Is your department called Purchasing, Buying, Sourcing, or Procurement?
Even if the definitions of the different terms seems quite similar, the name of the department can establish how important is the function within the organization and what level of maturity it has accomplished. Both sourcing and purchasing/buying can be considered a subset of procurement.
Tactical purchasing is simply executing routine tasks – receiving purchase requisitions, requesting quotes/RFP, placing orders, expediting, etc., on a repetitive basis, outside of the context of an enterprise-wide focus, and without pursuing continuous improvement or contribution to specific senior management goals.
The procurement function has developed considerably over the last several years, and is evolving daily. Most organizations start with a tactical Purchasing Department, which has to deal with all the administrative tasks associated with onboarding of suppliers and ordering.
The typical characteristics of a tactical purchasing department are:
- Purchasing department is a cost center.
- Price is the main decision factor and negotiation cum squeezing the suppliers for the lowest price a normal practice.
- Buyers are asked to get minimum three bids and go with the lowest.
- Buyers take care of ordering materials and dealing with faulty materials.
- High number of suppliers means security.
- Specifications are sent to the department to order the goods/services.
- Internal stakeholders always complain about the department.
- Maverick buying is quite common.
- Purchase office is always in the fire-fighting mode.
Over time, the department develops by adding the sourcing part, introducing new tools, processes and targets, and maximizing the control over the spend of the company. Strategic sourcing is a systematic, long-term, and holistic approach to acquiring current and future needs of an organization at the lowest total cost of ownership (TCO) and lowest risk to the supply line. This process creates a closed loop link between customer and the supplier to ensure continuous improvement in quality, delivery, cost, and service while providing the means to achieve optimal efficiencies in both (customer and supplier) organizations.
There are three very important components of strategic sourcing:
- Spend analysis,
- t research, and Supplier evaluation/selection and relationship management.
The typical characteristics of a sourcing department are:
- The procurement department adds value to the bottom line of the company.
- Terms like TCO, SLA, risks, hedging, SPM, sustainability, or supplier collaboration are embedded in the day-to-day activities of the buyers.
- The procurement manager reports to the CEO.
- Procurement contributes to the specifications.
- The department is responsible for procurement in all areas, including the non-traditional spend areas.
- The major sourcing processes are conducted with the use of a cross-functional team.
- Technology is integrated with the suppliers (catalogues, EDI…).
- TCO and value (together with other parameters such as sustainability) are the major decision factors.
The supplier market and internal needs are assessed, multiple sourcing strategies are developed, qualified suppliers are identified regardless of location, and a rigorous request for proposal (RFP) is put in place.
High number of suppliers means loss of opportunities.
The procurement function is often undervalued in businesses, not realizing the benefit that strategic procurement can bring. Procurement is more than just buying at the lowest possible price.
I believe that companies should view their procurement spend as a kind of asset. It may not show up on the balance sheet, but it has the potential to generate a return that is equal to or greater than other assets such as equipment or intellectual capital. Organizations can leverage procurement for EBITDA improvement.