Insider Business Club: procurement -buying potential

Do companies pay enough attention to procurement?

Steve Bagshaw, editor, Supply Management

Generally the answer is no, it isn’t high up the agenda. But there are some
notable exceptions to that, and in the last issue of Supply Management, Sir Alan
Sugar was quoted as saying that procurement was the third most important element
of any business behind product development and sales. Royal Mail also now has a
chief procurement officer.

My experience is that the most advanced organisations are good at both direct
[which is sold to customers] and indirect [which is used inside the company]
purchasing but typically manufacturers, and more specifically retailers, are
very good at direct. Perhaps, though, their focus is so heavily on the direct
purchases, that they don’t focus so strongly on indirect. In other
organisations, such as financial services, where the only thing they buy is
indirect, if they’re good at procurement, they’re necessarily good at indirect

If you look at the issues where procurement can help beyond just cost
cutting, it should be a board level issue in terms of developing innovation and
long-term relationships with suppliers, so you are guaranteed to get exactly
what you want at a reasonable price.

How can companies benefit from better procurement?

John Hatton, client services director, TradingPartners

There’s a statistic, popular with procurement directors, which says that a
£10 saving in procurement is a £10 addition to the bottom line. In order to
achieve the same bottom line impact, you need to make £100 of extra sales. Every
£1 of saving on procurement goes straight to the bottom line pretty much, and
anybody who’s not looking at the leverage that the impact of procurement could
have is missing a trick.

An increasing part of what we do is emerging market sourcing and most of that
has been with manufacturing organisations, some with retail. In the early days
whilst these sources were considered, they weren’t actually implemented because
people were scared of the risks. Now a lot of organisations have recognised that
they’ve left a lot of money on the table by not actually exploiting those
sources and opportunities and now, increasingly, they are taking the risk. The
risks are lower because a lot of these emerging economies are producing machines
which are newer and factories that are better than we have in the West. The
opportunities are there and it is happening and the most enlightened companies
are using those sources.

How have relationships with suppliers evolved?

Osama El-Kadi, chief procurement officer, Centrica

Reducing the number of suppliers has been a very interesting dilemma for the
last 30 years. And I don’t think it’s that easy or that simple to cut them by
half. Procurement fields ought to be joined up on a strategic level with some of
the other departments that they’re buying with. To reduce the number of
suppliers is not a simple thing. It’s not up to procurement to do that.

People use a lot of hype when talking about creating systems. All that
systems do is make you have some records of what you’re buying and what you’re
selling, which is very important but should be left to finance. Procurement
should go and make deals and access markets and new sourcing opportunities to
again add value to the company. Systems are hyped. It’s a bureaucratic thing to
keep procurement thinking ‘let’s have system’. Give me £2m and I’ll give you a
good system – but to do what? To just count what you’re doing? This is a
slightly controversial view on the over-estimated value of systems and
procurement tools. You can end up missing the large chunk of money going out of
the company without control and good negotiations.

Is there more risk sourcing from low wage economies?

Ron Jarman, global head of procurement, Reuters

When I started, one of my first jobs was sourcing materials from Europe which
were previously sourced from the UK. So this is not a new thing.

Risk is changing and people should feel more able to source from more parts
of the world now as we better understand the risks. The key point is
understanding what you’re doing, know the risks and you act appropriately. At
Reuters we have operations in pretty much every country in the world. I have
sourcing people in every region of the world. We use the local sourcing team and
the teams from the other regions will work with them to do the sourcing.

You need to make sure that you take a more strategic viewpoint of this,
understand the risks or understand the opportunities from sourcing in different
parts of the world. For everything we buy, we should be looking around the world
and understanding where the opportunities come from sourcing from different
locations. It’s a lot wider than looking at India and China and it’s a lot wider
than just thinking about a labour, which is not the only element of cost.

Chaired by Andrew Sawers, editor of Financial Director

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