The easiest way to define Procurement is the acquisition of goods and services. It is a vital part of Supply Chain Management which has evolved from Purchasing which is an administrative function to Procurement which is a more strategic approach to goods and service acquisition. Today, procurement goes beyond that. It also entails good planning and management of the stakeholders who provide these goods and services.
Just like many other aspects of business operations, the procurement process has a lot of risks. If not well managed, there will be a major exposure to losses and poor business performance. Remember, that this article is worth reading if your organisation has a procurement unit. Moreover, who won’t have a procurement unit in 2021. Haha!
Cost
What are the risks involved when we talk about cost? A lot of procurement professionals have been asked by their company to ensure costs are low during purchases. This is cool but is it long term? How sustainable is it? Ever heard of Total Cost of Ownership? I’m not going to define anything here. Let me give you an example. Imagine you want to purchase a car. Option A is $1000 and Option B is $1500. You immediately think that going for Option A gives you a $500 cost saving right? It absolutely does at that time but…. Option A needs $100 monthly for gas and maintenance and Option B needs $40. By the end of one year, you would have spent $2,200 on Option A and $1,980 on Option B. By the end of the second year, you would have saved more than $900 if you went for Option B. So you see, focusing on unit cost isn’t always a sustainable way to deal with cost associated risks.
Quality
A lot of people might say quality is a myth and probably a business school conversation. Again, no definitions. Let me move from cars and come to our homes. Imagine you use a surface pump to get water to your storage tank for domestic water supply. Let me borrow a cost narrative here again since we all like money. You need a float switch to control the pumping of water. You have a low quality option for $20 and a high quality one for $35. And then you say, “Why on earth would I pay almost two times the cost of this for a float switch? Is it not the same thing they both do?” Well, here’s the twist… the $20 one lasts for two months before it goes bad and the $35 lasts for 4 months or more. You would need 6 pieces of the $20 guy per year which will be $120. 3 pieces of the $35 comes to $105. So generally, a good buyer is a long term thinker. Back to the business environment, quality is not a myth and it is paramount to competitiveness. Moreover, the peace of mind it brings gives more time to focus on other strategic purchases and procedures which add value to the company and fosters continuous improvement and growth
Time
The essence of a supply chain is to add value to the customer and today, speed has become very important in production and service delivery. Let’s go to the service industry. Imagine you are sourcing for a building contractor to renovate one of your restaurant branches in a key part of the city. Project delivery time will have to be critical in your selection process. ETC (Estimated Time of Completion) will probably be number one, then quality and then cost. I mean you should only have contractors who deliver top quality in your database anyway. So the only justification to move forward with a contractor with the cheapest cost who has a longer ETC will be that the savings from mobilising that vendor compared to others will be greater than the money lost during the additional period that the branch was closed. For example, if Contractor A says job will take 8 days to complete for immediate branch reopening and Contractor B says job will take 12 days and has a cheaper cost for the renovation. The only justification to select B here will be that the value to customers and savings from using Option B will be greater than the profit that the branch will make if they opened for the 4 days.
Capacity, Culture Alignment and Large pool of Suppliers
Working with suppliers who have the capacity we desire and culture alignment is one thing that many procurement professionals may not pay attention to and to be honest we really need to. Imagine a medium-scale FMCG company who had inaccurate forecasts and planning and had to turn to a supplier to save the day (remember that we are imagining here). They are open 24/7 and so they reach out to a supplier on Saturday morning to supply raw materials to their plants and the supplier says “We do not work on Saturdays. Apologies for any inconveniences caused”. Please tell me who cooked this beans. Now, write this down – NEVER RELY ON ONE SUPPLIER. They will check their supplier pool and ensure they get the raw materials to the plant. If you are reading this and you do not have a large pool of suppliers then you need some more strategic sourcing.
I hope these few points of mine are enough to convince Procurement professionals about the need to ensure risk management for daily activities or processes. We just shouldn’t focus on one or two parameter(s) and then make a decision but should critically look at all the data and how our decision(s) can probably cause harm and how harmful it would be to the organisation.
Thanks for reading guys!
