Streamlining Indirect Procurement

By Lakshmi Narayanan, Johnson & Johnson

Given the economic concerns in various countries across the world, spending has become a much sought after word, from the top government officials to the ordinary citizens who pay their taxes regularly. In the last few years, corporations and public sector enterprises have focused on streamlining their operations, across the spectrum, be it sales, manufacturing and surprise-surprise, procurement! 

In traditional manufacturing companies, Indirect Procurement was rarely streamlined by top management. However, there were exceptions by some of the smart folks, who realized that there is money to be made (literally speaking!) through this gold mine. There seems to be a sudden interest in some of the finance communities towards monitoring the percentile contribution by indirect procurement of goods and services towards operating expense of a firm. 

Corporations have started engaging with their indirect procurement leadership teams to streamline spending. However, much more needs to be done: 

1) Budget Visibility

The age old philosophy of saying, "I gave you money, but you didn’t spend it, so you get lesser next time," may be worth a second look. Why not try the other way around? Instead of saying, "you spent less, I will give you less', why can't we think, "I gave you money, you spent less, you know what, you get a little more, because, you exercised prudence even with sufficient funds and that makes me comfortable in providing you more money, as I believe, you will exercise the same level of prudence, even with the extra amount". 

It would offer substantial rewards, if budget holders are encouraged to save money and rewarded with extra funds for other projects, for making the effort to save money in spite of having sufficient budgets for the plan. This makes them view procurement as a partner rather than a hindrance. 

2) Category Strategy and Supplier Profiles

Indirect Procurement teams need to have a serious look at their category strategies and their supplier profiles. For instance, it may not be the best idea to have global contracts all the time, when you have better regional vendors fulfilling the demand. Further, let's be more open to having smaller vendors in some of the categories which are usually governed by global contracts. It would be very interesting and worthwhile to note that large scale vendors play on the economies of scale, they appear (and often are) bureaucratic and some times, the very thought of having to pick up the phone, makes the procurement manager give a long sigh and a shake of his/her head. One of the top management Gurus, Ram Charan used to urge business leaders to think like street vendors. The point is, don't bring in unnecessary complexities into the system for execution. 

Many a times, some of the best names in the industry have surprised consultants on the amount of information and competitive intelligence they have on vendors and market movements. Procurement Managers, don't have a clue of some of the basics related to cash flow, balance sheets, income statements, operating margins and net margins. We all use fancy terms and terminologies, but might be unaware of how a vendor's pricing is covering the net margin. One of the biggest headaches is the vendor base tail. This one particularly seems to be the toughest. Some of the top companies have no control over their vendor-base. What's funnier is the fact that two business divisions with the same type of requirements, do not want to use the same vendor. Why, because change management is not something they are used to. 

3) Stop being Region Centric, get Global

Talk about this topic over a cocktail session and you hear some of the most outrageous stories from procurement folks. Many a times, a global contract is charted out in a region by the procurement folks there, without even taking inputs from local branches in other geographies on its overall efficacy. Then, the so called global vendor is made to operate in areas where he is uncomfortable, for which he charges a hefty margin. Since the local procurement has no visibility or very limited visibility, there is nothing much they can do. 

4) Streamline Operations

Category teams along with operations and sourcing teams should have a serious look at the category, commodity structures along the content of POs. A retrofit for a category, which has no impact if a PO is not issued, is a recipe for disaster. Remember, that Procurement’s job is to facilitate the day to day business operations without compromising on quality of a deliverable. Have a realistic look at commodity codes, UNSPSC is a fantastic guiding document, but use it and customize it to the organization needs, make it more relevant and simple to understand for the users. There is this needless obsession with using some commodity codes which absolutely makes no sense to the business. While engaging in spend analysis, these codes, don’t give any visibility whatsoever, to the transaction engaged in. Most importantly, start using e-sourcing tools effectively. Growth oriented vendors love these tools, as it saves tremendous energy, time and effort.

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