Many leading companies and organizations have worked hard during the past several years to become lean, agile, and flexible. Among other initiatives, they have taken a close look at support function staffing (including procurement) and have downsized, right-sized, outsourced, and off-shored with the net effect resulting in an environment where employees are having to do more with less resources or more without more resources. Another set of companies and organizations have taken a different path, and, as it relates to purchasing goods and services, have never upgraded the effort nor staffed their procurement organizations appropriately. In either case, the net outcome has been one where real and significant savings have been left on the table because there were not enough resources or not enough skilled resources available to competitively bid a maximum amount of the company’s or organization’s spend for goods and services.
With the remaining resources, highly skilled organizations take a position of focusing on ensuring that crucial goods and services are protected by contracts and rebid every one to five years. These companies leave the smaller spends to sort themselves out with the help of dozens or even hundreds of business end-users following procurement policy to engage suppliers and hope for the best. The companies that have less skilled purchasing departments continue to focus on transactional buying with little professional oversight. In both cases, organizations are paying more than they need to pay and also are putting their companies at risk by not formally vetting many of the suppliers they are using.Improving the whole
In the effort to cut costs, many companies in the pharmaceutical industry and other industries have purposely taken an approach that reduces cost by cutting infrastructure, including significant reductions in full-time employees. Although much of this cutting is needed and laudable, there are many examples where cuts have been equally applied to all internal functions (e.g., 15% for all support staff). Although this approach fixes one part of the business (i.e., procurement labor costs), it has a negative impact on the organization as a whole. Procurement is one of the few functions that can have a direct and ongoing impact on the bottom line and should be staffed or supported appropriately for maximum savings delivery and overall risk mitigation.
Return on investment through procurement
To offer an example of the value of procurement, take the case of a small but growing pharmaceutical company that had no real center-led procurement strategy or organization. When it came to purchasing indirect goods and services (i.e., all goods and services with the exception of direct materials to make products), senior management and administrative assistants became the purchasing experts, which resulted in little, if any, competitive processes being used, suppliers not properly being screened, and generally creating unnecessary cost and risk for the organization. Poor procurement practice was evident when buying contract research organization services; marketing services; facility services; maintenance, repair, and operations; office supplies; benefits; and other services. After reviewing the company’s buying practices, limited policies, and several recent purchases, it was clear that the company was over-paying on average by a minimum of 20% for indirect goods and services. This organization spent approximately $100 million per year on indirect goods and services with revenues of approximately $250 million. It was recommended that the company make an investment in upgrading its procurement capability by naming a head of procurement to institute a center-led program for purchasing direct materials and indirect goods and services. The investment would easily have a 50 times return during an 18- to 24-month period, according to conservative estimates.