Capitalizing Strategic Sourcing
Companies can reduce total cost of their product by redefining purchase function and developing and promoting skills and abilities in the sector.
- Oct 07, 2019
- 7 min read
The overall cost of creating, generating and marketing a product relies on a number of variables. The larger part of this cost is based on the procurement of materials and services. Organizations that fail to invest inappropriately in the procurement team’s skill are losing on value.
Purchasing and procurement function is an important part of the corporate world. However, it is considered a rather unnecessary department comprising of professionals who couldn’t make it in other fields. Hence, there is no amazement in the fact that businesses do not invest enough in the purchasing team’s capabilities and leaves the associated strategic decision making to other departments such as sales or manufacturing.
Eventually, this attitude opens up a harmful, compounding effect on businesses. As new talent moves on to higher positions in other departments, a recognizable gap is felt especially in complex sourcing negotiations. When a supplier’s well equipped and resourceful sales team engage with an inexperience or undersized procurement team, the outcome is – often – predictable.
Regardless of the importance of the buying function, a major portion of the product cost is made up of procured materials and purchased services expense for most industries. Consequentially, organizations that fail to allocate appropriate budget to their purchasing team, in terms of their skills, capabilities and environment, are reducing their value unintentionally. As compared to organizations with mediocre procurement function, companies that incorporate up-to-date procurement practices and trend into their operations can significantly increase their return margins. From the various factors impacting the success of a purchasing team, aptitudes and culture affects financial performance more strongly than other factors.
In order to ensure improvement and growth of purchasing function, a method that accentuates quick purchasing practices and support large term development and institutionalization of procurement skill should be employed. This approach will help performing purchasing professionals in capitalizing on leadership development prospects and being exposed to upper level management. Additionally, companies can entice and retain procurement talent, which in turn results in higher financial gains and consistent growth. This approach has helped elevate purchasing profile of many businesses and enable them in achieving their objectives.
Recognizing and Developing Skills
In order to develop the purchasing function into a valued strategic benefit, a company should start by recognizing its explicit skills and ability to generate maximum value. These skills, of course, differ by businesses but there are some common ones like technical capabilities. These can range from precisely reverse engineering the supplier’s expense structure to examining the supply-market trends in-depth so that acumens can be gained to achieve competitive edge. Similarly, leadership aptitudes are also significant. These may include capability to manage complicated and varying objectives, make decision on trade-offs between contending requirements and recognize prospects with astuteness and far-sightedness.
In order to determine the array of skills and abilities that posses the maximum potential for enhanced performance, organizations should undertake a bottom-up evaluation of their leadership aptitude and technical abilities and compare the conclusions with appropriate existing standards.
In addition to individualistic employee talent and skill development, companies must incorporate these skills in their procedures, systems, frameworks and tools. For instance, a raw material supplying company successful completed a skill building program for its employees. But they did not halt there. They continued their efforts by incorporating an advanced and sophisticated organizational framework that emphasized value creating primacies. They separated the transactional tasks like purchase-order processing from strategically oriented tasks like category management at an organizational level. The organization also paid attention to employing suitable employees to each role. The last step taken by the company was implementing a performance-based management model to monitor and offer incentives for decreased total cost and increased consistent development.
Adult Learning Philosophies
The typical approach to corporate employee development and training through classroom is among the most ineffective method to increase employee abilities. The classroom setup is supportive for younger people. However, it has been observed that adults learn better when information is provided in concise format and at frequent intervals. When the training is hands-on and employees are required to complete specific task timely, they get instant practice of new capabilities that can help them in their daily activities. These acquired skills accumulate over time and grow into a full range of advanced skills.
Among the most impactful approaches to using these learning philosophies and developing new abilities swiftly is “train the trainer” method. According to this approach, few capable and driven employees get trained under a systematic “field and forum” scheme including technical and leadership abilities. In turn, these trained employees are required to impart the learned skills to their colleagues as mentors for a unit of selected key employees undertaking the real category-sourcing program. The training process continues as these purchasing professionals advance to become mentors. This model couples coaching and hands on training to develop a complex system that supports and advances new talents quickly.
Build and Institutionalize
Once the initial stage of employee ability development is completed, organizations need to concentrate on scaling throughout the company as that provides consistent and maintainable growth over time. For instance, a raw-material business achieved this by establishing a precise goal of seven percent decrease in third-party total cost. They devised a defined strategy to achieve this in a said period. They undertook a series of category-sourcing actions with specific unit of employees and developed an excellent team of coaches to transfer needed skills and capabilities to category teams. The outcomes were actively provided to the entire company to cultivate motivation and authenticity for expense reduction. As a result, the company is on schedule for delivering a goal which was considered nearly impossible.
The ultimate factor in skill development and ability building is culture. It is essential for an organization to develop an atmosphere where purchasing professionals can feel proud of their role in increasing company value and possess enough poise to adopt a leading role in identifying and procuring new contributors of value. This environmental shift is the foundation of a maintainable evolution of purchasing function. Organizations can implement this by crafting obvious upper management role models employing the changed culture. There are few ways to achieve this. Companies can introduce joint purchasing agents with the role of facilitating cross-functional cooperation. They can also create suitable channels for announcing success across organization and develop motivation. Additionally, they should monitor and access employees’ reactions and modify their approach accordingly.
For instance, in a multinational chemical organization, purchasing professionals felt unsatisfied by the corporate culture as major sourcing decisions were being taken without their consultation. In order to tackle with this mind-set, the organization took actions to involve senior management in reinvesting the purchasing structure and establishing a formal sourcing procedure. Additionally, they made action plans for publicizing the successes and achievements to all employees. In a short time, changes to the purchasing processes resulted in significant cost reduction and introduced a better alternative to organization operations.
Organizations with the foresight to establish and improve their standards of purchasing function has doubled their returns. They have been able to achieve consistent growth and performance by recognizing abilities that add value, develop them in real situations using adult-learning philosophies and structuring them to be part of entire organization fabric.