Procurement’s (Not so?) Finest Hour
Procurement is undergoing a transformation, moving away from process and price and towards undertaking initiatives that demonstrate value for the business. Therefore, when the opportunity arises for procurement to demonstrate its value, you would expect them to seize it in both hands… or maybe not!
We want to share with you a real life situation undertaken this month. We have removed the names of those involved to limit embarrassment; both company names are fictitious, but the scenario is real.
Situation: Acme Ltd has been a supplier to Tellman Inc. for the past 7 years. There has been no formal contract between the two organisations but Tellman has always used Acme. The services Acme delivers directly impact Tellman’s customers, so service and customer satisfaction are important aspects of their relationship. To date, it has been a strong business partnership for both parties. Acme has direct relationships with all key Tellman stakeholders, and Acme has never had a complaint raised by Tellman or Tellman’s customers, nor have they failed to deliver on their committments.
Acme is a SME and has grown through the work they have won from Tellman, employing the local workforce, creating apprenticeships, and feeding into the local economy. Tellman’s business is a substantial part of Acme’s revenue stream.
Tellman is a large business and a registered charity, it has to follow public sector procurement rules which influence the procurement processes they follow.
Next: Tellman Inc. decides to run a competitive tender for the delivery of the services currently fulfilled by Acme. The tender - which is stated as being scored on PRICE alone - lists the services required and asks for an associated price against each item. As a 7 year supply partner, Acme feels there are a number of aspects omitted from the tender that are critical to achieving the right level of outcome expected by the business.
Submissions: Acme submitted their pricing and expected to be short listed. During the next phase they planned to clarify the requirements and submit BOFA pricing.
Award: Tellman accepted the initial submissions and without further process, awarded the contract to a new supplier who submitted cheaper prices. Acme was notified of the decision via email, no personal communication with the buyer had occurred from start to finish.
Acme was of course surprised by the outcome and with the lack of opportunity to work with procurement to drive the right solution for Tellman’s business. Their years of successfully delivering value for Tellman were dismissed in an instant.
Food for Thought
Every organisation can choose how they undertake procurement but here are a few items worth considering.
- Brand: Most organisations cherish their reputation in the market, and a lower cost solution could provide savings or open the door to new risks. This is an opportunity for procurement to add value by evaluating risk versus cost.
- FLC: When procuring a service, one has to consider the Full Lifecycle Costs. Cheaper costs do not necessarily mean business savings, this is an opportunity for procurement to undertake supplier due diligence and demonstrate business acumen.
- Savings: All organisations want to maximise savings but this should be put into perspective. It is always possible to go cheaper but there has to be a limit. Procurement’s value is in balancing savings whilst ensuring services are still successfully delivered.
- Relationships: Good suppliers who consistently deliver can be hard to find. In the event you need to revert back to them, ensure you retain relationships wherever possible. How you engage with suppliers reflects your culture and influences how they engage with you - now and in the future.
- Culture: Demonstrating a culture of price not value or of price not collaboration is a far cry from where procurement needs to be.
Summary: Any tender has an element of price, but if procurement wants to show value it needs to move the discussion away from price and onto delivering successful contracts that enable successful business outcomes.
Unfortunately, this example is not unique and provides the ammunition required to justify automating everyone in procurement. Why employ a person to run a tender based on price alone when technology could do it faster, cheaper, and more efficiently?
The issue raised in this article is not how the procurement was undertaken though there may be room for improvement, the issue is running a procurement based on price alone. Utilising price removes all the great value procurement could bring into the business and the supplier engagement, resulting in just a process.
If you like working in Procurement we really need to do something about this!
Mike Robertson is among the Revolutionaries helping procurement professionals find the best way to Stand up, Speak out, and Drive change this September. Join us in the Procurement Revolution, its time to drive change http://theprocurementrevolution.com/
When you subscribe to the blog, we will send you an e-mail when there are new updates on the site so you wouldn't miss them.