The Procurement function has developed considerably over the last several years and continues to change daily. We are now in an age where a majority of organizations have identified Procurement as a key business unit in the success of their strategic business plans. But have you wondered if the term “Procurement” wasn’t a good fit for your particular department? Have you struggled to accept the reality that your team doesn’t fill the shoes of the role of Procurement in 2019? Though it may seem daunting to shift your department from tactical to strategic, the only way to fail is when the journey hasn’t begun. In this blog series, we will observe what a Purchasing department looks like versus a Procurement department, take a look at what a best in class Procurement organization looks like, and help you get started on your journey. So let’s dive in!
Identification: Purchasing or Procurement?
There are distinct features between a “Purchasing” and “Procurement” department. For one, purchasing is a function that is very tactical and considered immature in the growth spectrum today, while a Procurement department is seen as an agent to add value to a company’s bottom line. Purchasing is considered reactive or commonly referred to as “firefighter mode” where Procurement appears to be proactive, progressive, and innovative. You’ve probably heard the common phase “3 bids and a buy” associated with purchasing, and that’s exactly the philosophy you will see deployed throughout the department. Let’s take a closer look.
Attributes of a Purchasing Department
-“Purchasing” is considered a cost center not a department
-Lack of standardized, repeatable processes
-Lack of strategic sourcing: buyers are asked to go out and get 3 bids (if at all) then go with the lowest price
-“Squeezing” the supplier for the lowest price is a normal practice
-Buyers are responsible for not only ordering products/services but also dealing with damaged/inaccurate deliveries
-Lack of contract management or category planning
-Technology in place does not support processes/enable strategy
-Lack of metrics/reporting/spend management
-Lack of supplier segmentation/risk management
-No/limited supplier relationship management
-Internal stakeholders always complaining about the department
-Department staff expresses job dissatisfaction and lack of growth
-Suppliers are often confused/suppliers no longer willing to work with the organization
-Maverick(rogue) buying is quite common
Now let’s observe the characteristics of a Procurement organization. Typically, successful Procurement organizations will deploy a standardized, systematic, long term and holistic approach to all their activities while addressing both current and future needs of an organization. The product of this approach will allow for a free following channel between the customer, procurement, and supplier, thus creating a closed feedback delivery loop for continuous improvement.
Attributes of a Procurement Department
-Standardized, repeatable, documented processes with clear roles, responsibilities, and accountability
-Internal stakeholders view Procurement as a valued business partner
-Internal stakeholders are involved in sourcing, purchasing, contracting, supplier relationship management, and category planning processes
-Strategic sourcing process is in place (RFx, supplier qualification, scorecarding, market research, benchmarking, negotiations, contract execution, contract maintenance)
-Supplier relationship management is in place addressing performance, quality, risk, innovation, etc.
-Terms like TCO, SLA, risk mitigation, market research/intelligence, hedging, SRM, sustainability, supplier collaboration, and innovation are embedded in the day to day activities of the buyers/specialists
-Procurement has representation on the executive or senior leadership team
-Career path and role descriptions within the Procurement department are clear
-Team is trained and cross-trained on all processes/technology
-The department is responsible for procurement in all areas, including the "non-traditional" spend areas
-Technology supports processes and enables end to end P2P, spend management, and automation
-Maverick spend is proactively managed
Now that we’ve examined the characteristics between a Purchasing and Procurement department, have you figured out where your team stands? Identification is key in beginning the journey of transformation. The shift from Purchasing to Procurement will allow an initially undervalued business unit to become a respected and trusted business partner. You must realize Procurement is more than just buying at the lowest possible price, it touches all business processes and can significantly impact an organization’s bottom line. Purchasing has been an area of underinvestment by organizations for years causing them to be understaffed. This results in resources being pulled into day-to-day tactical activities, leaving little to no time to focus on strategy thus stopping the transformation from Purchasing to Procurement. But now, it’s time for a shift. If you’re identifying more with the “Purchasing” characteristics, don’t worry, there is some good news. It means the opportunities within your department and organization are huge, and you have the potential to make a significant bottom line impact if you choose to begin the journey.