At leading companies, yesterday's procurement department has evolved over the past two decades into a high-impact supply management organization. Along with carrying out their own greatly expanded responsibilities, today's supply management professionals contribute across the enterprise to functions ranging from business strategy to new product development. How can a chief procurement officer know where his or her organization fits against the best?

This article lays out a framework for assessing a supply management organization.  For such organizations to have significant impact and deliver results to the broader company, they need four elements: people with the right skills, the right position in the organization, emphasis on the right sets of activities, and the right processes for applying key skills.

People with Right Skills

Considerable research has already been done on supply management skills, notably by the Center for Advanced Purchasing Studies (CAPS), which identified about ten critical skills. Of these, four stand out as required competencies for high performance supply management organizations:

• Conduct insightful market analysis that identifies all market-based opportunities
• Carry out cost analysis and modeling to develop a complete picture of all costs, including supplier costs where appropriate
• Develop robust sourcing strategies that cover broad-based value drivers
• Manage supplier performance and relationships to help ensure value drivers are realized

Organizations need all these skills -- but not necessarily embodied in the same person.  Building the right mix involves thoughtful recruitment, development and support for knowledge-sharing.  Companies that have achieved the top stage of excellence (Stage 4 in Censeo's Supply Management Maturity Model) recruit staff with expertise in identifying broad-based value drivers. These professionals are groomed to take a "first principles" approach to addressing supply management challenges, in addition to their specific knowledge of various spend categories.

Stage 4 companies offer comprehensive professional development programs -- targeted at specific development metrics for each person -- that cover training in key processes, deep skills in critical competencies (identified above) and cross-functional team management. Staffers receive internal certifications to promote a culture of continuous development, and follow a defined career path that includes options across the broader organization.

Knowledge sharing takes place through a centrally managed Center of Excellence.  It has the staff, support and infrastructure to create and maintain a culture of innovation and thought leadership.

Right Organizational Position

The supply management organization must be positioned to interact with the broader organization in order to contribute to its full potential.  Executive sponsorship is essential. Stage 4 organizations have a clearly established role for senior sponsors able to mobilize the entire organization to support supply management initiatives. Sponsors also position the supply management organization to contribute to overall business strategy.

In terms of organization structure, the hybrid has proven most effective.  The definition and exact composition of "hybrid" will vary considerably among organizations based on factors such as commonality of external spend, organizational expertise, and role of the supply management organization. 

Another element in positioning is stakeholder engagement. In Stage 4 organizations, cross-functional stakeholders, including requirements owners and end users, are deeply engaged in sourcing teams. The supply management organization works closely with stakeholders to identify the full set of value drivers, ensure buy-in and adherence to sourcing efforts.

Right Activities

The right activities are those with a TCO focus, which incorporate sophisticated price management, demand management and supply chain and lifecycle costs where applicable.  It is worth pointing out that unless a supply management organization hosts the required skills and is positioned properly in the enterprise, it will not be able to carry out these activities effectively.

Stage 4 price management builds current pricing trends and supplier cost trends into price negotiation, and applies such tactics as lifecycle/seasonal buying and price change management where appropriate - in addition to simply driving price competition among suppliers.  

Demand management is often the single largest opportunity area.  This remains true across a variety of different spend categories. Stage 4 organizations realize this, and apply sophisticated methods to develop requirements based on a clear understanding of costs versus performance. Top organizations also manage to these specifications (and volumes). They manage requirements proactively and act fast if purchasing takes place outside established methods.

Cost modeling also underlies the understanding of supply chain and lifecycle costs in sourcing efforts and supplier evaluations, once again highlighting the central role of critical competencies.

Right Processes

A supply management organization has people with the right skills on board.  It is well-positioned within the enterprise, having gained the trust and support of senior executives who sponsor its initiatives as well as key stakeholders who value its complementary expertise.  It is paying attention to what matters, namely the elements of total cost of ownership.  What is left? Simply, how the key tasks take place: the processes for doing the job.

Strategic sourcing is among the most visible supply management processes. Stage 4 companies treat fact-based, analytical sourcing as a core competency, identifying all possible sophisticated sourcing levers and drivers of value for end users. In addition, the enterprise continually gauges compliance and user needs through a comprehensive internal performance management process.

Supplier relationship and performance are actively managed, via regular feedback and prompt corrective action. Supplier actions have consequences, as commodity volume is allocated partly based on supplier performance where appropriate.  Stage 4 companies also often collaborate with suppliers on joint demand planning, forecasting, supply chain management and process improvement.  They aim for win-win relationships with suppliers.

Finally, day-to-day procurement transactions typically require purchasing staff involvement only in exceptions. The entire ordering process is integrated with suppliers for major, strategic and high transaction spend categories.  E-procurement tools handle the great majority of the work load.

Conclusion

Though they are separated for this discussion, the elements of people, position, activities and process are tightly intertwined. Companies aiming for Stage 4 excellence seek to understand where on the maturity curve they lie, and develop a focused and orchestrated approach for how they will move to the next stage of excellence.

Source: Censeo Consulting