Committing to a sound management

Margaret Botha A BIG question in the procurement industry is whether procurement and supply chain should be run as a single entity in a business or as two separate entities. Gregg Barrett, director of Cylon Technologies, says there isnt a specific answer to this it depends on the industry the organisation is in and its nature. Companies should do research, conduct a SWOT (strengths,weakennesses, opportunities, threats) analysis and start asking questions such as: - Who are we? - What is our core business? - Where is the organisation at? - How good are we at what we do? These questions will provide information on how to gear the organisation and to benchmark itself. This will affect the organisations strategy, says Barrett. Pierre Mitchell a director of the Hackett Group said at an International Association for Contract and Commercial Management (IACCM) Conference that to advance procurement, you need to understand where you are today (value delivered and capabilities), have a clear vision of where you want to be and where the business wants you to be. It is important to understand the value expectations of your stakeholders and to continue to expand your circle of influence. Another important aspect of procurement is to understand indirect and direct procurement. Money paid on indirect procurement is maintenance, repair and operational costs, such as paint or maintenance of a building. These do not form part of the end product that the organisation is producing. Direct procurement has to do with money spent in producing the end product, for example assembling a vehicle in which case the steel price will play a significant role. Barrett says the Hackett Group has found that world-class organisations have, on average, 49 procurement team members for every $1billion (about R7.7billion) in indirect procurement spend. This compares with 84 for organisations in the middle of the pack (the average organisation). However, it seems that in the tender process, the difficult part is to manage the commitment after the tender has been awarded. Organisations struggle to manage the supplier to produce in the set timeframes and sometimes, an agreed budget. This is a very important part of the tender process and there are a number of standards and processes that organisations might want to follow such as the IACCM and Aberdeen Groups frameworks, he says.

But how do you define commitment management? The IACCM definition is that commitment management is an advanced method through which organisations apply quality principles to business terms, policies, practices and processes to drive improved negotiation, contract performance and standards of relationship selection and market governance, says Barrett. He says the IACCM top 10 best practices in commitment management is of great help in managing suppliers. However, organisations should take what applies to their organisation and marry these steps with its strategic plan. The IACCM top 10 best practices are: - Ownership and accountability for the contracting process - Terms and structure audit and update - Integration with product life-cycle management - Portfolio risk management - Value chain focus - An electronic contracting strategy - Self-help skills assessment and development tools - Strategically aligned measurements and reporting - Pro-active change management - Differentiation and sources of value awareness and marketing Mitchell says world-class commitment management capabilities are needed for worldclass procurement and the principles fit hand-in-glove. He uses the word STORM to describe the situation procurement organisations find themselves in, says Barrett. The S in STORM is for savings savings are difficult to sustain. As supply markets tighten, suppliers are more formidable and global supply markets are increasingly volatile. The T is for top-notch technology and talent. Too many organisations get one or both wrong by licensing software that sits on the shelf, is under-used or by failing to match skill sets and packages with the capabilities required to get a job done. The O is about operational challenges challenges and lower-value processes that divert precious attention and funds from high-value resources. The R is for risk. Risk and regulations in the value chain that increase prices, decrease availability drives suppliers out of business and finally increase compliance costs. The M stands for more. Everyone wants procurement to do more. Chief executives want more growth, innovation, and brand enhancement but without more investment.

Customers also want more for less and they want it now this creates shorter and more volatile product lifecycles. The Aberdeen Group uses two frameworks to explain commitment management. It sums up the primary drivers for procurement as drivers, strategies, enablers and technologies also known as the DSET framework. The drivers are external forces that affect an organisations market position, competitiveness or business operations. The strategies are the approaches an organisation takes in response to its drivers. Enablers are the business process competencies required to execute its strategies and technologies are the hardware and software systems solutions required to support the organisations business practices, says Barrett. The PACE framework is about pressures, actions, capabilities and enablers. Pressures are the external forces that affect the organisation. Actions are the approaches an organisation takes in response to industry drivers and capabilities are the business process competencies required to execute the corporate strategy. The enablers are the functionality of technology solutions required to support the organisation. Next weeks topic is on risk management in procurement and how to identify and manage risk areas in an organisations procurement division.