Tag Archives: centralised procurement

What Literature and Film Teaches us about Savings

The theme of money is a very common one in the world of books and film. So what can our favourite fictional characters teach us about increasing our savings?

From Pixabay on Pexels

It’s not too much of a stretch to suggest that procurement can learn a lot about saving from literary and film characters. Money is a common central theme in so many novels and movies and so it shouldn’t come as a surprise that there is a multitude of good and bad examples of how organisations can manage their money. 

One of the many options available to organisations is to look for external assistance in the form of procurement consulting. To tie in with the idea of drawing inspiration from a network of sources, one particular strategy would be to use a Group Purchasing Organisation (GPO). A GPO draws uses the collective purchasing power of its members to achieve greater discounts and lower prices from suppliers. 

The benefits don’t stop there. A GPO can apply various procurement strategies and actually increase organisational savings year-on-year. It’s about selecting the right strategy or strategies. And this is where our movie and book characters come in.

Strategic Buying and Mr. Micawber

Wilkins Micawber is a primary character in the Charles Dickens novel, David Copperfield. The character has begat the ‘Micawber Principle’, which simply and eloquently states that if annual expenditure exceeds annual income, then the result is ‘misery’. Though he seems to be better at offering this advice than taking it himself, this shows a good example of strategic buying.

In spite of some criticism faced, GPOs don’t encourage greater spending or higher volume of purchasing – this is a myth! They do, however, utilise the greater buying power of the collective over the individual to provide lower prices for members. And then, in addition, keep these prices lower in the long-term by leveraging higher volumes and pre-negotiated contracts. 

Definitely no misery here if the strategic buying is carried out effectively, as this will result in continued savings for the organisation.

Monty Brewster and Centralised Procurement 

If you haven’t seen the 1985 comedy classic, ‘Brewster’s Millions’, then finish reading this first and then go and find it on whichever TV/film/streaming service you use! In the book and film, the titular Brewster must spend $30 million in 30 days in order to inherit $300 million. And there are a couple of catches: 

  1. if he fails to spend the full amount he is left with nothing; and 
  2. he cannot tell anyone the reason for his spending spree.

Let’s set aside for a moment that this is every procurement professional’s nightmare end user – off doing their own thing without communicating anything. 

One of Brewster’s main issues in spending the money is his well-meaning friend, Spike. While Brewster is off throwing money away, Spike is making shrewd investments and actually earning more. It’s the very definition of decentralised procurement.

A GPO helps to build centralised procurement in the organisation and in its network of members. Communication is key and demand management strategies are developed by procurement in conjunction with end users, reducing excess usage. This is all supported by GPOs providing metrics and benchmarks from the network for all members to use. 

This again helps keeps the price down in the longer term and reduces the likelihood of an end user going on a Brewster-style spending spree!

Procurement Software and Nick Leeson

They say the best stories start with the kernel of truth. Well this one is based on a true story which helps to highlight the benefits of procurement software in both traceability and compliance. Ewan MacGregor plays real-life ‘Rogue Trader’, Nick Leeson, whose attempts to save and recoup money caused one of the biggest scandals in banking history.

Without trivialising the situation, or making light of what was a very damaging time for a large number of people, the film and real-life story highlight why organisations, and procurement within them, need high quality procurement software to track and manage spend. The concept of ‘you can’t save what you can’t see’, as well as ensuring that spend is compliant rather than non-contract or maverick, links heavily to the savings agenda.

Companies like Sourcing Insights provide world-class software and analytics which enable procurement to track and visualise data in real-time and see where future issues may lie. You may not have a Rogue Trader in your midst, but with the application of the right software you’ll have greater control on your spend which will help to deliver savings year after year. 

Managing your Money

There’s an idea in procurement that to get the best from spending, professionals need to spend the money like it’s their own. But how about you engage some procurement consulting and get them to manage your money like it was their own?

Whether you are a Micawber or a Brewster, you can access the best knowledge and software, knowing that your money is safe in their hands. After all, it would be nice to be able to point to this success the next time your CFO asks “show me the money”!

From savings and pre-negotiated agreements, to spend analytics and collective buying power, GPOs provide a wealth of benefits to procurement organisations. Find out more by visiting UNA.com now.

Is Hybrid Best? The Centralised vs Decentralised Debate

Centralised, decentralised and hybrid models – is there actually a ‘best’ way to organise procurement departments. The debate rages on.

Recent studies, and accepted wisdom, have continued to confirm the trend towards a centre-led procurement model. Both fully centralised or decentralised procurement operating models have their downsides, and that a middle (or hybrid) road is preferable.

Centralised organisations unfortunately:

  • do not always understand regional and local supply markets and consumption patterns.
  • run the risk of maverick buying outside contracts.
  • are not suited to managing some indirect commodities.

In decentralised organisations, there is often:

  • inability to leverage corporate spend.
  • poor coordination of information and best practice sharing.
  • uneven supplier performance.
  • higher procurement operating costs.

The Centre-Led Model

The best centre-led procurement organisations concentrate on defining strategy and policy, as well as applying best practices to both direct and indirect procurement. They mostly employ a category management structure, which supports the roll out of their directives to business unit and regional level.

In the Aberdeen Group’s recent report, they noted that centre-led companies reported more spend under management than others. This was twice more than companies with a decentralised structure, and nearly 20 per cent more spend under management than companies with a centralised structure.

“Organisations with centre-led procurement considerably outperform their non-centre led counterparts, in both spend under management and supply cost reductions” (Aberdeen Group 2015).  

Leading from the Centre – Levi Strauss  

The Director of global indirect procurement at Levi Strauss, Celeste Smith, said recently that the while the company wants to create a centre-led global function, there should be good regional support.

“Success for me looks like centre-led, a global approach to managing indirect – not necessarily with global suppliers – but that we have a very consistent and disciplined approach to procurement globally.

“Centre-led means that everyone is on the same page in terms of methodology and approach. But I think it’s very important to have the same regional support.”

Levi Strauss has a global spend of around $1.8 billion (£1.09 billion), of which it wants to manage $1.2 billion (£723 million).

Leverage Central Knowledge – Fluor

Fluor is a world-leading engineering and construction firm. It also offer clients procurement and project management services for capital projects.

Fluor uses a centre-led procurement model, leveraging international procurement expertise and market knowledge, with the aim of providing the best value for their clients’ capital projects.

Their procurement organisation manages an annual global spend of more than $16 billion. This is done through consistent execution strategies across their worldwide network of 1,900 procurement professionals.

For example, Fluor’s local operation in South Africa uses a global logistics planning strategy to help clients overcome procurement execution challenges unique to operating in Africa.

Stakeholder Challenges for Hybrid

A hybrid model seems to combine the advantages of a centralised structure and decentralised execution with minimal downside. So why isn’t everyone doing it?

It’s not that easy. Whatever the model, the satisfaction of stakeholders and end users is paramount. The best model seems to be one that delivers results through open lines of two-way communication, and processes that are flexible enough to take into account regional and cultural differences.

One way to generate higher levels of stakeholder support is to ensure that the global category management structure is replicated in decentralised business units or regions, probably on a more limited scale.

It has been suggested that this type of structure encourages agility and innovation, as well as better compliance to contracts.

The Wheel Turns     

Procurement Leaders’ recent survey on procurement operating models found that no one single model can sustain the expected benefits indefinitely.

They report that savings delivered from a given procurement operating model can erode over time as behaviours become ossified. Incremental savings thus become more and more difficult to achieve. The model just gets tired.

A structural change may be needed to allow procurement to deliver value in new ways, and enable benefits to be sustained or even improved.

Procurement Leaders say that procurement organisations must tackle a wide range of hindrances that arise from change, in order to maximise the benefits from a change in operating model.

Their research also found that the greatest factor preventing transition in procurement is its own lack of change management capabilities.

As a procurement organisation matures, it is likely that it will revise and adjust its hybrid or centre-led structure, in order to stay aligned to corporate objectives and continues to deliver value.