Why are businesses failing to get the most out of their non-core costs? (pt 3)
Nov 20, 2013 6:15:00 AM
Part one and Part two of this three part mini-series have covered several reasons why non-core procurement is more complex, wider reaching and changes faster than most people imagine (compared to core or direct procurement). In this post, the final in the series, we will discuss why businesses need to approach procurement in a completely different way.
Effective procurement is very different to the typical view of it being a series of sourcing exercises, which get repeated every year or so.The final piece of the jigsaw is to understand that sustained improvement, sustained supplier performance, and sustained value, are only achievable through on-going management both internally of the overall area of cost, and externally of the supplier base. It sounds simple – but it so seldom gets done outside of the top few strategic suppliers. As a result, procurement fails to manage the cost base in a sustainable way. And the business misses out on a lot of potential.
What happens in reality is that every two years or so, a sourcing exercise is carried out and ‘savings’ get claimed. But no sooner has ink dried on paper than the focus moves elsewhere and the supplier works its magic at clawing back its margin. So the next time a sourcing exercise is undertaken, large savings are (yet again) claimed, as the situation has deteriorated back to where it began. What happens is that cost savings don't materialize as predicted; and any that are achieved, are not sustained.
We see this all the time. It’s the sad reality of what goes on in too many businesses. It reminds me of Albert Einstein’s quote “Insanity is doing the same thing over and over again but expecting different results.” The trouble is, business don’t value undertaking on-going category management and on-going supplier management – or as we call it in Proxima ‘commercial management of suppliers’. One of the reasons it gets neglected is that it’s difficult to measure its impact – and as the business demands 'implemeneted savings', that’s where the energy gets drawn.
So ironically, sustained savings don’t happen because of pressure elsewhere to deliver more savings. Business would be better to put in new arrangements, and lock them in – as opposed to what they do now - put them in and then encourage them to dissipate.
So there we have it – five simple reasons why procurement is failing. And why businesses are failing to get the most out the hundreds of millions they spend on non-core costs.
Our view is that overcoming these problems is possible – but not by applying old fashioned management techniques to what is a modern day business problems. Today’s leaders must understand that suppliers play an increasingly large role in the success of their business. They are often more agile, more innovative, cheaper and more effective than trying to deliver in-house – leading to a state of corporate virtualization - where payslips have become supplier invoices.
In essence, business leaders need to take an alternative approach - one that overcomes all these issues and provides a profoundly different experience to its employees, its suppliers and the business’ overall performance.
But where to start?