Indirect Sourcing – readers comment on our briefing paper

Our last piece here around the recent Spend Matters / Xchanging briefing paper (“Indirect Category Sourcing Savings: Fact or Fiction?” – download it here) drew some really interesting comments, from some rather eminent procurement professionals. Many thanks to them. I’m going to feature those comments here today, and I’ll come back in part 2 and respond to some of the excellent points raised.

You may remember that the research paper suggests that procurement should focus on managing the delivery from sourcing programmes, with a more structured approach and (critically) clearer measurement of benefits, including savings. So here are some of the responses to that.  We’ll start with RJ:

“...many Procurement teams still have a long way to go in the first, and, particularly, second building blocks of technical and interpersonal skills to really drive a strategic agenda in their business.  Partly as a consequence of this Procurement is still seen by most organisations, as a former boss of mine described his team, as “cost killers”: having the primary purpose of attacking suppliers to drive down cost (or more often than not, price).

In my view this is where functions such as Marketing, Finance and even HR still retain the edge over Procurement in organisations’ perceptions. These organisations are seen as “value drivers”, whereas the Procurement role of “killing cost” can just as easily be interpreted as killing innovation, time to market, quality (of product or service) and external relationships.

Over the past few years you yourself have noted the rise in interest in the role that strategic procurement (with a small “p”) can play in non-traditional categories such as professional and financial services, marketing, audit etc. In such areas cost (and certainly price) are low on the agenda of senior executives – they see spend in these areas as “investment” rather than “cost”. What they want to measure is the VALUE they obtain from these services, whether this is better or worse than their competitors, what would drive improvement and what would they have to do in order to get a better return for their investment”.

Now Steve Mullins:

“This all exactly mirrors the debate I am have with professional services organisations here. I am developing this very minute some material to support their engaging with the various tribes of Procurement 2013 and to help them get procurement people to lift their eyes up from the unholy trinity of rate card squeezing, master service agreements and preferred supplier lists – and onto addressing the real question, ‘What value does my business need from this organisation and therefore what are the best means to acquire that’?”

Paul Vincent (who leads the Consultancy Buyers Forum) picked up the ball:

I would agree with Steve and RJ. This certainly mirrors my own experience when advising the ‘sell-side’ on how best to engage with procurement. On the flipside when I advise procurement teams about how to add the most value to their organisation when looking at indirect spend without doubt the biggest ingredient of success is to approach it from a change management rather than commercial mindset. I will give you a simple example.

A procurement professional came to me one day and asked for my advice. He said his organisation spent too much on taxis in London and his big deal was to negotiate a central contract with one provider and achieve lower rates. Did I know who would be best and what target he should aim at? I asked him who owned his organisation’s internal policy for taxi usage - he wasn’t sure. I asked him how much taxi spend was compliant with that policy - he didn’t know. He merely saw his task to reduce the ‘price paid’. Success to him was being able to say that a taxi journey would now cost x% less than it would have done without his involvement. When I pointed out that taxi users may see cheaper rates as a reason to use taxis more often so he would fail to meet his principle objective i.e. overall taxi spend down he realised the naivety of his thinking! Unfortunately in my advisory day job this is not an isolated occurrence!!”

Finally, Ian Heptinstall chipped in:

“Another price versus value example I’ve used before is the one from Zara the fashion chain. Apparently they spend more (by traditional, per item measures) on transport and distribution than their so-called efficient competitors. The result is that they have fewer customers leave empty handed because they are out of stock of a size/item, whilst at the same time they have lower working capital and discounted end-of-season sell offs. They are also known for buying in small volumes and from local European suppliers, more than many do, again missing out on perceived per-item savings.

They have grown faster than the market for over 20 years, and their owner has just entered the Forbes top 3 billionaires list. Their buyers knew a good deal was about making more profit and supporting sales, not a blinkered focus on reducing unit prices”.

Thanks to everyone who contributed – more to follow.

First Voice

  1. Ben Glynn:

    Ian’s Zara example is an excellent one. A fascinating article and interesting to hear the “price vs value added” argument for Procurement as well as the traditional “price vs total cost” TCO side of purchasing.

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