Anyone who has been around procurement very long will encounter or at least hear about some supply management failure, whether it is a negotiation that went badly wrong, a buyer who specified the wrong item, or even a juicy case of procurement-related fraud.
So says Peter Smith in a guest column on the pages of SupplyManagement.com, a web site of the Chartered Institute of Procurement and Supply, a similar organization in the UK to the Institute for Supply Management in the US. Smith is a past president of CIPS and author of a recent book on procurement.
Smith then offers five tips to help current procurement managers from finding themselves somehow involved in a procurement failure of their own.
1. Define clearly differentiated procurement processes
Such processes are sometimes discussed in terms of a target operating model or TOM. Whatever it is called, to maintain process discipline, organizations need to formally document how managers should buy goods and services.
“It should cover all eventualities, from day-to-day ordering of stationery through to buying the most complex IT systems or construction projects,” Smith says.
“Usually, an organization needs variants within the overall model, so that the process is defined differently depending on the size and risk of the purchase,” Smith adds.
That approach can result in buying low-value, low-risk items as simply as possible, with minimal and sensible controls, while complex purchases are subject to more rigorous approaches.
Even many large companies do not have these standard operating processes in place for procurement, Smith says, increasing the risk of a failure.
2. Competition is great – take advantage of it
Buyers need to make sure there is real competition for each purchase cycle, Smith says.
“Even when we want to develop close, long-term relationships with suppliers, having the possibility to substitute a supplier undoubtedly keeps any firm on their toes, even if you then choose to work with them closely and collaboratively,” Smith adds.
Competition is also effective protection against fraud, Smith notes.
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3. Think hard about incentives for unfavorable behavior in contracts
Companies will get what that the incentivize suppliers to do.
For example, open-ended consulting contracts don’t provide an incentive for firms to finish the job.
4. Don’t relax once the contract is signed
Many practitioners still think their job is done once a contract is signed, Smith says.
“For all but the most basic contracts, success is absolutely dependent on what happens once the supplier is actually delivering the goods or services in question,” Smith observes.
Contract and supplier management requires robust processes to keep detailed records and to support proactive performance, risk and value management, Smith adds.
He also says companies often under-resource contract maintenance activities.
5. Everyone in the buying process must be appropriately skilled
This is the most important recommendation of all, Smith says.
“When assessing real-life case studies, few failures came from technical procurement department problems,” Smith says. “Almost always the issues were broader and involved different players within the process” – often stakeholders outside the procurement organization.
“The future role of the CPO (or procurement leader) must therefore focus on what we might call organizational buying (procurement) capability, not just what goes in in their own function,” Smith concludes.
A basic but useful set of recommendations from Peter Smith.
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