Tag Archives: global procurement

Can Procurement Lead the Fight Against Protectionism?

Protectionism will never produce a win-win situation. And it can be a huge wall for procurement to work around.

protectionism

Few procurement professionals view their role through the lenses of either protectionism or free trade. But the protectionism-free trade dimension is a crucial topic for procurement, so it is certainly worth thinking about the impacts on procurement the world over.

The Oxford English Dictionary defines protectionism as, “the theory or practice of shielding a country’s domestic industries from foreign competition.” Further, protectionism is a mind set as much as formal policy; it is the intentional or inadvertent preference for domestic industries over foreign industries.

Free trade meanwhile is “international trade left to its natural course without tariffs, quotas or other restrictions”.

The translation into procurement is fairly simple. Protectionism is limiting access to domestic procurement markets to foreign suppliers, and the preference for awarding public contracts to domestic rather than foreign suppliers. Free trade is the absence of this.

Protectionism is largely, or partly, illegal between numerous countries with free trade agreements (FTAs), such as the North American Free Trade Agreement (NAFTA), or are part of a trade bloc such as the European Union. But protectionism includes more subtle biases.

Ideas around boosting the local economy, creating local jobs and protecting the local environment are all protectionist when preferred over equal boosts to an economy, job creation, or the environment elsewhere.

Protectionism – A Zero Sum Game

The first strand of this article is that protectionism harms economies, jobs and prosperity, locally and globally, for two reasons.

Firstly, it is intuitive to think that sourcing goods and services locally has positive impacts, creating jobs and economic growth in the local area. But this is a zero sum game.

Protectionism is normally reciprocated. If one country has policy preference for domestic businesses, then other countries respond in the same way, offsetting the benefit. Protectionism may allow Country A to create more local jobs by awarding contracts to domestic businesses. However, when Country B does the same, export jobs in Country A are lost.

No more jobs are created and no additional economic growth is produced by procuring from domestic suppliers. Domestic industries get some short term benefit and exporters lose out.

Should We Really Favour Our Own Country?

Protectionists argue that public procurement in their own country should favour domestic businesses. In the UK, the contract for a large rail project in London was awarded to Germany’s Siemens, ahead of UK-based Bombardier. Cue outrage at job losses in the UK factory because the government awarded to a foreign business.

Unless protectionists believe they deserve double standards, this logic dictates that Bombardier should not have won contracts with Trenitalia, Italy’s main train operator. Nor should British architects have been awarded the contract to build the dome for the German Reichstag.

These created British jobs from German and Italian taxpayers. Hundreds of thousands of British jobs rely on British businesses winning public contracts outside the UK through non-discriminatory competition.

In the USA, incoming president Trump has riled against other countries “stealing” American jobs. However, he does not seem to oppose German, Japanese and Korean car manufacturers employing hundreds of thousands of workers in American factories. But surely the British and American governments’ obligations are to their own workers and businesses?

Maybe so. A country having an obligation to help domestic businesses and workers more than the rest of the world is understandable, but there is not actually any gain. Protectionism also makes British and American citizens and workers worse off.

Reducing Choice & Raising Costs

This leads onto the second reason. Protectionism gives citizens fewer choices of what they can buy and increases their living costs. The belief that protectionism helps local communities at all is flawed.

Free trade allows consumers to have the best goods, regardless of location. In the developed world, the UK is bad at growing bananas and the USA makes expensive toys, so free trade enriches citizens by allowing better bananas and cheaper toys.

Free trade allows businesses and citizens in the developing world to access the best technology and equipment that is not or cannot be effectively produced locally. In essence, protectionism limits the goods that citizens can buy, to everyone’s loss.

Hamstrung by Protectionism?

This has the exact same impact on procurement and the second strand of this article is that the procurement industry is hamstrung by protectionism. Protectionism harms both the procuring entity and ultimately the users of public services.

If a hospital needs new radiotherapy machines, it should procure the machines with the best combination of quality and price. In a world of 7 billion people, the best radiotherapy machines will probably not be made locally, and maybe not domestically.

Basing buying decisions on nationality rather than value for money and effectiveness of the radiotherapy machines hurts cancer patients and increases costs for taxpayers. As protectionism is reciprocated, it decreases consumer choices and increases import costs. This is without even a net benefit for domestic industries or workers.

This conclusion that should therefore be reached is that every protectionist move has pros and cons, but the pros are directly and equally offset by counter-moves, leaving only the cons intact and everyone worse off. Hardly a desirable outcome.

So in the context of the Brexit vote, Trump’s victory and the stagnation in global trade, the case needs to be made now more than ever that protectionism on net harms prosperity. Procurement functions have a large role and responsibility to their organisations, countries and the world to avoid it.

How Can Procurement Break the Chains of Sole Sourcing?

Whether its design specifications, or traditional attitudes, sometimes procurement gets painted into a sole sourcing corner.

single sourcing

This article was first published on Future Proofitable.

I am jealous of those who have never had to deal with true sole suppliers. I think IT buyers will understand me best. It’s just not that much fun. Let’s take a closer look at what sole or single sourcing is, and how best to deal with it.

I will cover the subject in two articles. The first one covers what it is, and the second will contain tips and hints how to deal with these situations.

Spot the Difference

If you there are a few suppliers in the market who you could buy from, but you choose to stick with one supplier (leaner supply chain, eliminated duplicating logistics and management, administration costs), you have a classic single source situation.

If there is only one supplier in the market, and no alternatives, you have a sole sourcing situation.

Real-life Examples?

There are many office cleaning services providers out there in the market. However, for a list of very good reasons, you choose to outsource it to one service provider. That would be single sourcing.

Now, imagine five different suppliers working on your ERP system creation and implementation at the same time, doing the same job for the same part of scope. Not fun.

Or imagine that your supplier comes up with exactly the product you need for your manufacturing process, but patents it and keeps on increasing the price at every opportunity. Even less fun.

How Does It Happen? 

For single sourcing, the option is deliberate choice. There are many advantages to it:

  • You keep the competition, because the supplier can be easily replaced. Negotiation leverage is at its maximum level like this.
  • At the same time, you spend less time for supplier management and supply chain administration.
  • You have consistent quality of items or services delivered. Or, if not, deal with it in one go.
  • You eliminate all non value-adding activities (some examples here).
  • The supplier will be more willing to work with you on various cost reduction or services improvement initiatives.
  • The threat of losing business in the future will be a big motivator to not overcharge you.

There are a variety of reasons why a sole supplier situation can form. Some are more to do with perception and resistance to change, while others are truly sole supplier situations. They can be categorised in three ways.

1. True Sole Sourcing

Where your company might depend on one supplier without any escape routes. For example:

  • Market monopoly – utilities (water, gas, electric); Governmental services.
  • Patents – technical designs; chemical formulae.
  • Lack of supply alternatives.

2. High Exit Barriers

There are situations when due to various barriers (most often financial – switching costs) competitive situations turn into sole supply situations. For example:

  • Equipment investment – when supplier provides plastic granules storage and supply systems; cleaning chemicals’ supplier provides funds for equipment.
  • Digital solutions (and their switching costs) – you may have had big leverage during first negotiations, but once the initial contract period is over you find yourself dependent. The supplier is technically not sole source, but switching costs are so painful that it gradually turns into one way street of constantly increasing maintenance bills.
  • Manufacturing supply chain integrations – this can often happen naturally, or through pre-existing relationships between different tiers of suppliers. Along the way, one supplier is sold to another, or bought out, and a partnership is ended even though production lines are tied together.
  • Industry regulations (or agreements) – for instance, in order to be able to insure cash in a safe, an insurance company might require a specific quality certificate from a very specific certification organisation. In this case, there is really only one option for supply.

3. Pseudo Sole Sourcing Situations

Frequently, evaluating the situation in the business is more about perception and will, rather than based in fact. Identifying these can bring big benefits.

  • Business users’ preferences – surprisingly, there are quite a few categories of spend where business users are permitted to have preferences. Next time you complain about resistance from stakeholders, consider the number of colleagues who work with particular safety equipment, or similar. And yes, over time, people tend to form preferences for brand name products. Implementing any change might be challenging.
  • Historical heritage – the classic “we’ve always done it this way” situation. It always been bought from this supplier, and only this supplier.
  • Business’ requirements – technical specifications, prepared by engineers. Delivery requirements, set by business users. Packaging requirements, defined by operations or logistics or marketing.

 So now you know how these situations may occur. The question is, can you do anything about it? And how? You’ll have to come back to find out more!

Transforming the Procurement Function from Within

It’s a tall order to come in and completely transform the procurement function within an iconic global company.

Kelly Irwin - Head Procurement Function Holcim

But Kelly Irwin didn’t beat around the bush when she started as Head of Procurement at the Australian subsidiary of Swiss group at Holcim (which has since merged with the French group LaFarge) five years ago.

The company, which is a leading supplier of aggregates, concrete and concrete pipe and products, had plenty of room for improvement. In fact, the company’s procurement department was mostly handling complaints, rather than handling strategic buying for their future.

The 20+ year procurement industry veteran soon realised the magnitude of the role, so set about implementing improved systems and processes for the procurement function. The first step was to establish a centralised purchasing model, then build a talented procurement team to support her role.

“It was a very dysfunctional team that had little direction, that wasn’t aligned with the company’s strategic directions,” Irwin says.

Building an Effective Team

Today, Irwin heads of a team of 34 people and manages a mind-boggling AUD $900 million budget. She has implemented and centralised structure and processes within the procurement function. She has previously worked in procurement for Qantas and building firm Boral, though this role with Holcim Australia is her first where the procurement buck stops with her.

With those changes bedded down, her remit is again broadening, and she will now handle all buying across New Zealand for the company, with a recent trip across ‘the Ditch‘ to establish processes there.

Not only this, Irwin has developed a highly effective procurement team, which has been awarded the Internal Customer Excellence Award for Holcim Australia for three years in a row.

Her approach has transformed the procurement function for the company, with her team has an 80 per cent engagement score, which was the highest in Holcim Australia in 2015.

Irwin has strong capabilities in building effective working relationships with teams, development of Procurement strategy, management of supplier and keyholder expectations, highly developed negotiating skills, contract management, risk management and compliance expertise and operational experience through the implementation of change initiatives and process improvements.

Irwin was also recently awarded the CIPS Procurement and Supply Chain Management Professional of the Year.

Building Individual Engagement

Irwin keeps staff informed on all aspects of the business, has an open door policy, and doesn’t mind being contacted after hours.

“I recently read that people play harder when they know the score. This is something Holcim Procurement do well. Not only do we have clear goals, (quantitative, savings targets), but we have the measurement tools the accountability element to keep score on how we are tracking.

“I believe this shared goal, as well as individual accountability to reach this goal builds individuals’ commitment to team uniformity direction, and overall engagement,” she says.

To emphasise her point, she recalled talking to someone in procurement who had major issues trying to speak to the head of the department. This was slowing down their ability to tackle their own role.

“This person would need to book a meeting with their superior two or three weeks ahead, and it was usually a walking appointment as he was always in between meetings. I honestly don’t know how someone can be that busy, that they’re practically unavailable for their own staff. You’ve got to make sure your staff feel engaged and supported, and that you’re a team.”

Nearly 70 per cent of her team is degree qualified, though that wasn’t a prerequisite when she entered the industry more than two decades ago.

“I always look to hire people that complement the skills we have, and find people who have talents in areas we need to improve in.

‘Be Inquisitive Problem Solvers’

Like so many working in procurement, it was never a deliberate decision to follow this career path.

Irwin deferred university and entered the workforce before stumbling into a procurement role, with the sound of buying things for a living appealing to her. She’s since completed a number of qualifications, certificates and management courses that support her role.

“Procurement is one of those professions that you’ll excel in as long as you’ve got the right soft skills.”

Irwin describes herself on being approachable, down to earth and honest. And she doesn’t take herself too seriously.

“Though depending on where you’re standing, that can be a bit rough as well,” she admits.

Procurement professionals need to be inquisitive problem solvers with strong communication skills, she says.

“While your superiors might be great at what they do, with all due respect, they don’t necessarily know more than you about your function within the business. Realising that you could well have a far better idea of the best approach than other senior people within your business can be professionally liberating.”

As far as the future goes, Irwin says the procurement function has an increasingly broadening remit.

“Procurement was entrenched in a brown cardigan mentality in the past, but that’s changing, and we’re now a business function that’s well respected across the globe.”

Kelly Irwin is one of the leading Australian professionals to speak at the second annual Women in Procurement 2016 event, which inspires leadership, advances careers and drives innovation in procurement, and supply chain function and practice. The event will be held in Melbourne in 21-23 March. Book your ticket here.