Commercial Objectives v Technical Objectives in Procurement - Should it really be a battle?

An interesting debate occurred last week with my recent blog about how procurement personnel should really learn how to sell. A discussion materialised covering which skill-set a buyer should have that can add the greatest value and lowest risk to the organisation.

Piggy-backing on the topic (as opposed to discussing the Strategic Sourcing process which I promised last week although it is briefly mentioned here), I would like to reach out to the many disciplines out there, not just procurement, to get their opinion on the subject.

The debate focused on when and on what grounds should the buyer become involved in the procurement process with the objective of purchasing the goods or services that provide the optimal value. This is a very large area but I'll try and break it down.

Firstly, it depends on what is being purchased in the first place. The familiar Kraljic positioning matrix can be used in this case to assist in developing sourcing strategies.

Products or services that are deemed of high complexity with a high level of technical specification are usually categorised in the bottleneck or strategic quadrant. Failure of the correct specification given to the supplier (or the incorrect specification delivered) will result in a 'Supply Risk' to the purchasing organisation/ client. Items such as new cooling fans (mentioned in last weeks discussion), a new IT system or a winch for a crane can be in this category.

Other items can be simpler and more standardised such as items for maintenance, repair and overhaul (MRO). In many organisations these are the high volume/ low value purchases as opposed to those in the 'bottleneck' and 'strategic' quadrants.  Consideration should also be given as to whether the procurement in question is an item that has never been purchased beforehand, a straight re-buy or modified re-buy. Straight re-buy poses significantly less risk to the organisation (assuming the previous purchase was successful!). Conversely, something purchased for the first time will definitely need more control and diligence.

Categorisation of these items, or groups of items, are extremely useful and should be conducted in the planning phase (see diagram at top of blog). This greatly benefits the prioritising of resources, effort and risk. From this a multitude of sourcing activities can be established, each can be conducted at different levels dependent on the Kraljic quadrant placing. This can include:-

  • Which disciplines should be involved in each sourcing process and when, e.g.what level of technical participation and technical approval is needed
  • What information needs to be collected and by whom to assist in the decision making, e.g. spend analysis, needs analysis and supply market analysis for each group of items
  • What supplier pre-qualification criteria is required for each procurement
  • How the suppliers offering will be assessed and agreed, using a selection criteria at the outset with a balance between commercial and technical objectives
  • Agree on a sourcing strategy; duel source, partnership etc
  • Development of the execution strategy; RFQ, straight negotiation or ITT
  • Plan any negotiation strategy and which parties should be involved
  • Create a plan to monitor the performance of the vendor drawing from possible lessons learned

In most organisations there should be procedures in place to govern the above and in an ideal situation there should be adequate time and availability of the personnel involved to make the key decisions. However, in the real-world this isn't always possible. Additionally, the procurement procedures and policy may not cover such areas previously stated. Possibly they are already in place and simply not being followed for whatever reason.

So what then?

Often functions have conflicting objectives. Procurement may have savings to demonstrate that they're performing whereas the end-user (the one actually using the materials or services), also wants to do a good job. From his/ her perspective this is done by completing the task in hand, possibly on a tight timescale, and needs to know exactly what is being bought to achieve this. However, both functions serve a similar objective, to satisfy the needs of the customer/ client and maximise the company's profits.  Essentially all employee's are part of the same team, but are the functions aligned and understand each other to ensure this takes place?

What impacts one function will ultimately impact another. Organisations operating a 'silo' mentality internally will often be inefficient in delivering eventual customer satisfaction. Understanding the needs of each function and their drivers are essential. Over time many employee's pick up certain areas of knowledge and skills due to the interfaces with their own department. Often buyers learn what it is they're buying talking to engineers, suppliers and possibly from in-house training. Technical personnel pick up market knowledge as they become familiar with the suppliers that are commercially viable along with discussions with buyers and suppliers. For example, both technical and procurement personnel could have been involved in negotiations or determined supplier selection criteria together. The amount of shared information being passed over time can add up.

The extent that this exposure of knowledge and skills occurring in an organisation can depend on many variables; culture, individuals, structure, procedure and leadership being a few. However, the trend remains for individuals and departments to become multi-functional and adaptable to the increasingly rapid change of industry and customer demands. The right decision is expected quicker but can also lead to greater risk.

For example, I've seen many instances where buyers have taken it upon themselves to make a technical decision without involving technical personnel. I've also seen technical personnel making commercial decisions without involving procurement. Both scenarios led to sub-optimal value mentioned earlier.

Often when mistakes such as the above are made it's easy to nail down governance of activities and tasks, such as buyers should assume no technical knowledge and technical personnel assume no commercial knowledge. Doing this will lose a whole host of opportunities in the process. 

Of course, there has to be a huge element of trust with each function knowing where the line is drawn. Technical personnel speaking to suppliers? No problem! Often it's required to define the specification. However, that engineer or technician needs to be aware of the commercial (and future security of supply) risks of becoming locked into that supplier and on no account commit company funds without the proper approvals. Discussing commercial terms and conditions with the same engineer? Also no problem! The same engineer or technician may well be the budget holder with a vested interest in costs.

It's important to remember that technical and commercial criteria are interlinked, higher spec = more cost and possibly longer to wait for their goods. The two just cannot be separated.

In summary; proper planning, following correct working procedures and utilisation of appropriate tools will greatly help and can accommodate procurement in purchasing the majority of materials and services. In conjunctions with this, nothing beats good communication, trust and an understanding of each functions needs.

 

Colin R McIntyre - Lean Procurement