Procurement starts with Demand Management

“procurement” starts with managing demand, finding suitable suppliers around demand (strategic sourcing), and managing the performance of suppliers around suppliers (supply performance). You should know that any role has two functions: service function and supervision function. The fundamental reason for the existence of a function is its service function, that is, internal or external customers have needs, and this professional function is needed to meet them. For procurement, this is design, marketing and other functions that have needs.

This may seem like common sense, but common sense is not always practiced. In many “purchase” companies, purchase is lackluster in terms of service functions, and the only function that stands out is the supervision function. This makes “purchase department” even more of a target of public criticism, and its status in the company is even lower.

Let me give you an example. Once, when I was doing a training in China, a purchasing manager said that her other end user treated their purchasing as their enemy. This was a service chain with its own catering service. other end user, like engineers in manufacturing companies, also had to design new service and needed to purchase this. One of the main tasks of purchasing department was to watch over the boss and not let end user spend money recklessly. For example, if end user wanted to buy a piece of good food to try out a new catering services, the purchasing application would be submitted, and the purchaser would review it, and then the purchasing manager would review it, and then the finance department would review it. Sometimes, even after a week or two, there was still no sign of the food. Do you think purchasing is adding value or creating trouble? Can end user look at these “purchase” with promising treat?

Figure001: “Procurement” starts with demand management

Coincidentally, also in China, a friend said that their company conducted a survey to see which function is the least popular. The top of the list is of course finance, because finance is naturally responsible for a lot of supervision (don’t you see, in the eyes of the financial director, everyone is a suspect). The second place is a bit unexpected, it is supply chain (procurement is one of its main functions). I think in addition to the fact that the supply chain cannot effectively meet the needs of internal customers, the supervisory role played by procurement should also be one of the reasons.

If the service function is ignored, procurement often becomes a “watchdog” for legal and compliance. This can be seen from the reporting line of the procurement function: if the procurement function reports to the vice president in charge of finance, auditing, personnel, etc., it may mean that the supervision function of procurement is prominent, and it is probably “purchase management”. You should be more careful, because this is probably not the place for you to learn skills. I have found that some non-manufacturing companies report to the CFO. Obviously, these companies regard procurement as a money-spending master and do not realize that procurement is managing suppliers, a strategic resource.

Of course, perhaps this is also because these companies are not short of money – the net profit margin is about 30%(it is the net profit, compare it with your 12% gross profit), and spending money correctly may be more important than spending money well. The former only needs to play a supervisory role, which is the specialty of “purchase management”; the latter needs to do “procurement management”, including management demand, strategic sourcing and supply performance management.

As a professional buyer, would you rather go to a “purchase mangement” company that mainly performs supervisory functions but may earn higher incomes, or go to a company that mainly performs service functions but may have a harder life? This is like choosing between laughing while riding a bicycle or crying while riding in a BMW.

This is a bit off topic. Having said this, I think everyone has a certain understanding of what “procurement” does.

Take BP as an example. As shown in Figure 001, “procurement” is about managing demand (demand planning), finding the right suppliers (strategic sourcing), and managing overall supply performance (managing suppliers). You can clearly see that this is a complete life cycle around suppliers (strategic sourcing and performance management), starting with demand management and ending with meeting demand (managing supply performance). In this cycle, you can’t see much at the order level. This is also easy to understand: once the demand is straightened out and the problems at the supplier level are solved, most of the problems at the order level will naturally be solved. The rest can be automated through e-commerce. The exceptions are handled by buyers, quality inspectors, and expediters.

Figure 002: BP builds market-oriented “procurement”

For many local enterprises, procurement is not up to par in terms of demand management, supplier search (strategic sourcing) and supplier performance management. Especially for large state-owned enterprises and central enterprises, departmental barriers are strict, procurement is at the downstream, and intervention in demand management is very limited; supplier performance management is also not solid, because of extensive management, it is difficult to collect supplier performance data; although the main task of procurement is bidding (a way of sourcing), it is also not very good. It can be said that in the process of moving towards “purchase”, state-owned enterprises have the longest and most difficult road.

For private enterprises, the pressure of survival in the market is great, which is converted into cost reduction indicators year after year. Procurement cannot drive design and quality to promote design optimization and process optimization to reduce costs, and the only way is to negotiate price reduction until dark. In this case, strategic sourcing becomes a bargaining chip in the process of negotiating price reduction, or is kidnapped by the negotiation price reduction: those who meet the cost reduction target are good suppliers and “strategic” suppliers; those who cannot meet the target will become the target of elimination, or the target of threat of elimination. This is destined to be distorted strategic sourcing, and it is difficult to optimize from the perspective of full cost; it is also destined that in subsequent management, many performance problems of suppliers are unsolvable. In the words of a company’s quality personnel, the suppliers found by procurement (driven by the lowest price) are all eliminated suppliers (in the eyes of quality). Do you think quality problems and delivery problems can be solved?

Similarly, due to the high market pressure, sales are naturally in a strong position in private enterprises, making it difficult for procurement to manage demand. In these enterprises, procurement and supply chain operations are both victims and perpetrators. They are first held hostage by sales: sales accepts all orders, “whatever falls into the basket is good”, regardless of whether it is worth doing from the perspective of procurement and supply chain operations (cost); “The market competition is so fierce, I can get orders, why can’t you do it?” In the competition with sales, there is almost no suspense, procurement and supply chain operations have no hope of winning. Under pressure, procurement and supply chain operations can only “die in front of you”, regardless of the work. As a result, the business was done, but no money was made; even if there was money on paper, it was all earned into inventory. Firefighting has become the norm, and gradually, procurement and supply chain operations are also same. Anyway, everyone is an urgent order, and there is not much to do, so I will just break the jar and break the pot, “I don’t have the goods, I have my life”, and I will take every step I can. As a result, procurement and supply chain operations took sales hostage. The customer-centricity of the company’s early days was gradually replaced by departmental interests, and there was constant friction between functions. As for procurement, it could neither manage demand nor supply well, and was destined to continue to wallow in the quagmire of purchase”.

In technology-driven companies, the above-mentioned game is also happening, but sales is replaced by design. On the one hand, design and sales are too strong, and on the other hand, procurement and supply chain operations are not capable enough to support one corner of the iron triangle of enterprise operations. We know that enterprise operations are inseparable from three things: (1) R&D to design good products; (2) marketing to sell them at a good price; and (3) supply chain operations to produce them at an appropriate cost (procurement is the main force of the supply chain). The drivers of value are marketing and R&D. If they cannot design good products and sell them, everything else is useless. If I were to choose, I would rather choose design or marketing to lead a company than procurement and supply chain operations. Why? Design and marketing are driven by sales and profit maximization, which will cause many problems because there are no considerations for cost and inventory. However, if procurement and supply chain operations are allowed to take the lead, the ideal company would only produce one product, with only one part, and only one customer and supplier, so that cost and inventory are optimal. But as we all know, such companies would have gone bankrupt long ago. Therefore, the demand side represented by marketing and design must be balanced with the supply side represented by procurement and supply chain operations.

This balance cannot be established solely by the leadership’s attention; procurement and supply chain must practice internal skills, and they must first be strong and proficient in their own business, and create more value for the company, in order to win the respect of marketing and design. I have visited some private companies, and the person in charge of procurement is mostly someone the boss trusts very much. Some of them have worked with the boss all the way up, and the boss’s support is not small. Design and marketing are often outsiders, but procurement is still a typical “purchase management”. Apart from urging goods, it cannot add more value to balancing supply and demand, so it can only continue to struggle and play a third-class citizen in the company.

The solution is not that the boss should pay more attention to it, but that purchase should transition to “procurement”, that is, manage demand well, select suppliers well, and manage suppliers well, becoming an effective part of the enterprise’s iron triangle, supporting and balancing demand management, and adding more value to the company.