Back to Procurement Basics – Explaining to An Alien

Let’s imagine for a moment that a few hundred very, very smart and very friendly aliens have arrived on Earth and (unlikely I know) have been welcomed into the Human family.

They have no knowledge of business, accounts, P&L or category management, existence on their planet being devoted to music, poetry and art. But their inherent intellect (around 300 on the IQ scale that put Einstein at 180), as well as highly empathetic nature, means big corporations have started appointing our new friends as CEOs.

You happen to be the CPO or procurement functional leader in one of these organisations, and you are called in to see your new extra-terrestrial boss, known as TraceyJim (gender is a totally fluid concept on their planet, reproduction being a separate matter to sexual pleasure, friendship or social constructs).  So we’ll use TJ for short. The conversation might go something like this.

TJ  - It is good to meet you, CPO person. Please explain what this thing called “procurement” means?

CPO – Well, our organisation provides goods and services to customers. To do that, we have to buy things from other firms or people outside the organisation. We take what we buy, our own employees add value to those purchases and apply their own work and knowledge, and we create something we can sell that has more value than the cost of the inputs.

TJ – I see. That is very logical. And if you cannot sell your products for more than your total costs, the business is not sustainable. It will go “down the pan”, as I think you earthlings call it.

CPO – Yes that’s correct.

TJ – How much do we buy from these outside entities?

CPO – We spent around 70% of our revenues with external suppliers of all types in total. That compares to 20% that we spend on our own internal staff.

TJ – But why do you need to buy from outside entities? Could you not use your employees to meet all those needs?

CPO – No. At the extreme, we would have to build our own power station to provide electricity. In other cases, we only need the goods or service we buy very occasionally, so it would not make sense for us to train our own expert lawyers for instance when we might only need a few days’ a year of their services. Then the most common reasons for buying from outside are specialisation and economies of scale and expertise. If we wanted to produce our own paper, laptops, skimmed milk powder, gearboxes – or whatever our key “raw materials” might be - then this would be very expensive for us and we would have to be very clever at many different activities.  And unless we could sell to many other firms, we would not be as efficient as firms who produce just those items.

TJ – That is a very good explanation, and with my enormous IQ I can immediately grasp those ideas. So we must buy many goods and services from external entities, who specialise and become successful by developing expertise in those areas. So we find those organisations and then buy from them. That seems simple.

CPO – Well yes, but there are a few factors that make it a little more complicated than it sounds.

TJ – I thought is sounded too easy. So what are these factors?

CPO – We have to manage risk and find suppliers who we can trust. Otherwise an incompetent supplier – or one who did not want us to do well – could even put us out of business. Then we should consider how suppliers can offer us competitive advantage. That means …

TJ – I am sorry, fascinating thought that is, I must go and execute my daily rejuvenation ritual  - shedding and re-growing three of my fifteen arms every three days is quite a chore, you know. But I am finding your “heavy metal ” music provides a very enjoyable backdrop to that chore. We will meet again soon and you can explain this competitive advantage thing to me in more detail …

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