In many companies and non profit organizations the Purchasing Department is an operational unit that is focused on contract management and the administrative burden to manage the contract and call off parts of the agreed contract. In those companies Purchasing and Logistics go hand in hand and both activities are placed in the operational side of the company. The organizational structuring places both activities under an Operations Director or a CFO.

Procurement covers purchasing activities, stock replenishments, warehouse transportation and waste management and should be seen as part of the complete supply chain. In organizations with Procurement departments one can note that these departments are linked with the supply chain and start to work on a tactical level. We have experienced that these organizations still do not have a Procurement Strategy that is derived from the general strategy of a company. That is the reason why these parts of the organization are also never heard in the Board meetings. Procurement personnel is also not able to sell themselves in terms of empowerment and realizing parts of the general strategy of the company. Contractual savings have been scored but actual savings are never measured since we do not measure ourselves as such. “Ask me how you measure me then I will tell you how I will behave” is a well known saying of Eli Goldratt, the supply chain guru.

Strategic positioning and performance measurements

In a fast growing company in the pharmaceutical industry one is determined to start educating their Procurement personnel. Although business is growing with 40% every year and margins are massive, this company is determined to educate their Procurement personnel and organize their supply chain. When the competitors enter the industry and the revenues and margins are under pressure, the supply chain should be lean and mean and the Procurement personnel should be bridge builders in the supply chain, establishing clear communication and delivering value to the complete process.

Every organization and company should start their education with the description of the Procurement strategy derived from the general strategy. What part of the strategy owns the Procurement department and will be delivered by that same department? Through the development of the value chain and the supply chains within a company the Procurement department can describe their processes in a clear and simple way. When you know the process, you also know the main performance measurements. But in order to control your environment you want to know which critical success factors are the crucial factors in the processes.
Besides processes, culture and change management are imperative factors in developing a Procurement organization into a mature and strategic field of interest. Since most of the Procurement departments act as operational units, entering Procurement into a strategic area means a serious change management project. .

The normal tooling of the performance measurement of a Procurement department are process related measurements, which is called Category Management. Through a spend analysis and a portfolio analysis the Procurement department is aiming at the right categories, since time and resources are limited. In these standard measurements subjectivity prevails and in many cases there is not an actual performance measurement for Procurement departments. Stakeholder Management Analysis, Power Relationship Analysis, Value Leakage Analysis are all missing tools in measuring objectively the results of a Procurement department.

The actual value of a Procurement Department By developing the actual value chain of the company or organization it is imperative to record that the Procurement department is in contact with external suppliers and the internal organization. They can use their experience and knowledge of the supplier and their organization to link the processes of both organizations in a more optimal way. Besides this strategic value Procurement should also measure the opportunities to realize savings, bearing in mind the present organization, the quality of the personnel and the culture of the organization. What is an organization able to realize in terms of cash savings and what are the actual realized savings? What is leaking from the organization by chosing the wrong persons on the wrong places? Are we placing the priorities in the right way and what can we improve in terms of effectiveness of our complete supply chain?

Each organization should go for the elimination of the Procurement constraints. We have learned from Eli Goldratt’s Theory of Constraints1, that we have only one or two constraints. Finding these constraints and exploiting the solution to eliminate those constraints can be found when we use Procurement in a strategic way.

“Procurement will have to increase the use value of the purchased product or service and should always decrease the actual total cost of ownership at the same time” as we have learned from Prof. Andrew Cox from Birmingham University. We can deliver these results when we give our Procurement personnel the chance to educate themselves and focus on the strategic arena of Procurement.

Note 1: Goldratt, Eli and Cox, Jeff , The Goal, The North River Press, Great Barrington, MA, 1984