Problems and Opportunities With Direct Procurement

There has been a lot of focus on indirect procurement in recent years. Indirect has been the ugly duckling within manufacturing companies. But, there is often an assumption that direct procurement, being a part of the core supply chain, is the proverbial swan. The benchmark metrics say that spend influence is nearly 100% for direct procurement, and we constantly see so many innovative best practices that have been pioneered by procurement groups in the supply chain. BUT, I’m here to tell you that all is not well within direct procurement, especially within any one manufacturing company. Although direct procurement is inherently part of the supply chain, it isn’t necessarily driving the supply side of the ongoing transformation in a sufficiently meaningful way.

The first problem is structural. Spend is less heterogeneous and more fragmented across business units, sites, geographies, etc. Procurement also requires closer coordination with other supply chain groups, so it’s harder to centralize or move to shared services. Besides, transformation is harder (e.g., higher switching costs to change not just suppliers but also product specifications, tooling, logistics, etc.). The opportunities are simply harder to come by. Yes, there are some low hanging fruit in corrugated, fasteners, stampings, simple assemblies, transportation, etc., but generally the business case will be need to built on much more than favorable PPV, and this will require lots of cross-functional and cross-enterprise teaming. Here lies the rub – and the opportunity.

The biggest problem though is not surrounding the quantity of spend influence (i.e., procurement having involvement in sourcing activities before the contract is signed), but rather the quality of the influence. For all the advancements made in modern supply chains, procurement has still been stuck in a fairly narrow operating model of buyer planners, BOM-based sourcing, single-tier supplier measurement, etc. Sure, it sits with the design teams, helps find new global sources of supply, and helps support many operational initiatives in Lean/6Sigma, logistics, new market entry, sustainability, etc.

But that said, is procurement really driving the bus and bringing best practices across all these areas? Is it trying to actively re-configure the extended supply network to better tap supply base value alongside its business partners and functional peers? Is it tapping new sources of innovation and the best ideas from the best suppliers? Is it seeing into multiple tiers of the supply network? Is it identifying key market intelligence to spot opportunities on the demand side as much as risks on the supply side?

Given the complexity of global supply chains, it’s tempting for direct procurement organizations to re-trench, stay in the silo, stay in the business units, and keep firefighting rather than taking a proactive leadership position in the broader supply management opportunity. Note, when I say “supply management,” I don't mean renaming the purchasing function! See Krajlic’s article circa 1983 here.

So, the fork in the road is here, and for direct procurement organizations, there is a terrific opportunity to improve the quality of their influence in the supply chain. But it requires a new approach that is broader, more flexible, more collaborative, and powered by stronger techniques and tools. I have been disappointed in the level of overall innovation of deep direct procurement tools, but there are interesting and hopeful advances coming from vendors not just within procurement, or even traditional supply chain technology vendors, but also from other areas (which we’ll cover in future posts).

The time is now to tackle this problem. The transformation has already started, but in bits and pieces, and much of it is coming from other parts within the supply chain organization rather than from Procurement. One of the things that we plan to do is to help lead the charge and help direct procurement organizations assess themselves against this larger backdrop of  “art of the possible” within the extended supply network.

We are currently conducting some direct procurement research to identify over a dozen key integration points of direct procurement in the broader supply chain where advanced practices can bring discontinuous improvement. I am conducting a set of confidential qualitative interviews with senior practitioners at advanced manufacturing firms as part of it, but I am also working with ISM on a quantitative assessment study that will evaluate direct procurement funds on the broader supply chain, the level of adoption of these various advanced capabilities, the ways in which these capabilities were implemented (thus the need for qualitative research), and some of the specific techniques and tools that were used.

We are proud to partner with ISM on this study and it’s appropriate that we do so.  Since ISM’s mission is to “enhance the value of procurement and supply chain management practitioners and their organizations”, this study is designed to assess how direct procurement groups are enhancing their value and performance within the broader supply chain management function.

The quantitative survey component of the study is actually live, and I will be discussing some of the advanced capability areas from the study in future posts, but if any practitioners are interested in participating in it, or if any provider firms would like to send the study link to their practitioner clients, please feel free to contact me at pierre@spendmatters.com.

What do you think?  Do you think the direct procurement is still mostly untapped and that there is a ton of value to capture “at the edge” of procurement in the broader supply chain?

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