Stage III Article-4: Sourcing and Procurement AS-IS

After a barrage of concluding questions in my previous article of Stage III you might wonder how will I answer these questions and where will I start?

The start is here and now. In Stage III Article-2 I had discussed about the Rummler and Brache, a great tool to capture Sourcing and Procurement ‘AS-IS”.

The martix above captures essence of Rummler and Brache’s frame work. The bi-directional arrow heads that you see should be considered a spectrum, including those that are diagonally aligned. It is important to treat these arrow heads and the areas they cover as spectrum due to lack of clear demarcation in the responsibilities that one sees in real world organisations.

The following are some of the questions that I used in semi-structured interviews to capture the current state of affairs at X’s various purchasing departments.

1A. Org level goals & concerns

1.       What is the role of Business Services department within X?

2.       Which are the most critical functions with-in BS that will make a difference to X?

3.       Why do you think these are critical?

4.       What are you seeking to achieve through these functions?

5.       What mechanisms or processes do you have in place to deliver these functions?

6.       What problems/issues are you currently facing/ you anticipate facing when working on and with these functions?

7.       How do you plan to overcome these issues?

8.       How do you ensure the process goal/departmental goal is in line with business goal?

1B. Org level design & concerns (Focus on Procurement/P&P/IT) (1B)

1.       What processes/mechanisms do we currently have in place that caters to organisation’s procurements/P&P/IT needs?

2.       If yes, who are the current owners? Do we have a purchase department or function?

3.       If no, it cannot be NO because then the business stops functioning!!! No, could be an answer that could come out of lack of knowledge.

4.       How are resources allocated to each of these functions? – Man power, budget, IT, etc

5.       Any specific areas of concerns? - Quality, Speed, Dependability, Flexibility, Cost?

6.       Why is it an area of concern?

7.       Do you see any duplication of efforts in the work flow? Why do you consider it to be so?

8.       How do you detect duplication of work?

9.       Do you see any miscommunication in the work flow? Why do you consider it to be so?

10.   How do you detect miscommunication?

11.   Where do you source your information from to make business decision?

12.   Decision on demand variation in the market? – Capital goods, Outsourced service & Materials

13.   Decision on supplier pricing? Of all above and IT

14.   What decision making processes is in place? Who do you involve in the developing decisions?

15.   When do you outsource manpower? Why do you outsource man power needs?

16.   How do you approach manpower outsourcing?

17.   How would you describe EINW’s relationship with your suppliers?

1C. Org level management & concerns (Focus on Procurement/P&P/IT) (1C)

1.       How do you ensure accountability in your department?

2.       What measures do you have in place to ensure Quality, Quantity & Timeliness? – of procured goods & services

3.       How do you ensure the employee has all the information needed to carry on the task assigned?

4.       How do you ensure documentation, training and employee needs are being met regularly?

2A. Process level goals & concerns

1.       What is the role of your department/process/function within EINW?

2.       What procurement strategy/policy do you have in place?

3.       Which are the most critical functions with-in your function that you think makes a difference to EINW?

4.       Why do you think these are critical?

5.       What are you seeking to achieve through these functions?

6.       What mechanisms or processes do you have in place to deliver these functions?

7.       What problems/issues are you currently facing/ you anticipate facing when working on and with these functions?

8.       How do you plan to overcome these issues?

9.       How do you ensure the process goal/departmental goal is in line with business goal? Can you spell this goal out for me?

2B. Process level design & concerns [Sourcing]

1.       How do you recognize and identify business need for procurement?

2.       Do you differentiate between procurements for internal consumption or External Trading?

3.       How do you validate need for procurement?

4.       How do you budget procurement?

5.       Do you carryout risk assessment before procurements? Yes – when? No – Why not?

6.       How do you develop specifications for the goods/services being procured?

7.       How do you source suppliers? First time purchase, repeat purchase?

8.       How do you handle emergency, out of turn needs?

9.       How do you ensure Value for Money (VFM) for the procurements that you make?

10.   What procedure do you follow in requesting quotations?

11.   How do you develop legal framework for the procurement being made?

12.   Do you invite tenders? When? Why not?

13.   How do you evaluate the quotations and the tenders received?

14.   How do you carryout legal and financial check of the selected suppliers?

15.   How do you select supplier/s?

16.   Do you notify unselected supplier? How do you do it?

17.   How do you complete legal formalities? Do you enter in to agreement for every purchase made or is it cash and carry?

18.   Do you differentiate procurement based on value of purchase? What other criteria or classifications do you have?

19.   Do you differentiate between purchase of goods and services that you make? What other criteria or classifications do you have?

20.   Who is authorized to issue purchase orders?

21.   How are supplier payments initiated?

22.   What IT systems, services or infrastructure do you have in place to support your P&P?

2C. Process level management & concerns

23.   What is the average turn-around time between supplier identification and issue of purchase order?

24.   What is the average turn-around time between issue of purchase order and receipt of goods/service?

25.   Average cost of tendering?

26.   How many tenders are issued in a year? Half year? quarter? And in a month? Any seasonality patterns?

27.   How many goods and material suppliers used in one year? Half year? Quarter? Month?

28.   How many service suppliers used in one year? Half year? Quarter? Month?

29.   How many of these suppliers were customer nominated?

30.   Do you maintain separate records for capital goods, materials or services purchased?

31.   How many rejections per year? – Good/services break up?

32.   Average total procurement cost? – Cap good/Material? & Service?

33.   Breakdown of total procurement cost? – Cap good/Material? & Service?

34.   Average total acquisition cost? - Cap good/Material? & Service? [goods + Transaction]

35.   Average total transaction cost?

36.   Average cost per transaction?

37.   Average cost per supplier?

38.   Average total tenders per supplier selected?

39.   Average cost per tender?

40.   Average creditor period?

41.   Average labor cost per tender?

42.   Average labor cost per supplier?

43.   Average inventory hold period? Trading goods/materials.

44.   What value evaluation mechanism do you have in place for the procurements that you make?

2B. Process level design & concerns [ICT]

1.       How do you recognize and identify business need for ‘a’ IT solution?

2.       What ICT strategy/policy do you have in place? What is the overall objective of IT in EINW?

3.       What drives ICT strategy/policy?

4.       What IT systems, services & infrastructure do you have in place? Which business function/s do they support?

5.       How do you validate need for IT procurement?

6.       How do you budget IT procurement?

7.       Do you carryout IT risk assessment before procurements? Yes – when? No – Why not?

8.       How do you develop specifications for the IT goods/services being procured?

9.       How do you source IT suppliers? First time purchase, repeat purchase?

10.   How do you ensure Value for Money (VFM) from your ICT?

11.   IF IT DEPARTMENT CARRIES OUT ITS OWN PROCUREMENT, THEN GET ANSWERS TO QUESTIONS LISTED IN THE 2B PROCUREMENT SECTION.

12.   How has ICT benefited your organisation?

2C. Process level management & concerns [ICT]

1.       Do you have a comprehensive and coherent IT architecture for EINW?

2.       How do you evaluate/measure the effectiveness of the current IT systems?

3.       How do you ensure relevance & currency of IT strategy?

4.       Do you have a breakup of Systems, Services & Infra that you use? Yes, -can you provide me those?

5.       How do you measure cost effectiveness of the IT system in place? (any bench marks –reuse, -vs-)

6.       Current Total cost of ownership of the IT systems? – Systems, services & Infra.

7.       Current measure for ROI on IT spending?

8.       Any other measures of value evaluation that you have in place for IT spends?

2B. Process level design & concerns [P&P]

1.       How do you recognize and identify business need for ‘a’ Project/Program solution?

2.       What P&P were carried out in the last 12 months? Break up?

3.       Who approves initiation of internal projects?

4.       What P&P methodologies do you have in place?  Why do you use them?

5.       What is the overall objective of P&P function within EINW?

6.       What drives P&P strategy/policy?

7.       How do you budget P&P initiative?

8.       Do you carryout risk assessment before P&P initiatives? Yes – when & How? No – Why not?

9.       Where do you source your P&P resources from?

10.   How do you ensure Value for Money (VFM) from P&P initiatives?

11.   IF P&P DEPARTMENT CARRIES OUT ITS OWN PROCUREMENT, THEN GET ANSWERS TO QUESTIONS LISTED IN THE 2B PROCUREMENT SECTION.

12.   How has ICT benefited P&P?

2C. Process level management & concerns [P&P]

1.       Do you have a comprehensive and coherent P&P policy for EINW?

2.       How do you evaluate/measure the effectiveness of the current P&P methodologies used?

3.       How do you ensure relevance & currency of P&P undertaken?

4.       Do you have a breakup of Systems, Services & Infra that you use? Yes, -can you provide me those?

5.       How do you measure cost effectiveness of any new P&P initiative? (any bench marks –reuse, -vs-)

6.       Average life time cost of project undertaken in last 2/3 years?

7.       Current measure for ROI on P&P spending?

8.       Any other measures of value evaluation that you have in place for P&P spends?

Stage III Article-3: Sourcing and Purchasing in perspective

My client X has around 500+ customers and it uses 600+ suppliers to serve them. Average value of turnover per customer is £31500 without deductions while average value of purchase per customer £18110 (These figures are exclusive of Salaries and other benefits that employees receive). Add to these the cost of sales, depreciation of capital goods that are indispensible for servicing these customers, etc and you can gauge the value addition happening at X.

Average spend per supplier is   £9500, not a big number; combine to this that top 10 suppliers take away 40% of business from X and you see where we are heading. It is really difficult to leverage on the scale and scope of purchases for any individual company within the group.

The group, all companies put together, purchases over 1500+ unique items, purchasing across wide geographies nationally. A supplier with strong presence in Midlands might have no presence in North, and supplier holding bastion in North might have skeletal presence in South-East or East Anglia. Add to these complexities a purchasing officer’s conveniences, necessity to keep suppliers happy for the sake of contingencies, etc then you get the picture of what I am up against. Purchasing officer here could be a field technician, purchase coordinator in office or a project manager. Also a substantial part of revenue, about 33%, is generated from contracting division whose major procurement is sub-contracted manpower.

How do you design an optimal sourcing and purchasing (S&P) strategy for the consolidated group without compromising on Quality, Speed, Dependability, Flexibility & Cost factors? But more importantly how can S&P strategy make a difference to the bottom-line? How can S&P improve cash-flow conditions for my client? How can S&P strategy align itself with the company’s short term and long term objectives? And most importantly what can S&P strategy do to enhance value to my client’s customers?

Stage I Article-5: Hostile Markets

A hostile market can be defined as ‘one which is associated with over capacity, low margin, intense competition and management in turmoil’ irrespective of industry type these finding have been found to be true.

Hostile Market

Don Potter’s (and not Michael E. Porter of Porter’s Five Forces fame) report suggests that outbreak of hostilities is triggered by two major factors:

·         Fall in demand – Caused by external event/s that affects the industry’s customers; consequently there is sudden over capacity of supply

·         Competitive expansion – competitive expansion occurs because new opportunities prop up providing high margins and profits or because competitors undercut each other’s competitive advantage due to fall in demand

Below I will discuss the six phases of a hostile market identified in the Windemere study following which I will, in next few paragraphs, show you how this definition fits in the context of X.

The six phases of hostility that an industry experiences is mentioned below and they may or may not necessarily occur in the order mentioned:

1.       Margin pressure – Low profit margins resulting from predatory pricing. This situation leads to asymmetric power shift towards customer, giving large customers extra bargaining power. Eventually competitors start looking for niche areas that comes from higher-margin smaller customers.

2.       Share shifts – Three factors account for this shift a. Industry leader or leading firms in industry hold on to premium pricing under false assumption that superior offering and customer loyalty will sustain premium pricing only to loose market share and spoil brand reputation over time. b. Flight to quality. c. Acquisition driven by desperation to achieve economies of scale.

3.       Product/Service Proliferation – Competitors compete for market share by attempting to generate value for the customer through product/service proliferation. Firms resort to bundling or unbundling of their offerings in an attempt to find niche. Bundling is achieved by adding features or functions to existing service or product while keep the price constant. Unbundling removes some of the features or benefits from the product or service and are then offered at lower price.

4.       Self-defeating cost reduction: In an effort to maintain margin firms resort to cost cutting measures that scuttles investment in product/service or quality improvements thereby giving unintended lead to competitors.

5.       Consolidation and shakeout: As a consequence of these externalities industry is forced to separate chaff from the grain. Consolidation happens in three waves: first, firms work hard towards reducing overhead by right-sizing the workforce, closing and consolidating facilities and pruning businesses. Second, Strong firms take over weaker firms in the markets thereby reducing the competition. Third, larger firms begin to collaborate to beat the heat.

       6.       Rescue: This is a long drawn and arduous process which leads to few players controlling large      chunks of market share. And typically is based on shift in industries entry and/or exit barrier arising through industry innovation or external intervention reigniting demand.

X in a Hostile Market

A Cursory look at Mechanical & Electrical (M&E) industry in UK will reveal that it is highly fragmented.  The following table, table 1, from a well respected market intelligence company Mintel indicates the number of VAT registered companies that operate within the segment of M&E in UK as of early 2009.

Table 1.

Table 1 shows that the sheer number of firms operating within M&E sector erode any competitive edge that any single firm may try to bring to the market; also given that these firms are of different sizes any differentiation strategy adopted will be hard to sustain.

As indicated in market fragmentation definition the tables below, table 2 and table 3, proves the point that profitability is unrelated to size. Table 2 drawn from Plimsoll Portfolio Analysis for M& E contractor shows that the industry has firms spread across a broad spectrum of sales growth; some firms are experiencing high growth while others are experiencing severe negative pressure.  Table 3 shows that the Top 50 companies in terms of sales growth range in their annual sales figure of over GBP 500 million through firm with just over a million in their annual sales.

Table 2.

 Table 3.

Given the above hard facts combined with ‘not-so-bright’ macro-economic conditions, and the internal situation of the company it is pertinent that X look at multiple dimensions to sustain itself in this hostile market environment; and may be decide to embark upon growth strategy based on market penetration, service market expansion and if possible, based on X’s ability to manage risk and make long term resource commitment, also look at vertical integration and diversification. The final recommendations made to X will be discussed in later articles.

The business strategy presented here is an opportunity for X to bring together its holding companies and device a common marketing strategy accommodating them all. Implementation of this strategy will demand commitment from all stake holders - existing private owners, current management team, employees and sub-contractors, to see it through the end. The greatest pressure on resource will come in the form of pressure on time and motivation to manage this change.

Internal changes triggered by adopting customer centric strategic market management will not and cannot happen in isolation. Similarly any business strategy change cannot be oblivious to its perils of present in the hope that a great plan for the future will somehow make the current problems vanish. This is why managing cash flow is as important for a firm’s survival today as its plan to grow market share or sales turnover or net profit or profit margins in the mid to long term; a marked improvement in a firm’s overall performance. A structured growth strategy will prepare an organisation and give it the confidence it needs to undertake broader reform in its business strategy.