Have Procurement Practices Been Self-Defeating?
Looking back over the last 10 or 15 years, many proclaimed the birth and maturing of the ‘procurement profession’ and predicted a steady rise to ‘the top table’.
But in truth, how much progress has been made? Does an assessment of procurement practices over this period point to sustained improvement, or does it reveal that opportunities were missed and value was destroyed? Indeed, in a recent blog, Guy Strafford asked whether the word procurement had become ‘toxic’, perhaps reflecting his own anxiety over the future of the function. The volume of replies suggests that a large number of practitioners share that concern.
In my view, many procurement functions have indeed been led down a blind alley. An unrelenting focus on short-term savings destroyed valuable relationships, introduced hidden costs and complexity and has done little to develop sustainable business practices. Procurement associations and major consultancies have conspired in promoting the latest fad – commoditization, compliance, category management, low-cost sourcing – to drive the next wave of nominal savings, without apparent analysis of business impact. And now, when many of the claimed benefits are shown to be bogus, we head in the opposite direction and pursue value-based procurement, on-shoring and supplier relationship management.
The economist John Kay offers an excellent example of the effect of recent wisdom in an article in the Financial Times. “Sometimes a spot of collusion can be a very good thing” is a marvelous expose of how the drive to lower prices has increased complexity and costs. He points to the fact that the buyer’s judgment has been driven to focus on the headline price, which may disguise the reality of true cost and quality. It has driven suppliers to hide extra fees, to fight for compensation on every change and to skimp on quality because it has no apparent value. Loyalty also has no value, because it was discarded in the scramble for savings, and therefore long-term customers pay a premium to subsidize the special discounts offered to the new arrival. “The company that offers a fair price loses business to the company that provides the misleading tariff,” is John Kay’s conclusion.
For many Procurement groups, what happened after they claim their savings became of little relevance. And Sales organizations adapted to this new world because short-term relationships demand far less in terms of honesty and on-going support.
Sustained, long-term relationships do have value, They create organizations that work in synergy, with shared interests and benefits. Yes, they require discipline and oversight, just like every other form of human relationship. But the wisdom that drove Procurement down the path of short-term cost-cutting has much to answer for and much to recover from.
What is your view? Has Procurement been steered in the wrong direction? Where should it go next?