Procurement and supply what is the difference. How is a purchaser different from a supply? Set big goals, but start small
About the role of procurement in the company
There are two ways to increase a company's profits: by increasing sales or by reducing expenses. For example, with an average margin of 9%, in order for a company to increase profits from 70 million to 75 million units, sales will have to increase by 54 million units.
Those who have dealt with sales know that it is quite difficult to achieve such a figure, for this it is necessary to make a breakthrough worth a lot of effort.
If you try to achieve the same profit figure by reducing costs, then we will talk about reducing purchases by only 5%. For a professional buyer, this is nonsense. Thanks to various tools, the buyer can reduce costs from 5 to 30%.
About buyers
Everyone is familiar with the terms "purveyor", "supply department". They came to us from the USSR. Now there are also supply departments and suppliers. Their main role is to ensure the uninterrupted production of goods and services. But they do not carry out strategic tasks.
And the term "buyer" appeared in our country in the late 1990s - early 2000s. Buyers grew out of suppliers. The buyer fulfills the same role, but with some innovations that have come to us from the West. Now buyers actively influence the business, engage in it and bring additional profit and value through strategic decisions.
Their function is implemented not when everything has already been decided - “here's a plan for you, go buy”, but precisely at the early stages of strategic planning, decision-making - to produce on your own or buy, do it yourself or outsource, etc. In our country, this is just beginning to develop, we are 5-10 years behind Europe and America.
What knowledge does a professional buyer need?
For a long time in the first place was the ability to negotiate. But as a result of a study by Western colleagues in 2012, it turned out that it fell to the second step, and category management, analytical skills and the ability to approach strategically came to the first.
Risk management and minimization is one of the functions of a professional buyer. He must understand what risks he may face, firstly, in the contractor's market, and secondly, in the market where the company sells its goods and services. The buyer must manage both.
With a strategically important contractor, the buyer must discuss his risks and control what he does in order to avoid an unforeseen situation. It is very difficult, for this you have to have a very close relationship.
The buyer is such a very political profession. The buyer's job is jewelry, because he must reduce the company's costs without harming the business.
The organization of supply provides for the creation of the infrastructure of the process of organizing the supply and the organizational structure of supply management.
Let's look at each of these components.
The supply infrastructure includes subdivisions of warehouse, transport, procurement facilities. Separate enterprises may also have divisions for the processing of production and packaging waste.
Warehousing can be represented by a network of general factory warehouses or warehouses of individual industries, workshop warehouses and storage areas in large specialized areas. In general, the structure of warehousing at enterprises is determined by the sectoral nature of production, the scale and size of the enterprise, the size and type of production, as well as the organization of production and management.
Economics, marketing, technology, organization, supply
To perform technological functions for the preliminary processing of materials, procurement and preparation of products for production consumption, the enterprises create a procurement economy, which is included in the organizational structure of the supply of the enterprise.
The basis for determining the organizational structure of supply management should be based on the principles that provide all the functions of managing a set of units. First of all, these are: low-link management, flexibility, an effective communication system, the principle of unity of command and a clear delineation of functions.
There are two main forms of organization of supply management: centralized and decentralized. How supply is organized depends on the type and size of the organization. In a small organization, one employee may be responsible for all purchases. A medium-sized organization may have a department staffed by purchasing staff, freight forwarders, warehouse workers, and clerks. In a large organization, sourcing may involve hundreds of people coordinating huge purchases of materials.
If an organization approaches the procurement process from a decentralized perspective, then department employees will make their own purchases, each for their own department.
The advantages of this approach are: 1) the user knows the needs of the department better than anyone else; 2) the possibility of faster satisfaction of the need for material resources.
Disadvantages of decentralized procurement: 1) when solving operational issues, employees may not notice trends in planning changes in the organization as a whole; 2) insufficient professionalism of employees and problems in determining supply opportunities; 3) no unit can be large enough to carry out functional analysis in areas such as customs, transport services, warehousing, inventory management, purchasing analysis, etc.
For the implementation of centralized procurement, one supply department is usually organized, concentrating all the supply functions of the organization, which allows you to get certain benefits:
consolidation of all purchases of similar or similar materials, which makes it possible to receive discounts for a large order;
coordination of related activities to reduce transportation, storage and maintenance costs;
elimination of duplication of operations and unnecessary techniques;
having a single point of contact with suppliers and providing them with the necessary information and services;
obtaining special qualifications and improving supply operations;
the ability to focus other employees on their own functions so that they are not distracted by purchases;
concentration of responsibility for supply, which facilitates the implementation of managerial control.
For more than a decade, competition has been driven by globalization. During this time, business leaders around the world realized that competent procurement and supply management can provide a number of strategic advantages. These primarily include significant cost savings through collaboration with suppliers in low-cost countries, as well as improved supply chain competitiveness, streamlined product development and faster time-to-market for new products. At the same time, changes in the approach of managers to procurement and supply management often do not translate into real results. Some companies experience a lack of qualified personnel, which nullifies optimization efforts; others run into problems because of too low or incorrect targets or because of discrepancies between the procurement strategy and the overall corporate strategy.
In many companies, the role of the purchasing function is still limited to a narrow set of routine operations, such as the purchase of raw materials, components and services. At the same time, in some companies, purchasing and supply management units are taking their activities to a qualitatively new level. By working more closely with internal customers, some purchasing departments have achieved significant cost savings in non-traditional areas (such as marketing activities and sickness benefits) where cost optimization efforts have previously failed. Other purchasing management departments go even further, including production and administrative functions in their circle of interests. Finally, others turn purchasing into a testing ground for innovation: by attracting new suppliers of tangible and intangible goods, these divisions contribute to the expansion of activities in the field of new product development.
None of the companies whose experience we studied managed to fully realize the existing potential in the field of procurement and supply management. Nevertheless, an analysis of the experience of the most effective enterprises can shed light on how to achieve maximum results in this area. First, companies that excel at optimizing procurement pay more attention to work with people: they make efforts to develop the skills of procurement specialists and at the same time look for effective ways to unite all employees of the organization with a common goal. Secondly, these companies set themselves ambitious goals, the planning of which not only takes into account the strategic vision of the future development, but also determines specific ways to achieve the intended results. Finally, the top performers in purchasing and supply management pay special attention to ensuring that the tasks of the purchasing department are in line with corporate strategic priorities. This not only allows companies to better exploit existing cost-cutting opportunities, but also sets the stage for even greater benefits in the future as globalization intensifies. These pioneers are shaping a new approach to sourcing, an approach that less successful companies should look at.
PROBLEMS RELATED TO PROCUREMENT MANAGEMENT
The tactical potential of procurement and supply chain management as a cost reduction mechanism is well known. In general, the cost of purchasing goods and services is up to 70% of the total cost of the company, so leaders are well aware that the optimization of procurement can increase profits. Accordingly, the role of purchasing management is largely associated with the idea of cost reduction. This is achieved, for example, by obtaining discounts from external suppliers or by implementing procedures to reduce unnecessary, unbudgeted costs. Today, such steps are mandatory in many situations related to supply and demand management (in the first case, it is mainly about price control, in the second - about determining the optimal range of purchased goods and services). Companies that ignore these key purchasing optimization techniques typically find it difficult to reduce costs, let alone reap additional benefits.
Many enterprises that generally perform well in the field of procurement management do not notice a serious problem, which is that the functions of their purchasing departments have not gone beyond transactional activities. This is largely due to the shortage of personnel. Most companies systematically underestimate the role of qualified personnel in procurement management, which negatively affects performance indicators. For example, in a European consumer-facing company, the marketing and purchasing departments could not agree on a new sourcing strategy because the purchasing staff had a poor understanding of the specifics of marketing activities and, therefore, were unable to establish a constructive dialogue with marketing specialists. After analyzing the current situation, senior managers came to the conclusion that fruitful interaction between the two departments will not be possible until the company has new purchasing managers who, through their experience, can better understand the needs of internal customers. And several such specialists were hired.
Another problem in the field of procurement is that the relevant departments are set too low goals, and the mentality of procurement specialists is limited to transactional activities. Consider the following example: in a consumer goods company, the main function of the purchasing department has traditionally been transaction ordering. In this regard, the company's management did not seek to expand the powers of the purchasing department (in particular, to give it the right to centrally transfer some work to outsourcing), while under other conditions, procurement specialists could well have received these powers. As a result, decisions to outsource certain jobs were randomly made by individual business units. It was possible to solve this problem only as part of a large-scale reorganization.
There is another problem, the essence of which is that the actions of purchasing specialists can go against the corporate strategy. As a rule, this problem is directly related to the two described earlier. In low-performing companies, it arises from the fact that procurement issues are not taken into account in the early stages of strategic planning. Over time, this negatively affects the state of affairs throughout the organization. For example, one European company was more than two years behind its competitors in new product development due to an inefficient purchasing department. This was largely due to the fact that when making decisions, its procurement specialists were guided solely by the prices of certain goods. As a result, the company had disagreements with suppliers of new technologies, which made cooperation in the field of innovation impossible. In another company, purchasing specialists spoke poor English - in the end, this led to the fact that the main aspect in the development of cooperation with suppliers was the geographical factor, and not the quality and range of goods offered. Because of this, the company could not optimize the supplier base in order to reduce costs (despite the fact that cost reduction became one of the corporate strategic priorities), and procurement specialists practically did not acquire new knowledge and experience in the field of procurement of certain categories of goods and, therefore, could not win the trust of internal customers. Finally, another company faced the following challenge: a major restructuring required cost reductions, and to meet this challenge, procurement professionals reduced the IT costs of one of the business units. However, the results did not live up to expectations. It turned out that due to the inconsistency between the priorities of the purchasing department and the goals of the financial block, savings from cost reduction did not affect the company's profit. As a result, the IT budget of the business unit remained the same, while it had to be reduced to reflect the resulting savings.
CREATING VALUE BEYOND TRADITIONAL PURCHASING
Some companies still manage to avoid such mistakes and improve the efficiency of their procurement departments. The most successful companies expand the power of these departments within the organization, carefully aligning their actions with those of internal customers, product development departments, and other functional units. This is done in order to find and analyze new value creation opportunities.
Coverage of non-traditional categories
The best purchasing departments succeed primarily because their cost reduction efforts cover even areas of activity that were previously uninteresting or very difficult to optimize. For example, in one government agency, procurement professionals helped their HR colleagues select the best employee benefits and compensation plan by comparing several alternative programs. After analyzing the costs of all existing programs for the past periods, the purchasing department, together with the human resources department, developed and evaluated several options for the new system. Then the specialists introduced these options to ordinary employees and asked them to evaluate each of the proposals. Only after that a new program of benefits and compensations was approved. Thus, the procurement specialists brought their own experience in analytical work to the project, as well as the skills in evaluating suppliers and negotiating with them. In turn, the personnel department brought the system of benefits and compensations in line with internal requirements and ensured its approval. As a result, the cost of the new system was 7% lower than the previous one; while the employee satisfaction rate increased by 25%.
Another company, through smart procurement planning, was able to stem the rise in legal costs. This was achieved by commoditizing these services and segregating them into separate segments (including related legal and due diligence services). A separate procurement strategy has been developed for each of these segments. In parallel, the company developed a system of performance indicators - for example, established an average damages guarantee - and created an independent division under the leadership of the General Counsel. The new division included lawyers specially trained in the basics of procurement management. As a result of these efforts, the company has been able to reduce the number of legal service providers from 900 to nine, as well as significantly reduce the cost of legal services.
Business system optimization
Some purchasing professionals not only look for hidden value creation opportunities, but also work closely with other departments to optimize the marketing of a company's products and services. For example, in one of the European conglomerates, the purchasing department insisted on increasing the number of production processes outsourced. The company conducted a comparative analysis of its capabilities and those of third-party organizations, after which the circle of outsourcing partners was determined. As a result of these measures, as well as effective management of contractors, the company reduced its in-house manufacturing operations by 30% and significantly reduced the time to market for new products. In addition, as it turned out later, working with a common supplier improved the traditionally tense relationship between the two business units.
Purchasing professionals can directly assist other departments in solving their problems. Already today, some companies are using their own supply centers located in low-cost countries as a base for increasing sales in these countries. The most effective purchasing departments develop such cooperation much more widely. Thus, the purchasing department of one of the chains of family restaurants, together with the sales department, developed a system for quickly changing the menu in case of an increase in the cost of purchasing certain products. For example, if shrimp is cheaper relative to beef this week, salespeople can quickly create a new menu that will feature shrimp more than beef, and vice versa. By doing so, the company was able to respond to ongoing changes by influencing the demand from its customers, which approach to sales management allowed the restaurant chain to increase profits and minimize the risks associated with interruptions in the supply of key ingredients.
The ability to expand the horizons of their activities, characteristic of the most effective purchasing departments, can be truly strategic. Consider the following example: when jet fuel prices went up, one airline decided to analyze its fuel consumption patterns and outsourced this task to the procurement department. Teaming up with engineers, procurement specialists formed a working group. The results of her analysis convinced the airline's senior management that a wingtip was needed to reduce fuel consumption on older aircraft. Thanks to this modernization, it was possible to reduce the annual volume of aviation fuel consumption by 3-5%. In addition, the flight range of the company's cars has increased by more than 200 km, which made it possible to open new flights.
"Fuel for Innovation"
Suppliers have always provided companies with vital "fuel for innovation" - for example, by acting as a potential source of valuable knowledge and technology needed to improve products and processes. In turn, purchasing professionals serve as the critical link between a company's suppliers and the rest of the supply chain. Some firms use this relationship model very effectively. For example, Procter & Gamble has made significant progress in implementing its ambitious plans to expand collaboration with third-party innovators. Procter & Gamble's purchasing team was instrumental in creating one of the company's highly acclaimed products, the low-cost, battery-powered SpinBrush electric toothbrush. This toothbrush is developed by a third party based on proprietary technology previously used in the spinning lollipop stick. Another large company, Apple, also uses the services of third-party developers. For example, much of the software and electronics inside the iPod media player was developed by outside contractors. Even the very idea of creating this device came to Apple from outside - its author was the entrepreneur Tony Fadell.
It should be noted that few companies have restructured their innovation processes so radically. In many cases, such a move would be unwise, since the corporate innovation model must take into account many factors - the company's unique strategy, its position in the market, its industry specifics, etc. However, far-sighted buyers are able to establish close cooperation with service providers in the development of innovative processes and products, which will not only save money, but may also provide additional strategic benefits. For example, at a high-tech company, purchasing professionals worked hard to develop software interfaces for controlling critical manufacturing equipment with a supplier as part of a broader lean manufacturing program. ). The advent of software interfaces saved valuable time for the operators, who subsequently took part in the modernization of the plant.
HOW TO REALIZE THE POTENTIAL OF PROCUREMENT OPTIMIZATION
Although some companies are now actively working in these areas, no one has yet been able to fully realize the potential in at least one of the areas of procurement optimization, let alone all at once. At the same time, if you analyze the experience of companies that have achieved maximum results in this area, and understand what underlies their success - exceptional compared to most other enterprises - you can determine what skills and methods of work are needed for comprehensive procurement optimization.
Strengthen the link between purchasing management and core business
It is truly impossible to overestimate the role that qualified personnel play in ensuring the effectiveness of procurement. In most industries, good commercial negotiation contributes only 20-30% of the total cost savings that can be achieved through procurement optimization. The rest of the costs are reduced through tools such as demand management and product purchase requirements adjustments. To master these two methods, purchasing professionals need to thoroughly familiarize themselves with the work of various departments of the company, as well as analyze the categories of goods and services consumed by it. In addition, these professionals must come to understand the strategic goals of the enterprise and learn how to apply their experience in a variety of settings. Recognizing all these factors, leading companies start optimizing procurement by appointing those specialists who have a clear understanding of the main items of expenditure of the company to key positions in the supply departments. For example, for an aerospace company, this is the cost of purchasing composite materials, and for a telecommunications operator, this is the cost of marketing. By focusing on attracting real professionals, companies increase the level of trust in the supply department from internal business units, as well as create conditions for the development of cooperation between this department and other departments. The most effective purchasing departments actively recruit such professionals from other organizational units of the company. For example, the procurement department may bring in a talented development engineer to manage the supply of electrical parts, or may invite a lead IT specialist to develop a strategy for finding and acquiring new technologies. In our experience, involving subject matter experts in procurement management can be very, very useful, no matter where these experts come from.
In addition, the best purchasing departments systematically implement personnel development programs to help purchasing professionals increase their business knowledge and develop professional relationships with internal customers. Personnel development activities aimed at promising university graduates can be carried out in the form of "staff rotation programs" that allow you to get acquainted with the various activities of the enterprise. In some cases, special training programs are developed for employees who have been working in the company for a long time. For example, the management of a large logistics conglomerate suggested that the interaction between the central purchasing unit and one of the most important business units of the conglomerate was difficult due to the lack or lack of necessary skills among procurement specialists. To address this issue, the company has developed a two-year training program targeted at high potential candidates. The program included theoretical training, category-specific procurement workshops, and skills development activities tailored to the individual abilities of employees.
In addition, strict evaluation criteria have been established for procurement professionals who manage procurement projects. To meet them, these specialists had to have a good knowledge of the specifics of the work of functional units, as well as skills in project management, communication and leadership.
As a result, the relationship between Purchasing and the Business Unit has been improved, with Purchasing staff now seeing Purchasing professionals as equals (in fact, some of them have been offered leadership positions within the Business Unit). Collaboration between the purchasing department and the conglomerate's internal customers has become much more efficient.
Leading companies actively involve procurement specialists in the work of other departments. Some organizations send key purchasing professionals to work in areas such as design, manufacturing, marketing, and quality management. At the same time, all companies strive to ensure that partnerships develop between the purchasing department and the services responsible for the above areas. For this, special cross-functional groups are created, headed by procurement specialists. Each of these groups specializes in a certain category of goods and services, and together they form the basis of the company's purchasing activities. Cross-functional groups can determine the requirements for the necessary goods and services, develop a supply strategy, and analyze the market and supply structure. Let's consider a specific example. Following this approach, a major European manufacturer set up more than 50 cross-functional teams tasked with identifying hidden savings opportunities and developing new sourcing strategies. Thanks to cross-functional research and business thinking efforts, the company was able to save around 100 million euros in nine months, and this result is by no means exceptional. We estimate that the creation of cross-functional teams can nearly double the effectiveness of cost-cutting programs (see chart).
Set big goals, but start small
The best purchasing departments tend to change their role within the organization. The solution to this problem begins with setting ambitious goals. For example, employees in high-performing purchasing departments are much more likely than their counterparts in less successful departments to perceive cost reduction as a very important (though not the only) step towards company success. The best purchasing specialists consider their direction not only the basis of the enterprise's commercial activity, but also the most important source of information about the situation on the market.
Despite the presence of such grandiose goals, the leading supply units in their actions are very pragmatic. Typically, purchasing professionals begin to realize the feasibility of this approach when the purchasing director, together with the head of the company and other senior managers, sets ambitious goals for reducing costs throughout the organization and subsequently ensures that these goals are achieved. The actions of managers may seem illogical: in an effort to reduce costs, they are also ready to carry out expensive activities. However, it is important to remember that many low- and even medium-performing purchasing departments do not set such goals at all, or go towards them in a very inconsistent way - for example, without bothering to carefully analyze the main items of expenditure or the features of the work of specific business units. As a result, the boundaries of responsibility become blurred, and the sense of significance of the activities being carried out weakens. Ultimately, the work of the purchasing department does not provide sustainable improvements or does not bring any results at all.
Everything can be different. When the purchasing director, together with other senior managers, sets optimization goals that are spread across the company and span several product lines, this not only increases the potential for cost savings, but also improves the image of the purchasing department within the organization. Through successful cost reduction activities, the purchasing department can gain the trust of other business units. This is the path followed by a major European manufacturer, which we have already mentioned above. The management of this company has set a goal to reduce the cost of purchasing goods by 13%. To solve it, a well-elaborated action plan was proposed, which involved the joint work of various departments of the company. After a while, the purchasing director found that the relationship between the purchasing department and other business units had improved; in addition, the initiative of the procurement specialists found a response in the enterprise team as a whole. As the cost reduction plan progressed, the benefits of closer collaboration with suppliers early in product development and production also became apparent. The chief engineers of the company, who previously resisted the introduction of such a practice, gradually began to apply it. As a result, less than a year after the launch of the cost-cutting program, the procurement director learned that several senior engineers from key business units had expressed interest in joining the new purchasing team.
At one mobile phone company, a new purchasing director has set ambitious cost optimization goals. At the same time, he publicly assumed responsibility for reducing the lion's share of costs, the optimization of which was recognized as possible within the framework of the new restructuring program. Once the goals were achieved, the Purchasing Division turned its attention to expanding its role within the company, seeking to transform itself from a simple buyer into a full partner of other business units. Over time, this division has acquired powers that just four years ago could not have dreamed of, such as the ability to participate in decisions about the range of mobile phones manufactured by the company.
Adjust the work of the purchasing department in accordance with the strategic goals of the company
The experience of the telecommunications company mentioned above suggests that once the purchasing department is able to create new value and establish equal partnerships with other departments of the enterprise, it can move on to solving larger tasks at a strategic level. The Purchasing Director and other senior executives should formalize the new, increased role of Purchasing and communicate this to all departments in the company. This is to ensure that business unit managers and employees understand and respect the responsibilities of purchasing professionals as well as their decision-making rights. Of course, in different companies, the scope of responsibility of supply units will be different - this will depend on the strategic goals of this particular enterprise. Is the company focused on driving growth through innovation? Does management outsource a number of manufacturing processes to compete with low-cost competitors? The answers to questions like these will determine the priorities in which purchasing professionals will search for suppliers and manage relationships with them.
When the purchasing department's competencies are clearly defined, the purchasing director can join the strategic planning effort early on to work with other senior executives to align purchasing block priorities with the company's strategic goals. In addition, the accumulated experience in the field of procurement management can be very useful in various situations. For example, through a massive procurement optimization program, a US retailer was able to secure funding for a comprehensive restructuring plan that involved redesigning the company's stores and improving its marketing policies. As another example, the purchasing division of an aerospace company played an important role in the exit process of one of the divisions from the company. In doing so, the purchasing department was able to resolve a number of complex issues relating to the legalization of exit conditions and ensure that synergies were realized through cooperation with the newly formed organization as a supplier.
Finally, a highly effective purchasing unit, endowed with the role of "link" between various departments of the company, can even influence changes in its organizational structure. For example, one European manufacturer suffered serious losses in its industry due to the crisis of Internet companies. To reduce costs, management needed to develop a new, more profit-oriented way of thinking among technical people. Subsequently, the company's CEO noted that cross-functional working groups, led by procurement specialists, were able not only to successfully convey the new management position to employees of all departments, but also to prepare the enterprise for competition in the new conditions.
ACQUISITIONS AND MERGERS
The potential for cost reduction through PSM optimization is so great that it could be one of the decisive arguments in favor of the merger. For example, in a recent merger between two U.S. energy companies, state and federal regulatory approval of the deal was greatly facilitated by the fact that the cost savings planned for the first ten years after the merger were about $1 billion. , with nearly half of this amount expected to be freed up through improvements in PSM. As another example, the executives of an electronics company were only fully convinced of the feasibility of the upcoming merger when they assessed the amount of money that was planned to be saved by optimizing the PSM. As a result, the company's real savings from the merger amounted to about two-thirds of the premium paid to the acquiree.
It should be noted that exploiting the hidden shareholder value opportunities available through PSM optimization is indeed a difficult task. In fact, these opportunities are often underestimated, because in order to use them effectively, you need to make significant efforts and carefully consider all actions. However, the result will definitely be worth the effort. For most companies, outsourcing and purchasing from suppliers for everything from office furniture to raw materials can be as high as 75% of total costs. In fact, this figure may well exceed this level as companies increasingly outsource ancillary activities such as payroll, call center management, debt collection, inventory management, and even product assembly and delivery.
In this way, PSM can be a source of significant cost savings for any company, whether it was created through a merger or not. At the same time, it should be noted that PSM optimization as a tool for reducing costs is especially effective during the first weeks and months of joint work of the combined companies. This is due to the fact that the process of merger or acquisition creates an atmosphere of time pressure and uncertainty in companies. At the initial stage of mergers and acquisitions, the potential for cost reduction is greater, and it is easier to realize it than in subsequent stages. All divisions and departments face the same tasks: to integrate the personnel and processes of several companies within one unified one and achieve ambitious goals for improving efficiency in the shortest possible time.
As a result, proposals to optimize PSM, which were previously planned only in a very uncertain future, are among the most significant priorities. Faced with a plethora of issues to deal with urgently, departments not previously involved in PSM can focus on optimizing the process to find ways to reduce costs that do not require staff cuts. Thus, PSM, traditionally playing only a minor role, can become a priority for a new company created during a merger.
As part of the merger of the two financial institutions, retail and corporate banking professionals collaborated with the PSM working group to identify opportunities for cost reduction in a variety of areas such as credit reporting, check printing, ATM maintenance, and advertising booklets. Moreover, earlier these types of activities did not fall within the competence of the UZS units. To reduce costs, the working group took the following measures: consolidation of “disparate purchases” (under “disparate purchases” is understood as a situation where the purchase of goods and services are carried out with the participation of too many suppliers and customers), the development of original strategies for concluding contracts with suppliers, the search for new suppliers, changes in the structure of demand (for example, adjusting the volume of materials and services that are ordered and used in each period of time). Thanks to these measures, during the first year after the merger, the working group was able to reduce costs in the above areas by 8-20% (minimum savings - 8% - were noted in the field of ATM services, and the maximum - 20% - in the field of credit reporting and printing of promotional products ).
The merger and its consequences are relevant not only for the new combined company. The merger becomes a source of uncertainty for the suppliers of both companies involved in the merger - especially if the merger forces the suppliers to compete with each other. While some suppliers can confidently look forward to new deals, others risk losing a customer. That is why many suppliers offer new companies better prices and new terms of cooperation, thus giving them more opportunities to make the necessary changes to contracts. Even the smallest cost reduction on all goods or services a company purchases can free up a significant amount of cash. At the same time, the offers of suppliers who want to keep their customers often significantly exceed all their expectations.
For example, one electronics company that was created through a recent merger asked a supplier for a 10 percent discount on PCB assembly. The supplier put forward a response offer, under which the client could double his savings. This was made possible by the fact that cooperation with the new company opened up wide prospects for the supplier: he could reduce his costs by increasing the volume of production, as well as establish closer cooperation with the new company in areas such as optimizing production and compiling technical specifications for individual details.
In the first weeks after a merger, CEOs and senior management of new companies are faced with the question of where to start optimizing purchasing activities. A truly effective optimization strategy should cover both the short and long term. Successful implementation of a strategy requires first identifying cost-cutting opportunities currently available and then assessing the benefits that can be achieved in the long term. To make the most of the time pressure and uncertainty that comes with starting a new organization, senior leaders should take the following six actions, preferably within the first month after the merger.
1. Restore stability. The post-merger uncertainty encourages suppliers to set and achieve new goals, but it can also paralyze a new organization if employees are deeply concerned about their future. Senior management needs to reassure employees as soon as possible who are concerned about three questions: why the merger is being done (goal), who is responsible for carrying it out (responsibility), and what will happen to employees (outlook). Restoring stability is essential - only after questions about the future fate of the company are resolved, the new organization will be able to direct all efforts towards carrying out activities to improve efficiency. Within the framework of PSM, the main optimization tool is a significant cost reduction to avoid staff reductions.
The news that the situation inside the new company has stabilized, and its management is focusing on creating value, must be communicated to suppliers. Also, suppliers should be aware that the new company is likely to change the existing supplier base. All this will prepare suppliers for the next work and encourage them to take action.
2. Educate employees that PSM optimization is the most cost-effective way to offset the premium paid to the acquired company. In many corporations, purchasing departments suffer from a lack of discipline due to the unattractive image of this functional area, as well as the low level of demands from management. Traditionally, purchasing management is not considered the "cradle" of talented leaders. Purchasing is more often viewed as just one of the areas of administrative activity, and not at all as a “training ground for developing skills”, by actively working on which the company can achieve continuous improvement in efficiency.
To break down stereotypes about the procurement system, companies must make it clear to their employees that PSM is critical to post-merger success. It is necessary to draw the attention of employees to how exactly the costs of purchasing goods and paying for services affect all the overall financial performance of the company, as well as the total amount of value created for shareholders. Finally, employees should be made aware of the upcoming work to optimize the PSM, during which all company costs will be subjected to a thorough analysis.
3. Set elusive targets to reduce procurement and supply costs. CEOs who have to deal with post-merger challenges can succeed if they set hard-to-reach goals for all functional areas of the company. For the PSM division, a major but still achievable goal would be to reduce costs by at least 10-15% during the first year after the merger. Let's take an example. The CEO of a diversified energy company, created from the merger of two midsize companies, set a goal of $100 million in cost savings without layoffs, with $20 million in savings within the first six months after the merger. The company achieved its target, with cost savings accounting for more than a third of the total cost savings expected from the merger. In addition, savings amounted to nearly 75% of the total shareholder payouts planned for the first year.
The best solution is to set cost reduction targets within the PSM before the completion of the merger, in order to start working in this direction immediately after the creation of the new organization.
4. Appoint an experienced authoritative leader to manage procurement and supply. On the one hand, PSM plays a very important role in achieving the right level of cost savings; on the other hand, when optimizing the procurement system, it is necessary to overcome organizational barriers, such as the low status of PSM departments within the company and the need to establish interaction with other departments. That is why procurement and supply management should be entrusted to authoritative senior executives. The most successful companies most often appoint a top manager from another department as the head of the purchasing department. Upon taking office, he promptly develops a PSM proactive action plan, prioritizes work areas, and recruits new staff as needed to work in areas such as purchasing portfolio management, inventory management, financial analysis, and category purchasing. At the same time, activities carried out in the field of PSM should cover the entire range of goods and services consumed by the new company.
Some companies are looking for experienced, established PSM professionals outside the organization, but our research suggests that this approach may be misguided. When the efficiency of work comes first, it is best to involve a competent specialist from the company's staff. An in-house specialist is familiar with the activities of at least one of the merging companies, can immediately take up a new position and immediately begin work to reduce costs. In addition, there are not many competent PSM specialists in the world, and the search for such workers outside the organization is very difficult.
Sometimes acquiring companies are lucky enough to get not only another company but also an experienced purchasing director through a merger. In general, evaluation of third-party candidates should be conducted as part of the acquisition's pre-merger due diligence.
5. Encourage employees to implement and use the new PSM model. The new organizational model for PZS has two distinctive features that are critical to the full potential of PZS, but may also be unfamiliar to the company's employees.
Firstly, the new PSM model extends the competence of the purchasing department to all costs of the company. It is surprisingly common for companies to find themselves in a situation where the PSM unit controls only half of the company's costs of purchasing goods and paying for services. In a large insurance company, the purchasing department controlled only 30% of these costs, while the acquisition of all new technologies and the payment of most contractors was handled by other departments. When purchases are carried out by several departments at once, the company cannot conclude contracts with suppliers on the most favorable terms for itself. In addition, this situation makes it difficult to find and evaluate new suppliers, and makes it impossible to strictly control all external costs.
Secondly, the new PSM model suggests that decision-making must take into account not only the cost of individual positions, but also the total cost of ownership within the new company. The total cost of ownership includes internal operating costs and losses (including the cost of moving inventory, loss in production and loss due to loss of productivity, inventory consumption rates), as well as the unshared costs of doing business and working with contractors (including including order processing and fulfillment costs, forwarding costs, shipping costs, and specification and standardization costs).
In some companies, measures to reduce procurement costs are limited to negotiations with suppliers, during which companies achieve price reductions by increasing the volume of purchases. However, up to two-thirds of the potential savings can be missed with this approach, since in general only a slight cost reduction can be achieved - no more than 2-3%. To give another example, in one of the mergers, the PSM division identified an opportunity to receive a five percent volume discount on the purchase of new personal computers. However, working with the IT department, the following additional savings opportunities were identified: reduce the number of programs used and reduce hardware requirements; outsource computer maintenance and repair; find out which users can fully work on supposedly outdated computers. The use of these opportunities allowed us to triple the savings on the purchase of new computers.
Analysis of the total cost of ownership opens up new prospects for cost reduction: choosing the best bids is no longer the only source of savings. Taking into account the total cost of ownership, it is possible not only to determine the desired price level, but also to formulate requirements that are far from always included in standard contracts, in particular, requirements for such parameters as the weight, volume and quality of goods, as well as the amount of costs associated with its life cycle.
As part of the merger of two banks, one of the leading print media companies decided to win letterhead printing contracts from long-term suppliers of these banks. The company not only offered lower prices for printing forms compared to competitors, but also expressed its willingness to provide four opportunities to reduce the total cost of ownership: buying back old forms from both merging banks; assistance in creating electronic versions of the most frequently used forms; storage of the least demanded forms in its warehouse, and not with the client; assistance in the development of an automated mini-printing house for printing forms (the following system was proposed: a computer automatically sends data to a high-speed printer, then a special machine packs the forms into envelopes, and a franking machine puts stamps on the envelopes).
This example shows that PSM can be not only a tool to reduce costs, but also a competitive advantage, especially for those companies that are able to constantly optimize work with suppliers, and not just receive a one-time benefit from transactions with them. Reducing costs simply by lowering purchase prices and foregoing other cost savings deprives companies of the benefits of the new customer-supplier relationship model. And suppliers, in turn, are deprived of incentives to improve performance.
6. Develop and implement activities that give an immediate effect. As a rule, high-performing organizations created as a result of a merger quickly compile a special database of their costs in order to identify the 20 most expensive goods and services. The companies then compile a list of suppliers of these goods and services, clarify current prices, current inventory levels, terms of delivery and distribution, information about the automatic system for registering orders, as well as the dates of conclusion of the last supply contracts. Having obtained all the necessary information about critical goods and services, the PSM unit within the new organization can form cross-functional procurement working groups. The main task of these groups, which almost always include representatives of suppliers, is to find opportunities for cost reduction and effectively use them. UZS optimization should be aimed at achieving the following goal: in two years to reduce all costs of the company, and not just the cost of purchasing goods and services, by 10-15%, with half of the planned savings to be achieved within the first six months or the first year.
The most significant savings can often be made in the procurement of those goods and services whose suppliers (or even entire markets) are struggling due to overcapacity, globalization and the emergence of new technologies. The costs of acquiring such inputs - which include but are not limited to office supplies, communications services, temporary labor, computer equipment maintenance, IT services, travel and leisure arrangements for employees - are usually charged to indirect costs. Let's take an example. The annual volume of indirect costs of one of the companies we have already mentioned was about 100 million US dollars. To reduce these costs, competent procurement working groups carried out a number of activities: determined the total volume of consumption, found new suppliers, standardized specifications and reduced their number, switched to cheaper analogues for some positions, optimized demand, appointed a responsible manager to monitor compliance new supply policy. As a result, more than $20 million in cost savings was identified and exploited within six months.
Experience shows that it takes only eight weeks after the merger for a full evaluation of one of the major cost items for the PSM working group. Therefore, it is possible to start a cost reduction program within the first three months of a new company's existence. One electronics company formed several working groups to evaluate 12 major cost items. It took only 180 days for the specialists to complete this task. Thanks to this, the company was able to accelerate the implementation of cost reduction measures (the planned savings were 10-15%).
Procurement optimization should not be limited to finding opportunities to reduce costs as soon as possible. The top management of the new company should make every effort to ensure that the purchasing system does not lose its effectiveness in the long run. This can be achieved through the following measures.
1. Develop performance evaluation criteria to track exactly how the savings provided by PSM are reflected in the company's profits. Half of the potential savings from PSM may go unrealized if the company does not have a specific valuation system to help track the conversion of savings into profits. For example, the savings generated by substituting one product for another - for example, replacing an expensive pump with many unnecessary features with a cheap low-power pump - can turn into additional profit for a particular business unit. However, the reality is that business unit leaders typically don't generate higher profits by simply wasting their savings.
It is necessary to point out a number of factors that make it difficult to assess the effectiveness of PAS. First, corporate financial reporting systems are often poorly aligned with major cost items. Secondly, when two companies merge, the formation of a common accounting system is most often a difficult task, since the numbers of cost centers and product codes adopted in each of the organizations do not match. In addition, companies may have very different ways of reflecting spending on specific goods and services, as well as deciding which costs should be treated as investments and which should be treated as operating expenses. Finally, the most serious problem is that most financial reporting systems are based on cost of goods sold (including, in particular, the cost of raw materials), while the cost of purchasing individual goods and services (for example, the cost of acquiring computers or paying for services contractors, the cost of operating, maintaining and repairing equipment, etc.) do not receive due attention. Therefore, companies need systems that can track and evaluate cost savings through PSM optimization, as well as identify sources of savings (it is important that savings are achieved by optimizing the combined company's budget).
At the same time, companies should not stop or slow down the implementation of cost reduction measures due to the absence or imperfection of information systems. Important, time-consuming IT issues can be deferred until the merger process is complete. In the short term, all the information you need can be obtained using a simple and practical computer database that records all of a company's costs.
A creative approach to the use of IT systems can reduce transaction costs; in addition, IT systems can monitor and control post-merger costs. Recently, a merged company partnered with one of its suppliers to develop and deploy a dedicated e-page on the intranet that allowed employees to order their stationery on their own. This freed up the purchasing department from a number of routine tasks, allowing procurement professionals to devote more time to value-creating activities such as supplier relationship management. The company has vertically integrated with a single partner and now buys the bulk of stationery from them, while enjoying a significant volume discount. In this way, she managed to get rid of the need to cooperate with hundreds of small suppliers. In addition, today the company can track the dynamics of the consumption of office supplies with an accuracy that was previously unimaginable.
2. Concentrate efforts on creating a PZS unit that meets the level of world standards. After the merger, the purchasing department will most likely need to attract new specialists from other, non-PSM departments. This is necessary in order to meet the sharply increased requirements of management and to increase the level of competence of employees who will have to manage all the company's costs. To meet these challenges, at least half of the procurement staff may need to be replaced. However, the implementation of such a decision can take too long, which is hardly acceptable in the course of a merger - at a time when cost reduction is of paramount importance. Finding and hiring qualified procurement professionals can be challenging and possibly more time-consuming and costly than CEOs anticipate.
3. Assign the status of an independent line of activity to UZS. In the world's leading companies, PSM units work with key internal clients (which include business units responsible for core activities, as well as individual units such as production and new product development) to develop and implement proposals for continuous cost reduction not involving staff reductions. The effective work of the PSM department can significantly improve all financial performance of the company. The CEO of an electric power services company said that his purchasing activity is "the highest return on investment."
Already, many of the world's leading companies perceive PZS in this way, assigning it the status of an independent line of business with its own virtual income statement and its own balance sheet. At the same time, income reflected in the income statement should be made up of funds saved by the PZS unit, and expenses - from direct costs of PZS, such as labor costs. The balance sheet must take into account the value of inventories and accounts payable - this is necessary in order to reflect the impact of PSM on these indicators within the whole company as a whole (see diagram). Thus, making PSM a stand-alone line of business allows you to focus on the savings that this unit can generate.
MANAGEMENT EXPERIENCE
Representatives of such companies as SIBUR, TNK-BP, Rosatom, Atomkomplekt, Silvinit, Mosenergo, TGC-1, IDGC Holding, Severstal-Resource, Metinvest, IES-Holding, Fortum and Gazprom Neft exchange their experience in procurement management and talk about interesting solutions found by their companies.
PARTICIPANTS OF THE ROUND TABLE
Sergei Archipenko - Procurement Director of the Steel and Rolled Products Division of Metinvest Holding LLC
Vladimir Bezzubov - Deputy General Director for Procurement of OAO Silvinit
Natalya Grigorovich - Deputy Director of the Department, Head of the Department of Methodology and Pricing, Rosatom State Corporation
Konstantin Gusev - Head of Investment Procurement Department, Fortum JSC
Felix Itskov - Director of the Procurement Department, MTR and Inventory Management, BN Refining and Trade, OAO TNK-BP Management
Fedor Kirsanov - Director of the Production Assurance Department of OAO SIBUR Holding
Igor Lastovka - General Director of OJSC Atomkomplekt
Pavel Lezhnev - Purchasing Director of CJSC Severstal-Resource
Sergei Mikhailov - Vice President of Supply Chain Management, TNK-BP Management
Andrey Sokolov - Logistics Director of TGC-1 OJSC
Maxim Stepanov - Head of the Directorate of the MTO and CS Directorate of JSC Gazprom Neft
Marina Ustinova - Head of Supply and Logistics Department, Mosenergo
Ruslan Khalfin - Vice President, Head of the Department of Methodology and Organization of Procurement Activities of CJSC IES
Taras Shevchenko - Head of the Procurement Department, JSC IDGC Holding
How many KPIs do purchasing managers have in your company? How regularly are KPI targets set and actual performance evaluated? To what level do KPIs cascade in the company?
What place in the organizational structure of the company is occupied by purchasing departments?
Andrey Sokolov: We had a long and heated discussion about which block - production or financial - should include the procurement function. In the end, she was subordinated directly to the CEO. We have been living this way for two years now. It has now become much easier to work and solve the tasks assigned to us.
Igor Lastovka: At ROSATOM, the procurement function also reports directly to the CEO. And taking into account the importance of this area of activity, recognized even by the state, we consider such subordination to be the most correct. In the field, in managed organizations, this function is most often subordinated to the deputy head of the organization.
What functions do purchasing departments perform in your companies and how is their activity controlled?
Ruslan Khalfin: Our purchases are built as a business process, which begins from the moment the need arises for the acquisition, and ends with the counterparty fulfilling its obligations to the customer. The procurement business process is institutionally divided into three areas: the procurement methodology and control block sets the rules and controls their implementation; the commercial block directly conducts negotiations with the participants and heads the tender commissions; the customer block generates purchase requisitions. Thus, the company removes the conflict of interest in the procurement process.
Taras Shevchenko: In IDGCs, buyers simultaneously build a methodology for the entire procurement process and implement it. It begins with the planning of the purchase and ends with the issuance of a protocol with the decision of the procurement commission. Our auditors control this process.
Konstantin Gusev: At Fortum, the procurement department develops the methodology and carries out procurement, while the internal audit department monitors the implementation of the methodology. Buyers participate in the formation of plans for the purchase of equipment, materials and services in terms of planning the timing and budget for investment projects and current purchases.
Natalya Grigorovich: At Rosatom State Corporation, the Procurement Methodology and Organization Department determines the sectoral methodology for carrying out procurement activities, ensures the organization and controls the processes of planning procurement activities, and conducting procurement procedures. For an objective selection of the winners of the procurement procedures, mixed commissions are necessarily created, which include representatives of the customer, consumer and procurement organizer. Compliance with the methodology in the implementation of procurement activities is controlled by the internal control and audit unit, which is also directly subordinate to the General Director.
What tasks do the procurement and purchasing departments solve in your companies?
Pavel Lezhnev: The main task of buyers is to minimize production costs, the total cost of ownership. This task is primarily operational - to provide production with resources at the right time, since a stop in production leads to large losses.
Fedor Kirsanov: Buyers determine an effective procurement strategy for items and carry out a direct selection of a supplier for a specific application; all the way they are accompanied by a dedicated back office, which performs all documentary operations that are unusual for buyers, but necessary for the purchase. However, the purchaser is responsible for the delivery of material and technical resources to the customer's warehouse.
Maxim Stepanov: In our company, purchases begin with the collection and processing of applications and end with the transfer of materials and equipment to production. Purchasing departments develop methodology. The Service Procurement and MTP Department controls purchases in subsidiaries, and the entire process is controlled by internal audit.
Sergei Archipenko: Procurement departments help build a procurement methodology, which is a "set of laws and regulations", and carry out procurement. Internal audit once a year conducts a comprehensive review of procurement activities.
Many people believe that the best way to optimize purchasing activities in industrial holdings is with a centralized supply system. What principle do your companies follow?
Fedor Kirsanov: We have a clear dividing list for the range purchased centrally and at enterprises, which on average for the year gives about 60% centralization in terms of materials and equipment and 95% in chemical raw materials. In the near future - to bring the level of centralization of materials and equipment to 90-95%.
Sergei Archipenko: Purchasing in our company is characterized by a high degree of centralization: 80% of purchases are controlled by a central unit.
Marina Ustinova: The procurement process at Mosenergo is maximally centralized. The stations themselves do not buy anything, they only determine the need for resources and deadlines, that is, they are “internal customers”. Procurers of the General Directorate are directly involved in ensuring the supply of material and technical assets, works and services. They also develop the procurement methodology. Approved by its board of directors.
Sergei Mikhailov: The main purchases at TNK-BP are carried out by two business areas: Exploration and Production and Refining and Trade. Purchases of materials and equipment and services for the Exploration and Production business area are mainly consolidated: the most costly and critical items (about 55% of costs in monetary terms) are purchased in Moscow, the average cost items are purchased in the regional center (about 30% of costs). About 10% of materials and equipment and 20% of services are purchased locally (about 15% of costs).
Felix Itskov: We are gradually starting to delegate authority to specific employees. The purchasing commission may recommend something, but the final decision is made by a specific person. He bears all the responsibility for the decision.
McKinsey: One of the priorities of the procurement function is to reduce the cost of production. How to calculate savings and what KPIs should purchasing departments have?
Vladimir Bezzubov: Savings on the purchase of inventory items, we determine quite simply - from past results. The data of the past period on the purchased item are indexed according to the item reference books of the Ministry of Economic Development and Trade. If we beat growth indices, then we are efficient. Thus, one can evaluate one's efficiency by the nomenclature that intersects between years, and in our country its share is about 80% of the total volume of purchased goods and materials.
For some of the most important positions, we adjust prices using special coefficients. For example, we have incorporated the London Metal Exchange copper price change index into the contract with monthly revision.
Sergei Mikhailov: TNK-BP uses the same approach - reducing the effect of inflation. Inflation targets are set for the planning year, within which prices must be kept. Inflation is determined by comparable items. From year to year, at least 70% of the nomenclature is crossed (all operational needs and part of the investment). At the same time, in capital costs, a significant part of the need is unique. In this case, to calculate the investment project, we expertly determine the planned price level. After the approval of the project, the implementation of the budget of the investment project is monitored. At the same time, we are actively working on the standardization of the equipment used, the unification of design solutions and, consequently, prices in capital construction, which in the future will allow us to ensure almost complete comparability of needs.
Details Created on 10/28/2014 09:00
In different networks, the structure responsible for working with suppliers may have its own individual characteristics. In short, there are purchasing managers (buyers), there are also category managers, department (section) managers, and so on. In each case, each of them has its own powers and targets for which they are responsible. It happens that two positions are concentrated in one employee at once and, accordingly, the circle of his powers is much wider. It is important to know this in order to correctly assess the interests of the opponent sitting opposite you during negotiations.
He is responsible for a certain category (group) of goods. For him, the input cost of the product, the price on the shelf, and also what tools will be used to sell this product are important. For example, merchandising, marketing (advertising, trade marketing). The category manager is responsible for product turnover, margin per square meter. meters. In addition, he is responsible for the commercial part of the product on the network. His KPI is often tied to the condition of how to sell a product.
Who is a buyer (buyer)?
He has a different set of criteria, according to which he makes a decision in favor of a particular product. First of all, these are: bonuses from the supplier, deferred payment, commercial conditions (for example, return, exchange, service), i.e. conditions for the purchase of goods.
It happens that a purchasing manager (buyer) concludes an agreement and introduces the supplier's products into the assortment of the network, but this does not mean at all that it will appear on store shelves. Managers in retail outlets often act as a category manager and do not enter into the matrix a product for which the buyer has made a positive decision. These managers are empowered and independently decide on the prices on the shelves of their store and the quantity of goods ordered, since their target indicators are directly tied to this. Their motivation is:
The received profit of the department,
turnover of each SKU,
number of sold units (pieces),
the presence of high stocks, returns.
For example, there is such a division in the Auchan network, similar in the Leroy Merlin network, in the Media Markt network, etc.
However, keep in mind that category manager powers do not apply to all chains, and assortment decisions made by a buyer must be carried out across the chain as a whole. In this case, the buyer has mixed powers when he is responsible for the conditions of work with the supplier, as well as for the sale of goods included in the assortment of the network. A buyer can assign different statuses to individual items, such as "required for placement" or "at the discretion of the store management." These powers are mandatory for chains, since the shelf capacity is limited by the size of the retail space and it is not always possible to keep the entire assortment.
Principles of constructing a product presentation:
It is necessary to clearly understand the area of \u200b\u200bresponsibility of the person with whom you will communicate
during a personal presentation, talk about the interests of the end consumer as often as possible Focus on how your product solves the problems and problems of the consumer, and not on technical features or product quality
do not start negotiations with a presentation (for more details, see your company, start with products, then move on to commercial terms and only after all this, if allowed, tell about the company
demonstrate knowledge of the market, your competitors in this network. You will save a lot of time if you clearly show how the product is better and what will allow it to sell at a high level.
If you get the opportunity to work as part of test sales, then the negotiations have already been successful. Test sales imply more simplified terms of cooperation.
Next, you must ensure that your product sells well, which is what you need to prove to the representatives of the network. They must be sure that your products are well received by the Buyers, that they can earn money on their sale. In this case, it will be possible to proceed to the standard terms of the contract.
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