procurement strategy by derek hendrikz

Procurement Strategy

derek

hendrikz

http://www.derekhendrikz.com/

Copyright © 2014

Derek Hendrikz Consulting

www.derekhendrikz.com



The Interdependence of Delivery

Support

Delivery &

Production

Customer

Managem

entEffectiveness

Strategy

Efficiency

Policy

KnowledgeSkill

Attitude












The Question!!! Do our cost calculations correctly

reflect reality?

Do our cost values effectively represent the effort which was spent to manufacture a product

or deliver a service?www.derekhendrikz.com


Problems in cost measurement:

• There is no way to directly measure costs.

• Cost measurement is always an indirect process,

sometimes very indirect.

• Behind cost measurement are human beings who can

make mistakes and misinterpret the rules.

• In worst cases, there could be humans who have an

interest in distorting cost values.www.derekhendrikz.com


Overall problems with measuring organizational performance:

• Activity-based costing struggle to locate activities to overall organisational functioning.

• Balanced scorecard methodology has generic perspectives that do not necessarily represent the essence of the organisation.

• Strategy cannot be linked to organisational action, resources and cost, because strategy represents +- 20 to 30% of what happens in the organisation.

• Current organisational structures are ‘one-parent’, two-dimensional structures.

• The organisation reports to people and not to outcomes.• Senior management do not understand the essence and nature

of mission and vision.



You'll Find the Problem Here

•Structure;

•Systems; and

•Culture.




Two-way classification of internal and external factors

Strategy

The Organization

• Goals & Values• Resources &

capabilities• Structure &

systems• Culture

The Industry Environment

• Competitors• Customers• Suppliers• Substitute

Producst• New Entrants• PEST








Communicating & Linking• Communicating & Educating• Setting Goals• Linking rewards to performance

measures

Clarifying and Translating the Vision

and Strategy• Clarifying the Vision

• Gaining Consensus

Planning & Target Setting• Setting Targets

• Aligning Strategic Initiatives

• Allocating Resources

• Establishing milestones






The Procurement Mission…

We acquire goods and/or services at

the best possible total cost, in the right

quantity and quality, at the right time, in

the right place and from the right source

for the direct benefit or use of our

organization, generally via a contract



The Strategic Outcomes of Procurement:

1. Vendor Selection;

2. Vendor Compliance Management;

3. Acquisition; and

4. Contract Management (SLA & Works)



The Structure of Procurement Strategy

Supply Chain StrategySupply Chain Strategy



Strategic SourcingStrategic Sourcing

Manufacturing StrategyManufacturing Strategy

Lean Manufacturing

Lean Manufacturing

Quality ManagementQuality Management

Organisational Strategy

Organisational Strategy

Inventory Management

Inventory Management

Transaction ManagementTransaction

Management

Supplier Relationship Management

Supplier Relationship Management



















Making the Procurement Decisionwww.derekhendrikz.com



STRATEGIC LEVELS IN PROCUREMENT:

Integrative

Supportive

Independent

Passive



Strategic Levels in Procurement Passive:

The procurement department does not have its own strategic direction and primarily reacts to requests from other functional areas.

Independent:

The procurement department has adopted strategic practices, but has not aligned these with the organisations corporate strategy.

Supportive:

The procurement department has adopted strategic practices and is supporting the organisations corporate strategy through their use.

Integrative:

The procurement department has become an integral part of the organisations corporate strategy and is actively working with other functional areas to implement that strategy.



Make or Buy?

Vertical Integration:Vertical integration takes place where the organisation performs as many activities in the supply chain as possible, from the supply of primary materials to delivery to end customers.

Outsourcing:This is the practice where an organisation focuses on doing what it does best (its core competencies) and using outside suppliers to perform and supply all other ‘non-core’ activities.



Advantages of Vertical Integration

• Provides management with maximum amount of control over performance and cost.

• Retaining in-house expertise.• Full utilisation of in-house assets.• Reduced risk in continuity of supply.• Reduced risk of commercial secrecy or

confidentiality.• Increased quality control.



Advantages of Outsourcing

• Reduced Cost.• Access to suppliers expertise.• Increased capacity, leading to faster and more

flexible supply.• Reduced capital employment.• Reduced headcount.• More accurate operating cost.• Concentrate on core business activities.• Reduced inventory.



Project-based Work Process-based WorkOutsour

cing

Insource



OverheadCost

VariableCostVS

Enhanced through in-sourcing

Enhanced through out-sourcing







Supplier rationalization or Expansion

Pro’s & Con’s




Advantages of Supplier Rationalization:

• Supplier much more responsive to customer needs.

• Reduces the amount of inventory held by the customer.

• Stronger relationship with suppliers.

• Increased supplier involvement & commitment.

• Strong customer / supplier relationship.

• Suppliers involved in planning activities of the customer.

• Push for supplier to build their capabilities for future customer requirements.

• Suppliers involved in drawing up specifications.

• Suppliers involved in product design & development.

• Customers can use suppliers in-house technologies & expertise.

• Customer to receive more cost-effective and higher quality designs.



Advantages of Wider Supplier Choice:

• Fosters competition amongst suppliers.• Enables customer to play suppliers of against each

other in order to achieve lowest possible price.• Lowers risk when there is a problem with existing

suppliers.• Lowers risk of supplier holding the customer

ransom.• Lowers risk of inability to supply by one supplier.



HIGH

Risk

LOW

Critical Items/Potential Bottlenecks

Example: scientific equipment

Goal: quick turnaround, minimal disruption of day-to-day operations

Natural owner: user’s department

Role of Procurement Office: support for user’s department

Strategic Items

Example: capital improvement

Goal: maximum value for money

Natural owner: user department with advice from Procurement Officer

Role of Procurement Office: part of cross-functional team

Routine Items

Example: catering supplies

Goal: efficiency of process, cost reduction

Natural owner: user department with advice from Procurement Office

Role of Procurement Office: leads sourcing (user’s department leads execution

Leverage Items

Example: office supplies

Goal: lowest price

Natural owner: Procurement Office

Role of Procurement Office: centralised procurement, with no exceptions

LOW Savings Potential HIGH



Strategic Procurement Matrix

Bottleneck items:Here it is important to ensure that supplies are not interrupted.

Strategic items:Here the emphasis is on co-operation of suppliers.

Routine items:Here the emphasis should be on the most efficient way to procure the product.

Leverage items:Here it is important to find the best deal.



Examples of factory scenario…

Bottleneck items:Specialist manufacturing equipment.

Strategic items:Expansion of factory space.

Routine items:Safety gear.

Leverage items:Stationary.



• High Risk• High Savings

Potential

• High Risk• High Cost

• Low Risk• High Cost

• Low Risk• Low Cost

Strategic Items Bottle Necks

Routine Items

Leverage Items



STRATEGIC PROCUREMENT MATRIX:




procurement strategy by derek hendrikz

Leadership & Management