Last week, we began a blog series exploring the state of procurement in the small and middle market sectors. See 2013: The Year of Source-To-Pay Adoption for SMB Procurement and 3 Essential Procurement Services For Small and Middle Market Businesses. As we continue our analysis of SMB procurement practices, it makes sense to do a level set around why these organizations fail to deliver on their purchasing and cost management promises.
Here at Spend Matters, we've brainstormed a big list of the underlying reasons of why SMBs waste money on procurement. Out of what we've thrown out, these are the ones that appear to stick consistently. Note, these are not symptoms of poor procurement, but rather the contributors to the broader malady:
- A lack of senior procurement leadership and underinvestment in talent – few (if any) small and middle market companies have been willing to invest in the type of talent necessary to effectively manage the function and drive category success (hint: you have to pay these people close to or as much as their sales equivalents on the other side of the business)
- Tribal knowledge centers – no means of capturing, codifying and sharing knowledge within the business (e.g., information on tooling that is owned by the company but resides with a supplier)
- Death by a thousand spending daggers – (but parrying off the sword). Small and middle market companies, ironically, often do a commendable job managing their very top categories (often owners, CEOs, CFOs and broader management teams do this) such as raw materials. But everything under this falls off the radar
- Limited (if any) focused procurement technology infrastructure – (compliance, analytics, negotiation, contract and supplier management, etc.) Procurement technology adoption is a trainwreck in the middle market. Here's where we would invest first: 3 Essential Procurement Services For Small and Middle Market Businesses
- Poor spending and visibility and a lack of internal alignment and understanding – much like larger organizations, limited if any functional definition and alignment exists between procurement, finance and lines of business owners (savings baselines factoring in commodity pricing, currency, order volumes, working capital costs, inventory, etc.) But SMBs also lack basic visibility into data beyond AP-based reports (i.e., they lack access to basic spend analysis reports)
- No one holds the spending reigns (although the CFO sits on the horse) – it's one thing to "stop" spending when times are tight, i.e. cutting off travel budgets. But it's another to truly influence and control at all times and let business leaders themselves make the best possible decisions within a set budget
- Centralization without influence – one of the worst aspects of middle market procurement is the "empowered buyer" who is anything but a category expert or leader. Instead, they're someone tasked with attempting to centrally negotiate contracts that everyone in the business (e.g., on the plant, facility, office or retail site) ignores because of underlying issues making it easier to work with existing local contracts and suppliers
- Limited coordination with the rest of the business to drive collective outcomes – this includes procurement coordinating with AP and treasury over looking at total cost decisions, including those tied to payables (e.g., payment terms, working capital management, early payment discounting programs, either self-funded or bank funded, and the like) as well as broader working capital opportunities (e.g., inventory carrying costs)
- Poor spend segmentation – SMBs are absolutely horrible (for the most part) at segmenting their spend. Come on – it can't all be strategic. What about saying "Our owner/executive team focuses on these top two key commodities and owns decision making (e.g., buying forward to lock in prices or buying on the spot market), procurement owns XYZ and will actively source, engage and develop suppliers, we participate in GPO 1 for these commodities and GPO 2 for these. And for the rest, we take advantage of discounts offered through corporate membership programs and these preferred distributors." I've never, ever seen this level of spend segmentation in the middle market. But it makes perfect sense!
- Not being a customer of choice – part of being good at procurement is being a customer of choice for strategic suppliers. If there are supply chain risks that become delays (weather, natural disaster, etc.) it's the best customers – not always the largest, mind you! – who get products (or services) first. What does it mean to be a good customer? It's about working with your suppliers, thinking about joint cost take out opportunities together and understanding a fair margin and working to get both party's costs down. It's also about paying on time based on the agreed payment terms
If we're missing a top reason for poor SMB procurement execution, please, by all means, add to the list.