Do you remember one of the final scenes in the Raiders of the Lost Ark, when the "bad guys" open up the Ark of the Covenant and well, they meet a very gruesome end? Well, I believe that with the metrics for procurement often being purely about just driving down costs, will inevitably cause procurement and/or the business to meet the same fate.
Prior to procurement becoming an integral part of an organization, there was limited consistency and the opportunity for cost reduction abounded. It was like a kid in a candy store! A lot of the categories were tackled and professionally negotiated and the metrics of cost savings were not only met, they were consistently exceeded. Procurement folk, got bonuses and accolades and the future seemed bright!
Unfortunately, the powers that be thought "Wow, this is great! We can get these type of bottom-line savings every year, and well, because these procurement people are constantly exceeding expectations, let's up the ante and give them even a higher goal!"
After a few years of this, the adage "blood from a stone" becomes appropriate. Assuming you have been diligent, you should be pretty much at the bottom of the price structure.
The metric of cost savings can result in behaviour that doesn't help the business and in the long run can cost more!
What's the point is saving ten cents on a bolt, when the result becomes a quality issue and there is greater amount of discarded product (and damaged reputation)? And if the ingredient in a food product is cheaper, but the taste isn't quite the same and customers move to another product? You might be able to get cheaper contract labour, but the cheaper person, might take 6 months vs. the three months the slightly more expensive/better person would have taken. And by the way, if you continually to squeeze the margin of the provider of the contract labour firm...well, the "good" people will be placed where there are higher margins, because that's the client that they want to keep happy.
But because of the metrics, which are focused on procurement cost savings and not on what's best for the business, this type of behaviour is encourage and is repeated over and over again.
On Monday, I wrote a blog suggesting that it is time for greater decentralization (Deconstructing a Sacred Cow) and today I'm probably going to be seen as an outlier on this topic (but given my blog entry from yesterday that shouldn't surprise anyone) but I believe that too many procurement folk have begun to bully their suppliers so that they can meet their metrics and get their accolades. And they always go to price, because, hey that's the easiest and fastest route, but it is also potentially the most damaging one. The other one I've seen continually as well, is significantly extending the payment terms to suppliers, more or less making your supplier, your bank. And when your sales force gets the same request from their clients, well they can't say, this is not how we do business. So cash flow ends up being neutral...so who wins this game of dominoes?
Why not focus on demand management? Work with the business unit to determine if they need as many bolts, do they discard many, or can they be ordered in different volumes to potentially affect a discount? And how about compliance? I have gone into many firms where they thought there was an over 90% compliance rate, to only show that it was less that 50%. Why? Because when you are not representing the true needs of the business, people can be very creative in getting around you. And process streamlining -- there can be significant savings in that as well! Renegotiate the contract -- there might be an opportunity to have longer warranties, have tiered levels of buy etc., etc.
Oh...and by the way, has your finance department actually removed budgetary dollars from the departments that use the products/services? I have found that most don't, so you truly haven't saved anything. What you have done is given those areas of the business a slush fund. So procurement might feel better, but nothing has been truly accomplished and that may be one reason the corporate gods keep coming back to you
I could go on, because there are lots of levers of opportunity for reducing costs -- both tangible and intangible -- that are beyond price.
So it's time to reset the expectations of the corporation and work with both vendors and the business units. You can't get blood from a stone, so stop bullying the suppliers to giving you more. It is time for Procurement to advise the senior leadership that given the successes to date, that the trough of cost savings is pretty barren, but you have other ideas on how to support the business, perhaps streamline processes, introduce technological advancements, become a revenue source (or at least a revenue catalyst) and that you are working, in partnership with your suppliers, to become creative in how services are delivered and perhaps even entertain a shared-risk, shared reward model.
Just as your business costs are increasing, so are those of your vendors. Yet we expect them to go to prices that are based on yesteryear benchmarks. Does that make sense to anyone? Certainly not to me.
As procurement professionals, we shouldn't be dealing with the supplier as the enemy. They are as important to your success, as you are to theirs -- ergo the need for openness, honesty and partnership. And don't give me "ah, there are twenty other suppliers who could provide this product/service." I don't know about you, but I've found when you find a vendor, who understands your business, who works hand-in-hand with you, that is responsive when there is an issue or problem and they are cost competitive-- well they are worth their weight in gold. Ok, maybe not gold, but they are worth paying a little bit of a premium, because they ensure that your business and its reputation (and the reputation of procurement) remain stellar.
I hope you are not thinking that she's crossed to the other side and become a supplier lover. Not at all. And I'm sure that any supplier that I've negotiated with would tell you that I'm not that easy. But what they would say, that I was tough, but fair, and I worked with them in partnership. With that attitude together we came up with some pretty creative ways to do business, that benefited all!
Change the metrics to incent the behaviours you want. Tell the powers that be, you have a better approach. And open up the kimono, and ask your supplier to do the same. And work together with them. Challenge them to be creative, not to sharpen their pencil. They will help you get to where you need to go.
Your success, is their success. Remember that!
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