5 milestones to Sourcing Excellence

“Sourcing excellence = professional knowledge + market knowledge + product knowledge” Jonathan Dutton

As per a recent study conducted by IACCM, 88% of Contract Management professionals indicate that improvement of the quality of the Requirements was the number one factor to improve contract performance in their organisations (IACCM – Contract and Commercial Management – A Operational Guide).

I have discussed the importance of understanding and clarifying the scope with your vendor as part of the Iron Triangle (here).

As we all know, having incomplete, erroneous or unexamined specifications for a product or service category lead to confusion, rework or simply sub-optimum  results.

To be successful, you first need to fully understand the scope and alternatives yourself i.e. what the business really needs and different possible ways to achieve it.

Let’s see some practical tips on how to do so.

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The 5 milestone Road to successful Requirements’ Identification and Sourcing Excellence

1) Know your stakeholders

First of all, you need to know your own stakeholders.

Anyone, the project affects directly and indirectly is a stakeholder.

Some of them are affected more than others and some of them will have a greater influence in determining the success of the project. So, if during the procurement process, you miss out on engaging with a stakeholder, you then risk project failure.

HOW to: Brainstorming and looking at the process and usage of the product and service should reveal who you need to approach.

2) Know you business objectives

You also need to know your business objectives.

You should embrace a different approach if the business objective is a strategic one e.g. entering a different market, rather than a tactical or an operational e.g. improving a process or removing cost.

Moreover, different stakeholders will have different motives and will probably target different outcomes in order to consider the project outcome successful. These need to be identified and defined.

Hence, the stakeholders need to know and sign off on the final defined business objectives.

HOW TO: Use interviews and questionnaires to define the requirements, needs and expectations from each one. Then ask them to review and sign off on the final result.

3) Understand the Specification

This is self evident. If you cannot articulate the functional and technical specifications then you probably do not have a good grasp of the project and would not know how to evaluate the suppliers.

Try defining this using AMPP technique (Ask, Mirror, Paraphase and Prime) and see that you have a good understanding of it and its implications.

Moreover, check that the functional and technical requirement are aligned with the business objectives and that at the end of the process all stakeholders have a high level of confidence of the final defined results.

HOW TO: A number of effective communication techniques can be found in the book Crucial Conversations by Kerry Patterson et al.

Phrases like e.g. “Please let me know if you see this differently….. If I understand correctly……. Is this what you mean…… In my mind this means that ……..” can help.

Moreover, make use of a requirements checklist, questionnaires, interviews, roundtable discussions and brainstorming sessions. Research and benchmarking are tools you can also employ.

4) Agree the acceptance criteria

After the 1-3 steps are complete you can crystallise from the feedback provided the acceptance criteria. These can be categorised in three categories:

i) Hurdles (the Must Have criteria) e.g. ISO certification, Insurances’ cover, No accident record.

ii) The Essential Requirements (for which the vendors can be graded on a scale) e.g. quality, price level…

iii) The Good to Have (additional attributes that may not be immediately required but an extension of the service) e.g. operations in another state or territory that may be a target for your company in the future.

Moreover, the project team needs to have a clear idea of

A) What is the procedure of picking a bid
B) What are the quantifiable, measurable criteria and
C) How assessment and grading will be made.

5) Change Management Process

Scope creep, the process of evolving and ever-changing requirements, is a major cause that many projects fail e.g. run over-budget, over-time.

However, ignoring that there may be changes is not an option.

So, especially for complex and longer on duration projects, a clearly defined practical change management process needs to be defined in order  to have a good chance of been successful.

Based on mutual trust a clearly defined process for approaching changes identified (which can be clearly linked to the business objectives) is key.

HOW TO: An effective way to do this is to agree to change control documentation and a sign off process.

Moreover, great tips on the 5 levels of building trust can be found in the book The Speed of Trust by Stephen M.R. Covey

 

The Speed of Trust - 5 Waves

The Speed of Trust – 5 Waves

 

In essence, working on your internal and external relationships is the only way that will provide the necessary trust that is the bedrock on which any change management process can be based on.

 

RELATIONSHIP MANAGEMENT

The Requirements specification  as well as the overall Procurement and Contract Management process are heavily reliant on good relationship management skills.

Ron Larimer in his article My three issues with the Seven Step Model has made this very lucid in the Procurement model he supports:

The Sourcing Wheel

The Sourcing Wheel

 

So, in thinking about Sourcing Excellence I suggest that Jonathan’s quote needs to be modified a little to include the key element of trusting relationships.

Sourcing excellence = professional knowledge + market knowledge + product knowledge + well established trusting relationships

 

What are the successful ways you use to define requirements in your Procurement process?

 

Procurement as a differentiator – Part 3 (what kind of differentiation?)

In a previous post (Part 1) I explored an expanded definition of what Procurement is becoming and then how it can become the link between Customer Demand and Supplier Innovation.

Then (Part 2), how Procurement’s potential could reinforce the basic Strategies of Organizational differentiation.

In this post I will explore in more detail what this differentiation could look like.

Innovation Anna betts

C. PROCUREMENT AND DIFFERENTIATION

The argument that Procurement can become a key Differentiator is supported by the fact that Innovation is a key contributor of business growth and that Procurement can be a great curator and creator of Innovation.

Jimmy Anklesaria in his great book “Supply Chain Cost Management” posits that Procurement should:

“leverage [the] collective intelligence of the extended enterprise (your customers and their customers, your suppliers and their suppliers), and generate substantial results”.

and also that

the next generation of cost management is: “breakthrough solutions”.

C1. COST LEADERSHIP AS A DIFFERENTIATOR

Jimmy Anklesaria also highlights the fact that genuine cost management is different from cost cutting.

Indeed, genuine Cost Management does look at the business as a whole and asks questions like:

-Do we really need this service?

-What is the value this service provides to the business?

-Is there a better way of doing this?

Moreover, he stresses the importance for Procurement to move towards embracing a Strategic perspective as, according to him, successful Cost Management will be the key differentiator in the future:

“So, here we are in the twenty-first century. What will differentiate your firm from its competition? Will it be technology? Or maybe it’ll be quality and reliability? Perhaps speed of delivery? Or excellent customer service? Or do you think your firm is the onoly one in the industry doing e-business? The answer,…, is that nowadays, frequent technological breakthroughs, high quality, reliability, on time delivery, top customer service, and e-business are merely the prerequisites for being in the global race for market share. Today’s customer expects this from a supplier; rather, demands it. And there are enough firms around the world that have overcome the “preliminary rounds” of technology, quality, reliability, delivery, service and e-business.

So, why should they choose your firm?

In a few years the only differentiation will be cost. Companies that best manage their costs through the entire supply chain to bring you the latest technology, best quality with on-time delivery at a price lower than the others will take home the prize-your check. There is no prize for coming second”.

C2. INNOVATION AS A DIFFERENTIATOR

Now, reflecting on the power of Innovation to drive growth we find evidence in Kate Vitasek’s reminder of Solow’s Law that states that business growth is driven by innovation.

Specifically,

“The population and the labour supply grow at a constant rate and capital intensity (or capital per employee) can be regulated. But without technological progress, Solow continued, growth rates for capital, labour and total production would all be about the same. As a result, technological development would be the motor for economic growth over the long haul. In Solow’s model, if continuous technological progress can be assumed, growth in real incomes will be determined by technological progress”. (Kate Vitasek, outsourcemagazine)

But probably the most important contribution Solow demonstrated was that only a small proportion of annual growth could be explained by increased inputs of labour and capital. Just how small? Thirteen percent.

In other words technological growth makes the crucial difference when it comes to economic growth – a whopping 87 percent. Now keep in mind technological growth happens in two ways: product and process improvements.

For both these ways, Procurement can play a pivotal role.

This notion is also reinforced by the view of Cavinato and Kauffman when they detail Technology Advancement (e.g. Product and/or Process Improvement) and Supply Chain Synchronization (e.g. Process Improvement) among the four key trends that will most likely fundamentally shape tomorrow’s procurement practices (here). The other two key trends being Globalisation and Industry Consolidation.

 

CONCLUSION

I think that the above amounts to a strong argument for Procurement to be one of the primary differentiators for the organisations of tomorrow. Utilizing the Procurement function towards clever Cost Management and stimulating Innovation will mean that organizations will empower a yet not fully explored source of creativity and immense potential.

 

Where do you think Procurement will be and should be by 2020?

 

 

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Image courtesy of Anna Betts/ www.flickr.com

 

Procurement as a differentiator – Part 2

In the previous post (here) I explored an expanded definition of what Procurement is and how it can evolve into becoming the link between Customer Demand and Supplier Innovation.

It is important though to also explore the Procurement potential through the lens of Michael Porter’s model of Organisational Success in an effort to understand how the basic Strategies of differentiation could be reinforced through the Procurement profession.

Michael Porter

Michael Porter

B) PORTER AND COUSINS MODEL FOR ORGANISATIONAL SUCCESS

Michael Porter in his seminal book “Competitive Advantage: Creating and Sustaining Superior Performance” describes three generic strategies for businesses.

These are:

“”Cost Leadership” (no frills), “Differentiation” (creating uniquely desirable products and services) and “Focus” (offering a specialized service in a niche market)”. (mindtools)

The above easily brings to mind the airline Tigerair reputed for low cost, 3M reputed for innovation and Qantas which with the formation of Jetstar pursued the “Focus” strategy (niche market differentiation).

Reflecting on this model it is evident that Procurement can clearly respond to 2 out of 3 of Porter’s differentiation strategies i.e. Cost Leadership and Differentiation and can affect the 3rd one.

B1. COST LEADERSHIP

Cost management and cost cutting has been an archetypal quality for Procurement.

 

B2. DIFFERENTIATION

I believe that the second differentiator i.e. Innovation, is the next frontier. Procurement can and is slowly moving

from

“purchasing goods and services at competitive prices”

to

also focusing on cost reduction techniques, improving cycle times, reducing time-to-market, and constantly seeking to exploit actual and potential innovations from within the supply market. 

Moreover, in the current environment, and considering Strategic Supply Management, the Organization should constantly re-evaluate what is core and what could be outsourced. So, Make or Buy decisions will become more common.

As Cousins et al, highlights:

“Supply strategy is increasingly a factor in identifying the organization’s boundaries. Supply management assumes responsibility for developing and implementing supply structures that will sustain the competitive position of the firm” (Cousins P. et al, 2008, Strategic Supply Management)

B3. CAVEAT

The necessary caveat of course is that the Organization views and enables Procurement to function in a strategic and collaborative way, internally and externally, and that the Organization has and is clearly communicating the preferred differentiation strategy it has chosen to all, so, that alignment of goals and business unit strategies is ensured.

 

In the next and final post of this three-part series, I will explore this differentiation could look like.

 

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Image courtesy of Wikipedia / www.wikipedia.com

 

 

Procurement as a differentiator – Part 1

“In 2020, company leadership will likely look at procurement not as a group that focuses on sourcing raw materials, goods and services, but rather as one that sources ideas. Creativity will involve engaging stakeholders in new, innovative ways” -Deloitte, Charting the Course, Why Procurement must transform itself by 2020
Over the recent years, the procurement profession has started going through a transformation from a clerically oriented function to becoming a strategic contributor, embracing supply chain management principles.
Organisations slowly but surely have started investing in procurement, acknowledging the importance of strategic cost management.

So, what would be the next step Procurement should aim for? Moving beyond Cost Cutting, can Procurement become a core differentiator for every Organization? I believe the answer is yes. Let’s have a closer look.

Royce Blair - Starfish - Different

PROCUREMENT DEFINITIONS

Discussing Procurement, there is a variety of different elements to it: Direct, Indirect, Sourcing, Category Management, Contract Management, Supplier Relationship Management, Procurement Excellence, the list goes on.

In the traditional way of looking at Procurement (see below definition) it can be argued that not all these elements can be considered core.

However, if we expand our definition of Procurement from the more traditional approach of:

Procurement is “the overarching function that describes the activities and processes to acquire goods and services involving establishment of fundamental requirements, market research and vendor evaluation and negotiation of contracts including the purchasing activities required to order and receive goods” – purchasinginsight

to also engulf activities such as:

“make-versus-buy decisions, outsourcing and in-sourcing, supply chain management, inter-firm communication, strategy formulation, relationship management, performance assessment, inter-firm networking and innovation scanning” (Cousins P. et al, 2008, Strategic Supply Management)

then it becomes apparent that Procurement has the potential, if viewed strategically, to effectively link customer demand with supplier innovation and thus, change the way we view Procurement’s core elements.

In a practical sense though how Procurement fits in organizational Strategy and why should it be there?

Some thoughts are summarized below:

A) THE LINK BETWEEN CUSTOMER DEMAND AND SUPPLIER INNOVATION

a) Firstly, it is evident that Procurement is the function that forms the contract framework and the supplier relationship.

Hence, provided that the business outlook, targets and organizational vision allows, Procurement is responsible for defining the scope and setting the framework within which the supplier relationship will evolve.

In recent times, the requirement for suppliers to work with the business into strategic relationships (especially, discussing categories of high spend and/or high risk) is slowly becoming the norm.

Contract clauses that require continuous improvement and innovation as part of the contract are implemented more and more.

b) Procurement is also the function that has direct contact with new suppliers.

The business is well aware of what the current suppliers can do (although there may some gaps especially when the contract doesn’t promote sharing of new ideas and incentives for continuous improvement). However, the business does not know what it doesn’t know.

Hence, unless Procurement through its contacts re-assesses the supplier market and re-evaluates of what can be done e.g. what the suppliers’ new processes are and how innovation affects the market landscape, then the fast-paced market space we operate in may constitute the business activities too expensive and/or irrelevant by today’s standards.

It thus becomes evident that it would be very useful, if not essential, for the Organization to make Procurement the focal point of collective knowledge between internal functions and external sources.

Procurement can thus, be placed as the liaison between R&D, Sales and Operations on one hand and Suppliers on the others.

Furthermore, in pursuit of establishing the “fundamental requirements” or specifications for Sourcing the right products and services, Procurement has to assess supplier capabilities and can and should collect and communicate market intelligence back to the business in order for best practices and product development to be fine-tuned.

 

In the next two posts (part 2 and part 3) of this three part series, I will explore how Procurement’s potential through could reinforce the basic Strategies of Organizational differentiation and what this differentiation could look like.

 

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Image courtesy of Royce Bair / www.flickr.com