1. © Auxis, 2009 All Rights Reserved1By: Jamie Mahoney and Greg StollerStrategic vs. Tactical ProcurementShifting Focus Towards Value Creation7874001689100393700033274003937000469900Published: July 2009 2© Auxis, 2009 All Rights Reserved Introduction: As organizations look to right-size in today’s economic environment, Procurement, despite its cost-saving mission, is not immune from the cuts that have affected many other parts of the organization. With Procurement professionals today taking on additional workload, focus on moving the “sophistication needle” towards higher value strategy remains imperative in order to deliver the expected value. The following are the top ten Procurement dimensions that compliment a Procurement organization’s ability to achieve maximum results. Knowing when and how to move an initiative along the continuum from tactical to strategic is critical to achieving optimal results. 1. Procurement Strategy6. Supplier Relationship Management2. Tools & Technology7. Culture and Change Management3. Source-to-Pay Process8. Contract Management4. Organizational Structure Alignment9. Inventory Management5. Category and Spend Management10. Risk Mitigation 1. Procurement Strategy A shift in focus from transactional purchasing to value-based strategic Procurement can translate to significant bottom line improvements to the corporation. In comparison to reactive transactional Procurement, a best practice Procurement strategy examines the current supply and demand markets, and the commercial terms and conditions of significant importance. The Procurement strategy should also include a pricing structure and guidelines on how the relationship with key suppliers will be managed. At the “C” level in the organization, a key focal point on Procurement is to ensure that the Procurement strategy is aligned with and that it rolls-up to the overall corporate strategy. A formal and well structured Procurement strategy process is required in order to optimize buying decisions and to diversify risk. The strategy should be developed at the product category level and include metrics, goals and guidelines related to sourcing channels, sourcing countries/locations and sourcing supplier base, among others. The strategy process needs to include a compliance tracking component to measure and ensure effective adherence and implementation. 2. Tools and Technology In comparison to faxed purchase orders and the use of Excel spreadsheets, an effective technology platform, including a robust database management component, is vital to providing reliable and accurate expenditure information for spend analysis and management. An integrated ERP system with an effective Procurement / e-Procurement suite is a key enabler to successful Procurement. Industry research validates that visibility to spend across categories is a must have before actually managing the spend. 3© Auxis, 2009 All Rights Reserved 3. Source-to-Pay Process A well defined and adhered-to source-to-pay (S2P) process allows for more strategic initiatives to be quickly identified and put into action with the appropriate allocation of Procurement resources. While efficiency in processing purchase orders, vendor payments and the receipt of goods may be the key objective here, driving out maverick spend and reducing ad-hoc spend can be collateral benefits. Enabling the S2P process through technology, such as with an effective Purchasing Card (P-Card) program, e-Catalog and automatic approval authorities, provides further streamlining. 4. Organizational Structure Alignment Having the right organizational structure in place allows Procurement to influence key purchases for the company as well as lead change with suppliers and across functional areas of the business. Within the Procurement group itself, having a balance of resources between tactical Procurement and strategic sourcing aids in meeting departmental resource budgets and meeting the savings that the organization expects from Procurement. The key here is to identify opportunities and initiatives to shift focus from “buyers” doing straight “purchasing” transactions and look for larger win opportunities for strategic sourcing, and possibly having more auto-buy and automated replenishment activities to free up Procurement talent. 5. Category Management and Spend Management The need for category management comes from the repetitive purchasing of products and services with common characteristics (i.e., resin, paper, etc.). These products typically have common internal customers, allowing for the opportunity to aggregate spend. Grouping them into categories (across both direct and indirect areas of the business) enables efficient management of these products/services for the company. Successful spend management is tied to the ability to plan purchases and must be aligned with the Procurement strategy. When companies know how much and when they will buy, and possess the ability to proactively plan for this spend, then they can engage in spend management. Spend management may impact the cost per unit as well as the number of units purchased (demand management). Recent industry research indicates that CPO’s most heavily value people that can manage spend efficiently so that they may manage more spend and more suppliers. 6. Supplier Relationship Management The strategic relationship with suppliers begins long before the first order is placed and continues well beyond the receipt of goods. This relationship is far different from the transactional tactical supplier relationship. Strategic relationship management transcends procuring products and services. It seeks to maximize the benefit for both supplier and customer and identify and implement mutual successes that will benefit both parties. Among the topics managed in the strategic relationship include continuous improvement, assurance of supply, lowest landed cost, lowest total cost of ownership, performance management, performance improvement, and KPI’s among others. A common trend today is toward continuous improvement and promoting supplier innovation. 7. Culture and Change Management An organizational culture that understands the importance of an effective Procurement process is vital for Procurement to bring the maximum value to the organization. This culture will encourage different departments to work with Procurement for the greater good of the organization. Instead of Procurement having to continuously search for opportunities for the company, the different departments will play a role in uncovering some of the opportunities. As a Procurement organization grows and matures, its skills and capabilities must go hand-in-hand with the tactical purchasing activities and “big picture” strategy of the Procurement organization, though many CPO’s will admit that the greatest challenge to delivering savings is gaining commitment from business units and budget holding functional peers to partner with Procurement. From a retail perspective, the trend is to link and integrate processes across business functions (merchandising, planning, design and product development, production, Procurement, QA, logistics, store operations etc.) to ensure that the Procurement strategy is aligned and effectively executed. 8. Contract Management Strategic Procurement organizations regularly negotiate and renegotiate contracts. The Procurement department often works closely with Legal, Risk Management, and other contributing subject matter experts. While the terms and conditions of some contracts are sufficiently handled by Legal with little input required from other departments, strategic contracts usually require the collective wisdom of multiple functions working together under a project management structure (often led by Procurement). This structure usually takes responsibility for the startup, maintenance, and cancellation of contracts. The development of strategic relationships requires special contracts and agreements with key suppliers. Such win-win collaborative relationships allow suppliers to benefit from more volume, mid/long term capacity commitments, visibility to forecasts and demand planning. Their customers, on the other hand, benefit from better cost, cost transparency, superior supplier performance, continuous improvement practices, innovation, etc.) 4© Auxis, 2009 All Rights Reserved9. Inventory Management Most organizations practice some form of inventory management. This practice usually grows in complexity as companies grow, especially in today’s world of growth through M&A. Multi-location global organizations have the potential to build large and costly inventories. Strategic inventory management seeks to maximize the turnover of those inventories without putting the company at risk of stock-outs. Creative inventory management in today’s supply chain environment may include pushing inventory back “upstream” to suppliers, consignment inventory and the use of Vendor Managed Inventory (“VMI”). With order sizes diminishing and the frequency of inventory replenishment increasing, robust inventory management and Warehouse Management Systems (WMS) must support this rapid inventory velocity and give enterprise-wide visibility to manage it. 5© Auxis, 2009 All Rights Reserved 10. Risk Mitigation Much like inventory management, as companies grow they have more to lose and therefore more to protect from risk. Obviously, this includes typical product safety risks; however, there are other risk issues of importance that go beyond the typical scope of the Risk Management department. Those issues include assurance of material supply, indemnity from claims arising from a supplier’s poorly manufactured products, risk due to unexpected price fluctuations, public relations risk resulting from a supplier failing, and risk to quality, etc. A sound Procurement strategy should include a risk mitigation component that addresses unexpected performance issues and provides alternate sources for meeting product requirements (i.e. alternate suppliers, shipping routes, contingency budgets, etc.) Conclusion: By knowing when to apply certain strategic Procurement practices in lieu of tactical ones on a situation specific basis, Procurement professionals are well positioned to deliver peak performance and outstanding financial results. Of utmost importance in developing an effective Procurement organization that delivers continuous value to the business is the constant search to transform your organization’s level of sophistication from tactical to a more strategic focus. As these ten vital “building blocks” of Procurement infrastructure are put in place, the benefits derived will clearly be recognized throughout the organization and will provide momentum toward harnessing spend and ensuring supply at the best cost. Case Study: In 2008 Auxis was retained by a $500 million logistics company to assess its Procurement organization, processes, systems and key supplier relationships. Our approach included: assessing the maturity of the organization across the 10 Procurement dimensions mentioned above; working with our client to identify their desired level of maturity in the dimensions; and finally helping them with the implementation and organizational transformation. While the company’s business experienced explosive growth over the last 15 years, they had underperformed in integrating four acquisitions, had too many divisional fiefdoms, processed a huge number of transactions and severely fragmented their spend. This led to complexity in Procurement resulting in lost opportunities with suppliers, lack of leverage in negotiations, higher priced goods, additional staff & systems time to support the transactions, and ultimately, the inability of Procurement to demonstrate their expertise and value to the organization. During the assessment phase of the project, Auxis performed a reorganization of the categories, an in-depth spend analysis, a review of the source-to-pay process and associated technology use. Furthermore, Auxis assessed the culture of the organization and its probability to embrace change to allow Procurement to drive efficiency and savings in the organization and align itself with the organization’s strategy. The assessment resulted in the identification of $4.5 million of year-over-year savings and identified opportunities. Auxis is a leading Management Consulting firm headquartered in Coral Gables, Florida. Auxis’ Supply Chain Excellence Practice believes in a practical, “back to basics” approach to help our clients buy, store and ship right. Our methodology is designed to provide our clients with real-world business solutions anchored by solid financial analysis. Auxis can help you improve your supply chain for the benefit of your customers, business partners, and shareholders through service offerings such as sourcing and procurement, strategic evaluation, network design, inventory management, 3PL provider selection and outsourcing, warehousing and transportation management and supply chain planning. Auxis, Inc.55 Miracle MileCoral Gables, FL 33134Tel: +1 (305) 442-0060www.auxis.com8572506562725