The “7 deadly sins” in Purchasing and Supplies and how to avoid them

After 15 years working on “both sides of the table” – as a consultant and executive in Purchasing and Supplies and also in Business and Sales – and 9 years teaching related disciplines in postgraduate programs, I am still bothered by the seriousness and persistence of some problems encountered, with frightening frequency, in Purchasing and Procurement practices in companies. The harmful effects on business and the competitiveness of organizations in different economic segments, especially in a context of competition and growing disruptive innovations, are significant but not sufficiently (re)known.

The literature and training available ignore or just touch these relevant issues, typically limiting themselves to the technical aspects of a complex activity whose critical success factors go much further and also encompass strategic, behavioral and governance issues.

In this brief article, I resorted to the metaphor of the “7 deadly sins” to give due emphasis to the serious problems that afflict the Purchasing and Supply areas and on which I discuss below based on my empirical knowledge (corporate and academic) and on the of my clients, peers and students.

All these problems and the respective recommendations for eliminating them I address in a broader and deeper way in the short course (12h in the live online modality) "Strategic Management of Purchasing and Supplies” which I minister periodically at ILOS.

1. Misalignment with the company's priorities and business model

A few years ago, the Procurement Director of the Brazilian branch of a gigantic multinational operating in the Oil & Gas sector summarized the biggest challenge he faced at that time as follows, and which he would like to direct the content of the in-company training that I would give in the next few years. weeks for his team: “The barrel of oil is around USD 50 and my team continues to work as if it were still at almost USD 100, when concerns about costs were almost non-existent.”. Even more serious is when the Purchasing and Supplies areas do not fully understand the peculiarities of your company's business model and do not act accordingly. Applying the same sourcing techniques and in the same way to a BMW and a Carrefour is a mistake that is as serious as it is surprisingly common.

The alignment of the Purchasing and Supplies structure with the company's business must occur continuously, systematically and at all levels of its organization chart. Through the proactive and frequent participation of its leaders (directors, managers, etc.) in strategic discussions with their peers from other areas on how Supplies can and should enable the achievement of corporate goals and support priority projects and businesses for the company , passing through the formation of multifunctional teams (led or not by the Procurement area) and reaching actions such as buyers experiencing from time to time the operational reality of their internal customers (requesters) to understand their needs and challenges.

2. Exclusively operational and reactive performance

One of the most frequent complaints I hear from both requisitioners and buyers is that “Buying only puts out fires”. In other words, it receives demands from requesters that are always "for yesterday" and with inadequate specifications - vague and incomplete, generating significant risks of "buying wrong" or its opposite, so specific and directed towards one or a few suppliers that it makes any minimally competitive competitive process unfeasible - , is required to carry out activities that should be carried out by the requesters or other areas of the company (provisioning of supplies and resolution of payment problems to suppliers, for example) and ends up acting in a merely operational and reactive manner and with the sole purpose of “getting little” from applicants. Everyone (with the exception of suppliers, who enjoy profiting from their customers' incompetence) loses: requisitioners, buyers and, above all, the company's shareholders.

Transforming this reality requires structural measures at the corporate level: strategic redirection of the Procurement area; training; adequate information systems; and norms and procedures that clearly define the responsibilities of each area (Supplies, requesters, Legal, etc.) and the punishments for eventual deviations, the flows of internal and external processes (from the issuance of the purchase order to the effective supply and payment at the end), internal and external SLAs (Service Level Agreements) and KPIs (Key Performance Indicators) and other essential aspects to standardize and optimize routine Purchasing activities. Additionally, the Purchasing and Supplies area must be structured internally in order to have specific teams for more operational and transactional activities (issuance of spot purchase orders, registration of suppliers, registration of supply items, etc.) and others for more strategic activities (Strategic Sourcing, category and supplier management, Supply Intelligence, etc.).

3. Imbalance between search for results and mitigation of supply risks

I once concluded my orientation to a new member of my Procurement team (a Specialist in charge of some relevant supply categories) by saying the following: “Remember: avoiding supply interruptions is a basic requirement for you to keep your job, but without delivering results you will not meet your goals and you will not grow in the company.”. In most companies, there are not enough guidelines to determine how much supply risk is acceptable to assume in order to leverage results (in terms of savings, quality, lead time, etc.). As a consequence, decisions are taken using non-homogeneous criteria and under the interference of political and circumstantial issues. My experience shows that both orderers and buyers with operational roles tend to be more conservative (prioritizing the maintenance of suppliers and supply models), in contrast to executives (managers and superiors) who tend to be more prone to change and innovation. This stems mainly from differences in professional goals (usually more financial and aggressive for the executive levels and more operational for the others).

In each economic segment, the relationship between “risk and return” varies, which makes sense to be sought in strategic and operational decisions (including Purchasing and Supplies decisions). In sectors where risks are intrinsically higher (pharmaceuticals, nuclear, aeronautics, etc.) or where there are higher profit margins (luxury consumer goods, for example) it is natural that supply risks are a greater concern than than in others where competition is essentially via cost efficiency (supermarket sector, for example) or via product innovations (electronics industry, for example). The Procurement area must have policies, goals and procedures that are consistent with the idiosyncrasies of each company's business, always making supply decisions in agreement with its requisitioners and aiming at maximizing value for shareholders. And always remembering that without taking risks (in a planned way, it is recommended) there is no return.

4. Inadequate relationship with requesters (internal customers)

This is such a common problem that it's practically a corporate cliché. As deleterious as a Purchasing and Supplies area is to be a “doormat” for its requesters, it is its opposite extreme, which is to assume a posture of permanent antagonism. The practical result, in both cases, is an “embrace of the drowned” in which the two sides end up having much more difficulty in achieving their goals due to the unproductive conflicts that undermine the exploration of the almost always underused potential of collaborative and convergent actions. .

100% of the Strategic Sourcing projects that my team and I were able to develop (some of which were awarded) were only viable when we managed to forge the only recommendable relationship with the applicants: that of partnership. Building genuine partnership relationships requires time, effort, mutual trust and transparency to achieve common interests, but the return almost always compensates for the “investment”.

5. Inadequate or non-existent supplier management

In contrast to the relationship between Supplies and requisitioners, which must always be a partnership, the relationship with suppliers must depend on critical variables such as supply risk and impact (financial, strategic, etc.) of the supplied item on the company's business and also of the balance of power between supplier and customer. But there is a significant number of companies that do not carry out these analyzes and, even more serious, do not have an appropriate and institutionalized process for the continuous management of suppliers. The result is a wide range of serious problems: supplier dependency, increased supply risks, disadvantageous supplier negotiations, worse results (in terms of savings, quality, lead time, etc.), increased compliance risks, etc.

Good practices include the use of category and supply item segmentation tools (Kraljic Matrix and MPEM, for example) and categorization of the balance of power between supplier and customer; the employment with each supplier of strategies consistent with its segmentation; of policies and procedures for the active and continuous management of suppliers; and information systems that make this management possible. In a successful case of GlaxoSmithKline, its global Supply area started to prioritize the management of 30 suppliers with the greatest impact on its business after classifying all its 10.331 suppliers according to the variables “risk”, “criticality” and “expenses” .

6. Team with inadequate technical and behavioral profile

Once, the global HR VP of an American multinational company in which I worked as an executive presented several scientific studies during a lecture to support the following final message: “The most relevant decision an executive makes is the decision to hire someone, because when he erra direct and indirect costs for the organization are absurdly high.”. And the incredibly high turnover rates in Brazil show how common this error is in this country, combined with other problems such as deficiencies in employee motivation, retention and development. How many Supply executives can say they have teams with the right technical and behavioral profile? And assessing and developing behavioral skills is an even greater and more critical challenge, corroborated by the principle (which I observed and carried out in practice as an executive) that “you hire for knowledge and leave for behavior”.

In Supplies, the ideal professional profile is complex and multidisciplinary, ranging from technical skills such as analytical and quantitative skills and knowledge of supply categories to behavioral skills such as leadership, interpersonal relationships and resilience.

My recommendation here is: invest in a close relationship with your company's HR and engage in activities that are absolutely critical to the success of any area, from Purchasing and Supplies including: Recruitment & Selection, Performance Assessment, Development & Training, etc. These are ultimately the responsibilities of any and all leaders, with HR having a “supportive” and “facilitating” role.

7. Outdated and insufficient sourcing techniques and tools

Last but not least is the frequent problem of using outdated and insufficient sourcing techniques and tools. If your Purchasing and Supplies area still decides to hire suppliers based only on the acquisition cost and compliance with mandatory requirements; perpetuates old delivery models; fully complies with the scopes defined by the applicants; prioritizes obtaining savings through commercial negotiations; adopts contracts with fixed prices; does not get involved in implementing new delivery solutions; does not supervise the management of contracts carried out by the applicants; and communicates remotely with its suppliers exclusively by phone or email, so I regret to inform you that your practices urgently need to be reviewed.

The universe of techniques and tools that constitute one of the vital foundations of a high-performance Purchasing and Procurement area is quite broad: Strategic Sourcing, Procurement Intelligence, cross-functional teams, use of benchmarking and RFI (Request for Information), analyzes based on TCO (Total Cost of Ownership), adoption of contracts based on supplier performance, use of reverse auctions, automated processes via workflow and Supply Chain Management tools, and many others.