10 September 2009

Procurement has been the subject of increased attention during the recession. Steve Bagshaw asks industry experts what role it might play in the economic recovery

Steve Bagshaw (SB): Was your organisation, or the procurement profession, ready for the increased responsibility and attention that has been focused on purchasing during the recession?

David Harrison (DHarr): We have been ready for a while. We now need to put in proper measures, install technology to help us evolve those measures, and create dashboards that are useful, not just for procurement, but for the business as a whole.

Paul Kimber (PK): We were ready in terms of wanting to take on some of these challenges. The difficulty has been capacity. Our company has had to restructure and some people have left. But within procurement, we have a need to grow our capability. We can't do that, so we are making do with the capacity we have.

Ross Kavanagh (RK): Good people are scarce at the moment. What we have said is we have this huge business, and we need to do [procurement] properly now. The economic downturn just adds weight to the case.

John Durrell (JD): When I was at HBOS the problem was not so much that we had too many people, it was more a case of having the wrong kind of people or talented people doing the wrong thing. I think that is the big opportunity we have right now in procurement. Get the right people in front of the business and you can cover incredible ground. The thing is: how do you find the right people?

Larry Beard (LB): The door is now open on marketing, legal and audit. But you need to have good people to walk through that door, especially in areas where purchasing hasn't had the opportunity. You only get one chance. If your credibility is on the line and you don't talk their language, you have a problem.

Richard Alderton (RA): We had to lose a few people and that is a bit depressing, having built up a team in the past few years. The good news is we have not had to lose nearly as many people in the supply chain - specifically in procurement - as other departments. That is recognition in itself, the business understands we can help get it through the downturn.

David Loseby (DL): [In the public sector] the reality is that there is less money to go around. We have to do things in a different way and we are going to have fewer resources to do it, so the quality of resources has to be better. Personnel have to be 'commercial business partners' as opposed to just experienced in tactical procurement. If you have the right quality of people with the right aptitude, behaviour and mindset, then you can cover so much more ground. They will pay for themselves any number of times over.

Richard Jowers (RJ): There is a danger here that if we haven't already got the people, we have lost out. We needed them in place last year to cope with the recession. Now we need to start building our team to cope with an upturn. As the economy turns that corner, we have to slingshot past the competition and if we don't have the people now, I think we are pretty stuffed.

David Hawkins (DHawk): We needed those people in place 10 years ago. The point is we are now getting into a far more complex marketplace. The problem is that we don't have enough purchasing people with a background in business.

Mathew Harrowing (MH): I do hear a lot of people in the business saying the quality of general purchasing staff is very poor. I challenge that view because in my experience that isn't the case. We are now seeing purchasing becoming a lot more structured. People who are good at relationships are doing a front role, people who are good at analytical work doing the back-end role.

Clive Dedman (CD): One of the biggest problems the profession has is that the procurement department has always been looking outside of the business. The downturn has given procurement the opportunity to look at what is being done inside. Working for a family-owned business, there is a much greater drive coming from the owners and directors to say: "You don't spend any money without going through our processes and the procurement team is part of our process". That has been the biggest, most evident change. There are more and more people coming through us.

MH: I don't believe it is wholly a 'people' issue. What I am hearing is structure, technology and business drivers.

LB: We are confusing the need for a great procure-to-pay process to give transactional efficiency versus the credibility of just managing some key stakeholders. If you go to the company secretary to discuss legal services and say: "I have a great process", it won't excite them. It is the quality of the person. What we haven't spoken about is bringing in an interim or a specialist.

SB: But what if your boss says: "I want you to save money" and you are telling them you have to spend money to get somebody else in? JD: That is where the magic of procurement comes in and you do the cost-benefit equation for them.

PK: There is that initial discussion, the catalyst and the key to success or failure. It is selling the proposition. If you sell it right, then you will get the buy-in.

RJ: What has been really powerful is, once you have that opening, to bring in an interim with deep category expertise. For example, HR people have brought some great knowledge into meetings. You find you build a momentum within those areas because they see you as a source of expertise.

LB: I hear of places that are having to submit a 10-page business case [to hire an interim] and I think: "We'll be in the next recession by the time that gets approved".

DHawk: We were talking about procurement needing to be part of the business. They will talk about cost-benefit analysis, not hear a business case for the activity, which may not be just about cost.

PK: You are right. That may satisfy the CFO, but for the engagement of wider stakeholders we need to be talking in exactly these terms.

JD: Often I find when procurement asks the business: "What else do you want?", they don't know the answer. You have to be able to move the conversation forward, so they can come up with additional services they would love to see. Like it or not, procurement gets put in the saving money box and we have to actively work to get out of it.

PK: We changed our name from purchasing to 'sourcing and contracting' to better engage the business and to educate them about what we do. We are involved with sourcing at the start of the process and we follow it through to the end, which is contracting, and then you can own it. Otherwise, people just think: "Procurement - it's cost saving."

For us it really isn't, we have moved on from that. We were brought in to do the cost saving, but we have evolved and the only way to get a grip on the business is to evolve into other areas.

DHawk: Is a recession an opportunity? By hell it is, because there has to be an awful lot of scope out there - by working with external providers and customers - to change the way you do business.

RK: We ran a balanced scorecard for the whole business. I went to every department from merchandising to sales and finance, and said: "What do you want?" We also got the top 40 vendors in and said: "How do we treat you? What do you want? And what do you want to look like?"

RA: The advantage of procurement is that you can now drive profit, not just cut cost off the bottom line. If you are getting involved in new product introductions early on - this is something I think is bringing quality into the function - you can drive the business forward.

DHawk: I have consistently argued that procurement isn't a process on its own, it is part of the business. Everybody is part of the process and that is where savings and benefits come. If you start to look at the business holistically, you see where the real savings can be made - by streamlining the back-end processes and the payment process. You will also see where the pain is, because if the finance department doesn't pay your suppliers on time, you have some very unhappy suppliers who will very quickly back off from things you agreed they were going to do.

DHarr: We had better not be just a process, otherwise we will find ourselves outsourced to Romania, or wherever. We have to give it something extra.

SB: Should now be a more collaborative effort with suppliers, or is it the time we are going to cut costs and renegotiate the contract, regardless?

RA: It is very difficult. It should be a collaborative approach about taking costs out and understanding what your costs are. Don't just focus on bringing the price down, because you need to understand the background to that price. It may not be the fact they are an incredibly uncompetitive supplier. It could be that the service they provide for you, because of the way you operate, may make them expensive.

CD: It isn't just a case of going to your supplier and saying: "Cut your costs". It is: "Show us how we can cut our costs". You have to balance the risk of the effect of taking that cost reduction on your service.

DHawk: There is a huge amount of knowledge out there [with our suppliers]. We don't tap into it because we take exactly this approach - "Are you robust enough to stay in business? Can you cut your price? We are going to change the payment terms." Why would I give you anything out of a relationship like that?

PK: It is a balance. You have to have the right approach in the right circumstances. Collaboration is appropriate for certain types of commodities and services, but equally you can't ignore the fact that you have the greatest opportunity in terms of deflationary pressure on labour, materials and supply markets. You can't ignore that. We have to take advantage.

CD: The right relationship with the supplier will get some of that - and maintain the relationship because they are in the same position as you.

LB: If you've had a good track record in the past year or so, you know you are going to have a good conversation. If you have been late on payments during that time, then you are going to have a tough conversation.

MH: You say: "We would like to extend your payment terms to 60 days", and they reply: "You pay in 90 days, so what's the difference?"

RA: Where we represent an unhealthily high percentage of some of our suppliers' revenue, it could bite us in the backside. One of the things that keeps me awake at night is our suppliers' cash flow. The last thing I am going to do is increase my payment terms.

DL: Westminster has taken into account the needs of SMEs and local community suppliers. It has reduced the payment terms to seven days because it recognises cash flow is critical.If those suppliers aren't there over that period of time, then it is detrimental to the economy and fewer people will be contributing, in terms of providing and still paying business rates.

MH: Even if you have to give suppliers a kicking, tell them to give them time to prepare. It is a lot better than just giving them a kicking.

RA: Think about how you would respond if somebody just came along and said: "We are just going to bash you over the head and we are not even going to have a conversation with you first." I don't want to deal with those people. It is the fundamentals of good business practice and common sense and it shouldn't be any more than that.

DHarr: It is a shame that we are talking about being defensive with our suppliers now, and talking about increasing payment terms. We should be thinking about what it will be like in a couple of years' time, when the good times return. Let's talk about how to innovate. Forget about squeezing on payment terms - let's look at how we can use this fallow period to really drive improvement in the supply chain.

RK: What we have done in terms of increasing working capital is we have taken our stock inventory and we have really pulled it right down - without affecting the service.

CD: There is never a time not to try new suppliers, because you never know what they might bring to your business.

LB: The demands on everybody have increased, so you have to prioritise. I would say focus on those areas where you have a supply source fundamental to your business. Perhaps you want to spend some time looking for an alternative source, rather than find a competitor [to a great supplier].

RA: There are probably more suppliers than ever before, looking for you right now. In automotive, these guys are all looking for work. They might not even have looked at a small company like mine before, but perhaps they are now.

LB: This has just been a wake-up call. They have to diversify.

PK: We should be able to advise the board on the supply market. How do we know what the supply market is doing if we don't embrace suppliers and have access to what is going on?

DHawk: If suppliers can see that they can have grown-up discussions with you, raise issues and realise you are prepared to listen - even if you can't help, just listening makes them feel better and perhaps makes them look at something slightly differently. It is probably a measure of most organisations at this moment if their supply chains are brave enough, or feel confident enough to come to talk to you about their issues.

PK: For those of us with factories that aren't doing much at the moment, there is a sense that now is the time to do those trials and try out some new materials; innovate, change the widgets, dual source and standardise.

Our colleagues would be pleased to have something going though the factories, in preparation for the future. Now is the time to do that.

DL: The public sector is very keen to create markets, which is about asking the supply base to think about diversification. It is healthy to inject some competition, engage in dialogue and think: "If we broker these contracts in a different way we could get suppliers". You can create more competitive markets. That is good for everybody, because it means you are spreading the risk, you are engaging with other suppliers and you are looking at doing things in a different way. There should always be a time for saying: "We need to look at the way we are doing stuff".

SB: Before the downturn, one of the main focuses was sustainability. Considerably fewer people are talking about it now, so what are you maintaining in this respect, while you are doing all the other things because of the recession?

RJ: From a sustainability perspective, we are looking after SMEs. At Essex, we haven't managed to achieve [payment in] seven days, but 10 is what we are offering to SMEs. We have also tried to support them and we are looking to award new business. We still have this drive for sustainability. The local economy is incredibly important to us and is the main thing we are dealing with.

RA: If you are cutting cost out, if you are redesigning products, if you are in at the beginning of product design, where you can get commercially available, modern, eco-friendly materials, the whole sustainability drive helps the case for what procurement can be. Ultimately, a lot of that will save money.

CD: Those companies that took it seriously in the first place will still carry on taking it seriously. The sad part is there are still companies who didn't take it seriously in the first place. Green-washing publicity, rather than the reality.

DHarr: Behaviour is the same, whether it is CSR or demand reduction. In the downturn, we need that more than ever. CSR was a prelude into questioning demand and those organisations with an agenda to question demand are still doing so.

DHawk: There is an opportunity to build sustainability in a recession because if you cut out waste you are inherently supporting the bottom line.

RA: In a manufacturing organisation, the cost of running head office from a carbon footprint point of view is nothing. Most of our carbon footprint is produced in our supply base, so if our company is serious about this, we have to look at our supplier base.