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Did Procurement institutionalize the wrong things?

July 10, 2014

Purchasing was a largely administrative discipline that ensured orders were placed and goods were received. In the last 30 years, it has changed its name, matured, specialized and become inextricably linked with the concept of ‘savings’.

At the beginning, that journey made perfect sense. Fragmented buying authority meant that there was little control over prices paid or sources of supply. The opportunities to consolidate and to root out inappropriate – even corrupt – relationships were obvious. But once control was established, the on-going ability to eke out continued ‘savings’ becomes rather more debatable. Certainly there are some opportunities – for example, through innovation or revised procedures, even sometimes through dramatic new sources of supply.

But it may be that institutionalized procurement based on negotiated savings is actually costing money because it is now focused on the wrong thing.

In indirect procurement (the acquisition of services, solutions) and major capital projects, the evidence increasingly points to the fact that organizations often end up buying or commissioning the wrong thing. The negotiation is a battle over the wrong costs and the wrong terms. ‘Savings’ in this case are more a measure of reduced waste than true value.

And then we move to the post-award phase, where control and performance management frequently move back to the business unit or project team. This is when negotiated savings are often eroded or disappear. Many factors contribute – poor control over invoicing or deliveries, weak change procedures, failure to adequately test, missed opportunities for alternative or lower cost supply etc.

Some organizations have grasped the need to build ownership and quality into the entire make-or-buy acquisition process, but many have not. They have instead institutionalized Procurement around a rigid process designed to deliver theoretical savings, which actually far too often ends up costing the business money. It is time to break free from this trap and to focus activity on optimizing the right requirements and ensuring the right outputs and outcomes.

 

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