Q: My boss has given us the go-ahead to take a more European approach to how we buy. Currently, we have procurement responsibility for only one country. What issues must I take into account, and what is best practice?
A: Culture and politics are among the issues to consider. The detail of both is unique to your company so the first advice is to work out what suits you and not simply copy what others do. Next, understand precisely what your CEO means by “a more European approach to how we buy.” Does this simply mean some Europe-wide aggregated deals, or is the aim to raise procurement’s profile and impact in the other businesses to the same level that you have achieved in yours?
Whatever you conclude about the CEO’s intentions, you will need to reorganise procurement activity. The two choices are to centralise procurement tasks, especially the critical ones, or to create a European procurement network with central leadership but with nominated businesses leading specific procurement strategies on behalf of the network.
The choice also depends on what benefits your CEO expects to see in the near future as proof that the change is worth making. If the emphasis is on cutting costs now, urgently centralising key deals is probably the best way to deliver short-term results, although in future this could constrain procurement’s impact in the company and lead to people in the outlying businesses feeling disenfranchised.
On the other hand, better financial performance may be seen as coming not from cutting costs but from creating a superior cross-company procurement-led value acquisition process. If this is the case, the next steps are to build the network at the same time as working on two or three key supply deals that have the potential to deliver quick wins.Both choices require absolute buy-in from the different procurement teams and their managers if you want to succeed.
Lastly, I recommend that the people in the European procurement teams are involved in your deliberations (or at least kept in touch with them) as much as possible. Don’t wait until you have reached conclusions before you spring them on your colleagues as a fait accompli.
Q: Today’s volatile supply markets and the increasing number of company failures emphasise the importance of effective procurement risk management (PRM). How can we ensure that we cover all the angles?
A: Many good things are written about specific aspects of PRM, much of it embodied in major project contracting wisdom. What is often missing, though, is a way of surveying the whole supply scene to reveal where the risks are lurking. As one CPO put it to me: “We are good at reacting to issues when they arise but not good at populating our risk register in the first place.”
I believe 80 per cent of effective PRM is about identifying the “at risk” situations in the first place, so I suggest you survey five landscapes where risks may reside. The percentages (in brackets) resulted from benchmarking between several companies and indicate how well prepared they felt to handle risks in each of these areas:
Procurement process (71 per cent).
External dependencies – eg supply chain robustness, supplier viability (57 per cent).
Management controls (54 per cent).
Market conditions and behaviours – eg competitive or not and supply availability (45 per cent).
Ability and agility to handle unexpected events (40 per cent).
However, all five areas need attention and none is less important than another. Each contains undetected “at risk” situations that had catastrophic consequences.
To find unexploded risks, distinguish between what is at risk (ie, exposed) and the possible event that can do damage. For example, profit margin is exposed in the event that supply costs escalate out of control. Then connect these factors with the following equation:
Being at risk = (exposure x event) x distinct probability x no mitigation
Just as fire is extinguished when fuel, oxygen or temperature is removed from a conflagration, so removing or reducing one or more elements in the above equation means the event is not at risk.
Note, however, that this does not require all risk to be eliminated. Effective PRM includes accepting some risks but monitoring circumstances to avoid being caught out if things change. Other situations can be left at risk, but set up contingency plans should risks materialise and, where real trouble lurks, take urgent action followed by regular audit.
Searching the five risk landscapes will ensure that you cover all the angles.
Dr Richard Russill (www.russill.com) is a business adviser and writer, specialising in supply, cost and relationship management