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  • 8/22/2019 Avoiding the Pitfalls of Centralised Procurement

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    Home Supply Chain Procurement Logiscs Change Management About Us News Contact Us

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    Execuve Interim Manager and ACUITY

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    Avoiding the Pi%alls of Centralised Procurement

    16 Reasons why procurement cost-saving iniaves fail to deliver to the bo#om line

    Tony Colwell - 17 November 2011

    This arcle is the fi.h in a series on how to avoid the pi%alls of centralised procurement

    In the first arcle I commented on the reasons why, when many large organisaons embark on centralised procurement

    iniaves with the promise of substanal savings, direct increases in profitability fail to materialize within the business units

    A discussion to capture the views of other procurement professionals has been running at Procurement Professionals Group

    on LinkedIn

    This week I shall analyze the comments - 157 at me of wring this arcle - from 65 contributors, excluding myself.

    As a piece of qualitave research, the discussion was not intended or designed for quantave analysis. I have a/empted,

    nevertheless, to idenfy, normalize and count the reasons for failure menoned by the 65 contributors. Whilst I accept that the

    validity of this analysis is quesonable, I do feel the results give some valuable insight to the causes of failure, and possible

    areas to be given a#enon in order to deliver a successful centrally-led procurement programme

    First I shall comment briefly on the method of analysis.

    The inial comment from each contributor was examined and the key reasons idenfied. Typically contributors gave between one

    and four reasons. A few contributors gave no reasons in their first comment (for example one contributor's first comment was a

    queson) but did so in their second comment. In such cases the reasons in their second comment were idenfied. Collecvely, I

    have called these 'original menons'.

    Some contributors posted several comments, restang and clarifying their views. I chose not to count the subsequent menons

    of their original reasons. Also, in their later posngs, some contributors were debang others' reasons and, again, I chose not to

    count these menons.

    The reasons were listed and normalized to produce the 16 Reasons listed in Table 1 A few reasons we unclear or ambiguous, so

    they were categorized as "Other".

    Two counts are listed against each of the 16 Reasons The counts are also expressed as a percentage of their respecve totals

    The first is the total count of 'original menons'. The second is a weighted value calculated by a/ribung to each contributor a

    total value of 1 shared equally across hisher reasons. For example, if a contributor provided 4 reasons each was given a value of

    0.25. The first count gives equal weight to each menon, and the second count equal weight to each contributor

    There are a total of 109 menons from the 65 contributors

    Table 1

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    Tony Colwell

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    tonycolwell How Procurement ProfessionalsCan Win Over Reluctant InternalCustomers, Part Iblog.purchasingcourses.com/2012

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    tonycolwell 18 Reasons why #procurement

    cost-saving initiatives fail to deliver to thebottom line acuityconsultants.com/wp

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    tonycolwell MT @Procurian:@thehackettgroups report to close the gapbetween claimed & real savingsslidesha.re/TuulBY15 days ago reply retweet favorite

    tonycolwell@WarrenJessi Misguidedstrategy (blanket supplierrationalization/consolidation) is the firstbarrier. Diversity may offer better value!15 days ago reply retweet favorite

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    tonycolwell Why have we become suchcrappy managers? shar.es/hWquj via@pfersht Solution: hire professional interimmanagers!17 days ago reply retweet favorite

    tonycolwell From the archives: 10 Tips onthe use of Value Chain Analysis for#Procurement Strategyacuityconsultants.com/news.html#blog17 days ago reply retweet favorite

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    tonycolwell@Hal_Good@ProcurementPros

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    The most frequent reason given for failure of cost savings iniaves to deliver to the bo/om line, was Procurement's lack of

    understanding of the true costs and resultant savings. This was a clear leader followed, some way behind by the next 3 reasons,

    grouped in close proximity to each other (in order dependent on the number of menons or weighng by number of

    contributors).

    Poor planning and leadership/unclear objecves covered a range of procurement management-related reasons, including

    misdirecon and inappropriate pursuit of cost reducon where other objecves (e.g. quality or efficiency) were deemed more

    important. Savings redirectedrefers to redirecon within Business Units or by budget holders, for example where budgets arenot adjusted downwards to reflect the procurement savings, or where savings are passed on to customers. Comments relang to

    savings taken centrally and not passed to BUs or budget holders, for example central rebates, were counted separately.

    Inadequate stakeholder engagementwas the third reason in this following group.

    Arguably, lack of stakeholder engagement is a cause of other failures, notably lack of understanding of the true costs, unplanned

    redirecon of savings, delays and non-compliance. Contrary to the results, it is my belief that inadequate stakeholder

    engagement is the number one reason for failure and that these other causes are symptomac. The discussion thread gave some

    support to this hypothesis but the construct of the research provides no means of tesng it objecvely.

    Readers may be interested in the arcle "7 Essenal Elements of Stakeholder Engagement" in which I give a pragmac guide to

    ensuring stakeholder engagement in projects and programmes.

    Economic factors, e.g. inflaon, exchange rates were given as a reason but, arguably, these should be forecast and any losses

    offset by comparable gains. Failure to forecast was included here rather than in cosng inaccuracies.

    Inadequate follow through/contract managementrefers to the disengagement and dissociaon of Procurement aDer seng up

    the contract. This behaviour might be reinforced by performance measures based on theorecal 'contracted savings'rather than

    'realized savings', with non-compliance being a major reason for the difference between the two.

    Inadequate sponsorship refers to sponsorship by C-level execuves, as disnct from procurement leadership covered in an earlier

    Reason.

    Conflicng metrics and conflicng incenves, and a lack of joined-up KPIs across departments and funcons, can encourage

    non-compliance especially ifcommunicaons and stakeholder engagementare poor.

    Lack of necessary skills refers to the capability of procurement management and staff. We might expect this reason to be

    understated given that the contributors were mainly from the procurement funcon.

    Opmisc mescales and delays in achieving savings (doing the right things more slowly than planned) were idenfied

    separately from other planning and control issues (doing the wrong things) covered in an earlier Reason.

    There was a specific reference to contrived savings, or fabricaon of results, which was worthy of menon separately from

    cosng inaccuracies.

    Finally, the pracce oftaking savings centrallyto withhold them from BUs and budget holders was discussed, and views

    expressed regarding the adverse effect this may have on relaonships with some stakeholders.

    I hope that any readers involved in a centrally-led procurement programme will find this analysis helpful as an aid memoire

    when considering the risks to successful delivery to the bo#om line

    Individual comments and the opportunity for readers to post their own comments are available in the discussion "Why do so

    many procurement cost saving iniaves fail to deliver to the boom line?"in the Procurement Professionals (Open) Group on

    LinkedIn.

    Go to top

    How to select suppliers to create value

    Supplier Appraisal

    Tony Colwell - 10 November 2011

    In my recent series of arcles "Avoiding the Pialls of Centralised Procurement" I wrote on the subject of starng a strategic,value-creang procurement programme. Last week I reflected on the idenficaon of suppliers that will create or add value.

    Central to my argument was the need to assess the supplier's capability to collaborate and innovate, to help us opmize exisng

    productsservices, and to achieve our desired business outcomes. Rather than focus exclusively on the required product or

    service we need to pay a/enon to supplier evaluaon and pre-qualificaon.

    This week I shall be commenng in more detail on the methodology for supplier appraisal and how I tailor my approach to

    Blog posts:

    Avoiding the Pialls of Centralised

    Procurement

    Part 1 : Why so many procurement cost saving

    iniaves fail to deliver to the bo/om line.

    Part 2 : Strategic or Taccal Cost-Savings

    Programme?

    Part 3 : How to Start a Strategic Value-Added

    ProgrammePart 4 : Are your Procurement stakeholders

    champions or saboteurs?

    Part 5 : 16 Reasons why procurement

    cost-saving iniaves fail to deliver to the

    bo/om line

    10 Tips on the use of Value Chain Analysis for

    Procurement Strategy

    How to select suppliers to create value

    Part 1 : How to select suppliers to create value

    (Introducon)

    Part 2 : Supplier Appraisal (Pre-contract)

    Three Principles for Effecve Services

    Contracng

    Change Management: 7 Essenal Elements of

    Stakeholder Engagement

    Effecveness of Interim Management Supply

    Models -

    Part 1 : The Metrics?

    Part 2 : Consultancy and Interim Assignments,

    if you could tell me how to value the

    outputs that would be fantasc.

    Part 3 : Where Next?

    A Case for Business Process Management

    Part 1 : Business realies and the business

    process perspecve

    Overcoming obstacles to successful change

    programmes

    Ulising Professional Interims to help reduce

    the budget deficit

    Professional Interims: consultants or

    conngent labour?

    A single, shared forecast for the business... so

    what's the problem?

    Part 1 : The mess businesses get into

    Part 2 : Products at risk, and managing inbound

    supply

    o the UK electoral polling and counng

    processes need reform?

    PROFESSIONAL EXECUTIVE INTERIM

    MANAGERS AND CONSULTANTS -

    PROCUREMENT & SUPPLY CHAIN SERVICES

    AND EXPERTISE

    Acuity (Consultants) Ltd provides professional

    interim execuves, execuve interim

    managers, consultants and experts in

    procurement and supply chain, transformaon

    and change management.

    Join the conversation

    UITY CONSULTANTS News & Blog Archive: Supply Chain, Pro... http://www.acuityconsultants.com/news.html#why_do_procurement_in...

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    meet the requirements of corporaons and individual businesses within their specific industry context

    My aim is not to repeat the advice of other guides but rather to suggest to readers that they develop their own approach Why

    should we do this when there are 'best pracce' templates to follow? Anyone who is familiar with push and pull strategies in

    supply chain management will understand the advantages of pull strategies when it comes to meeng customer-specific

    requirements. My point is the supplier appraisal design can be 'pulled' by (external and internal) customer values rather than

    'pushed' by generic best pracce. Compeve advantage is elusive and uniquely interwoven with the customer values within a

    supply chain. Generic templates are fine for generic results If you are looking for the truly exceponal, then you need a

    differenated approach one tailored to your, and your customers', specific needs

    Here we are looking at supplier evaluaon and pre-qualificaon processes mainly for partnerships. We perhaps need to qualify

    where partnerships are appropriate. For other types of relaonship a generic approach may be more than adequate. To be clear, I

    am not saying that the design of appraisals for partnerships should be totally new. There will be important elements - for example

    financial background - which can be taken from generic 'best pracce' models. I would encourage appraisers to review and use

    elements of exisng published models and then add criteria appropriate to their specific needs. (I'll come to this later.) Also It

    helps to know your subject before trying to develop a new approach... so first I shall recommend a couple of good sources of

    advice on general pracce

    The first source is the Supply Management (CIPS) Guide to Supplier Appraisal - an excellent concise guide to pre- and

    post-contract appraisal, and a recommended read for anyone new to the subject. It defines supplier appraisal as follows:

    "Supplier appraisal is the evaluaon and monitoring of supplier capability to ensure successful delivery of commercial outcomes. It

    is an essenal part of strategic sourcing, supplier management and securing compeve advantage."

    Whilst it idenfies supplier appraisal as essenal to securing compeve advantage, the Guide offers no substanve connecon

    between appraisal and the means by which compeve advantage can be secured The pre-contract appraisal focuses on risk

    migaon rather than the idenficaon and exploitaon of opportunity:

    "Conducng checks or due diligence on your potenal supplier does not guarantee there wont be any future problems, but it

    will help reduce the chance of them arising."

    "...an appraisal process is usually used if any, or a combinaon, of the following contract condions exist:

    High value; Highly complex;

    Long term;

    Business crical;

    Likely to affect reputaon;

    Internaonal in nature;

    It would be difficult to change suppliers;

    The market has a limited number of suppliers."

    My parcular interest is in 'business crical' condions. One needs to be wary of the presumpon that Procurement knows

    exactly what condions are business crical. While there will be business crical condions that are apparent to all, there are

    usually some (especially opportunies) that go unnoced... and not just by Procurement! These less obvious condions or

    opportunies are oDen the source of compeve advantage. (If they were that obvious then everyone, competors included,

    would be addressing them!)

    The second source is a research paper "Supplier Evaluaon Framework Based on Balanced Scorecard with Integrated

    Corporate Social Responsibility Perspecve" by Worapon Thanaraksakul and Busaba Phruksaphanrat (2009)

    The authors developed an evaluaon framework from a literature review of 76 papers related to supplier selecon criteria. The

    original evaluaon frameworks were conducted in various contexts, and some papers reviewed mulple selecon models. From

    their review, Thanaraksakul and Phruksaphanrat created a generic model - ranking the selecon criteria based on frequency of

    appearance. Given the varied contexts of the original frameworks, individual criteria would have assumed differing importance

    and been given different weighngs. The ranking in the generic model does not take this into account, and I would advise readers

    not unwingly to infer that the ranking has any significance to their own circumstances.

    I feel I also need to comment on Balanced Scorecard ("BSC"). BSC is ulmately about choosing measures and targets associated

    with the main acvies required to implement a business strategy, not a supplier appraisal tool (Readers might also consult

    the EFQM Business Excellence model which is more aligned to achieving excellence through connuous improvement in business

    processes and management.) BSC aims to provide a 'one size fits all' set of metrics to be cascaded down and across the business,

    and a balance between the 4 perspecves: Financial; Customer; Internal Business Processes; Learning & evelopment (5

    perspecves if you include Corporate Social Responsibility). The Balanced Scorecard Instute (a private company) acknowledges

    that these perspecves may not be relevant to non-profit organisaons or units within complex organisaons, which might have

    high degrees of internal specialisaon. In pursuit of supplier partnerships we may be looking for specialisaon and skewed focus

    i.e. within a parcular context, very specifically at certain criteria.

    Having cricised BSC for supplier pre-contract appraisal, I can thoroughly recommend Thanaraksakul and Phruksaphanrat's paper

    as a source of generic supplier appraisal criteria.

    As a third source, readers with special interest in quality assurance might look at the Internaonal Society for Pharmaceucal

    Engineering's Good Automated Manufacturing Pracce Guides. which deal with supplier audits. The assurance demands of

    automaon in this highly regulated industry are parcularly challenging, so the GAMP guides are very thorough. The focus on

    validaon planning and supplier due diligence have relevance to answering the queson "Is the supplier able to perform?" The

    Guides are not cheap, but a quick scan of the contents pages may give a few ideas and help determine if a purchase is

    worthwhile.

    Now I shall address the idenficaon of suppliers that warrant a tailored appraisal, and then the tailoring

    Supply Management proposes the use of Kraljic's Purchasing Porolio matrix (1983), which plots profit potenal against supply

    vulnerability. The recommendaon is to apply the most rigorous appraisals to the high profit potenal, high vulnerability

    quadrant. Most procurement professionals will be familiar with a number of similar 4-quadrant 'supply posioning'models that

    have been developed subsequently, for example Ellio/ Shircore & Steele's Procurement Posoning (1985), and Van Weele's

    Purchasing Porolio (2000).

    'Supply posioning' models convey important concepts but have significant weaknesses in their praccal applicaon to

    supplier appraisal:

    they are intended for purchase items or categories, not suppliers; individual suppliers may therefore span more than onequadrant;

    the supplier's side of the supplierbuyer relaonship is disregarded;

    they pose unanswered quesons about what will be posioned, at what level of aggregaon, and for what organizaonal unit

    will the analysis be performed.

    In pracce, if you perform a porolio analysis on individual categories you will oDen idenfy component groups that map across

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    different quadrants of the grid; then when you look within component groups you may find individual items sit in different

    quadrants; different mappings are generated with different operang units, and so on. So whilst Kraljic and the like are

    informave in terms of an overview, they do li/le to connect specific crical issues and opportunies to supplier capability.

    In order to address these issues I've developed my own matrix, based on 'intrinsic value' (as value is what we are ulmately

    trying to deliver):

    - to perform item/category analysis (supply posoning) from an operaonal perspecve

    - to link to Value Chain Analysis for the strategic and supplier perspecves

    This enables the use of a common rangranking system across strategic and taccal opportunies.

    Value Chain Analysis ("VCA") answers the aggregaon and organisaonal quesons le. unanswered by supply posioning The

    point about VCA is that it circumvents the porolio analysis. VCA will idenfy crical requirements which cannot be resolved

    in-house and therefore require soluons to be procured. If VCA does not highlight an opportunity or risk, then the required

    relaonship is probably non-strategic and non-partnership. Note that there may be partnership requirements with the same

    supplier in other value chains. (This emphasises the need to perform a strategic analysis before embarking on taccal

    cost-reducon programmes. See arcle "Strategic or Taccal Cost-Savings Programme?")

    The other things that VCA addresses:

    VCA exposes crical issues and previously unrecognized (or inacve) opportunies,

    within very specific circumstances-within-business-within-industry context to gain compeve advantage,

    and links these specifically to required supplier inputs

    You will know, beyond the generic requirements, specifically what you are looking for in your key suppliers. If you have

    performed VCA you have the informaon to tailor the supplier evaluaon matrix

    Regarding the BSC format, conceptually, the range of criteria is a good: we need to consider all angles. But differenaon - the

    source of compeve advantage - may be very unbalanced. We may be looking at a focus on specific bo/lenecks or opportunies

    for which the overall scorecard may have li/le relevance. Addionally, BSC has always been subject to cricism that the content

    of each perspecve is somewhat arbitrary. The focus on defining a simple set of broadly applicable measures conflicts with the

    requirements for a comprehensive set of criteria both to migate supply risks and appraise partnership potenal. Arguably, a

    more comprehensive version can be used for pre-contract appraisal; then a consistent, stripped-down version containing only keyperformance measures could be used for post-contract review. Personally, I do not like the format for pre-contract appraisal,

    mainly because I can see a more logical and helpful structure.

    My 3-part supplier appraisal separates

    (1) Readiness - the physical a/ributes (requiring acon to modify), from

    (2) Willingness - the metaphysical (subject to influence, to reasoning and persuasion), and

    (3) Ability - the evidenal, reasoning material, which indicates the supplier's power or capability to translate the metaphysical

    into the physical... to realize the dream!

    I find this format more conducive to developing a supplier management strategy

    To recap, my appraisal format is in three parts:

    Is the supplier ready? oes the supplier have the right infrastructure technology and resources...the appropriate means to

    provide the products or services you need? Potenal suppliers may not have the product or service today, but the capability to

    provide it. (Perhaps there is a reverse markeng opportunity?)

    Is the supplier willing?What are the supplier's values, market orientaon, direcon and strategy? How flexible and adaptable are

    they, operaonally and commercially? Are you aligned, and will you be a valued customer?

    Is the supplier able to do business? Some suppliers may have the right infrastructure, technology and resources; they are

    focusing on the right market; they express similar values; they say they want your business. The promise is there, but they simply

    fail to deliver. So, here, we are looking for demonstrable capability to perform.

    I am not going further to populate the three categories but I will comment briefly on weighng and scoring

    'Best pracce' guides generally refer to weighng the criteria. Preparing and agreeing a weighng system with stakeholders can

    be a lengthy task. Although I do it, in pracce I have never found weighng was necessary; I've never performed a partnership

    evaluaon that came down to the weighngs on individual criteria. I do advise that you classify criteria, to be clear what is

    essenal, highly desirable or nice to have

    When it comes to rang, make scores as objecve as possible I like to use a 7-point Likert-type scale: a supplier may have

    a/ributes that support or run counter to the achievement of your objecves. A negave score might apply, for example, if a

    supplier had a strategic relaonship with a competor which would impact adversely on their willingness to support your

    business.

    Finally, the numbers are an aid to stakeholder discussion and agreement. I would never reduce the process to an evaluaon by

    numbers - to a decision based on total score.

    I am inving the views of procurement professionals. and other readers who may wish to comment, at " How would you assess a

    supplier's capability to collaborate and innovate, and to create value in your business?" in the Procurement Professionals

    (Open) Group on LinkedIn.

    Related Items

    Readers may also be interested in the discussion " Why do so many procurement cost saving iniaves fail to deliver to the

    boom line?" at Procurement Professionals (Open) Group on LinkedIn.

    References and further reading

    The Supply Management (CIPS) "Guide to... Supplier Appraisal",

    Very similar: "How to appraise suppliers" - CIPS Knowledge Works (available for download on the Chartered Instute of

    Purchasing & Supply Web Site)

    "Supplier Evaluaon Framework Based on Balanced Scorecard with Integrated Corporate Social Responsibility Perspecve" -

    Worapon Thanaraksakul and Busaba Phruksaphanrat (2009)

    Informaon on the purpose and applicaon of Balanced Scorecard at The Balanced Scorecard Instute (private company)

    "A Study to Compare Relave Importance of Criteria for Supplier Evaluaon in e-Procurement - Ashis Kumar Pani and Arpan

    Kumar Kar (2007)

    Go to top

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    How to select suppliers to create value

    Tony Colwell - 3 November 2011

    In my recent series of arcles "Avoiding the Pialls of Centralised Procurement" I wrote on the subject of starng a strategic,

    value-creang procurement programme, and subsequently went on to give 10 ps for the use of Value Chain Analysis.

    This week I want to reflect on the idenficaon of suppliers that will create or add value

    My theme for this week was influenced by a recent video of sales trainer Eric LoDholm in which he talks about the importance of

    collaboraon, innovaon and opmisaon in the sales process.

    When engaging with suppliers of strategic goods or services - repeve supplies, or one-off purchases that have a connuing

    maintenance requirement - we can o.en create value through collaboraon, innovaon and opmisaon. We need to focus on

    the business outcomes we are trying to achieve not simply on our perceived input requirements. Procurement generally focuses

    on the required product and, oDen, not enough on the inherent capabilies of the supplier. We need to assess the supplier's

    capability to collaborate and innovate, to help us opmize exisng products/services, and to achieve our desired business

    outcomes

    The implicaons of such 'product' focus in public sector procurement are all too evident. There are many areas (ICT for example)

    where rapid change can render products and services virtually obsolete by the me they are deployed. Similar failings are less

    visible in the private sector, where the procurement processes are more agile, and greater flexibility exists to change

    specificaons or source add-ons. But the symptoms are manifest: excessive complexity and fragmentaon; cost overruns;

    supplier margin creep; failing 'partnerships'; suppliers either lacking commitment or gaining a stranglehold over customers.

    The answer, I believe, is be#er supplier evaluaon and pre-qualificaon

    The public sector procurement process mandates that all suppliers are treated equally... the intenon is to level the playing

    field... the outcome is that mediocre suppliers get carried though the process. The process appears to be founded on unreliable

    assumpons: that there are mulple suppliers who are capable; good suppliers will be keen to supply; their products will be

    similar and can be evaluated against a single specificaon.

    The reality is this: in the supply of all but the most basic commodies there will be one supplier best placed to meet the

    customer's needs. Procurement's task is to idenfy and contract (not necessarily exclusively) with that supplier. This is

    parcularly important in strategic categories, where reverse markeng may also be beneficial. Success cannot be guaranteed by

    focusing on the product alone. The boundary of the supplier and customer's interacons - the opmum soluon - will be

    determined by the supplier's capability... more precisely, by the supplier and customer's relave capabilies across a broad

    spectrum of requirements.

    So how do we idenfy the best supplier? How do we evaluate capability?

    A former colleague and purchasing manager, Bill Weinert, once said "There are only three quesons you need to answer: is the

    supplier ready, willing, and able to do the business? " It was a great piece of advice that I've taken and developed into a supplier

    appraisal process. The process is tailored to the specific value creaon opportunies within a business, which I'll save for a future

    blog. For now, I will outline the basic principles.

    Is the supplier ready?

    oes the supplier have the right infrastructure technology and resources...the appropriate means to provide the products or

    services you need? Potenal suppliers may not have the product or service today, but the capability to provide it. (Perhaps there

    is a reverse markeng opportunity?)

    Is the supplier willing?

    What are the supplier's values, market orientaon, direcon and strategy? How flexible and adaptable are they, operaonally and

    commercially? Are you aligned, and will you be a valued customer?

    Is the supplier able to do business?

    This is the more difficult of the three quesons. Some suppliers may have the right infrastructure, technology and resources; they

    are focusing on the right market; they express similar values; they say they want your business. The promise is there, but they

    may sll fail to deliver. So, here, we are looking for demonstrable capability to perform.

    Convenonal supplier audits can tell us a lot: do suppliers have the processes, assurance systems, training, etc. Supplier audits,

    and procurement due diligence, are usually directed at validang and verifying suppliers' 'readiness', rarely on validang their

    'willingness'

    The validaon of suppliers' willingness needs to be prospecve, not retrospecve Negoaons oDen play on suppliers'

    willingness to compromise in order to make a sale; this should not be confused with willingness to perform in the longer term.

    The key a#ribute is free will, not the product of coercion A#empts to gain co-operaon by contractual means (obligaons and

    warranes) are not the answer; this amounts to use of force. As I explained last week - in my blog " Are your Procurementstakeholders champions or saboteurs?" - force can only guarantee reluctant compliance. And reluctant compliance is not a

    foundaon for collaboraon and innovaon.

    We need to look beyond the convenonal audit criteria to ask "What are this supplier's movaons to collaborate and

    innovate?" and then, "How do we validate these in our specific context?"

    Next week I shall be commenng in more detail on the methodology for supplier appraisal and how I tailor my approach to

    meet the requirements of corporaons and individual businesses within their specific industry context

    In the meanme I am inving the views of procurement professionals. and other readers who may wish to comment, at " How

    would you assess a supplier's capability to collaborate and innovate, and to create value in your business?" in the Procurement

    Professionals (Open) Group on LinkedIn.

    Related Items

    Readers may also be interested in the discussion " Why do so many procurement cost saving iniaves fail to deliver to the

    boom line?" at Procurement Professionals (Open) Group on LinkedIn.

    Go to top

    Avoiding the Pi%alls of Centralised Procurement

    Are your Procurement stakeholders champions or saboteurs?

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    Tony Colwell - 27 October 2011

    This arcle is the fourth in a series on how to avoid the pialls of centralised procurement.

    In the first arcle I commented on the reasons why, when many large organisaons embark on centralised procurement

    iniaves with the promise of substanal savings, direct increases in profitability fail to materialize within the business units. In

    my second arcle I compared strategic and taccal cost-savings programmes and exposed some of the myths associated with

    taccal programmes. My third arcle focused on starng a strategic, value-creang procurement programme, and, last week, I

    digressed from the core theme to give 10 ps for the use of Value Chain Analysis.

    This week I want to return to the core theme - the pialls of centralised procurement - to touch on the subject of stakeholder

    management.

    A discussion thread to capture the views of other procurement professionals has been running at Procurement ProfessionalsGroup on LinkedIn. There have been many comments relang to lack of leadership and conflicts between stakeholders.

    Parcipants recognize that conflicts can occur as a consequence of inter-departmental inconsistency in funconal objecves and

    targets. However, we also noted that good personal relaonships can, in part, overcome some of these divisive influences.

    On reading through the enre discussion thread (80 comments at me of wring) I was surprised to find that there were no

    references to formal stakeholder analysis or the development of supporters. Given that category management is at the heart of

    many centralised procurement programmes, one might have expected some reference to the importance of category champions.

    In contrast there were several references to mandates and use of force... perhaps reflecng that procurement leaders put more

    emphasis is on pressurising resistors and restraining mavericks. Similar views have been expressed in other discussion threads, for

    example, "How do you get the business to take Procurement seriously? "

    A Web search will reveal many sources of advice and guidance on stakeholder mapping (including templates) and stakeholder

    engagement. Indeed I have already wri/en on the subject, "Change Management: 7 Essenal Elements of Stakeholder

    Engagement."

    Now I invite readers to reflect on what I call "The Engagement Spectrum" - a graphic illustrang the degree to which stakeholders

    support or resist a proposion - and the acons they might take to move stakeholders from a resisve (or less supporve) to a

    supporve (or less resisve) stance.

    The key message here is that the maximum degree of engagement that you can guarantee by use of force is 'reluctant

    compliance'. Now there may be some circumstances in which reluctant compliance is all you need, in which case, why go any

    further? But such cases must be few and far between. So why is there such emphasis on mandates and use of force?

    Join the discussion in the Procurement Professionals (Open) Group on LinkedIn:

    "Are your Procurement stakeholders champions or saboteurs?"

    Where do your stakeholders sit on The Engagement Spectrum and what are you doing to move them towards the champions

    end?"

    Go to top

    10 Tips on the use of Value Chain Analysis for Procurement Strategy

    Tony Colwell - 21 October 2011

    Last week as part of my series on Avoiding the Pialls of Centralised Procurement I wrote an arcle "How to Start a Strategic

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    Value-Added Programme." I commented on the use of Value Chain Analysis ("VCA") which was developed by Harvard strategy

    guru Michael Porter. In developing VCA, Porter addressed the limitaons of his Five Forces model. Whilst Porter's Five Forces

    model has been taken up extensively by the Procurement community as a strategy development tool, VCA remains li/le used

    despite its superior capability.

    In this arcle, I give my ps on the use of VCA in the context of developing procurement strategies. Readers will benefit from

    prior knowledge or reading on the subject. VCA experts may disagree with my approach - it does deviate from Porter's concept -

    for which I make no apology. My reasons will become apparent.

    First I shall recap on the VCA steps that I outlined in a li/le more detail last week.

    5 steps to developing procurement strategy using Value Chain Analysis:

    (1) Create a model of the value chain, seng out the key acvies.

    (2) Capture external factors and customer values.

    (3) Assess the relaonship between customer values on key acvies. Assess the potenal to create differenaon and cost

    advantage.

    (4) etermine operaonal strategies whereby value to the customer can be most improved, and compeve advantage can be

    most enhanced and sustained.

    (5) etermine procurement strategies to support the operaonal strategy needs and maximise added value.

    Michael Porter said, " In a world where managers are prone to look for simple prescripons, detailed acvity analysis was and is

    challenging." Value Chain Analysis as prescribed in full by Porter is indeed a challenging and intensive exercise. For our purpose it

    doesn't need to be.

    Here are my 10 ps for running Value Chain Analysis

    The first two are suggesons for liming the scope and simplifying the process:

    Tip 1 Be clear on the purpose

    If you are using Value Chain Analysis to develop procurement strategy, not as part of a larger programme to formulate businessstrategy, you are likely to encounter some resistance from other funcons. Funconal heads may think Procurement is trying to

    interfere in the formulaon of their strategies. Rather than try to re-define business strategy, use VCA as a tool to "listen" to the

    strategies of other funcons. VCA will capture their objecves and how these link, or not, to customer values. This can enable

    other funcons to discover for themselves flaws or holes in their own strategies, and inconsistencies between strategies... also to

    find new ways of operang, and new ways of using the procurement funcon to add value.

    Tip 2 Limit the scope

    VCA examines two sources of compeve advantage: cost leadership and differenaon. If you are not the clear cost leader in

    your markets, focus on procurement alone is unlikely to achieve that posion. The analysis of cost structure is an intensive,

    numerical process. Use the cross-funconal team to focus on opportunies to develop differenaon. Rely on the subjecve

    views of parcipants: opportunies to create be/er value-for-money and to take cost out of the value chain will be idenfied. You

    can always re-evaluate these later by more objecve, numerical analysis.

    Purists may argue that these two suggesons deviate from Porters concept. Porter failed to address some of the praccal issues

    of conducng VCA, in parcular how to deal with the commercial risk when involving suppliers or customers. Focusing on

    differenaon rather than cost reducon migates the risk; it also lends itself to use of cross-funconal workshops, which

    promote collecve ownership.

    Tip 3 Reflect on project management methodology and communicaons

    Even if you go for a narrow scope VCA (as suggested above) it is going to touch all areas of the business. You will need appropriate

    sponsorship and buy-in at senior level, you will need to borrow some key people, and you will gain from communicang to all

    people who would normally be involved in strategy formulaon. You may not be seng out to re-write their strategies but you

    will be re-wring the way they are supported by procurement; so the strategy makers need to be given the opportunity properly

    to communicate their strategies. Ulmately, all employees, regardless of their distance from the strategy development process,

    will need to know what is expected of them but at this stage we are concerned with strategy formulaon, not execuon.

    I am not going to comment on formal project management methodology or advocate its use, but I would suggest that VCA users

    consider what is appropriate for their circumstances.

    Tip 4 Determine the general approach

    Value Chains exist at business level, not at corporate level. Businesses may have more than one value chain. This will either be

    self-evident or will emerge during the VCA session. If evident in advance, you have two opons: (i) run enrely separate sessions

    for each value chain, or (ii) run a session to capture overarching business drivers, issues and objecves, then run separate

    sessions for each value chain. The advantage of (i) is that parcipants will be involved in the enre process for the value chain in

    which they are stakeholders; the disadvantage is that you may be duplicang analysis of similar acvies. The advantages of (ii)

    are that you can engage a broader range of stakeholders (e.g. more senior for the overarching session, more junior for the others)

    and avoid duplicaon; the disadvantage is the potenal for a disconnect.

    Tip 5 Propose the Acvity Categories

    It helps to have a straw man to take to the first session and to guide your team selecon. Aim to use the same categories for all

    sessions; you may have to make excepons, but try to avoid unnecessary differences in the models for each value chain. Mulple

    models will confuse stakeholders and make consolidaon of outputs difficult.

    Tip 6 Select your team

    Ideally all the categories need to be represented. I find workshops are easiest to run with 7 people and become increasingly

    difficult as numbers increase. So immediately we are looking for a compromise. I once ran a VCA workshop with 22 parcipants,

    but would try to keep numbers to 12 or less. You may be able to leave out some or all support acvies. You may need to run

    mulple workshops, for example (a) as suggested in p #5 above, or (b) separate workshops, one for primary and one for support

    acvies.

    There are three important characteriscs required of team members. Ideally they will be:

    creave and open-minded. The conservave and crical can have their input later.

    from the same peer group. No individual must be overly dominant, so don't put the M with junior staff! sufficiently senior and established within the business. They need to understand the business and its current direcon, and be

    able to challenge exisng strategy. Typically, you would be drawing from BU Execuve or the level below. In split sessions - i.e.

    4(ii) above - you might draw from 3 levels... no more.

    Tip 7 Make sessions easy for parcipants

    VCA sessions are held in cross-funconal workshops. I like to run workshops that require no preparaon by parcipants. You will

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    need to do some work on the outputs but that should not require all parcipants to be present, or put big demands on other

    stakeholders.

    As a piece of praccal advice - to minimise digressions into non value-adding acvies - my 'rules of engagement' for parcipants

    in VCA would include the following definion of a value chain:

    A Value Chain is the chain of acvies that add value to a product

    Value exists only where a customer need is sasfied

    Any acvity or process that does not serve a customer need is not part of the Value Chain

    Tip 8 Separate idea generaon from evaluaon

    The process of working from the customer interface down the primary categories, looking at the impact of customer values, is a

    fairly logical process but one that should not exclude creave thinking. This is especially important when it comes to idenfying

    opportunies for differenaon and enhancing compeve advantage. Apply 'brainstorming rules' to encourage free thinking: let

    the ideas flow, then evaluate the ideas aDer running through all primary categories.

    Tip 9 Pay a#enon to linkages and informaon flows

    Porter highlighted that the linkages between acvies and, indeed, vercal links up and down the value chain (including links to

    suppliers and customers) are a key source of compeve advantage. The key to linking acvies together in a way that gives a

    company an advantage over others is to understand the flow of informaon that occurs between the various acvies.

    Tip 10 Involve trading partners with great care

    The configuraon of acvies for compeng in a parcular way also shapes the appropriate contractual relaons with other

    firms. Exploring the linkages between acvies demands the involvement of cross funconal teams and possibly the involvement

    of trading partners. The risk of involving trading partners in VCA sessions is the potenal loss of commercial advantage and

    margin: "the poron of the created value we are capturing" may be lost to the trading partner.

    It is safer to leave trading partners outside of inial analysis... unl you have sufficient experience and a properly formulated

    negoaon plan to deal with commercial issues. In most cases it is be/er not to involve suppliers in the workshops but take

    specific outputs to them later. VCA might highlight issues, opportunies, or required outcomes; how those issues might be

    addresses, or the outcomes achieved, would be up for discussion with relevant suppliers.

    In introducing VCA last week I wrote "If Procurement has never engaged in such an exercise, Pareto will almost certainly apply:

    80% of the benefit from 20% of the effort!" I hope I have encouraged readers to explore the use of VCA for procurement strategy,

    and that these 10 ps will be of help in developing a praccal approach without too much effort.

    Join the discussion, " How do you start a strategic, value-added procurement programme? " at Procurement Professionals (#1

    supply chain & sourcing group) on LinkedIn

    References:

    " Compeve Advantage: Creang and Sustaining Superior Performance", Michael E. Porter, First Free Press Edion 1985

    Go to top

    Avoiding the Pi%alls of Centralised Procurement

    How to Start a Strategic Value-Added Programme

    Tony Colwell - 14 October 2011

    This arcle is the third in a series on how to avoid the pialls of centralised procurement. In the first arcle I commented on the

    reasons why, when many large organisaons embark on centralised procurement iniaves with the promise of substanal

    savings, direct increases in profitability fail to materialize within the business units. In my second arcle I compared strategic and

    taccal cost-savings programmes and exposed some of the myths associated with taccal programmes. A discussion thread to

    capture the views of other procurement professionals has been running at Procurement Professionals Group on LinkedIn.

    This week I want to touch on the subject of starng a strategic, value-creang procurement programme.

    In another Procurement Professionals Group discussion thread, "Are savings the wrong way to report procurement department

    performance?" Bill Young introduced a paper co-authored with Charles H. Green, which provides some interesng insights to the

    cause of unresolved conflicts between Procurement and its internal clients, and the reasons why Procurement is oDen less

    strategic than it would like to be:

    "Procurement today is a complex management service, intended to support the strategic aims of the organisaon. However, some

    of Procurements intended customers are confused about its role and intenons, and hence dont trust its moves.

    "We argue that trust is fundamental and essenal in the type of relaonship that Procurement is aiming for, but that the metrics

    and governance used by Procurement are anthecal to its aims."

    I would recommend any reader involved in, or about to set up, centralised procurement to read this paper.

    Returning to the discussion I iniated, some observaons by contributors have been directed at the need to create value rather

    save costs:

    "Most procurement [departments] are measured on savings - not on value creaon,"

    "Savings... should leave room for innovaon, improved quality, shorter lead mes, and not be a bo

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    strategies. espite Porter's development of VCA as a more relevant tool, I have not seen VCA used by Procurement anywhere

    other than where we have introduced it. I have seen the term used, but it has been misinterpreted as cost analysis of suppliers

    using convenonal accounng structures, which VCA is most certainly not.

    Michael Porter published Value Chain Analysis in 1985 as a response to cricism that his Five Forces framework lacked an

    implementaon methodology that bridged the gap between internal capabilies and opportunies in the compeve landscape.

    Whilst Five Forces and SWOT have their place, properly deployed VCA is much more rigorous and producve. The Five Forces

    model applies to all competors within an industry or market. SWOT provides a simple framework for individual companies but

    relies on the user to determine the scope, which leaves the capture of all relevant factors very much to chance. By contrast VCA

    provides a tailored and structured framework to idenfy company-specific strengths, weaknesses, opportunies and threats, and

    to develop strategies, within the context of a very specific compeve landscape. This includes vercal links to customers and

    suppliers... value creaon from procurement and supplier contractual relaons.

    Whereas Five Forces and SWOT can be conducted by the procurement team, VCA has to be performed by a cross-funconal

    team. This brings substanal benefit as the cross-funconal team members develop shared strategies and a clear understanding

    of how those strategies both determine and support their individual objecves.

    The value chain allows an organisaon to understand what acvies it performs, classify them into primary and support acvies

    and most importantly of all, understand which ones add value to the customer. Porter proposed 9 categories of acvies: - 5

    categories of primary acvies - inbound logiscs, operaons, outbound logiscs, markeng and sales, services - 4 categories of

    support acvies (so called because they support the primary acvies) - procurement, technology development, human

    resource management, infrastructure. These 9 categories can be further subdivided by analysts into their firm's industry-specific

    and business-specific acvies.

    Successful use of VCA may challenge Porter's original generic model. I prefer to tailor the value chain at the category level.

    espite Porter's claim that the 9 generic categories exist in every business, they do not work well for some products and many

    services. For example, in developing a procurement strategy (unclassified) for military support services (which excluded the

    procurement of military hardware plaorms and associated dedicated services) we found that Porter's classificaons were far

    from ideal. We defined 6 primary categories: recruing; basic training, equiping; collecve training; mobilizaon; deployment. My

    point is that Porter's classificaons are not sacrosanct. The important things to recognize are that the definions must reflect

    business terminology, and the disaggregaon of acvies must be sufficient to reveal the sources of compeve advantage,

    whether they be in primary or support acvies.

    There are 5 steps to developing procurement strategy using Value Chain Analysis:

    (1) Create a model of the value chain, breaking down a market vercalorganisaon into its key acvies under each of the

    classificaons. Include upstream linkschannels.

    (2) Consider the macro-environment, and external factors. What are the factors impacng on the markets and customers?

    Capture, explicit and implicit customer needs, known customer values and trends that will affect customer values.

    (3) Working from the customer interface down the primary categories, assess the impact of (internal as well as external)

    customer values. Capture key objecves and crical success factors within each key acvity. Within each key acvity assess the

    potenal for enhancing value. Consider points of differenaon and areas where the business appears to be at a compeve

    advantage disadvantage. Capture opportunies to enhance value (and to defend exisng compeve advantage). Move on to

    consider and capture opportunies to add value through support acvies.

    (4) etermine operaonal strategies built around focusing on acvies where value to the customer can be most improved, and

    compeve advantage can be most enhanced and sustained.

    (5) Link opportunies captured in step 3, and strategies in step 4, to procurement acvies and to suppliers. etermine

    procurement strategies to support the operaonal strategy needs and maximise added value.

    Michael Porter said, " In a world where managers are prone to look for simple prescripons, detailed acvity analysis was and is

    challenging."A full analysis of the value chain as set out in "Compeve Advantage" is indeed a challenging and intensive

    exercise. For our purposes it doesn't need to be. If Procurement has never engaged in such an exercise, Pareto will almost

    certainly apply: 80% of the benefit from 20% of the effort!

    Next week I shall be giving my ps on running the Value Chain Analysis process.

    Join the discussion, " How do you start a strategic, value-added procurement programme? " at Procurement Professionals (#1

    supply chain & sourcing group) on LinkedIn

    References:

    " Compeve Advantage: Creang and Sustaining Superior Performance", Michael E. Porter, First Free Press Edion 1985

    Go to top

    Avoiding the Pi%alls of Centralised Procurement

    Strategic or Taccal Cost-Savings Programme?

    Tony Colwell - 7 October 2011

    This arcle is the second in a series on how to avoid the pialls of centralised procurement. In last week's blog, I commented on

    the reasons why, when many large organisaons embark on centralised procurement iniaves with the promise of substanal

    savings, direct increases in profitability fail to materialize within the business units. A discussion thread to capture the views of

    other procurement professionals has been running at Procurement Professionals Group on LinkedIn.

    This week I compare strategic and taccal cost-savings programmes and expose some of the myths associated with taccal

    programmes. I'll also be raising relevant points captured in the LinkedIn discussion, in parcular in connecon with adding value

    rather than simply reducing costs.

    The comparison is in the context of a newly formed central procurement organisaon. Similar arguments may be made for new

    programmes run by an established central organisaon, the arguments geng progressively weaker with increasing level of

    procurement capability maturity. (Note: beyond level 3 of a 5-level Capability Maturity Model the organisaon is operang in

    strategic, value-adding mode.)

    Before going any further it is necessary to make clear that taccal and strategic programmes are, to a large extent, mutually

    exclusive. The strategic approach demands porolio segmentaon and the adopon of differenated approaches for each

    segment. There are various models for this (supply posioning for example) and a host of tools and techniques - which I will not

    go into here - for determining and applying approaches appropriate to each segment. The taccal programme dispenses with the

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    analysis and segmentaon, applying a more uniform approach across all categories, typically based on supplier raonalisaon

    and leverage.

    Later, I will argue that not only are these programmes mutually exclusive, but also the potenal to switch from taccal to strategic

    - and the potenal to gain strategic benefit - is progressively diminished as the taccal programme is pursued.

    Moving on to the comparison, first let us consider the typical measurement of procurement cost savings. Savings are usually

    measured by purchase price variance for directs, and by similar 'input' measure for indirects. For sake of simplicity, I will refer to

    these measures collecvely as "PPV" measures.

    Figure 1 shows the progress of fast taccal and strategic programmes based on PPV measures.

    Figure 1

    Advocates of taccal cost-savings programmes argue that they achieve quick results. Some Big 4 Consultants and specialist

    purchasing consultancies run fast taccal programmes claiming both quick results and that the cumulave savings of a strategic

    programme rarely catch up with the taccal approach. Clients may be seduced by this simple message; it's what they want to

    hear... the promise of quick wins! But the truth is seldom that simple. When I've made my case, I'll leave readers to speculate as

    to whether the advocates are proffering a deliberate distoron or whether they are just naive.

    Figure 2 includes the hidden costs of the fast taccal programme and the addional benefits of a strategic programme.

    Figure 2

    The "hidden costs" are hidden and unquanfied because the taccal programme does not allow the me to idenfy, design andmeasure how and where collateral damage will occur. This is one of the main reasons why taccal cost-saving programmes in

    parcular fail to deliver to the bo/om line. Hidden costs might include impact on quality, outputs and waste, as I covered at

    length last week, or unmanaged risks, for example exposure to insecure supplies, currency variaons, etc.

    The addional benefits of a strategic programme come from:

    be/er stakeholder engagement and use of cross-funconal teams

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    development of joined-up KPIs and funconal targetsincenves

    focus on total cost of ownership,

    risk migaon across relevant segmentscategories

    benefits of supplier partnerships and their innovaons

    pursuit of value-adding opportunies

    be/er analycs

    control of maverick spend

    higher levels of compliance

    A strategic programme does not preclude the possibility of pursuing quick wins - just that the approach will be verified and, for a

    given level of resource, fewer individual iniaves can be pursued simultaneously than would be possible within a taccal

    programme.

    Figure 3 shows the net effect of savings, hidden costs and addional benefits.

    Figure 3

    Unless an adjustment factor has been applied to PPV, the cumulave net benefit of the taccal programme will be less than PPV

    predicons. In extreme cases the 'savings' may actually be negave. Even in the best case, benefits are unlikely to be sustainable;

    year-on-year improvements become smaller and it proves impossible to find savings that do not impact in some way on value

    creaon. The cumulave net benefit from the strategic programme will exceed PPV predicons. The overall effects are twofold:

    1. a much greater relave benefit from the strategic approach and

    2. an earlier crossover than the advocates of taccal programmes would have you believe.

    A well designed and well run strategic programme will deliver sustainable benefits and a greater ROI than a taccal programme.

    So, why can't we have the short term benefits of a taccal programme, then switch to a strategic programme for the long-term

    benefits? Included in the collateral damage of the taccal programme is the adverse effect on key supplier relaonships of

    inappropriate adversarial and hard-line behaviour: loss of trust, co-operaon and commitment. Adversarial and hard-line

    approaches are supported by a strategic programme but, because of the analysis and strategy development, are directed only to

    appropriate segments of the porolio. It is this collateral damage that inhibits the switch from a taccal to a strategic approach.

    Once supplier trust, co-operaon and commitment have been lost they will be difficult, somemes impossible, to regain.

    In my first arcle, I drew to conclusion as follows:

    "Given that many central procurement organisaons are founded on the promise of procurement excellence and dubious

    procurement 'savings' it is clear that reliable delivery of improved profitability requires systems thinking - an integrated supply

    chain approach - rather than typical current pracce."

    To this I would add that procurement best pracce is about maximising added value, not necessarily reducing costs.

    Acuity (Consultants) Ltd takes a holisc and strategic approach, engaging all key internal (and, where approproate, external)

    stakeholders to deliver added value and to ensure procurement iniaves deliver sustainable bo/om-line profit improvement.

    Join the discussion, "Why do so many procurement cost saving iniaves fail to deliver to the bo/om line?" at Procurement

    Professionals (#1 supply chain & sourcing group) on LinkedIn

    Go to top

    Avoiding the Pi%alls of Centralised Procurement

    Why so many procurement cost saving iniaves fail to deliver to the bo#om line

    Tony Colwell - 30 September 2011

    Many large organisaons embark on centralised procurement iniaves with the promise of substanal savings, yet direct

    increases in profitability fail to materialize within the business units.

    Judging by the focus of much literature on procurement pracce, few organisaons would appear to be aiming let alone

    achieving much higher than level 3 of a 5-level Procurement Capability Maturity Model. (This subjecve view is not materially

    inconsistent with findings ofresearch by Batenburg and Versendaal in the Netherlands in 2008.) To explain briefly, the inference is

    that Procurement may pracse category management, and aspire to achieve lowest total cost of ownership ("TCO"), but would

    not be looking at the implicaons of external integraon (e.g. opmising the extended supply chain) and value chain integraon

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    (e.g. increasing business value derived from spend).

    Typically targets are set, and 'signed up to', by the procurement department, then savings are idenfied at the end of each

    sourcing process and are reported as a measure of procurement department success. It is generally recognised that savings are

    only realized as purchases are made on the contract; responsibility for the delivery of those savings usually falls with the

    consumers of goods and services. Procurement may monitor compliance - 'realized savings' vs 'idenfied savings' or some

    measure of the uptake of central contracts - and use this as a sck to beat users to make purchases under the contract when they

    might otherwise buy elsewhere.

    Low compliance may therefore be seen as a measure of errant users rather than ineffecve procurement, yet oDen it is indicave

    of underlying problems either with the procurement or execuon of the contract. And even when compliance is high, it sll does

    not necessarily deliver equivalent improvements in profitability. The reasons are in the way 'savings' are measured and the

    behaviours the parcular measures drive.

    Procurement savings are usually measured by purchase price variance ("PPV") for directs, and by similar 'input' measure for

    indirects. The true costs can only be measured in terms of outputs, aDer accounng for consequenal (in)efficiencies and waste.

    For capital items, or consumables involving set-up or maintenance costs, full lifecycle cosng - TCO - is necessary. But even TCO

    has its limitaons, focusing on internal costs, ignoring external factors and value that may derived from the expenditure.

    Operaonal departments and users may have to suffer the consequences of procurement shortcomings long aDer the sourcing

    process is concluded. Procurement KPIs rarely include appropriate measures of downstream, or lifecycle, performance. This

    inevitably leads to conflicng pressures on the various stakeholders. In such circumstances, opmum performance, and

    profitability, may depend on stakeholder relaonships and personal integrity running in opposion to individuals' performance

    incenves.

    Consider a very simple example. Procurement department sources packaging for a new product launch. Say Procurement

    performance is measured by PPV relave to target packaging price for the product group. This drives a minimum specificaon,

    low-price, high-discount approach... pile it high, buy it cheap! The Packaging Technologists are interested in protecve properes

    and pack integrity; Producon performance is measured on packing line speeds and minimum waste. Both drive for higher

    specificaons (at higher prices). The stakeholders are in conflict. By changing the performance measure from 'cost per unit

    purchased' to 'cost per unit packed' the three stakeholders are more aligned and working to the same ends. Looking further

    downstream, one might also measure 'cost per unit sold' (net of credits for damages).

    Given that many central procurement organisaons are founded on the promise of procurement excellence and dubious

    procurement 'savings' it is clear that reliable delivery of improved profitability requires systems thinking - an integrated supply

    chain approach - rather than typical current pracce.

    Acuity (Consultants) Ltd takes a holisc approach, engaging all key internal (and, where approproate, external) stakeholders to

    deliver added value and to ensure procurement iniaves deliver bo/om-line profit improvement.

    This arcle is the first in a series on how to avoid the pi4alls of centralised procurement. Next week I look at strategic vs

    taccal cost-saving programmes.

    Join the discussion, "Why do so many procurement cost saving iniaves fail to deliver to the bo/om line?" at Procurement

    Professionals (#1 supply chain & sourcing group) on LinkedIn

    References:

    "Maturity Ma/ers: Performance eterminants of the Procurement Funcon", R Batenburg & J Versendaal, Utrecht University

    2008.

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    Three Principles for Effecve Services Contracng

    Tony Colwell - 23 September 2011

    In the last week the media have reported huge waste of UK public funds associated with shared services projects This

    triggered broader debate about the value of public sector projects.

    Crics frequently refer to the failure to control suppliers of services - the consultancy architects of shared services; technology

    suppliers; outsourced services providers - and the hidden legacy of debt from PFI projects.

    The problem is not confined to the public sector In a recent live discussion hosted by The Guardian, it was claimed that research

    in the private sector shows 70% of shared services and mergers fail to deliver to expectaons, and that the problems are not

    about processes, they relate to people, power and polics. Cranfield University esmates for many firms, up to 75 of the

    products and services they provide are sourced from suppliers, suggesng that relaonships between firms are a key source of

    compeve advantage as opposed to the focus on managing processes and physical assets.

    Sustainable compeve advantage requires agreement to operate on terms where neither partner can exploit the other

    Anecdotal evidence suggests that public sector procurement processes and the resultant contracts for services are failing to

    provide adequate protecon. In my experience, private sector contracts frequently have similar shortcomings. Legal advisors

    oDen focus on documenng current requirements - a kind of snapshot - rather than considering how the requirements and

    relaonships might evolve. Service agreements need to provide a dynamic framework for controlling the evolving commercial

    relaonship over the contract life cycle Otherwise, as requirements and services digress from the original scope and intent, the

    result will be costly and uncompeve add-ons, and margin creep generally in the supplier's favour.

    So, here are 3 guiding principles to ensuring enduring compeve service:

    1 Procurement must focus on determining, and contracng on the basis of, supplier capability, not on lowest cost or perceived

    best value of current, soon-to-be-obsolete soluons. Selecon criteria need to take account of suppliers' intrinsic strengths and

    weaknesses:

    (a) infrastructure, resources and technology;

    (b) alignment and strategy;

    (c) assurance systems and demonstrable ability.

    2 Contract in a way that prevents suppliers from exploing and profing excessively from changing requirements Contract

    provisions must include

    (a) change control procedures to deal with any significant changes - in the business, the requirements, the assets and resources

    deployed, the methods of providing the services - and to set t he costs or budget for modified services. The procedures must

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    permit customer discreon in determining the way forward, including the use of third pares if the incumbent supplier is

    uncompeve.

    (b) supplier obligaon not unreasonably to refuse to perform similar services to protect against 'cherry picking' or a/empts to

    frustrate the development of services;

    (c) benchmarking to establish connuing compeveness, both in terms of cost and good pracce. The intenon is to protect

    against

    - divergence in customer's requirement and supplier's capability

    - driD caused by cumulave effect of small changes

    - uncompeve pricing for changes.

    (d) terminaon provisions on grounds of service and cost in whole or in part, to allow the separaon of services for which the

    supplier is no longer suitable.

    3 Manage supplier performance A service level agreement should include a formal, documented process comprising:

    (a) responsibilies matrix;

    (b) key performance measures and reporng cycles;

    (c) incenves to balance cost and service;

    (d) contractual cost targets at contract start, as modified under change control and benchmarking;

    (e) contractual service levels reflecng industry good pracce, as modified by change control and benchmarking.

    If your chosen supplier is reluctant to co-operate in any of the above, you have to ask, "Have I found the best supplier?" If

    customer and supplier are confident that the supplier is the best placed to provide the service, then reaching agreement in

    these areas should be possible

    iscussion at Procurement in UK Public Sector Group on LinkedIn

    Go to top

    Effecveness of Interim Management Supply Models

    Where next?

    Tony Colwell - 16 September 2011

    ADer the lull of the holiday season the Interim Management community has shown renewed interest in subject of "Catch 22" -

    the Cabinet Office's constraints on public sector deployment of Interim Managers. A discussion thread has restarted in the Odgers

    Interim Management Group on LinkedIn.

    The discussion had turned negave and a new direcon, leading to some posive acon, was called for. Because this is a closed

    Group, I thought it would be appropriate to reproduce my comment, which (with minor eding) was as follows.

    This [Odgers Interim Management] discussion thread started on 3rd June. Alf Oldman and I had a meeng with the Cabinet Office

    on 1 July at which we were informed of plans to introduce new framework agreements to cover consultancy and execuve

    interim requirements. We were not bound by non-disclosure agreement; it is more out of regard for our professional integrity

    that we have not broadcast plans that the Cabinet Office has chosen not to announce formally. It might be helpful, to take the

    debate forward in a construcve manner, to disclose some of what we know.

    The meeng dispelled a few myths surrounding "Catch 22".

    The Cabinet Office constraints on the use of 'consultants' applied to Central Government only. The use of consultants and

    interims by local authories has been affected by budgetary constraints, not (as far as I am aware) by Central Government

    direcve.

    William Jordan, former head of OGC, mandated that Central Government departments choose from 3 pre-exisng models:

    1. WP Cipher - the outsourced Capita supply model;

    2. Internal Buying Hub (CIX)Home Office portal to Buying Soluons' frameworks.

    3. ANY OTHER OPTION OFFERING EQUIVALENT VALUE.

    The mandate required that any excepons valued at more than 20k (but less than the 100k threshold requirement for

    tendering via OJEU) be supported by a business case approved by the department head, and the Cabinet Office nofied. I am not

    clear it was mandated that the Cabinet Office would have to approve such business cases. Besides, the freedom to use "any other

    opon" gives enormous scope, especially in light of the Public Accounts Commi/ee's findings that the Cabinet Office is incapable

    of assessing value.

    Cabinet Office (and formerly Buying Soluons') frameworks - of which there are currently 19 acve - have never been mandated,

    and neither will they be. That the Cabinet Office should be seen to prevent Central Government departments, or local

    authories, from discharging their responsibilies is clearly unwise both polically and in terms of maintaining managerial

    accountability.

    The proposed new frameworks are to fall within two disnct categories: (1) conngent labour; (2) consultancy, INCLUING

    EXECUTIVE INTERIM.

    Execuve interim will not be classified as conngent labour, but 'handle-turning' contractors' roles will be. I feel it is inappropriate

    to comment on the dividing line in terms of day rates but it was clear to me that many exisng public sector 'interims' will fall into

    the conngent labour category, including those working at rates above recognised as lower-limit thresholds by the two

    professional bodies, API and IIM. This is to be welcomed. If the Cabinet Office delivers what Alf and I were told is planned, then

    the recognion of execuve interim status and the crossover with, and alternave to, big consultancy will be addressed.

    My focus since the meeng has been on the interim management supply model. The success of any new frameworks is enrely

    dependent on the outcome of the tendering process. The crical factors are (a) Cabinet Office recognion that best value does

    not equate to lowest Interim Service Provider's ("ISP") margin, and (b) ISP's placing bids that demonstrate, can deliver, and can

    measure the added value of a higher-margin service.

    The Cabinet Office is fully aware of the need to evaluate different interim management supply models. To this end Alf and I

    produced a second White Paper which we have not published (in the public domain). Much of the content regarding measuring

    the effecveness of interim management supply models has been put to the IM community for discussion, both before and aDer

    we submi/ed the White Paper to the Cabinet Office. etails can be found in my earlier blog.

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    I also started discussions in the most acve ISP's own Groups - including a discussion at Odgers Interim LI Group - to ensure that

    ISPs as well as the broader Interim community were aware of the need to develop innovave models . isappoinngly, these

    a/racted only moderate interest and li/le comment from the ISPs themselves.

    Alf and I know from private discussions we had with various ISPs that more is going on behind the scenes than is apparent in the

    public domain. I would expect some recence to discuss publically what ISPs might be doing to establish their own posions and

    place their bids. The future of the execuve interim opportunity in Central Government departments is at stake. So perhaps this

    discussion should be redirected towards ensuring that ISPs provide the type of interim supply model that we execuve interims

    would wish.

    Non-members of the Odgers Interim Management Group can join the discussion "Effecveness of Interim Management Supply

    Models Where Next?" at API (open) Group on LinkedIn

    Go to top

    Change Management: 7 Essenal Elements of Stakeholder Engagement

    Tony Colwell - 19 August 2011

    Stakeholder engagement is a crical factor in the success of business change, especially business transformaons, which may

    require significant cultural change. Business transformaon typically involves people, process and systems changes which need to

    be delivered in order to produce a step change within the business. The design of effecve processes and applicaon of

    appropriate technology is not enough to ensure success. Insufficient acceptance and adopon of the new processes, arising from

    inadequate engagement of stakeholders, is a common cause of transformaon failures.

    The same is true for public sector transformaon, whether internally within public and civil organisaons or in pursuit of broader

    civil and social reforms.

    Much of the published literature on stakeholder engagement deals with the introducon of sustainable engagement programmes

    in public, private and civil society organisaons - with strong emphasis on accountability, parcularly democrac accountability -and is applicable to the integraon of stakeholder engagement with corporate governance, strategy and operaons. Readers who

    are interested in this context might consult The AA1000 Stakeholder Engagement Standard.

    This arcle is directed at the taccal applicaon of stakeholder engagement within a specific project or programme - a

    pragmac approach to geng stakeholders on board, and ensuring the desired outcomes are achieved.

    The overall aim of the engagement process is to achieve the desired outcomes. The desired outcomes should, therefore, always

    be at the forefront of planning an engagement process. They need to be clearly stated - seng out exactly what is sought from

    the proposed changes in process, technology, etc. The delivery of the technology, the process and the process outputs

    themselves are not the main focus, which must be on the achievement of the outcomes. This enables some latude in

    determining how the outcomes are achieved - what technology, process and process outputs are used - so that stakeholders have

    a sense of purpose.

    To engage stakeholders fully there are 7 areas we address . It is important to note that these are not sequenal steps, although

    the emphasis moves, with the passage of me, from the lower to the higher-numbered items in the following list :

    1. Sponsorship: Ensuring sponsorship for the change - in business, at a senior execuve level from both internal supplier and

    customer perspecves - in public life, from instuonal heads represenng providers and receivers of services. ODen, work

    needs to be done in advance to define the scope and context of the engagement in order to gain commitment to the engagementprogramme.

    2. Involvement: Involving the right people in the design and implementaon of changes, to make sure the right changes are

    made - so ensuring their effecveness. Also that no stakeholder group is inadvertently or intenonally excluded - so ensuring

    legimacy. And, at the outset, involving the right people in the design of the engagement plan itself.

    Seek acve parcipaon. Consultaon is good but programmes where the delliverables are 'done to' or 'done for' the

    stakeholders are less likely to lead to successful outcome than if they are (in part) 'done by' stakeholders.

    3. Impact: Assessing and addressing how the changes will affect people. 'Sweeping issues under the carpet' is a frequent cause

    of failure, yet oDen the issues present an opportunity to increase stakeholder engagement, by geng them to parcipate in

    finding or developing soluons.

    4. Communicaon: Telling everyone who's affected about the changes... and listening. Early communicaon the context in

    which the stakeholder engagement is taking place is important: - for sponsors, a common understanding of context and purpose

    ensures consistent leadership; - for other stakeholders to align parcipants, clarify their roles, and ensure the process is

    responsive to their needs.

    5. Readiness: Geng people ready for the changes, by ensuring they have the right informaon, training and help. The ming

    and resources required are oDen underesmated but the requirements can be reduced by the planned involvement of key

    stakeholders.

    6. Responsibilies: Ensuring people understand and accept their responsibilies, and are held accountable. Unambiguous

    definion of parcipants' roles is a pre-requisite.

    7. Compliance: Addressing resistance; in most cases revising 1-6 above, but occasionally requiring the removal of negave

    influences. Former US Secretary of State, Colin Powell said "The good followers know who the bad followers are, and they are

    waing for you to do something about it." I agree. However, the necessity to remove a significant number of negave people

    usually indicates a failure in design, planning or management. Mass removal of protesters, and their replacement by sycophants,

    is a recipe for disaster.

    This is not an exclusive list. Addional polical and organisaonal issues will need a/enon, depending on the nature of the

    changes.

    I opened by saying that stakeholder engagement is a crical factor in the success of business change. It seems to have become

    fashionable to put stakeholder engagement at the pinnacle of the business change agenda - suggesng that change management

    is purely about stakeholder engagement - as if changing the organisaon and improving stakeholder engagement will somehow

    transform the business. Real business change is not achieved by changing the organisaon structure. Effecve process is a

    pre-requisite. W. Edwards eming said "If you can't describe what you are doing as a process, you don't know what you are

    doing" (engaged or not). Stakeholder engagement helps the design of good processes, ensures their effecve operaon, andencourages personal commitments to deliver desired outcomes.

    Further reading:

    The AA1000 Stakeholder Engagement Standard (AA1000SES), AccountAbility - provides a framework to help organisaons ensure

    stakeholder engagement processes are purpose driven, robust and deliver results.

    A Road Map to Meaningful Engagement, oughty Centre, Cranfield School of Management - aims to provide an understanding of,

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    and praccal ps for, successful stakeholder engagement. Author: Neil Jeffery - July 2009

    Video: General Colin Powell, former US Secretary of State speaks about leadership:

    Go to top

    Effecveness of Interim Management Supply Models

    Consultancy and Interim Assignments, if you could tell me how to value the outputs that would be

    fantasc Sir Gus ODonnell

    Tony Colwell - 11 July 2011

    Following on from my last blog, Effecveness of Interim Supply Models The Metrics? and a recent invitaon to apply for an

    interim assignment with a not-for-profit organisaon, I want to explore the valuaon of consultancy and interim assignment

    outputs The link between my blog and the invitaon is the crical significance of the brief or Statement of Requirements (SoR).

    I have concerns over the absence of references to desired outcomes. My concerns are not specific to public and not-for-profit

    sectors so, hopefully, my comments will be of interest also to readers from the private sector

    The Effecveness of Interim Supply Models followed a visit to the Cabinet Office with my colleague, r Alf Oldman, and

    numerous conversaons we had with fellow interims and interim service providers, and is a precursor to our joint submission to

    the Cabinet Office. The invitaon to the Cabinet Office had come indirectly from the Rt. Hon. Francis Maude, Minister for the

    Cabinet Office & Paymaster General, following receipt of r Oldmans Catch 22 White Paper. Francis Maude replied,

    To ensure value is both improved and sustained, work is currently underway to develop a new strategy to centralize and simplify

    how Departments buy common types of consultancy and conngent labour.

    Alf Oldman gives hi