A revolution started about a dozen years ago in the federal government and is spreading to state, local, and commercial purchasing
organizations. This revolution is about turning procurement efforts into a sustainable cash-flow-generating stimulus machine
by extending available resources to get more spend under management, competitively bid spend more often, and take advantage
of market dynamics that create marginal pricing opportunities. It is a change in thinking that drives maximum efficiency,
maximum savings, and creates a truly holistic procurement management system that goes well beyond the 50% to 80% control that
most organizations have.
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.