DeltaBid welcomes this guest blog post from Nis-Peter Iwersen, global procurement consultant and interim manager. In it, he describes the major challenges faced by procurement functions worldwide and why a center-led procurement structure can be beneficial to the organization.
Successful procurement functions have a major positive impact on the company’s results, cash flow and hereby the competitive position of a company. What organization structure can be recommended here to enhance the efficiency, capture broader savings and improve the procurement effectiveness in industrial or automotive companies?
Procurement has developed substantially in the last 20 years. Twenty years ago, it was comprised of a transactional operational function doing procurement orders, contracting and troubleshooting in case supplier problems happen and suppliers don’t deliver what has been agreed.
Today, procurement is a key function in every company on the same level as sales, production, logistics and finance. Therefore procurement needs experienced and skilled employees to be able to act as a qualified business partner to:
- Align and integrate procurement with the company strategy.
- Become a strategic internal business partner.
- Enhance leadership skills to really make a difference in the business.
- Build strategic alliances with suppliers (SRM).
- Become leaders in the field (Risk, Cash flow, Cost, Quality and Delivery).
Large international companies have established world-class global procurement functions in order to improve the company’s competitive position. With the right global supplier base and a strong strategic supplier relationship management, a company can get access to improved know-how and resources, which can make a real difference. Such a strategic supplier base has to be managed in the supplier relationship management program (SRM), where also the company’s top management has to take part in yearly strategic supplier meetings in order to agree on the right supplier direction and which improvement projects to push forward.
In the following article, I outline secrets of best-in-class procurement organizations.
What are typical current challenges in procurement organizations?
In the following are a list of typical procurement challenges in industrial or automotive companies:
Procurement positioned right: Is your procurement organization positioned on the same level as other functions like manufacturing, sales, finance with report to the CEO or BU head? Procurement can execute successfully at a strategic level and create world-class results if it is positioned right, has the right qualified employees and processes and gets the necessary support from the top management.
Right employees: For many years now, procurement has become an important strategic function as outlined above. To be able to lead and manage this successfully, senior experienced procurement employees who are able to deal with the top management of the supplier base have to be on board. In some regions, like Asia, seniority is very important to get respect and open doors. Internally, it is also important that procurement is well-aligned with functions such as quality, logistic, manufacturing, etc. Without the right senior employees here, the procurement function results will suffer. Within the procurement function, quality is more important than quantity when it comes to employees. A few experienced senior procurement managers can deliver better results than many younger inexperienced procurement employees.
Cultural understanding: In order to achieve successful procurement, good cultural understanding is pivotal. Today, we are dealing with many international suppliers in different cultures. Without procurement employees with good cultural understanding, the company will fail to get the best procurement results. Therefore it is often necessary to have a procurement office located in the main procurement countries, just as one is used to having sales offices in the main countries one sells to.
Here some companies are setting up International Procurement Offices (IPO). An IPO structure can identify the most cost-effective product manufacturers across the globe. The international procurement organization will then convey this information to manufacturers looking to reduce production costs. One examples is Toshiba: “IPOs not only find excellent new suppliers from around the world, but also provide our business bases with daily procurement service procurement offices.”
Also IKEA can, via its many local procurement offices, very quickly identify the best cost producer in the world. At the same time, via its local organization, it takes care of the cultural relationship and communicates in the local language, which certainly is an advantage. Here best practice is if the global lead buyer is very well-aligned in a team with the local lead buyer in the region or country based on a clear governance structure.
Strategic skills and competencies: For every main category of direct or indirect material/service there has to exist an approved commodity procurement strategy, which is aligned with the business strategies and HQ. These procurement strategies cover subjects such as present supplier base and performance, future supplier base and targets, main projects to drive increased procurement results, etc.
Bundling of the total spend: Are you able to have an overview and bundle the spend on a group level and approach the preferred suppliers with ‘one face’ to get the best offer? We all are aware that economy of scale counts to get the lowest total costs and best service from a suppliers.
Clear governance and supplier responsibility: Do you have clear 'key account management’ and procurement responsibility outlined for your key group suppliers – “one face to a supplier'? It is not immoral that in some decentralized companies different worldwide procurement employees approach a supplier for quotations, sometimes even for the same part, without first internal coordination on group level. A supplier can often be confused by having so many different contact persons in a group. In some cases he also utilizes this misalignment in the group to offer different prices for the same part. Hereby the group is losing profit. Therefore it is essential to approach a supplier with ‘one face’ and use bundling power to get the best results.
Major procurement decisions via sourcing board: For larger procurement projects, do you have a cross-functional sourcing board to evaluate different offers aligned with the procurement strategy? Some procurement projects can have major impacts on profits and strategies. Therefore it is of vital importance for larger bidding projects, before a contract is signed with one of the suppliers, to have a procurement-led cross-functional team discuss and evaluate. In such a sourcing board the main stakeholders should be included, like supply chain and quality functions. For some projects the CFO, BU head or COO should also join.
Timely procurement process and on-time projects: Are you able to act on time with the right answers and services to your internal BU stakeholders? This is especially important in the automotive industry, since sales regular provides offers to customers, which have to be aligned with what suppliers can offer. Here we need a flexible procurement organization that can act on time with the right service for different procurement projects. In such cases a BU purchasing project manager can be the right organizational approach to be able to provide fast and good service to the BU.
Well-aligned strategies and processes: Are your procurement strategies and processes well-aligned with your top management, across functions and BUs? Procurement is an important integrated part of the business profits, material flow and the decision process: it decides what to buy, where to buy it, at what prices and what to get. To get this well-aligned internally and allocate the required resources, it requires regular cross-functional meetings with internal stakeholders to get the necessary buy-in and support for the strategies and required changes.
Procurement functionality: Does your procurement organization have these skilled and qualified team members?
- Lead buyers (LB) or commodity managers (supplier responsible that the company have aligned and approved commodity strategies and qualified main and backup suppliers who deliver what has been agreed and ongoing review improvement potentials, ongoing execute the commodity strategies, manage the cost level/ targets and risk management). They also manage the overall supplier relationship as key account responsible, negotiate frame agreements and carry through group bidding projects.
- Supplier development or supplier quality engineers (SDE or SQE), who secure that the supplier from the quality side can live up to the quality requirements and are able to work on quality improvements with suppliers. They also make sure there is alignment with the lead buyer and that issues from the supplier quality audits are closed and the supplier signs the supplier quality agreements.
- Supplier logistic employees (SLE), who carry through logistic supplier audits and set up the right supplier logistic processes and lead supplier logistic agreements aligned with the supply chain strategies.
- BU procurement project managers: Organizations with many different BUs or plants also need a BU purchasing organization. They align and get approved the BU purchasing strategies and make sure that the BU procurement projects are on time. They are also the purchasing link between the corporate procurement lead buyers and the BU, where the BU business projects are. It is important that the matrix between the BU procurement organization and the corporate lead buyers work well with clear governance and communication structures.
- Procurement centre of excellence: Certainly also for larger international organizations you need a center of excellence (COE) procurement section that takes care of overall procurement strategies, alignment, structures and processes. They also take care of important subjects like supplier code of conduct, procurement process/system improvements, risk management, procurement staff training, procurement KPI management, etc.
What organizational structure do we need?
Do we need a central or decentralized procurement organization? When targets are high or budgets are tight, the pendulum in organizations swings to centralized control. When the dollars are flowing, the focus shifts to customer or BU service and more decentralization.
The overall trend is clearly in favor of a centralized or even better a center-led procurement organization to be able to know the global supplier market, reach best results via bundling and have a high negotiation power with selected suppliers and still be linked to different BU strategies.
What is a center-led procurement organization?
A center-led model of procurement is where a procurement center of excellence (COE) focuses on corporate supply chain strategies and strategic commodities, best practices, and knowledge sharing while leaving individual buys and tactical execution to the individual business units provides the best of both worlds—it has all of the advantages of the centralized and decentralized models with minimal disadvantages.
The center-led model, built on cross-functional teams that represent all of the key divisions and business units, allows for the creation of flexible supply chain processes and commodity strategies that can be tailored at the local level when necessary to adhere to local regulations or take advantage of local markets or tax breaks. Corporate spend can be fully leveraged on strategic commodity categories well-suited for centralized sourcing and non-strategic categories not suited to centralized sourcing can be handled by the individual business units. Operational efficiencies increase and overall operational costs decrease and the organization maintains the ability to react quickly to unexpected changes in supply or demand. Best practices can be shared easily throughout the enterprise, maverick buying significantly reduced, and performance maintained at a consistent level.
Furthermore, a recent study from Aberdeen Group demonstrated that organizations with center-led procurement considerably outperform their non-center led counterparts in both spend under management and supply cost reductions achieved. Center-led companies reported more than twice as much spend under management than companies with a decentralized structure and nearly 20% more spend under management than companies with a centralized structure. Moreover, center-led companies report 5% to 20% cost savings for each new dollar of spend brought under management. That’s probably why more than 75% of companies surveyed expect to have either completed, or started a transition to, a center-led procurement organization by 2008. However, with that volume of savings, why wait?
Above organizational structures and secrets will result in a procurement function that can make a real difference in your group and create additional competitive advantages. To achieve this an experienced global CPO is required to lead and manage this change
This article first appeared on LinkedIn.
A note from the author: Nis-Peter Iwersen, Global Procurement Consultant
I am a global manager with multicultural experience from working in several countries: Asia (including China and India), UK, Germany and Denmark. I have had a successful career as head of global and regional procurement functions in larger industrial and automotive companies, transforming them into world-class functions. My focus has been to develop, align and execute successful procurement strategies and significantly improve profits/cash flow with a strong supplier base in high and best cost countries. I have developed procurement into a strategic internal business partner and enhanced leadership skills to really make a difference in the business.
Now I am available as an interim manager or full time to use my global skills and competencies to help other companies to transform their procurement function and obtain visible financial results. Please connect with me via LinkedIn.
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