Strategic Sourcing: Stretching a limited financial kitty - Part 3

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Recognition.jpgDr. Douglas Boateng, SmartProcurement Editorial Board member and President of the Institute of Operations Management Africa discusses the needed shift in thinking, and subsequent adjustment in hierarchical structure, needed for Supply Chain Management, Procurement and Strategic Sourcing to receive due organisation-wide recognition.

 

In part one of this series, the concept of strategic sourcing and how it fits into the overall procurement and supply chain mega-function was introduced. Part two examined why there is relatively limited impact resulting from strategic sourcing in South Africa and the rest of the continent. These reasons include, among others:

1) The perception that the function is a combination of tactical and operational activities rather than a strategic function.
2) A focus on short-term organisational interests and not on win-win supplier development and partnerships.

Setting the Scene for Strategic Sourcing

Old Structure jpg.jpgFigure 1 presents a schematic diagram of where procurement currently resides in most organisations and government departments (depends on the industry vertical). Historical background on how purchasing evolved has not helped the profession, especially in the developing world. Although perceptions are changing, procurement is still not viewed as strategic to business. Its contribution is unfortunately seen as minimal and transactional.

In most developing countries, a supply chain associated function reports to the board via the Chief Financial Officer, and is therefore viewed purely as a ‘number-crunching’ exercise, as opposed to a value-adding and strategic business development function. It is for this reason that the function is traditionally placed at a rather lowly position within the organisational hierarchy.

Today, it is still comparatively seen as the management backwater where relatively struggling professionals find solace, with little prospect for promotion or decision-making powers.

Dr Douglas Boateng.gifFrom a compliance perspective, it sometimes provides major conflicts for the CFO who has to balance the numbers, source products and services and also pay for them.

A CEO's background also directly affects the perceived importance attached to the supply chain and procurement function. For example, if the CEO is from an operations background, supply chain management will be seen as strategic. This, in turn, positively impacts procurement and strategic sourcing.

If from a finance background, the CEO’s focus will most likely be on price and not on total acquisition implications. And if from an engineering background (for example from manufacturing, mechanical or chemical), the motivation will fall predominantly on quality, which in turn positively affects strategic sourcing and supplier relationship management.

For the politician, the top-of-mind objectives are likely to be price and potential job creation.

Harnessing the power of strategic sourcing requires a major philosophical change within the organisation. To start with, there must be a fundamental paradigm shift for procurement, which is traditionally seen as a transactional and tactical process rather than a strategic management function. Following this, the CEO must make real and tangible organisational changes by elevating the function to reinforce the recognition of its strategic importance and ability to influence long-term competitive positioning.

Today, the importance of supply chain management and procurement is such that it is increasingly overcoming other factors that have previously supported its relegation to a low-level role in the organisational hierarchy.

Emerging Structure jpg.jpgFigure 2 presents the schematic fit of procurement within the rapidly emerging strategic realm of supply chain management (depends on the industry vertical). As can be seen from the structure, supply chain management is already elevated to a strategic-level function, which automatically upgrades the consequence attached to procurement.

With executive representation (via the Chief Supply Chain Officer [sometimes known as the Chiekf Operating Officer]), various root causes can be addressed through the strategic development of human capital. This, in turn, supports the systematic addressing of internal and external business relationship management, and developmental, issues.

The need for change and strategic recognition comes from the CEO (Chief Executive Officer or the Managing Director. For South African Inc, the change must directly come from the office of the President.)

It is universally acknowledged that harnessing value from strategic sourcing requires different skills sets from the Supply Chain and Procurement Professional. For example, the process custodian is expected to have a strategic mindset in order to view channel issues from a total acquisition perspective.

However, the transformational process can only be initiated by the CEO, who must be willing to genuinely empower related internal human capital to collectively reach new productivity and competitive heights. Below are some examples of initiatives that CEOs can embrace to set the scene for strategic sourcing:

1.Recognise and accordingly amend the organisational structure to elevate Supply Chain Management, and in some cases Procurement, to a strategic function reporting directly to the CEO.
2.Improve selected human capital within the Supply Chain and Procurement Function through focused training and mentoring.
3.Objectively engage seasoned mentors and coaches to assist with the transformational process. In so doing, most of the initial pitfalls and mistakes can be avoided, thereby giving confidence to the transformational process.
4.Launch internal efforts through cross-functional teams which focus on total value chain acquisition costs.
5.Set aggressive but realistic short- to long-term goals which involve selected suppliers.
6.Source the right information systems and decision support tools to support the transformation.

Information systems certainly have a central role to play. However, they are not a panacea and should not be seen as such. Rather, IT systems are enablers and help to streamline transactional processes, thus freeing up time for more strategically important value adding activities.

The key to organisational and sourcing transformation lies in the CEO’s appetite for sustainable change. The scene for strategic sourcing cannot be set through textbooks or lip service. Recognition of the roles of Supply Chain Management, Procurement and Strategic Sourcing are directly linked to a firm’s organisational structure. For governments, the function should ideally report to, for example, the Trade Ministry rather than Treasury. Such a shift will help to reduce the prevailing emphasis on a ‘numbers game’, and focus more on channel and long-term developmental issues.

In private business, procurement should report to the CEO directly or via the Chief Supply Chain Officer rather than to Finance. This will help avoid the conflict of interest which presently exists where purchase decisions and payments are made in one department.

The truth about supply chain management and procurement has become unpalatable for various executives and policy makers bent on hanging on to their ‘territorial’ roles. Regardless, the last 30 years have witnessed positive professional changes and recognition never before experienced within selected industry verticals and Government departments.

Executive recognition coupled with the right human capital has proven to enhance a firm's long-term competitive positioning. This acknowledgment certainly bodes well for current and aspiring Supply Chain Professionals. Hopefully, in the developing world, CEOs and policymakers will start acknowledging the need to recognise the function as strategically on a par with others, such as Finance and Marketing. Nevertheless, the increasingly strategic importance attached to Supply Chain Management, Procurement and Sourcing is here to stay.

Hence CEOs and policymakers who continue to turn a blind eye do so at their own peril!

For more infrmation on implementing strategic sourcing email Dr Boateng on dboateng@panavest.com or visit www.commercedge.net

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