If it’s true that you can’t manage what you can’t measure, then what exactly are managers aiming to achieve when they measure the performance of company buyers by counting the number of purchase orders they process each day?
It does seem odd, given that this type of measurement used by some organisation could result in buyers propelling the company towards bankruptcy. To me, it smacks of: ‘Don’t worry about the strategic impact to the company; just keep the orders flowing!’ It also says: ‘The end-user knows what they are doing – so just do what you’re told, purchasing!’
Consider this: in a typical medium-sized construction company, a 5 per cent reduction in the cost of goods and services purchased would have the same effect as a 60 per cent increase in sales. Talk about the leverage of procurement!
It does seem odd, given that this type of measurement used by some organisation could result in buyers propelling the company towards bankruptcy. To me, it smacks of: ‘Don’t worry about the strategic impact to the company; just keep the orders flowing!’ It also says: ‘The end-user knows what they are doing – so just do what you’re told, purchasing!’
Consider this: in a typical medium-sized construction company, a 5 per cent reduction in the cost of goods and services purchased would have the same effect as a 60 per cent increase in sales. Talk about the leverage of procurement!
This holds especially true for organisations whose opportunity to grow sales is impaired significantly by the maturity of the market.
In one local service company, an 8 per cent reduction in procurement costs would save the same amount of money as firing 30 per cent of the staff. (Perhaps, before a company looks at downsizing its staff, it should look at super-sizing its procurement function!)
Representatives in a medium-sized company recently told me that its first 1,200 procurement transactions buy the business less than $3 million, while the next 200 buys it hundreds of millions.
At the majority of organisations, 90 per cent of the total volume of procurement transactions represents only 10 per cent of the total value. As a result, procurement professionals have only 10 per cent of their time available to focus on where 90 per cent of the value lies.
Which brings me to ask: if salespeople are incentivised on revenue (and, one would hope, profitability), shouldn’t procurement staff be incentivised on savings (which equals profitability!), or on the strategic impact they are making to the organisation?
In fact, shouldn’t procurement be measured on how they are actively reducing the number of orders (and number of suppliers, for that matter), so releasing time to optimise the spend. And then they should be rewarded for this optimisation.
Yet many finance managers seem to be of the view that salespeople shouldn’t get commission – ‘They should just do their job!’ – so no wonder it’s difficult to get people to agree on letting procurement in on the action!
Then, there is also the issue that end-users believe that if it weren’t for them, procurement would have nothing to save! I am aware that the idea of procurement being entitled to a cut of the savings will meet resistance in some companies. ‘What about all the other people that are involved in the process?’ managers will ask.
But following a category-team-based approach founded on strategic-sourcing principles can result in the team – as well as the budget holder who helped make the savings happen – being rewarded for its efforts.
WIIFM – what’s in it for me? Is ultimately what drives us all, even if the organisation has an inspiring mission statement and an astounding vision. If procurement professionals aren’t rewarded for creating value for the company, and aren’t measured appropriately, then the company can make a profit only when it sells well. On the other hand, if the right mechanisms are put in place to allow and encourage procurement to excel, the company can still make some profit when sales are down – and an even greater profit when it does sell well.
Buying well is one of the greatest strategic advantages a company can have. Is profit made when you buy or when you sell? Well, that depends on what’s in it for the buyer...
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