Centralization of purchasing in business networks (Part 2)

How are the business networks towards the centralization of purchasing operated?

How are the business networks towards the centralization of purchasing operated?

  • Formal consolidation of the relationship with partners who have for years been part of a single supply chain, putting together a greater production, marketing, commercial and sales capacity.
  • Once the primary objective has been consolidated, it is important to look at the secondary objectives, best exploiting the indirect advantages of being part of a business network: what can be improved and optimised by working together? Clearly, suggestions in this respect can be obtained by looking at how big companies and/or industrial groups operate.
  • During this phase, the contribution by the network manager, who is responsible for performing this analysis and suggesting the right strategy by which to exploit the indirect advantages of the network becomes essential. Of these, one of the most natural, highest-impacting actions is without doubt the introduction of centralised purchasing.
  • For the centralization process to be a success, it is important to introduce it gradually, starting with the product markets that are most immediately and easily able to be centralised.
  • Finally, specific professional skills will be needed in the field of purchasing for managing the relevant activities, issuing the contracts/orders open and managing them (in some cases, the networked companies are of different sizes and the most structured may already have staff with specific professional purchasing skills who can therefore be used for the management of centralised activities, alongside the network manager).

Difference between business networks according to logistics

  • Same region
    • Greater attention may be paid to local suppliers for more categories
  • Multi-region
    • National/international supplier categories will mainly be used

E-procurement and the use of a platform to manage purchasing

The tool that helps us in centralization is an e-procurement platform. This is a question of equipping the business network with a “shared” computer system, based on the latest web technologies and used by all networked businesses.

The introduction of innovative purchasing tools such as e-procurement is one of the most important subject matters by which to improve the overall efficiency of the procurement processes of a complex organisation like a business network. The electronic negotiation of purchasing (e-procurement), in fact consists of enabling those using it to manage all relations with its suppliers over the internet, using a “dedicated purchase” IT platform that enables processes like the selection of the contractor, receipt of offers, submission of orders and catalogue consultation to take place on-line. For example, in the purchasing of consumable goods or in any case of repeated purchasing, the choice of a centralised procedure that defines a series of conventions with a series of suppliers makes it possible to include on-line catalogues available to the various different network structures by which to make direct purchasing at competitive prices, insofar as they had already been established in the conventions.

Current IT technologies also enable a simple interfacing and sharing of data, virtually in real time, with all the various managerial information systems (MRPs) of the individual networked businesses.

Methods for the use of the e-procurement platform and possible market offers:

  • purchase of licences by which to obtain a platform in Saas (Software as a service, i.e. hired, not purchased) mode for each buyer-operator;
  • hire or payment of an annual tariff for each utility activated for the use of a partner company platform;
  • delegation of the entire purchasing activity or part of it (through the e-procurement platform) outsourced to partner companies (maintaining complete visibility and sharing of all specialised processes in this activity.

The advantages of using such a platform include:

  • standardisation of the buying process using a single, common tool for all networked companies;
  • possibility of creating on-line catalogues for use by the individual customers of each company, whose list prices will be negotiated upstream, according to the forecast total quantities required by the network as a whole;
  • in the expenditure cycle activities, it enables the correct management and attribution of invoices for the individual company involved in the purchasing process. The platform will be easily integrated with the ERPs of the individual businesses (each business receives invoices from the supplier for its part or in any case as envisaged by the network contract rules);
  • use of electronic invoicing;
  • single roll of network suppliers available to each individual networked business;
  • objective supplier assessment system for the continuous improvement of performance;
  • each company can easily pool purchasing experiences (suppliers that are valid and others that are not, price references for individual expense categories, etc.), with clear reciprocal benefits;
  • standardisation of the technical specifications for purchases with the best practices of the networked businesses with consequent improvements in the price/performance of the goods and services purchased. It is easy to imagine enhanced efficiency in the purchasing of common materials such as Personal Protection Equipment, stationary, cleaning services and facility management, etc.

Procedures and controls

A choice to centralise purchasing entails special attention paid to the procedures regulating the purchasing procedure. In actual fact:

  • In the case of structures that are mutually independent, the procedures used by the individual networked companies vary considerably and may be more or less complex, depending on the dimensions of the structure (micro/small/medium-sized business) and the purchasing budget. In most cases, we find ourselves looking at a lack of written procedures insofar as the purchasing methods are connected with the common sense of the person implementing them.
  • In this type of situation, moving towards centralised purchasing entails paying special attention to the drafting of a purchasing procedure. This procedure, according to the expenses involved, must be:
    • coherent with the objectives of reducing costs and procurement time
    • coherent with the incoming quality and efficiency objectives
    • compliant with the ethical standards established for purchasing
    • shared and approved by way of protection of expenses managed by each individual structure participating in the purchasing group.

Again by way of protection of the interests of the individual networked companies, there must be a control of the operative application of said procedure by an appointed person/audit structure for the network (e.g. network manager).

Closing remarks

Considering that the priority objective for the centralization of purchasing can certainly be identified as the exploitation of scale economies by which to reduce the unit prices of the goods and services to purchase, it is important to see if that objective looks to include a standardisation of said goods and services or, additionally, the identification of the goods and services with the best cost-benefit ratio. In actual fact, these objectives need three different operating approaches, the consequences of which need to be carefully assessed, particularly according to the time frame involved in order to obtain results. In actual fact:

  1. it is relatively simple to obtain scale economies to reduce the unitary costs by bringing previous specifications together, but this can at most have a positive financial effect in the short-term. Already at the second tender, with the same logic, it is difficult to obtain significant additional discounts;
  2. If we add an objective of standardising goods and services to the positive effect of scale economies, we are then facing a more complex work in which all the individual structures must be involved (data collection and assessment/sharing/choice of standards), but at the same time, we are also looking at greater economic benefits;
  3. Finally, identifying the goods and services with the best cost-benefit ratio is an extremely complex matter, as it requires lengthy technical analysis and the concentration and sharing of data with the internal applicants. This, however, represents the launch of a virtuous process of the introduction of logics and instruments governing the business network, ensuring a comparison of peers and the construction of organic partnerships with suppliers, which may represent a carrier for long-term organisational development.

Finally, if the competences in terms of purchasing are limited to within the network of businesses, one solution may be to appoint external procurement professionals who, alongside the Network Manager, can start the centralization of purchasing process and, potentially, thereafter manage the activities by e-procurement, with the use of an appropriate platform. This choice would have effects that are so immediate that the costs of the solution would rapidly be repaid by the immediate returns enjoyed in terms of the reduction of the TCO.

Centralization of purchasing in business networks (Part 1)

Purchasing groups have many advantages including boosting 'purchasing power'
Purchasing groups have many advantages including boosting ‘purchasing power’

What do we mean by the centralization of the purchasing or purchasing group?

A PG (Purchasing Group) can be defined as an entity that groups two or more independent purchasing organisations that join together formally or informally or through a third independent organisation. Doing this combines their individual needs with the volume in the purchasing of materials, services and goods on capital account. Thereby exploiting the greater contractual strength in order to obtain the added value from suppliers in terms of best prices, best service and best technologies, which could not have been obtained individually by each organisation.

Advantages of the purchasing group

1. Scale economies or “purchasing power”

The first, most obvious advantage of a purchasing group is the scale economy. The volume of the aggregated purchase demands, for example of a network of businesses of reasonable size, gives the individual businesses that scale economy and consequent purchasing power that they could not hope to obtain alone.

2. Lower prices/Greater negotiating power

By increasing the forecast purchase volume, the PG is generally able to negotiate lower prices for the goods or services purchased with respect to what could be obtained, alone, by the individual companies. These savings are usually considerable, ranging from 10% to 35% according to the competence level of the structure dealing with making the centralised purchasing.

3. Reduction of transaction costs

By adhering to a PG, the organisations can effectively simplify the procurement processes. This not only reduces the unitary cost but also the total transaction costs, due to the reduced number of contracts (to be negotiated, prepared and managed).

4. Process economies

By sharing information acquired on suppliers, new technologies and market knowledge, as well as past purchasing experiences, not only is all redundancy successfully avoided, but transaction costs are also reduced and far greater process economies achieved than would have been possible by each individual organisation by itself.

5. Reduced workload

Given that the PG manages all stages for the issue and related management of contracts on behalf of the network, the individual businesses benefit from a significant reduction in their workload and are free to focus on their core business, which is therefore more strategic for them.

6. Improvement in best practices over time

The organisation that manages the PG enables the network businesses to improve their results by sharing the best practices in some business processes, exploiting competences in specific functional areas. In actual fact, most of the modern organisations that handle the PGs use sector experts for each individual product market managed. These sector experts constantly search out ever more effective methods aimed at improving the processes, quality and efficiency of the supplier in order to guarantee the optimisation of processes at increasingly competitive prices (improvement in the TCO – Total Cost of Ownership).

7. Technical savings and improved TCO

The organisation that manages the PGs in the future will offer all the advantages connected with its purchasing skills in the individual categories that will go beyond the initial advantage connected with scale economy alone. In actual fact, once the initial phase is complete, in which maximum use will be made of scale economy to lower prices, the organisation managing the PG will use its experience to help the networked businesses allow buying technology to progress, reducing waste and optimising the use of goods and services purchased.

8. Positive impact on the profits for each individual networked company

We know that a reduction in purchasing costs, for example of 5%, produces an increase in profits of more than 2% and that to obtain the same result, sales would need to increase by more than 20%…! Therefore, the saving generated by a centralization of purchasing in a network of businesses, increases profits in each individual network company.

Business networks contract in Italy: a great solution for SMEs

The business network contract is a private agreement between two or more enterprises to jointly perform one or more economic activities to increase their potentials for innovation and competitiveness. The network contract therefore enables companies (usually SMEs) to combine two key elements of business growth, which seldom coexist: enterprises can collaborate on large scale projects without losing their legal independence and their autonomy in the business activities not included in the contract.

Critical Issues affecting Business networks in Italy

The PG applied to the business networks, although having these undeniable advantages, also has critical issues that are often underestimated and that need to be managed in the right way:

  • Local supplier vs national supplier vs international supplier
    • Use of centralised purchasing by a group of networked companies, considering the increased quantities and related purchasing power, inevitably results in the involvement of national and international suppliers, as well as local ones. In this comparison/assessment of suppliers, it is important to pay attention to ensure that the right consideration is paid not only to the final price but also to the quality of the product and the services relating to the supply (lead terms, after-sales activities, etc.). It is also important to consider the characteristic aspects of long-standing (valid) suppliers linked to knowledge of the client, which results in greater flexibility in the customer-supplier relationship as well as the avoidance of the inevitable discontinuity typical when changing supplier. Naturally, alongside the attention paid to all the aspects highlighted, there must also be a new “Vision” towards the market, connected with the fact that now one is no longer alone, but rather part of a group of businesses, hence the choices to be made must be the best for the whole network of businesses.
  • Resistance to change (old supplier (history, knowledge, customs))
    • As for any process that results in a change in procedures/consolidated habits, etc., the centralization of purchasing will also be initially resisted. It is therefore important to pay close attention to dealing with this change gradually, so as to help the people involved to make it the best possible experience.

Petrobras Procurement Scandal Goes CSI

Petrobras Procurement Scandal Goes CSI.

After reading yesterday that the Brazilian government is considering offering leniency to the suppliers caught up in the Petrobras bribery scandal, my interest was piqued and I decided to look into the case a little more.

And wow, this one is interesting. It reads like the next HBO mini series; intrigue, bribery, political involvement and enormous sums of money. It’s all there.

But perhaps the most unbelievable twists (certainly the most macabre) were released this week when the congressional inquiry established to deal with the scandal filed for a court order to exhume the remains of the late politician Jose Janene after allegations were made by an unknown source that he might have faked his own death. It has been suggested that the former politician is now living in an undisclosed Central American nation.

Mr Janene was implicated in the scandal by Alberto Youssef, a black market money dealer. Youssef detailed that Janene, who reportedly passed away from a heart condition in 2010, was responsible for establishing the system of bribes and supplier kick backs that has brought the oil giant to it knees.

It’s not the first

Incredibly, this is not instance of a faked death involved in the scandal. Police have submitted evidence to prosecutors suggesting that another third party moneyman faked his own murder by mugging only to later turn up operating underworld business links between Europe and Brazil.

Not surprisingly, this case captivated the Brazilian public. 34 sitting politicians are now embroiled in the controversy. The recently re-elected president, who until now has avoided the controversy, is starting to come under fire particularly around the fact that she previously led the board of directors at Petrobras.

As discussed in yesterday’s Procurious article the scandal has had a dire impact on the Brazilian economy. In April of this year Petrobras estimated that the corruption scandal has cost the company R$6.2 billion or USD $2.1 billion. The company’s stock price has plummeted by around 30 per cent since criminal investigations started a year ago.

We can but only wonder, what comes next?

Transforming Sustainability Strategy Into Action

At Procurement Leaders World Procurement Congress 15 Shelley Stewart, CPO – DuPont, talked about the challenges of embedding sustainability into procurement processes.

Transforming Sustainability Strategy Into Action At World Procurement Congress 15

Why care about sustainability at all? That was the question posed by Shelley’s thought-provoking opening, before making the observation that although different places in the world feel differently about sustainability – ultimately it is an issue that affects all supply chains.

As evidenced by the following statement, sustainability is already hard-baked into DuPont and reflected in its core values: “DuPont is a science company. We work collaboratively to find sustainable, innovative, market-driven solutions to solve some of the world’s biggest challenges, making lives better, safer, and healthier for people everywhere.”

But while it’s nice to be sustainable, is there a real business value, after-all how do you quantify the value of sustainability?

Shelley points out that sustainability provides your business with mitigation strategies to risks in your supply chain. If we’re not doing much for sustainability then it creates a risk in itself.

Shelley says that at DuPont there was a sharp focus on saving targets, and conversely sustainability was in the distant background. Crucially, there was no one in the business for the CSO to call in the procurement organisation to talk to about supplier sustainability. In DuPont’s case they didn’t have a unified approach.

Happily this has since changed and you only need look as far as the company’s EHS programming slogan which once read ‘the goal is zero’ – and now ‘committed to zero’ for evidence of this fact. Shelley notes that DuPont has also appointed a single person to a centralised position to manage sustainability.

What lessons has DuPont learnt?

First you must learn what sustainability really means for you (in the context of your supply chain). However you must appreciate that the answer may be different for each one of your supply chains.

It’s also important to take onboard external perspectives – you will benefit greatly from peer to peer learning.

Specifically in DuPont’s case it was important to remind people that the work wasn’t being started from scratch. There was a foundation to build on, no matter how tentative that may have been.

It’s imperative that you create a unified approach and save yourself a lot of extra work by doing something ten different ways. At the same time “one size doesn’t fit all” – you’ll need to adopt a certain amount of flexibility to be able to understand changes in your supply chains.

Of course you might find that your supply chain and your suppliers are already ahead you in the sustainability stakes. Why not use their learnings to better realise your own initiatives? It is important to stress that sustainability is a mindset, not a checklist – we must encourage people to think differently if we are going to succeed.

10 tips for procurement professionals from a brand wizard

What Procurement can learn from CPA Australia

10 tips for procurement professionals from a brand wizard

According to Murray Chenery, Executive Marketing Manager, Brand, CPA Australia, procurement professionals cannot afford to ignore their business’ brand.

Speaking at the 8th Asia-Pacific CPO Forum, Chenery who for 12 years was marketing director of Target, one of the country’s most recognisable brands, guiding the retailer through the process of Coles Group selling to Wesfarmers, detailed that ignoring a business’ brand affects a company’s ability to do business.

Chenery highlighted that managing a business’ brand can help grow an organisation into a global player and detailed that this process has a direct effect on recruitment pipelines. Bad decisions in procurement can deal enormous damage to a companies’ brand, meaning brand risk needs to be constantly top-of-mind for every decision made.

It’s no accident that CPA Australia is a brand powerhouse. Under Chenery’s guidance, the accounting body has followed a clearly defined roadmap to success. Chenery highlighted the most important points of what he called “building brand DNA”: know your core business, protect it, nurture it and resource it. Define the brand by understanding your purpose, points of difference, your organisation’s personality and the customer promise.

Chenery stressed the importance of brand differentiation and the value of putting time into finding, understanding and amplifying what makes you stand out from your competitors. Importantly, your competitive advantage must be sustainable to establish and maintain your edge. CPA also places a big focus on customer centricity with an enviable growth market in young professionals between 24 and 32 years of age. His advice on “being where your customers are” to connect with this generation is 100 per cent relevant for the procurement profession and its ongoing challenge of securing the talent bank of future business leaders. Chenery also shared some valuable advice on the need to avoid internal-gazing, the importance of creativity and the immense opportunities for Australian businesses to push into the Asian market, where CPA Australia currently boasts 40,000 members.

To close his speech, Chenery gave the audience his top ten tips for good procurement practice. He’s not a CPO, but his background as a risk-averse brand expert makes his advice valuable and extremely relevant to the assembled procurement professionals.

  1. Recognise that marketing is a creative process.
  2. Treat suppliers as strategic partners.
  3. Understand your brand’s DNA and strategy.
  4. Understand the dynamics of the market in which you are buying.
  5. Appreciate the history of relationships.
  6. Be as clear as possible in your briefings.
  7. Understand the processes being bought.
  8. If you don’t measure, things don’t get done.
  9. Evaluate partners by visiting their operations.
  10. Use flexible, longer contracts to build partner loyalty leading to better deals.

The 9th Asia-Pacific CPO Forum will be held in May 2016. To ensure you receive an invitation, register your interest in attending here (info@thefaculty.com.au)

 

5 Megatrends In Technology

At Procurement Leaders World Procurement Congress 15 David Rowan, Editor of Wired – offered a fascinating insight into the megatrends that are making waves in the technology space.

wired-magainze-logo

 

 

 

 

 

 

The emergence of virtual currencies

What does a Video Games company, a Travel company and a Cable network all have in common? You can pay for all their products using a new kind of currency called Bitcoin. It exists only in the Cloud, meaning there’s no central bank. And (as David notes) although much of the news coverage surrounding Bitcoin is focused on the volatility of the prices, virtual currencies like Bitcoin are going to be something quite important. There’s a backbone to the Bitcoin/crypto  currencies called the Blockchain – it’s like a repository of trust, that keeps a record of all transactions.

Decentralised community ownership

Crowdsourcing is big business. Just look to online initiatives like Kickstarter and Indiegogo to see the already game-changing impact these platforms are having. Ideas that would once be looked upon as impossible challenges are now becoming reality in a matter of years, months, even weeks…

As a direct consequence we are seeing a power shift from traditional factories. Communities are now crowdsourcing their own manufacturing, creating  entirely new kinds of businesses. You no longer need to own your own factories, just access to someone with one.

From software to hardware

In recent years 3D printing has exploded. What started as a technicolour fantasy is now being realised the world over – in David’s view, the kitchen is where the 3D printer will really make an impact.

The beauty of 3D printing lies in its immediacy. It turns the imaginable into the tangible – if an idea pops into your head, all you need is a design in order to physically make it.

David makes the point that surprisingly for something so new, 3D printing is already being disrupted. As advancements are made in technology, availability of materials improves, speed of processes increases and costs come down – the 3D printing playing field is shifting and changing.

Internet of Things

You’ll have heard a lot in the press about the Internet of Things (or IoT for short). Hardware is increasingly moving online, aided by the convergence of wireless technology. This all plays into the scenario that IoT presents, and effectively removes the need for human-computer, human-human interaction. As a consequence companies are making connections for things that were once offline.

Due to the rise in availability of ubiquitous, embedded sensors, and as prices continue to fall – everything is now connected and being put online.

Logistics already use sensors in their pallet boxes to track location data, or to issue an alert if goods are tampered with during transport.

Humans becoming machines

Artificial intelligence is turning into a thing – it’s becoming real. A company in London’s King Cross has taught a computer how to not only play Space Invaders, but master it to become the best player in the world. Although it’s not been designed to generate any revenue, it didn’t stop Google from buying the company (and the idea) last year for £400m.

What if your devices could read your emotions? Another innovative startup is answering that call – machines are starting to become more intelligent, and as a result AI is starting to understand what you’re feeling and not typing. You only to have to look as far as apps like Swiftkey to start to see this advance in action – it’s not such a far-flung notion.

What will the Enterprise Bill mean for SMEs?

Tracy Ewen, managing director of IGF Invoice Finance, has provided Procurious with her comments on the announcement of a new Enterprise Bill in today’s Queen’s Speech.

Enterprise Bill announced in 2015's Queens Speech

“Measures will also be introduced to reduce regulation on small businesses so they can create jobs.”

The purpose of the Bill is to:

  • Cement the UK’s position as the best place in Europe to start and grow a business, by cutting red tape and making it easier for small businesses to resolve disputes quickly and easily.
  • Reward entrepreneurship, generate jobs and higher wages for all, and offer people opportunity at every stage of their lives.

Tracy says: “The announcement in the Queens speech today introducing a new Enterprise Bill – giving additional support to SMEs to settle payment disputes – ought to be welcomed by businesses across the UK. To have this Bill included in the speech should give hope to many struggling businesses that the government is serious about the need to protect SMEs and bring an end to the issue of late payments. 

The current payment terms that many suppliers in the UK are subjected to mean that goods delivered today wouldn’t need to be paid for until long after summer is over; a practice that isn’t sustainable, but it is a reality that, until now, SMEs have had very little power to change. The implementation of a Small Business Conciliation Service should protect SMEs against larger and more powerful entities, and should reduce the number of SMEs that fold due to intense cashflow problems.

Whilst acknowledgment in the Queen’s speech has symbolic importance, businesses have been waiting for support from Government to tackle this issue for a long time, so will be watching the progression of this Bill with care and limited expectation.

In the meantime, there are options available that cover the gap between work completed and money in the bank. It’s therefore important for firms to thoroughly review their options and make use of any free financial advice that their own financial partners and suppliers can offer before pressure from large customers impacts their growth or operations.”

How to Re-Energise Your Procurement Strategy In 100 Days

Steen Karstensen, CPO – Maersk, on re-energising your procurement strategy.

Maersk CPO Steen Karstensen

Steen was speaking at Procurement Leaders World Procurement Congress 15 in London.

At Maersk there is a vision, and that vision is represented by the following mantra: “Every dollar spent is spent professionally”.

Maersk believe that in order to be competitive and stay ahead of your contemporaries you need to constantly reinvent yourself. To that end the conglomerate follows a bi-yearly strategy: every second year it takes a long-term view of the business. Steen says that it’s imperative to keep momentum going – you’re either ahead of the game or dead in the water…

Maersk needed to ask “What would my successor do differently?” So we approached Rick Hughes, Procter & Gamble’s Chief Procurement Officer, to create a ‘CPO 100 day plan’. Rick would assess the organisation and come up with a list of actions.

Rick conducted a study that gathered a 360-degree view from Maersk management figures (CEO, COO, Group Strategy Officer), 30+ procurement staff and key suppliers. He brought with him a fresh, candid and apolitical mindset – he was the sort of person that could leverage insights from his vast experience, and had the appetite to change the business.

Maersk also approached the University of Bath to get a theoretical reading of the procurement strategy.

And what did they learn?

There were definite signs of “big corporate syndrome” – Maersk would need to take some of its own cost medicine. How? It would need to simplify work processes as well as organisation.

With the CAPEX Procurement model, the right structure was in place, but now was the time to deliver results.

In terms of category management there was a requirement to upgrade processes, roles and capabilities. Plus a call for investment of senior resources in SRM.

And finally it was noted that important procurement prerequisites were not properly in order, thus an obvious need to standardise and document all core processes going forward.

Success in all of these areas would only be truly possible with deep business integration. Having both the technical function and procurement community reporting into the same place encourages both alignment and innovation.

The challenges re-energised their strategy process and in-turn generated three main (actionable) take-aways:

1. Take a 360-degree view on the organisation

2. Be open to reveal and discuss weaknesses

3. Be bold on actions – also in previously failed areas.