Preferential Procurement: Destroying or enhancing procurement value….?

Whether it’s Green (Environmental) Procurement, developing historically disadvantaged individuals (HDI / BEE) or other forms of socially responsible procurement… powerful market forces guided by special interests play an increasing, and major role in defining procurement success. Will these issues destroy value created by strategic sourcing initiatives or will it raise the profile of the procurement organisation to the next level?

Recent procurement history saw a move away from price reduction to optimising Total Cost of Ownership (TCO). Managing TCO introduced more complexity to the procurement organisation and required a far greater level of sophistication than before. In some organisations the “narrowly focused” reduction of TCO has become synonymous with “Strategic Sourcing”.

A question I’ve often heard is: “Why should we engage with a supplier at a higher cost purely because they’ve been historically disadvantaged or more environmentally friendly?” Surely this defeats the objectives of strategic sourcing?

On the other hand:
“What is the point of dramatically reducing lifecycle costs only to find that the company will lose a major contract because it cannot meet its preferential procurement objectives?”
For most organisations, the cost of bought in goods and services are by far their greatest area of expense. Even in service industries the cost of bought in goods and services is significant.
No wonder then that legislators or special interest groups will target this immensely powerful driver of social change.
Instead of resisting these trends within the procurement spend, the procurement organisation should pro-actively study these trends and embrace them in advance so that the organisation can have sustainable competitive advantage in the marketplace.

Arguably, the most prolific global case study for harnessing the power of preferential procurement is the current situation in South Africa. Procurement objectives are set for all organisations (Public and Private Sector) to ensure that they procure in a manner that develops the previously disadvantaged. (Understandably, these co called BEE (Black Economic Empowerment)policies are the source of major debates when it comes to TCO reduction strategies)
Although painful for buying organisations, if one had to compare this with the anarchy that would ensued from a violent political revolution in South Africa, it’s a much more sophisticated and intelligent way to redress past imbalances. As governments globally and special interest groups latch on to this powerful driver of social change, more pressure would be experienced by the procurement function to comply.

The key “take away” is not to resist preferential procurement trends but to study them in advance and assist the organisation in rapid compliance. Rapid compliance will result in the organisation having advantage over its competitors when it comes to winning large contracts. There is usually a “lag” time before compliance can be achieved. Until competitors comply (which might take a year or two) your organisation will have competitive advantage.

Once rapid compliance is achieved, the procurement organisation should continually establish leadership for the organisation in this regard, as long as preferential procurement excellence is a provider of competitive advantage.
The implication of these powerful trends is that “narrow based” TCO needs to be reviewed (and measured) in the wider context that surrounds the commodity under Commodity strategy documents should include strategies that address ALL important issues surrounding the item and not just lifecycle costs but the total impact / value that can be created.

Although many procurement professionals agree on this, many organisations do not measure the success of commodity strategies on these factors but on a narrow based definition of TCO.
It is not prudent for any organisation to indiscriminately add the additional pressures such as preferential procurement compliance without adjusting its cost saving expectations. “Having your cake and eating it” springs to mind.

A balanced commodity scorecard might be more appropriate.
Preferential Procurement trends can create an excellent opportunity to engage the company’s senior management at a more strategic level. Instead of engaging onley at the cost reduction level, procurement can become an active contributor to the strategic debate.