It is often said that practice makes perfect. This is certainly true in the field of procurement and supply. Supply chain organisations around the world do not need professionals who can talk the talk, they also need to walk the walk.
The procurement cycle exists in some form or another within every organisation. From need to fulfilment, from problem to solution, the cycle is integral to achieving success in all industries and all sectors.
But what does procurement in practice really mean? Not only does the procurement and supply professional need to be knowledgeable in managing the cycle they must also be competent and that requires application. Most of the CIPS syllabus covers the what and why. In the real world the key question is how, and more importantly, how do we make this work?
Let’s look at some examples.
Examples of Procurement in Practice
Porter’s 5 Forces has been discussed hundreds of times and has been written about thousands of times. But how should it be applied, and should it be applied at all? Porter’s model examines rivalry in the procurement and supply marketplace. If we are aware of the market and it is always stable, we may simply give a cursory glance at the market to make sure nothing has changed. A quick check to make sure the buyers and suppliers remain the same, entry and exit rules still exist and there are no substitutes or advancement. This usually applies to the primary sector where the supply of raw materials contains a stable source of procurement and supply.
However, if the market is volatile, we will need to take a close inspection to develop a planned approach. But how? We start with the objective of the organisation or industry.
In the energy industry, there has been a dramatic shift toward renewable sources. This has seen the decline of nuclear energy and the rise of environmental options such as solar and wind. The objective of nuclear power was to provide energy safely. As nuclear energy begins to wind down, the requirement for supplies reduces and so does the number of suppliers and power plants. This is a constant so there is no need to conduct a detailed five forces analysis: suppliers exiting the marketplace, less competition and no alternatives or advancements.
The objective of renewable sources is to provide energy that protects the environment. As a new source of energy, the number of potential suppliers and advancements that can be applied expands. This increases rivalry and therefore volatility in the market with numerous new buyers also entering the scene. In this case, a detailed analysis of suppliers, advancements and the competition’s strategies need to be completed.
Applying Pareto Analysis in Practice
Pareto analysis is a classic model used for many years within procurement, not to be confused with ABC analysis. The 80/20 rule for procurement states that 80% of spend lies within 20% of the total products and services procured. This is fine if you are explaining the academic importance of the model, but how do you apply it to procurement in practice?
The first thing to understand is that time and resources are finite. We cannot focus on every item all of the time. The application of Pareto analysis in procurement is to achieve focus. Most organisations want quick wins that have a high impact. Pareto analysis will find the top procurements that will give them just that. Once the highest spend has been identified it should be followed up with a rigorous analysis of the product and its market to see if it is possible to reduce costs. A common mistake is to conduct the analysis once. The reality is that once the highest spend items have been identified and reduced, they will be replaced by the products and services below them, a constant circle of activity should ensue in which the next highest item is again analysed and investigated. Don’t forget that for some of the items in the top 20% it may not be possible to reduce costs due to factors in the market, or in the macro-environment. These should be revisited at a later date to see if any changes have occurred.
Using PESTEL in Procurement
PESTLE analysis considers the macro-environment. These are factors that are hard to influence but have a huge impact on markets. Interesting in theory but how is it applied to procurement in practice?
The analysis considers many factors and the first thing to do is identify those that impact on the procurement activity. So, although there are six factors; political, economic, socio-cultural, technological, legal and environmental (remembering that there are many connotations of PESTLE so the list may differ) some may not have a high impact. Returning to the energy sector the direct influence on renewable energy is through political motivation and care for the environment. If the move to renewable energy is not seen to be applied, then the laws will be changed bringing in another factor to be considered. Application is through the interpretation of political policies and environmental concerns. These are filtered through the procurement system so that they appear within any analysis of supply markets and suppliers, or the terms and conditions applied to the contract.
Procurement in practice is far from just understanding the models but requires direct application. Yet Vince Lombardi said ‘Practice does not make perfect. Only perfect practice makes perfect.’ Let us not forget that, although Procurement in Practice is covered at Level 4 of the CIPS syllabus the need for application intensifies as we move up through the next levels. Strategic decisions will require even more practice until we perfect the art of procurement and supply.
If you want to find out procurement in practice, you may be interested in a CIPS Diploma in Procurement and Supply. For more information about procurement courses and how to get your FREE two-week course trial, simply get in touch with one of our course advisors.