Friday Rant: Fixing the Broken Cycle of Procurement (Part 1: Rethinking the Core)

My rant last week digging into 10 elements of future procurement, as I called it, spurred some good comments and a lot of discussion on Twitter. In today's discussion, I'll continue by taking a few steps back -- we'll leave a continuation of the march forward to further commentary in the coming weeks -- and look at how procurement is coming up short in so many cases, even in supposedly top-performing organizations. Apologies for the formal prose to follow, but I wanted to try to capture my thinking in a manner that stepped up the discussion from the usual casual banter here.

To start, there are many anecdotal examples and hard evidence to suggest that what is now often described as the procurement function -- sometimes supply management, sometimes purchasing, sometimes supply chain -- is underperforming and underserving the constituents and customers that it has been designated to serve. In the case of management, customers and shareholders, procurement, I would argue, has failed to deliver on a wide range of promises it has made in the past two decades to truly prove a sustaining transforming presence on the bottom line.

And in the case of government, we can thank poor recent procurement not only for unnecessarily overspending taxpayer receipts, but also as an ineffective means of driving stimulus in the case of deficit spending. In public procurement, the cycle is made worse by the continual declining influence of the function that has become better known for scandal than positive outcomes. There are great folks working to change this -- and as a friend told me this week, the traditional strategy firms have descended on DC to transfer private sector thinking to the public sector -- but it's not happening quickly enough.

At the core, whether in the private or public sector, we have forgotten that the act of external buying involving a third-party other than our own organization -- in which there is no internal transfer of goods/services or internal debit/credits -- is dependent on a surprisingly huge set of changing internal and external forces impacting the market for what we buy, and ultimately sell. As any procurement manager knows, a simply cost model can have hundreds or thousands of elements, and these represent only a point-in-time snapshot of a market for a single item.

Yet forces work individually and collectively. Taken together, these forces impact procurement outcomes in ways that are difficult to predict given the current approach to the function that focuses almost entirely on negotiation and transactional outcomes and efficiency. At its all-too-common worst, procurement has been reduced to a zero sum game where "savings" serves as the transference of margin from one player in a supply chain to another as a primary objective.

One could look at the criticism of reducing a supplier's margin as procurement blasphemy. Indeed, for many today, the outcome of such a reduction is actually the core metric on which individuals within the function as well as the group as a whole is measured and incented. Yet I'm beginning to think that the ability to reduce a supplier's margin is suggestive of two potential red flags that point to why procurement is underserving its constituents.

On the one hand, a sustained decline in a supplier's margin at the forced hand of procurement, past a certain point, can lead vendors to cut corners and even, in the worst case, potential bankruptcy. And on the other, as someone pointed out to me last week in an "aha moment", the appearance of "savings" from a supplier's reduction in margin is a sign of dirty procurement laundry (e.g., procurement has not done its job in the past effectively as excess margin should never exist).

There are many folks we can blame for the path procurement has taken in recent decades (we are not innocent, mind you). Stay tuned as we think about not only who should be included on the enemies list (OK, not really an "enemies list" in a J. Edgar Hoover sense, but I will share some names of procurement experts and theorists whose thinking might not be serving us today as effectively as it was originally), but more important, what it will take to change the underlying mindset of those measuring and incenting procurement (finance, boards, etc.) and really catapult what we could be doing to an entirely new level and frontier.

- Jason Busch

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