Procurement is at the heart of business operations. In examining the imperatives of right quality, quantity, source or supplier, place and time, I propose that these are like balls the procurement professional has to “juggle” expertly without dropping any.
This does not mean that you will deliver all of them in every single transaction or project (though that is the objective), but you will at least be aware of which ones suffer in your attempt to drive value.
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You will also engage your stakeholders knowledgeably and inform them of the risks/benefits of pushing certain targets.
What is the right price?
To the unskilled procurement employee, any reduction in a quoted price is seen as value.
To accurately determine the right price, we need to understand the cost structure. What are the cost elements of the Supplier’s price? What factors influence those costs, and how many of those factors are under their control? The Industry Analysis tool is one way to gain insight into Supplier cost drivers.
Then we must do a detailed calculation on Life Cycle Costs or Total Cost of Ownership (TCO). acquisition costs (initial costs, transport costs, installation/commissioning costs, initial cost of spares, training costs); operation and maintenance costs (supervision, operator wages/salaries, energy costs, cost of materials used, insurance, servicing costs, wear and tear of spares, storage costs, maintenance of materials, depreciation); and lastly, disposal costs (including environmental impact and sustainability requirements). Where required we might need to show the opportunity costs of not choosing any of the other alternatives.
The price at which an item is procured is important because it is quite visible at the point of purchase, but hidden costs can rubbish all your hard work if you do not consider them in your evaluation of value. Value is often arrived at through collaborative exercises with your stakeholder.
Procurement cannot define value exclusively. If your internal customer places other business priorities above price, you must pull other levers in that transaction to deliver value.
Savings has always been the standard by which procurement performance is measured, however, an ability to manage all the imperatives mentioned in the first paragraph (juggling the balls), will ensure that you come out with a satisfactory outcome. Using the correct parameters, a financial value can be derived for each element of the five procurement imperatives of quality, quantity, source or supplier, price, and time.
If you can develop a balanced scorecard that attributes a figure to each one of these elements, you will have some positive results to show in your annual performance evaluation.
I remember having a discussion with my Supply Chain Director in one of my previous roles, and he asked me if I thought procurement was a Cost Center or Profit center.
My answer was as follows: Tell me what you consider as “VALUE” to you, and I will deliver on that. In other words, don’t pay me a salary or a bonus, until I have “saved” the money you are to reward me with.
Value must be defined in collaboration with your stakeholder. Do not sit down and pressure yourself to deliver “savings” when that is not what your stakeholder wants.
Focus on value and ensure that your impact is felt across the organization. You will be better recognized as a valuable business partner and your influence will grow if you adopt this approach.
Harold Nwariaku, FCIPS is branch chair, CIPS Nigeria and lead consultant, Harold & Co Procurement/Supply Chain Consulting
Email: [email protected]
