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Measuring
the Maturity
of Procurement Practices
by Rob Handfield |
Many
companies today are deploying a myriad of procurement
strategies, including:
| • |
Applying
reverse auctions to all commodities |
| • |
Apply
strategic alliances with all commodities |
| • |
Outsourcing
of key business processes |
| • |
Leveraging
and supply base reduction |
Not
all of these strategies have been successful.
In fact, there is perhaps some confusion regarding
how to proceed and which strategies are appropriate
at what times. Clearly, there is a need to understand
what makes sense, given the relative maturity
of procurement organizations. The reality is,
many organizations are very new at outsourced
relationships, and like any technological innovation,
we need to learn how to apply the new technologies
and strategies.
John Seely Brown, the recently retired Corporate
Vice President of Xerox and President of the
Palo Alto Research Center, published a paper
in the Harvard Business Review in Jan/Feb, 1991
('Research that Reinvents the Corporation')
which draws an interesting distinction between
'technological innovation' and 'local innovation'.
Technological results from research on the knowledge
base(s) underlying the products or services
that a company sells in the marketplace. 'Local
innovation' results from research on 'new work
practices' within the firm that contributes
to operational efficiency & effectiveness.
If that is so, then maybe 'local innovation'
is what happens in the new and emerging area
of what we call “Good Procurement Practices”
– that is, getting the products to market
more quickly, by improving business processes
in this area
It is important to note that “Rome wasn’t
built in a day”. Organizations typically
proceed through an evolution in the evolution
of their procurement practices (see Figure 1)
- beginning with quality and cost teams, then
moving towards cross-location international
teams and supplier reductions (as well as focusing
business on key customer accounts). In later
stages, global sourcing and distribution systems
provide full visibility to materials throughout
the supply chain, cost is managed on a system-wide
basis, supplier capabilities are improved through
joint efforts, and customers and suppliers are
integrated into NPD efforts. Organizations may
also re-consider which activities are not “core”
to their business, and decide to outsource those
activities for which they are NOT world-class.
Click
here for a larger version of the image.
The question of how far you are to the right
in this maturity grid is not as important as
understanding the relative baseline of where
you need to go. Moreover, pharmaceutical companies
need to measure the “maturity” of
their purchasing function, in order to set strategic
priorities for training, education, and organizational
development. Unless you have a baseline set
of metrics, it is difficult to know where to
go. One way of assessing this is through the
assessment of the relative “maturity”
of your company’s procurement chain processes.
These can vary substantially across a wide variety
of business processes – that are fundamentally
defined and design, plan, source, make, deliver,
and sell. The Supply Chain Resource Consortium
at NC State has developed a very detailed approach
to measuring and defining the relative maturity
of these processes – ranging from Ad Hoc,
to Defined, Linked, Integrated, and Extended.
Each of these elements is measured at the business
process level – as either a strategic process,
team-based process, or operational (day-to-day)
process.
A good example is that of strategic alliances.
One of our modules addresses whether there is
a process in place to create, execute, and manage
strategic alliances with outsourcing partners.
It is one thing to say that “yes, we are
doing that”, and quite another to validate
that :
| a) |
There
is a process that identifies specific responsibilities,
ownership of tasks, and associated metrics
to monitor the health of these relationships,
|
| b)
|
There
is a process in place to ensure that strategy-causing
communication is enabled and is not stalled
by misperceptions of information barriers
and/or confidentiality, |
| c) |
Engagement of all relevant parties is ensured
and promoted by top management to ensure
that effective mutual purpose is the outcome, |
| d)
|
On-going
sharing of information regarding changes
to the business are effectively communicated
on a timely business to ensure that all
parties can react in the appropriate manner. |
This
is but a single example – there are many
more.
I expect that the distribution of most companies,
quite frankly, would be skewed towards the lower
levels – simply because it is so difficult
to progress. My experience has been that it
takes organizations normally eight to ten years
to move from the left to right on this grid.
This hypothesis can certainly be challenged.
However, if you really take a hard look at your
processes, benchmark internally as well as externally
with other organizations, you have the beginnings
of a baseline set of metrics for understanding
how to set a vision for the future.
Sincerely,
Rob Handfield
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