Procurement in the Transition of Today’s Global Economy
Rob O’byrne explains what to do and what not to do in regard to sourcing.
Procurement has never played such an important role in the increasingly globalised economy. Has procurement fundamentally changed itself in the past 10 years? The answer is yes. Strategic Procurement can mean totally different things in different industries and sectors. People’s pursuit for bottom-line improvement will significantly impact the way we conduct our business in the local market, the efficiency we deliver through the supply chain, and the return we generate from our investment (ROI).
Highly successful organisations often see their Chief Procurement Officers (CPOs) proactively driving global procurement strategy, sharing responsibilities with COOs and CFOs on value creation initiatives, and deploying global resources to achieve the ultimate supply chain targets.
How should the Global Procurement Councils (GPC) in multinational companies position themselves in the global operations network? GPC was never meant to be a bureaucratic organisation. Instead, it should be an information exchange virtual platform. At the end, a company’s procurement experience and knowledge needs to be highly relevant to the local markets.
The time when Procurement was almost a synonym to Purchasing has long gone. Smart organisations try to get rid of the functional siloism, by encouraging cross-functional coordination with clear responsibilities and effective system supports. Such a cultural change in turn encourages managers and employees to actively take part in the procurement activities with clear guidelines. Do we really care about centralisation or decentralisation as a strategy? No. It all depends on an organisation’s maturity in skill, infrastructure and culture.
What does procurement encompass within a supply chain organisation? A capable procurement organisation should ultimately be able to represent the whole supply organisation (inbound supply chain). Depending on the design of an organisation’s supply chain, today’s procurement activities can permeate into just about every corner of an organisation. For example, BPO (Business Process Outsourcing) in logistics, manufacturing, IT and HR requires an organisation to not only know how to procure or acquire an external solution through cross-functional effort, but also be able to manage vendor performance and ensure the value of the outsourcing solution is sustainable.
Whilst China, India and the rest of the Asia continuously develop themselves as manufacturing super powers, is low cost country (LCC) sourcing a sustainable solution to the western corporates from environmental, customer service and supply chain efficiency perspectives? Recent a few years have seen contraction of outsourcing activities in many industries, even though the outsourcing momentum has not dropped completely due to economical and political reasons.
Clearly, procurement decisions are more and more based on total supply chain cost, carbon footprint impact, other ethical, social and economic factors, rather than just purchase prices. What skill sets are required for the next generation of procurement leaders? It is widely acknowledged that to find and retain highly capable procurement professionals is a difficult issue at different management levels. To some companies, to improve the procurement people’s cross-functional understanding is the highest priority, for sustaining the efficiency of highly interactive supply chain processes. To some others, letting procurement to lead the global supply operations is a tough challenge because of procurement people’s lack of exposure to the global markets. The next generation of procurement leaders should bear the following key characteristics (a) broad cross-functional management experience; (b) sufficient international exposure and multicultural experience; (c) practical system understanding and implementation experience; (d) hands-on process engineering and reengineering experience; and (e) great coaching and leadership capability, etc.
As the transition of global economy quietly happens, a company’s procurement function should adjust its geographical and functional boundaries, to reflect its contribution to the total supply chain. New generation of CPOs will present themselves as key drivers and enablers of long-term corporate strategy. Let’s not forget that there is still a long-way to go, for most of the organisations to transform procurement from a purchasing-savvy culture into a supply chain-savvy culture.
Logistics Bureau’s Procurement Consultants typically encompass the following three streams of services
Stream 1: Procurement Strategy
Global Procurement Strategy, Procurement Strategy Deployment, Global Procurement Network Design and Implementation Procurement Review, Inbound Supply Chain Review, ERP System Implementation, Procurement Organisation Restructuring
Stream 2: Procurement Operations
Purchasing (Direct, Indirect, MRO and CAPEX), Inventory Management, Demand Planning, Forecasting, Supply Planning, Sales & Operations Planning, Procurement Training, Vendor Base Management, Contract Management, System Implementation and Integration (ERP, SRM and others), Global Third Party Logistics (3PLs) Service Acquisition, Smart Sourcing, , IPO (International Procurement Office) and Offshore Sourcing Centre Implementation, Procurement Project Management, Purchase-to-Pay Process Reengineering, Supply Risk Management, Commodity Management, System Integration (SRM, ERP and Others), Procurement Scorecard.
Stream 3: Procurement Performance Measurement
Procurement Performance Benchmarking, Inbound Supply Chain / Procurement Metrics Introduction and Procurement Performance Measurement Systems
Global Sourcing – Contemporary Procurement Challenges
In the past few years, Global sourcing has been more of an economic as well as a political agenda, to many large corporates. As time goes by, more and more companies find that the supply chain issues associated with an outsourcing program have often been under-estimated. The crux of the problem is that many seemingly smart outsourcing decisions were based on low acquisition or purchasing cost, rather than total supply chain cost.
Here I want to share eight key procurement challenges that we and consultants are facing in today’s global sourcing world.
- Low supply chain responsiveness Challenge 1: A low level of supply chain responsiveness is often observed when goods and services are purchased from remote countries.
Supply chain executives need to analyse opportunities from a skills, experience, organisation and cultural perspective, to determine what process, procedure and systems are to be put in place to deploy an agile supply chain.
- Increasing logistics cost Challenge 2: High logistics costs often reduce the benefit from low cost procurement: Costly global transportation and excessive global inventory (static inventory and pipeline inventory) often cripple the company’s confidence in sourcing from remote countries. The good old theory of “total cost of ownership” should always prevail.
- Unstable supply Challenge 3: Many of us have experienced supply disruption as the result of increased buying competition and increasing material and energy cost in the common low procurement cost supply markets? Developing supply alternatives should be a continuous task to procurement managers and consultants.
- Quality and environmental concerns Challenge 4: We, as buying companies, often overlook the importance of introducing stringent control and audit mechanisms at remote supply sites to ensure high quality and environmentally sound products and services are being purchased.
- System deployment dilemma Challenge 5: Failure in providing supply chain visibility can detrimentally affect your procurement program. Today’s supply chain planning and execution tends to be heavily IT driven. We often ask ourselves if we are driving the system or the system is driving us? We can deploy a perfect ERP or Advanced Planning system today, but we can never guarantee that it solves the supply chain coordination issues tomorrow. While we are designing an IT platform, let’s not forget the basics – today’s supply chain issues are still largely people and process issues.
- Insufficient supply chain coordination Challenge 6: How should we coordinate along the supply chain? Internally, the interaction across your demand planning, procurement, purchasing, R&D, manufacturing operations, warehousing, distribution and other logistics functions, determines the systemic health of your supply chain. Externally, the connectivity to your suppliers and your customers to a certain degree, determines your company’s supply chain efficiency and effectiveness.
- Lack of genuine partnership Challenge 7: Cross-enterprise collaboration between you and your suppliers is going to be vitally important to your success on a global scale. A true partnership comes with honesty, integrity, understanding and transparency. It’s often easy to say, but hard to do.
- Need for consistent performance measurement Challenge 8:Companies can often be overwhelmed by the number of performance measurement matrices that external consultants give them. But selecting a set of KPIs that make sense to key supply chain stakeholders is not an easy task. Consistently measuring a suitable and balanced set of KPIs is going to give long-term and sustainable benefits to your organisation.We believe that proper management of all these challenges will help your company to contain not only your purchasing costs, but improve your total supply chain cost.
Global Sourcing – Start-up Basics
Nobody could ignore the role that global sourcing plays in today’s procurement world. Despite the global economic slowdown, the huge cost gap between the developed countries and low cost sourcing countries will ensure continuous growth in sourcing from regions, such as China, Mexico, South East Asia and Eastern Europe. No matter if you are a local manufacturer, a wholesaler or a retailer, I am sure that you’d agree with me that managing an efficient global sourcing network and process can be a serious challenge, and can have a huge impact on the total value that you are delivering to your shareholders.
I’d like to share two examples,
Global Sourcing – Example 1,
Just image your company is currently manufacturing consumer durable products locally, and facing competition from cheap imports, you might want to get yourself immunized by sourcing offshore directly, so you can maintain a relatively low product cost. But be prepared, it’s not only about getting the product imported from low cost countries. It’s also about managing your total supply chain from suppliers, to your DCs, and to your customers.
We would remind you that the longer your total supply chain is, the more prepared you need to be, to face the cultural, organizational and operational challenges. Here are just some key questions that we should ask ourselves.
- What is your organisation’s long term business strategy?
- What’s the broad commercial and supply chain implication of shutting down local operations and starting up offshore sourcing, or offshore manufacturing?
- Is your demand flow mechanism robust enough?
- Does your planning and purchasing team have the experience required to manage an overseas supply base?
- Do you have a competent support team on the ground to resolve supply issues?
- Is your functional purchasing closely aligned with your strategic procurement objectives?
- Have you established a clear business process to ensure effective coordination across demand planning, purchasing, engineering, global inventory management and international logistics?
(Just to name a few!)
Global Sourcing Example 2
Let’s say you’re a sizeable wholesaler in the local market, and you’ve been sourcing via your agency network for quite a while. Now the board of your company has decided to embark on direct overseas sourcing to make your COGS much lower and to increase the share of your private label business.
- Is your company ready to control direct sourcing from the origin
- What are the challenges of managing an overseas sourcing centre
- What impact will the extra 30 days + lead time give to your total supply chain, in terms of customer service and your inventory holding at various stocking points?
- How do you design a regional or global sourcing network that strikes the RIGHT balance between supply chain cost and SERVICE reliability?
- How do you manage supply chain collaboration across wide geographical and time span?
At Logistics Bureau consultants are here to help our customers to form a holistic view of the end-to-end supply chain, diagnose the key issues within it, prioritize key improvement initiatives, then provide specialist advice to your procurement function and help you to determine how much extra value you could possibly derive from your inbound supply chain.
Our Procurement Consulting Services will help you to determine your strategic, operational and cultural readiness for offshore sourcing or offshore manufacturing, and help you to operationalise your global purchasing strategy, in a practical way.
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- Logistics Bureau
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