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Posts Tagged ‘Indirect Material’

I came across an excellent article on CPO Agenda written by Tom Lawrence, strategy director at European procurement specialist buying team.  Those of you who have read my earliest posts on procurement branding will understand my frustrations and aspirations of my profession.  If you are keen in hearing another person’s views, I have taken the liberty to honor Mr. Lawrence’s work by copying his article here.  I will read it again and again as it echoes my views and vision exactly.  For those of you in my profession who would like to get in touch with Mr. Lawrence and his consultancy, please feel free to visit his company’s website.  The bold formatting is done by myself in highlighting the parts that resonate with me most.

 

What’s In A Name?    By Tom Lawrence
 
“The profile of indirect spend has grown considerably in recent years, but it is currently receiving more attention than ever before. There are two principal factors behind this rise.

Businesses are struggling to grow their top-line revenues. While forecasts do predict growth, this is weighted heavily towards 2013 and beyond. The outlook for the next two years is very sluggish. Therefore, to increase shareholder value, organisations are focusing on the bottom line, and on cost management.

Procurement is making headlines. Three recent government reports – Sir Philip Green’s efficiency review, the Strategic Defence and Security Review and the Comprehensive Spending Review – have turned the spotlight firmly on procurement and the consequences of not managing it effectively.

Procurement has come a long way in the past 20 years. However, the journey is far from complete. The renewed focus presents us with an opportunity to redefine procurement as a key strategic support function at the very heart of business. Yet indirect procurement’s value is frequently misunderstood, and this ambiguity leads to business leaders undervaluing it.

There are several fundamental questions which, as a profession, procurement simply does not provide consistent answers to. If we are unable to clarify these issues ourselves, it’s no wonder ambiguity occurs elsewhere.

It’s all in the name. First, perhaps surprisingly, is the terminology that we use – indirects, overheads, goods not for resale (GNFR), and non-core. All these words are both negative and imprecise. Indirects are simply the opposite of directs. The same goes for non-core and core, GNFR and GFR. Using only negative terms immediately relegates them to the second division, where they are perceived as secondary and unimportant, if not irrelevant, when in fact the complete opposite is true. Procurement is crucial. Without it, an organisation simply cannot function.

We need to shift fundamental perceptions, replacing the perception of procurement as a cost to one where it is valued as a business-essential activity. And it might be time to adopt a new name for this activity – one that reflects its importance and which will help to change mindsets. At buyingTeam, we have been using the term ‘Enabling Spend’ for several months.

If you look at text books or read market research to answer the question ‘what is procurement?’, you will find much around the source-to-pay process (eg, supplier relationship management, contract management, strategic and tactical sourcing, spend analysis, etc.). All of which is true and accurate. But business engagement – a key ingredient for successful procurement and an essential catalyst, in fact – is almost completely ignored. Procurement’s potential is released when it looks not only outwards to the supplier community, but at its own organisation, acting as an internal consultant or analyst, challenging and influencing behaviours, business rules and ways of working.

Beyond an almost cursory acknowledgement of the need for change management, business engagement is ignored by most textbooks and research and, to be quite frank, by many procurement functions. Procurement will only ever be viewed as a function to secure the best deal if that is all it focuses on, or all that it is tasked to achieve.

There is no common or industry-wide understanding of the areas that make up Enabling Spend. In some organisations, professional services such as audit fees or bank charges, for example, fall outside the remit of procurement. In almost all of the organisations we work with, there are areas of spend over which procurement has little influence, and these can include large spend marketing and IT.

The function may be engaged by the business to negotiate a deal, but all too frequently buyers are not trusted with any further involvement. The root cause of this attitude is the ongoing lack of understanding, even among the CFO community, of how procurement’s principles should be applied to all areas of spend. This is a missed opportunity.

What works for direct procurement doesn’t necessarily work for Enabling Spend. Enabling Spend contains hundreds of diverse categories, with thousands of suppliers serving a very wide range of stakeholders, all of whom have different needs. In comparison, directs has far fewer areas of expertise, suppliers and stakeholders. So a totally different approach is needed – yet many organisations apply their directs approach to Enabling Spend.

The range and depth of skill sets that Enabling Spend requires, – such as commerciality, change management, communication, procurement and deep category knowledge – are vast. ‘Best in class’ is a misleading concept. What is right for one organisation is not necessarily right for another. Procurement must be tailored according to an individual organisation’s culture, structure, profile and strategic aims to deliver the best results. Rather than ‘best in class’, a more useful question to ask is: “What do I need?”

Which brings us to procurement outsourcing. Even here there is confusion. Procurement outsourcing has come to mean different things. To many people, it involves shifting work wholesale to low-cost countries using technology and streamlining processes, running the same processes for less money. It’s all about efficiency. Yet true procurement outsourcing – and where multiples of the value achievable through efficiency are possible – is about how to do procurement better. The benefits are all about effectiveness.

Given all the above, it should come as no surprise that business leaders remain unaware of what is achievable by getting this right, and are therefore failing to prioritise it above other initiatives.

Finally, organisations are simply not investing enough in the management of their Enabling Spend. This is certainly preventing large elements of the above from improving, and is possibly the root cause of much of it. In our experience, procurement can and should be generating a return on investment of between 8 and 15 times. This is a huge benefit and one that substantially outperforms the ROI generated by most other investment decisions. Moreover, it goes straight to the bottom line. We see time and time again that the opportunities to improve shareholder value and operational performance are great – and way beyond the expectations of the senior executives.

The value that most procurement functions deliver is simply not good enough. Yes, much of this is due to the lack of investment in procurement. Yet we, as a community, must shoulder our fair share of the blame.

If procurement is to take its rightful place as a key strategic support function and be recognised as one, it’s time for us to address some of these fundamental issues. In doing so, we can continue to push procurement to front-of-business leaders’ minds as a powerful strategic asset that can deliver real business improvements.

The time has come for us to raise our game and, in doing so, release procurement’s true potential.”

If you have read my earlier posts, you will remember that I have written about delivering solid ROIs to my employers (my commitment is 7 times and up, comparing to Mr. Lawrence’s 8 to 15 times), as well as constantly expanding our span of involvement to areas of above-the-line marketing, consulting, sponsorship and professional services so as to further maximize the author’s definition of “Enabling Spend”.  If you are interested in joining my (and Tom’s) vision of “raising our game”, I am more than happy to hear from you!

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Corporate buying is not that different from us shopping for ourselves or our families.  When we shop for the latest fashion must-haves from I.T., H&M or Lane Crawford, we know we are getting our needs fulfilled, whether they make us look ravishing, keep us warm for the ski trip coming up, or just means of getting ourselves out of depression.  There are also purchases which we count them as investment in our everyday lives and work, like a flashy suit, a laptop or educational games for our kids.  In the corporate world, we buy just about the same things, only for very different reasons.

In the world of procurement, there is a rough distinction of two broad camps.  Intuitively enough, one is called Direct Materials while the other one Indirect.  Direct Materials refer to those that go into the product we sell.  Indirect Materials, on the other hand, refer only to those purchases made for the support of the corporate’s operation.  Take Hewlett-Packard (HP) as an example.  Its direct materials sourcing team will buy from plastics to printed circuit boards to batteries to packaging, while its indirect materials sourcing team will buy labor (staff), office rental, airplane tickets, and TV time spots to support its business operations.

Every corporate has both direct and indirect material sourcing.  Though we do not always see two distinct teams in service companies today (like financial institutions for example), I can still categorize whatever I buy that goes into the services we sell as Direct Materials.  It’s just a definition and no outsiders care about it, except us.

Like fashion buyers or fabric merchandisers you see in “The Devil Wears Prada”, it takes 10 or 20 years of experience for a buyer to be specialized in the direct material categories.  A food buyer, a plastics buyer, or an electrical buyer can be in hot demand depending on where you are located and what experience and supply base intelligence you can bring to the company.  The buyer needs to work closely together with the product development and production teams so as to source the right ingredients for the company’s products, and at the right price.  There are schools, networks, organizations and even unions for this community.  It may not sound too intriguing to the general public, but one can still quite easily appreciate the professionalism they bring to the table.

Unfortunately, I am not in this category.

I am an indirect materials buyer.

All of a sudden, the word “professionalism” shatters into pieces, and a loud piercing scream usually comes right afterwards.  Seldom out of revelation, mostly out of disgust.

“So you mean like… you are buying pencils?”

“Oh so you must be responsible for all those crappy knockoff Post-It notes they make us use now!”

“Get your hands off MY printer!”

“You just do NOT understand how bad the company will look if I am seen coming out from a HolidayInn by my clients!”

“What? You make us fly Korean Air?????”

Well, if answering what I do hasn’t bored people to death in the first place, these questions will definitely kill any cocktail party conversation.

Hmm… Can I yell “Trick or Treat!”?

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