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Have Procurement Practices Been Self-Defeating?

September 9, 2013

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?

  1. Excellent points. Certainly a short sighted approach by many in our own profession leads to immediate “savings” over long term economies. At the same time, business in general has moved toward the quarterly report, and what the company profits look like over the short term horizon.

    Because purchasing ultimately reports to the CEO (sometimes through operations or finance) we’ve also been dragged into this myopic outlook. Far too many job openings include the requirement for month over month reductions in price and say nothing about long term savings on total cost of ownership – a concept that sometimes seems foreign to those outside our discipline.

    Perhaps we’ve done a poor job of educating others in the value we can bring to that top table?

    • Thanks for your comment- and yes, I think your last point is exactly right. To be taken seriously, any function must have the ability to determine its own status and destiny, not wait for the call from on high. Value-add has to be proven as an item over and above the business as usual expectations of management; it must be something we take to executives, not wait until they ask for it.

  2. Another difficulty is that, while price is easily measured, TCO is harder to quantify. People tend to measure the easy and ignore what can’t easily be put on a spreadsheet.

  3. Great post! Procurement is traditionally thought of as a support organization, but my question is has Procurement been seen too much as a “support” organization and we’ve lost leverage? Are we now treated more as a “vendor”, processing requests from internal business owners? Is it time to rethink our position as a “support” organization?

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