enterprise has classified the supply as high risk
• The product is uniquely tailored to the enterprise’s specification
• There is a monopoly supply market
• It is a high-spend category
• The enterprise is not familiar with the product or market.
A scalable approach will be supported if some clarity in the definition of the roles required to manage the procurement, whether in conjunction with or in place of procurement, is established. The following is intentionally quite general in nature but adequate to cope with a variety of circumstances and to be a starting point for discussion in different organisations. In some cases the roles could be performed by the same person or function. For example, for ‘simple’ procurement the requirement holder may draft the specification and/or also perform the role of owner.
Owner Especially where there is a formal ‘key’ or ‘high risk’ supplier classification, or where a product/service is used across multiple functions, there should be a supplier relationship owner. For key suppliers this role may be undertaken by a senior staff member operating at a level above day-to-day operations. The owner might focus in particular on:
• High-level relationship reviews including business-to-business strategy alignment
• Resourcing assessments including any training needs
• Risk management including maintenance of accreditations
• Overall contract compliance (internal as well as external).
Requirement holder The person or business unit in an organisation that has the requirement that is to be sourced.
Specification holder The person or business unit in an organisation that develops and confirms the specification that is to be procured. This may or may not be the requirement holder depending on the technical nature of the requirement.
User/consumer Anyone in the enterprise that uses the supplied product or service in some way. This could include any of the people performing the above roles.
Clarity on who owns the supplier relationship supports the demarcation of responsibility and accountability, and avoids over-reliance on the function. I propose the following checkpoints to determining ownership.
• Where there is a single point of interface with a supplier, the owner should be the interfacing function
• In the case of an IT system or application for which, from user perspective, the supplier is transparent or supplier contact is nil, IT (ie. the specification holder) should be the owner
• Where the supplier dialogue is specialist or technical in nature or primarily related to product/service specification, the ownership lies with the specification holder
• Where there is a single user function and supplier dialogue is primarily regarding operational service provision or for advice and support, the owner should be the user function (requirement holder)
• For multiple user functions where supplier dialogue is primarily regarding operational service provision or for advice and support, the owner should be the main requirement holder
• The ownership of pan-enterprise services (for example, office facilities or staff amenities) should be decided on a case-by-case basis depending on who manages service call-out availability or any problem resolution.
I have conveniently brushed over the myriad forms of interface or stakeholder relationships procurement has within organisations, and, of course, boundaries are not black and white or immovable.
The procurement cycle is a common concept in procurement management and there are multiple variations. The diagram on the left represents my high-level take on this in visual form.
Given that all procurement cycle activities will be performed by someone, somehow, how does this relate to scalable procurement? For the sake of this discussion I suggest the following are the essential base elements of the cycle where procurement expertise and capability will be particularly beneficial as a point-of-difference versus other functions, and therefore procurement involvement more likely or desirable:
• Negotiation and/or price agreement
• Proposal evaluation and supplier selection
• Cost management through ongoing supply
• Supplier relationship management (where undertaken).
The scalable model
We can use the drivers for procurement involvement described earlier to inform the need for the function to be involved, although the relative importance of these drivers will vary between businesses. The simple scoring system is not definitive but will help shape deliberations.
Material outsourcing and categories classified as high risk should always involve procurement. For a unique or tailored product, or a monopoly supplier, add three points. For a high-spend category, add two points. For an unfamiliar product or market add one point.
If the total score is greater than four points, involve procurement. If the score is three or four points, determine on a case-by-case basis. For one or two points, procurement involvement can be low. Zero points, zero procurement involvement (bearing in mind that for smaller procurement functions, it is not possible to be involved across all spend).
Having determined the relative need or desirability for the involvement of the function, and gained clarity on the roles, we can establish a matrix mapping the roles and their involvement against steps in the procurement cycle.
The matrix is intended as a guide only, but taken with the procurement framework and an appreciation of the relative ‘drivers’ and context for each procurement the matrix can be used to support internal planning and stakeholder discussions centred on ensuring:
• A maximised return from resources
• The efficient use of procurement skills
• Support for the wider operation in playing its part in supply management
• That the approaches adopted form a consistent standard across the enterprise and a platform for ongoing improvement
• The enterprise’s agility in shaping its approach to changing priorities and possible increases in procurement resources.
Not all organisations have the level of procurement resources they need for optimal management of supply-side activity across all spend. There needs to be recognition of aspects of the function’s reach and designated responsibility. Where non-procurement functions are involved in procurement activity, this will be supported by a framework that is understood and accepted by the wider business.
Procurement resources should be deployed in those areas that will be of maximum benefit to the organisation in terms of the points of difference represented by functional skills, and in the context of each procurement activity in terms of risk, cost and market complexity.
Ownership of supplier relationships does not always need to reside with the procurement function and so accountability must be properly positioned.
By taking this approach, even organisations with comparatively small procurement functions will give themselves a chance of delivering benefit across the broadest scope of its supply management. This is supported in turn by having the enterprise view supply strategies as ‘business’ strategies, and not ‘procurement’ strategies.
By Dave Nellist, February 2015