Tag Archives: procurement challenges

Is Indirect Procurement Really So Complex?

You could be forgiven for thinking the management of indirect procurement is akin to rocket science. Is it really so complex?

Sourcing and contracting indirect goods and services in categories like I.T., consulting, HR and travel is important to keep the business running.

You could be forgiven for thinking that the procurement of such services is akin to rocket science, especially if you listen to those many external “solution providers” whose income stream may depend on you.

It may be tempting to consider outsourcing some or all of the management of your indirect spend. In many organisations it is often poorly recorded, loosely managed, widely dispersed, and, generally, messy or neglected. But first let’s consider the issues, and how this indirect spend could be managed internally.

Direct and Indirect Procurement 

Direct (or core) procurement traditionally focuses mainly on the sourcing of goods, and some allied services, that are used in the manufacturing or production of goods for sale. These items are usually clearly specified, often with a pre-defined supplier base.

Indirect procurement is different. It is essentially the sourcing of services (and maybe some goods) to support day-to-day operations.

The indirect spend may make up around 30 per cent of all third-party spend, but there are significantly more suppliers and the buying community is more decentralised. Add to that, a higher potential for maverick spend and sensitive stakeholders, and there is the added complexity.

What is happening now is that the percentage of indirect spend-under-management is growing in many companies. Difficult areas such as advertising, insurance and consulting fees are slowly being brought into the category structure.

It is often said that indirect procurement is not strategic. However, some high spend categories, such as sponsorship and employee benefits, could definitely qualify.

Key issues in Indirect Procurement
  • Buying decisions are often dispersed throughout an organisation into diverse and competing business units or locations.
  • Stakeholders can, and will, resist any changes on which they have not been consulted.
  • Managing an indirect category such as marketing services or consulting requires assembling the historical data and providing reliable spend information. Often transactions are miscoded – sometimes on purpose – which creates the wrong picture.
  • Suppliers can only be a resource for continuous improvement if the communication channels are open in both directions.
Strategies for Indirect Procurement  

The first step in a category strategy should be to aggregate the spend and understand it and its sub-categories. Next, present this information, in a digestible form, to stakeholders to elicit their input.

It is never too early to talk to stakeholders about the data or the proposed Scope of Work. After the Request for Proposal has been issued, it is too late.

Two of the success criteria in indirect procurement are a robust Scope of Work and a detailed Service Level Agreement with workable measurements.  Without these, any contract can fail.    

Indirect Procurement as a Career Choice

The requisite technical skills for individual success in procurement have been well-documented. One of the key skills of the future is to be numerate and have analytical ability, but not necessarily be a mathematician.

Managing indirect categories requires a different skill set from that which is needed for working in direct procurement. Behavioural skills, which can also be acquired, come into the spotlight here.

Particularly important is the need to collaborate with stakeholders. An aspiring category manager needs Influencing and listening skills, empathy, and the ability to take the initiative as well as being decisive when the need arises.

Indirect categories (when the tail-end spend is excluded) do not easily lend themselves to automation or the use of the e-procurement tools, such as e-catalogues or vendor management systems.

This creates a dilemma for external service providers who have these tools, but readily admit that there are nuances and emotions at play that may be beyond their control.

The organisational culture and landscape on the indirect side has many nuances that do not exist on the direct side. Procurement executives will therefore need to traverse the waters of indirect spend with unique strategies to ensure success.

Indirect procurement is all about building trust with stakeholders and suppliers to ensure continuity of supply and smooth operations.

Just try to procure the same make and model of smartphone for everyone, or change the catering company without considering end-users.

British Businesses Need to Respond to Brexit Now

British businesses can’t afford to wait before they take action and respond to the post-Brexit situation in the UK.

With uncertainty still abounding, and business implications not yet fully understood, two separate reports have confirmed that British businesses need to be taking action to prepare themselves for the Brexit.

Slowing UK Economy

The Markit/CIPS Purchasing Managers’ Indexes for both construction (weakest performance in seven years), and services (lowest growth in just over 3 years) showed that the UK economy was already slowing down before the Referendum took place.

The economic uncertainty following the June 23rd vote is likely to lead to further falls for July. Experts have advised that businesses need to take immediate action to mitigate these falls, particularly in the service sector.

And despite a fall in purchasing associated with these industries, companies also reported on-going supply chain pressures, including lengthening lead times linked to transportation delays, and lower supplier stocks.

Challenges for British Businesses

At the end of last week, the Institute of Directors (IoD) launched a paper outlining a wide-ranging assessment of what the Brexit means for British businesses.

While the IoD suggested that the UK will most likely retain access to the single market for goods, albeit with some concessions, the real concerns raised were also for the service industry.

The report highlighted that 83 per cent of IoD members had a link with Europe, whether via export, import, supply chain, staff or otherwise, and that these businesses needed to begin conversations with EU clients and supply chain to clarify what these changes will mean.

However, the IoD paper also offered the following thoughts:

  • The UK is unlikely to be able to deal with new trade partners whilst re-negotiating with the European Union and amending existing third-party arrangements.
  • Passporting for financial services will be difficult to negotiation, as remaining EU members will see this as an opportunity to shift business to European cities.
  • The IoD expects EU nationals living here to be able to stay once the UK has left the EU, but called on politicians to clarify this status as soon as possible.

In the immediate aftermath of the referendum vote, IoD members considered the key priorities for the Government to be:

  • Take steps to stabilise the economy in the face of any negative reaction in financial markets.
  • Securing a new trade agreement with the European Union.
  • Prioritise new UK trade agreements with high growth markets and ensure preferential market access to third countries (via existing EU trade deals) is maintained
  • Clarifying the status of EU citizens in the UK, and UK citizens elsewhere in the EU.
Coherent Response

Simon Walker, Director General at the Institute of Directors, stated: “In the wake of the EU referendum vote, we now need politicians to respond coherently to provide stability as we work out our future path. We must not lose faith in the ability of British businesses to overcome these challenges. 

“The IoD is resolutely positive about the opportunities that globalisation brings. We were promised an open and outward looking country after Brexit. Whoever ends up in charge must deliver on that pledge – a Britain that continues to play an outsized, global role in a world that is coming together, not moving apart.”

Allie Renison, Head of Europe and Trade Policy at the Institute of Directors and author of the report, added, “In the wake of the referendum, the most pressing concerns for businesses are responding to the short-term consequences stemming from disruption to financial markets, and preparing for longer-term ramifications, and maximising any opportunities that a post-Brexit landscape stands to offer.

 “With such a high degree of integration into EU markets, British businesses need to consider the possible outcomes of negotiations and whether we have access to the single market. There are a number of areas outlined in this report where we can forecast a range of potential changes to policy that firms should take into account when making any adjustment plans in the wake of Brexit, with both short and longer-term perspectives in mind.”

Throwback Thursday – 4 Challenges Procurement Faces & How to Overcome Them

Ask the question, “What are the challenges procurement faces?” and you’ll get the same responses time and again. So how do we overcome the key challenges and move on?

4 challenges procurement faces

We’re looking back at some of Procurious’ most popular content from the past 12 months. First up, we revisit an article on the 4 challenges procurement faces, and how to overcome them.

Why? Well, the nature of these challenges never seems to change, so by shining a spotlight on them again, we aim to start a conversation on how to finally put these challenges to rest!

Challenges Procurement Faces

Results from a newly published study shine a light on an assortment of internal challenges facing the procurement function, as well as its changing role as we enter an uncertain future.

Xchanging has issued the first results from its 2015 Global Procurement Study of more than 800 procurement decision makers. 

These first set of results look at internal challenges and the new role of procurement, covering misaligned KPIs, lack of internal engagement, capacity issues and skills gaps.

Challenge #1: Misaligned KPIs

Despite the now wide ranging responsibilities of procurement decision makers, 47 per cent name ‘cost savings realised’ as their number one KPI. The top four KPIs listed are all cost related. CSR/Sustainability impact, by comparison, is ranked as the least important at just 1 per cent.

Chirag Shah, Executive Director, Xchanging Procurement comments: “These results strongly indicate that there is a problem with the current KPI structure. Procurement teams are responsible for many business critical functions. From risk management to sustainability impact, procurement is engaged in activities that far surpass its cost-cutter legacy.

“The metrics against which organisations track procurement’s performance do not line up with what procurement actually delivers.”

Challenge #2: Lack of Internal Engagement

63 per cent of procurement decision makers globally identify ‘internal stakeholder engagement’ as a challenge, with 14 per cent claiming it is as an extreme challenge.

Shah explains: “Procurement’s strategic capability isn’t being understood and because of that, it isn’t appropriately valued. Not only is this causing problems for procurement performance, it is also restricting business success. By not engaging with the procurement team and fully understanding what it can deliver as a strategic partner, companies are limiting their potential for growth.”

CPOs clearly feel more internally valued than procurement middle management. 60 per cent of CPOs feel that procurement is a C-level priority in their organisations, compared to 37 per cent of procurement middle managers.

Shah makes a number of recommendations based on the findings: “To improve internal engagement, and properly communicate the value of procurement, procurement departments need to consider tactics such as introducing governance boards, using score cards to track deliverables, leveraging analytics and reporting tools to demonstrate results and even re-labelling team members with non-cost centric job titles that relate to their roles, for example ‘Risk Manager’ or ‘International Consultant’”. 

Challenge #3: Capacity Issues

According to Xchanging’s numbers, 80 per cent of procurement decision makers identify ‘procurement team time pressures’ as a challenge, and 20 per cent as a major challenge. This implies that the majority of procurement departments are facing major capacity issues.

Surprisingly, in comparison, ‘talent shortage’ is considered an operational challenge by far fewer respondents, with 59 per cent citing it as a challenge, and only 12 per cent as a major challenge.

The number citing talent shortage as a concern drops to less than half (40 per cent) when asked if it’s a problem for the industry as a whole.

xchanging

Challenge #4: Skills Gap

The skills considered most important for procurement professionals are ‘relationship management’ (88 per cent consider important, 59 per cent very important) and ‘negotiation skills’ (88 per cent and 58 per cent).

Significantly, these are also the areas where procurement decision makers identify the greatest gaps in skill set provision; around a quarter cite ‘relationship management’ (26 per cent) and ‘negotiation skills’ (23 per cent) as areas with the greatest gap in skill set provision. 23 per cent also name ‘project management’.

Want to read more about the challenges procurement faces? You can download the full report here.

Brexit: Reflections of a Procurement Professional

In the cold light of day, and after a weekend’s reflection, a procurement professional reflects on the implications of the Brexit.

Following my pre-referendum thoughts on supply chain trade and the EU, I was looking forward to the event itself.

A severe weather occurrence, disrupted travel during a six hour journey from Guildford to Norwich, and with the Mission Impossible theme tune on repeat in my head – this was my voting experience on the 23rd June.  I made it to Norwich to vote #Remain just in time before the polling station closed.

Storm on the Horizon

The real storm was not the weather. it was the result to come in the dawn with the UK #Brexit result.

My initial, personal, reactions on June 24th were of shock, anger and fear.  The value of the £ tumbled and the FTSE100 index crashed.  The ‘Leave’ campaign ideas, clearly taken by some as Brexit ‘pledges’, are already confirmed as “mistakes” or not “realistic”.

But time, even a few short hours, is a great healer. The £ and the FTSE both recovered a little on the 24th after their initial crashes.  My optimism and positivity is also slowly returning. The UK now has a fantastic opportunity.

Staying United

The first opportunity is to stay united. “IndyRef2” is already on the table, and the Northern Irish might follow suit. I doubt if many voting to leave the EU anticipated the potential break-up of the UK. Is this really an ‘unthinkable’ now?

The focus is now on what happens next. If there’s one thing I’ve heard through all of the interviews and opinions in the past few days, is that no one really knows what the future looks like now.

No state has left the EU before. The process is set out, yet it’s not tried or tested.  We have to find a new Prime Minister, and possibly face a General Election, to appoint the team to lead the UK through this.

Procurement & Strategic Relationships

There are uncharted and uncertain waters ahead. Procurement and Procurement Professionals can shine through and add the value we’ve all talked about for years and now have the opportunity to deliver.

Keeping in close contact with strategic suppliers and working together to build certainty in existing trading relationships might be a crucial first step to steady the ship.

Businesses need to keep focus on their mission, vision and values, and make sure they are still relevant in a post EU, UK. Most will need to adapt, and Procurement needs to ideally provide, or at least proactively source, the help and guidance to do that.

Procurement must not sit back and wait any longer for the invite to the table it has been waiting decades for. At the Big Ideas Summit in April, we heard lots about Procurement being the source of talent within organisations – it’s time to step up.

I expect we’ll all be revisiting our segmentation matrices and risk maps this week for starters! We should rapidly review processes and procedures ready to make ourselves, our teams and our businesses as agile as we can, ready to adapt to the changes as they unfold.

A wiser man than me said “agility is core”.  Let’s make this work team UK.

Turning Point in SE Asia Supply Chain Challenges

A turning point has been reached in the challenges facing the South East Asia supply chain, say global consultancy Crimson & Co.

In the light of economic growth, rising affluence and booming consumer demand, many international businesses are seeking to capitalise on the growth in South East Asia’s developing markets.

The challenges in the South East Asia supply chain have reached a turning point. This is down to the scarcity of supply chain professionals, increased consumer diversity, and fragmented supply chains.

The many layers of suppliers, localised delivery and route to consumer practices, and lack of transparency and consistency in information flows, make it incredibly difficult for businesses to achieve the next wave of global growth.

SE Asia Supply Chain – Huge Promise

There is huge promise but transforming supply chains to reach market potential, handle diversified products, and provide outstanding quality and service to customers is a mammoth task. The businesses best able to overcome these challenges can transform their South East Asian supply chains to become a source of competitive advantage, and drive global growth.

With rising labour costs and the move away from an export-based economy, changes in China are creating opportunities for South East Asia in global manufacturing. This also positions global businesses to capitalise on growing demand in these markets.

For most companies the potential is clear. The challenge is how to address it.

The Time is Now

Richard Smith, Director of Crimson & Co Singapore, argues that the time to transform supply chains is now:

“South East Asia is an incredibly attractive region with rapidly growing markets and low cost operations. The challenge is how to address fractured supply chains and the shortage of supply chain skills.

“As companies move their factories from China to South East Asia, they should grasp the opportunity to carry out a full supply chain review to identify how they should configure their supply chains to better deliver on their current and future business strategies. Due to the significant costs involved in the transformation, businesses need to assess the real benefits and ensure it will deliver against objectives.

“Companies can accelerate their supply chain transformation by bringing best practice from elsewhere in their organisation, other industries and innovative local supply chain practices. Through understanding their businesses’ maturity and readiness to change they can identify where sustainable improvements can be made and how to leverage disruptive technologies to drive business performance.”

Challenges Remain

However Smith warns that a number of challenges remain across the South East Asian supply chain, such as high staff turnover, with employees quick to leave for higher salaries, as well as a lack of experienced professionals with supply chain knowledge across manufacturing, distribution, planning and supply chain management.

In order to ensure successful transformation, Smith also warns that knowledge and awareness of local culture and business landscapes is critical, with a long term focus on developing local supply chain knowledge and people capabilities. This can be done by establishing a physical presence in the region, and developing region-specific leadership and training programmes.

Smith concludes: “Opportunity abounds in the South East Asia region with unrivalled chances for market growth, logistics, sourcing and manufacturing. The time to reinvent networks and processes is now – transforming the South East Asia supply chain into a source of competitive advantage.”

Crimson & Co is a global supply chain consultancy, with a scope spanning supply chain strategy, planning, procurement, manufacturing, logistics and customer channels.

Are Traditional Views Limiting Procurement Innovation?

Is a lack of competitiveness and a risk averse nature holding back the progress of procurement innovation? New research seems to suggest so.

New research shows that procurement is innovating and wants to do so even more in the future. However, the function’s risk averse nature, non-competitive attitude, and the prioritisation of collaboration over leadership, may be holding back its progress.

While many procurement professionals and leaders are embracing procurement innovation, many appear to be innovating within a safe environment, sticking with the things they know about, such as the supply chain.

Procurement says its ability to innovate is stifled by what others think it’s there to do, but isn’t it time that procurement stopped worrying what others perceive it as and started focusing on realising its full potential?

Limiting Procurement Innovation

Wax Digital’s new Procurement Innovation Pathway research, which surveyed 100 of the UK’s senior procurement professionals, shows that 69 per cent considered themselves pivotal to business innovation today, with 80 per cent expecting to be so in the future.

On average, 76 per cent said that they are involved in a range of business innovations, but only 27 per cent are leading them. However, 86 per cent said they want to be a part of all ongoing product innovations and service developments in the future – not only those within the procurement function.

But procurement’s view of what makes a business innovative appears to be impacted by some of its traditional risk averse thinking. Having a clear business vision (42 per cent), reacting quickly to the market and customers (33 per cent) and reviewing and improving business processes (32 per cent) were procurement’s top cited factors associated with business innovation.

Other characteristics traditionally more innovation related, however, are at the bottom of their list. Only 20 per cent cited a willingness to take risks, and 19 per cent a high investment in R&D, for example.

Procurement Innovation Barriers

Procurement identifies a number of factors stopping it innovating, most frequently other departmental views (40 per cent), lack of required skills (33 per cent) and time consuming processes (31 per cent).

And while these factors clearly play a part, there seem to be attitudinal setbacks with procurement’s own mind-set. Only 10 per cent, for example, are focused on challenging business objectives; just 14 per cent prioritise competitiveness and 18 per cent leadership as skills within their team – which they also say are declining traits.

Commenting on the research’s finding, Daniel Ball, director at Wax Digital said: “It’s fair to say that the average procurement function today is a vastly different place to what it once was. Procurement is innovating – of that there’s no doubt. But are they heading in the right direction or truly prepared to break the mould? Clear indicators of some discomfort with taking risks and really leading and driving innovation suggest it’s not yet realising its full potential in this area.

“To become real innovators, procurement professionals must overcome these issues while fostering the right business relationships, nurturing the correct new skills and seeking to break ground in their approach to technology.”

The Innovation 2016 research was conducted by Morar Consulting in March 2016, involving 100 interviews to canvass the opinions of UK senior procurement professionals working in small to large UK enterprises.

You can find out more about the research, and download the report, by visiting the Wax Digital website.

12 Ethical Questions to Ask in Supplier Pre-Approval

In procurement, ethical practice is the key to a positive organisational image. Knowing the right ethical questions to ask can make a real difference.

phloxii/Shutterstock.com

Increasingly the corporate world is focusing on social issues in supply chains such as slavery, forced labour and human trafficking, typically referred to as “modern slavery”. Procurement professionals have an important role to play, by sourcing in a manner that enables and rewards suppliers for good ethical practices.

Local governments and consumers are increasingly aware of such issues and are supporting, if not demanding, that businesses act to implement ethical standards in their procurement processes. Organisations will suffer reputational damage if they are found to be sourcing from suppliers using exploitative labour.

Companies may also face legal sanctions if suppliers are found to be involved in corruption or bribery. Organisations naturally want to avoid negative impact.

The issue of modern slavery has highlighted issues in countries where:

  • Workers have fewer or no protections.
  • There are high levels of poverty.
  • There is widespread use of migrant workers.
  • Because of the industry and use of raw materials, there are high risks.
  • The supply chain is labour intensive, because the end product is cheap. 

Codes of Conduct

Many companies have a Code of Conduct. This is a great way to start out, but can seem ‘non-actionable’ when on its own. So instead, a company can also introduce initiatives such as:

  • Collecting and providing all parties with the information they need to plan more effectively (for instance by sharing audit reports).
  • Creating processes which ensure efficient communications and formalised, streamlined buying and production processes.
  • Empowering procurement professionals to reward good practice and leadership amongst suppliers.
  • Encouraging buyers and suppliers to collaborate with organisations who have expertise in addressing systematic problems within the supply chain.
  • Enable the supplier to collaborate with others who are purchasing from the same supplier.

Your Role as a Procurement Professional

Typically, a procurement organisation will establish some firm processes to ensure the ethical practices. In addition, you can, as a procurement professional, also make yourself aware of some of the most essential ethical questions that you can ask during a sourcing activity, within the supplier pre-approval part of the process.

I would recommend that you, as part of your pre-approval process, get inspired to use some of the following ethical questions and observations in your process:

You want the supplier to have good labour standards, a positive impact in the community, and actively work to improve standards.

You should be looking for:

  • Staff turnover at production sites
  • Good human resource management systems
  • Good labour standards audit results
  • Sharing of good practice with other suppliers
  • Willingness to discuss issues such as pressures on working hours and pay
  • Retrospective comparison of planned vs. actual timings and volume outputs, measured against overtime worked at site

You want the supplier to demonstrate improved working conditions at all times.

You should be looking for:

  • Sites with initiatives such as active trade union representation
  • An existing recognition agreement and collective bargaining agreement
  • Number of workers with long term agreements
  • Analysis of working hours

You want the supplier to demonstrate stable relationships with own suppliers and subcontractors.

You should be looking for:

  • Average length of relationship with individual production sites
  • The dialogue they have with their suppliers/subcontractors on labour conditions

What is the Biggest Challenge Facing Procurement?

From talent management, to ethics and transparency, there are some major challenges facing procurement in the current environment. But which is the biggest challenge?

When considering the potential issues and risks that procurement professionals need to be aware of in their day to day work, it’s difficult to single out one in particular requiring greater focus than the rest.

In fact, if you were to ask the question of what is the biggest challenge currently facing procurement, the chances are high that you would get a considerable number of topics listed. However, that is exactly what Deltabid did with a survey of over 500 procurement professionals. More on this shortly.

Blind Spots

During the Big Ideas Summit 2016, Procurious asked its delegates to tell us what they considered to be procurement’s blind spots, and major areas of risk, in the coming years. Our panel of experts highlighted these areas:

  • Too great a focus on savings
  • Dealing with the wider business
  • Talent attraction and management
  • A lack of ambition in procurement
  • Working with legal teams

A contributor to the Procurement Leaders blog commented that, “CPOs face one of the most complex roles in an organisation”, and highlighted skills required for the future including a focus on strategic relationships, management of global supply chain risk and use of big data.

At the 9th Annual Asia-Pacific CPO Forum, The Faculty will be discussing the need for procurement to leverage supplier-enabled innovation, and a focus for procurement on SRM in order to make this a reality.

And when you consider the prevalence of stories and news reports on sustainability and supply chain transparency, it seems we are reaching a point where not only can we not reach a consensus on what the biggest challenge is, but also facing a lack of understanding about how we tackle these challenges.

Making Progress?

The other issue to consider is whether or not the procurement profession is making progress dealing with its biggest challenges. A quick search reveals a number of articles from the past couple of years asking a similar question of procurement leaders, including this one from Spend Matters.

In it, the top 5 challenges for CPOs are highlighted, including mitigating spend creep, the visibility of realised savings, compliance, technology, and procurement skills and capabilities to deliver on strategies. Starting to sound familiar?

What procurement must do is set out to tackle these challenges, and actually make some progress on them, instead of moving on to the next thing. And also to realise that these challenges don’t go away – it’s going to be a continuous process.

Biggest Challenge

This circles back to being able to identify the biggest challenge facing the profession, and perhaps assessing an order for them to be in, and a plan of attack for meeting them head on. This is where Deltabid’s research can help.

A survey of over 500 procurement professionals found that the biggest challenge was supplier-related issues, including finding and qualifying suppliers and maintaining consistent supply, with strategy selection, and cost reduction making up the top three. You can see the full results in the infographic below:

Procurement Biggest Challenge

While the results may not be surprising, they go some way to helping generate a consensus on the biggest challenge facing procurement. It’s now down to the profession as a collective entity to work out the best way to tackle these challenges.

One of the best ways of doing this is by collaborating openly, sharing knowledge, information, and lessons learned, and flexing our collective muscle in order to change the profession for the better.

If you have any comments, ideas, thoughts, or anything else you would like to share, please let us know in the comments below. If you have also had successes in dealing with any of these challenges, then we would love to tell your story!