The Knowledge Club Compendium – 2007Issues 5-8

Index

The Knowledge Club - Issue #5 March 2007

1. Benchmarking – So how are we doing and where do we want to be? 3

2. Carbon Footprints in the Supply Chain 5

3. Global decisions in a Global Market place 8

4. Managing change in the procurement function 10

5. So what have my suppliers ever done for me? 12

6. The Missing Step - Bringing a project to a close 13

7. What is a brand? 15

The Knowledge Club - Issue #6 June 2007

8. Action Stations! 16

9. Benefits of implementing an electronic contracts management system 19

10. Discovering what to count and making it really count! 21

11. Introduction to successful e-Tendering 23

12. Key Performance Indicators (KPI’s) for Inventory Management in the Aerospace Industry 27

13. Supply Chain Vulnerability and Risk 29

14. Understanding Supplier Relationships 34

15. What is Procurement and Supply Management? 36

The Knowledge Club - Issue #7 September 2007

16. Building a winning team 38

17. e-Procurement Initiatives for Marketing Services 40

18. Pick the bones out of that - The Fishbone technique 42

19. It never rains but it pours 45

20. Savings at what cost? 47

21. Skills Transfer: I know something you don’t know 49

22. Stuck in the middle 50

23. It’s not how fast you walk, but the way you walk 52

The Knowledge Club - Issue #8 December 2007

24. Contract Management and Performance Measures 58

25. Negotiation: Winners and Losers? 60

26. The new CIPS year and a brighter future for procurement 61

27. Organisational Change in Response to Sustainability Issues 63

28. Resolve to Resolve 68

29. That tender time again 69

30. Standing on the Shoulders of Giants – Trends in Procurement 71

31. Wii three kings of orient are… 72

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IntroductionWelcome to The Knowledge Club Compendium – 2007. The Knowledge Club is a quarterlydigest of relevant and practical articles to support the procurement practitioner in deliveringthe finer points on their day-to-day job. A benefit for CIPS Australia members emailed out every three months. This Compendium is a compilation of 31 articles published during 2007. Articles from 2008 will be published during 2009. These articles are all available online on thePublications page on www.cipsa.com.au

Jonathan Dutton MCIPSManaging DirectorCIPS Australia

The Knowledge Club - Issue #5 March 2007

1. Benchmarking – So how are we doing and where do we want to be? Benchmarking is usually associated with measuring an organisation’s performance againstthat of another. Successful organisations are beginning to realise the limitations of this andare setting their own ‘stretch targets’ with which to benchmark their current performance.

Difficulties with BenchmarkingIt is notoriously difficult to identify suitable benchmarking partners, and aiming to be as good as the organisations you are measuring against may not be synonymous with optimumperformance. A lack of commonly used performance measures also means that you’re inevitablycomparing apples with oranges. Organisations can also face difficulty in distinguishing betweenthose processes which need to be benchmarked and those which do not. Benchmarkingoutcomes can sometimes be seen as credence good.

Where do I start?The following steps are a good starting point in assessing what to benchmark:■ Determining what customers really want.■ Realistically assessing competition.■ Identifying best practice.■ Learning from other business sectors.■ Introducing relevant best practice.■ Providing a means to constant improvement.

Andersen and Petersen have condensed this into five steps.■ Plan: Selecting a process to be benchmarked, forming a team to carry out the benchmarking,

documenting the process to be benchmarked and establishing measures of performance forthe process.

■ Search: Listing the criteria to identify a benchmarking partner, identifying the partner,selecting a partner and establishing contact.

■ Observe: Determining information needs and where the information can be found, decidingwhat/how to gather and record the information, carrying out the gathering.

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■ Analyse: Putting the information previously gathered into a useful format and using it toidentify the gaps in one’s own performance.

■ Adapt: Effecting an improvement in one’s own processes and performance. It also involvessetting targets, planning, and implementing change.

What’s it all about?What ever area of the business is being benchmarked, there are two primary characteristicsfor measurement and comparison, these are ‘INPUTS’ and ‘OUTPUTS’. ‘Inputs’ are concernedwith individual and organisational competencies, and ‘outputs’ relate to the value proposition.People often want value for money but generally have a poor understanding of what they meanby ‘value’.

Value proposition = FunctionalityTotal cost of ownership

Or in simple terms

Value = EffectivenessEfficiency

Effectiveness is about fit for purpose, whether this is customer or stakeholder satisfaction,or a product’s ‘fit’ with the specification. Efficiency relates to more measurable criteriasuch as price, cost, speed of delivery, streamlined processes etc.

Methods of measuring performanceThe input and output measures must then be linked to mechanisms to evaluate theirperformance. Andrew Cox from Birmingham Business School identified three methods formeasuring performance, they are;

Ideal Benchmarking – Evaluating current performance against a theoretically defined orobjective measure. This can be industry standards, ISO’s etc or an internal goal.

Internal Past & Current Benchmarking – Evaluating current performance against previousperformance. Getting ‘more bangs for your bucks’ is a common procurement measure to ensurethe organisation is getting more for the same price or the same qualities for less money.

External Comparative Benchmarking – Evaluating current performance against an externalthird party or third party’s performance.

So what should I do?Research shows that most organisations’ benchmarking activities fall into either Internal andPast or External Comparative, and many organisations fail to set their own ‘stretch targets’. Coxrecommends devising an Operational Improvement Migration Path (OIMP) depicted below,where organisations map the ‘ideal’ or ‘stretch target’, against the current position and includean ‘optimal’ position. Reaching the ideal will be constrained by resource availability and othermore pressing commitments.

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Why is it so important to me?Benchmarking is a valuable tool for the procurement function. Traditionally, the procurementdepartment has been seen as a cost centre to the organisation; more recently, procurementprofessionals have taken on a strategic role aligning with the organisation's strategic goals, with the recognition that it can make a significant contribution to an organisation’s bottom line.The relationships between cost and performance are measured with a view to comparing thedepartment against the norm and an ‘ideal’. Toyota did not become the leading car manufacturerby measuring themselves against their competitors; they set themselves ‘stretch targets’ tocompare current performance against. Organisations need to take a holistic approach and select the method or methods that best suit them.

2. Carbon Footprints in the Supply ChainWith global consumption of oil at around 82.5 million barrels per day, legislation andstakeholder scrutiny is driving the sustainable development agenda. Procurementprofessionals need to assess the impact this is making on their supply chains.

Sustainable procurement, sometimes referred to as ‘responsible procurement’, supportsthe three pillars of sustainable development (environmental, social and economic). Recentstudies, including the United Nations Intergovernmental Panel on Climate Change (IPCC)4th Assessment Report, and the UK Stern Review on the Economics of Climate Change,have given a renewed focus on the impact of burning fossil fuels.

Burning fossil fuels (oil, natural gas and coal) generates carbon dioxide which is seen as amajor contributor to predicted future variations in global temperatures. In communicatingwith consumers, this is expressed as the ‘carbon footprint’; the volume of CO2 generatedby a particular activity. The essential question for the supply chain professional is ‘what arethe threats and the opportunities seen as being generated by operating in this newenvironment.

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TIME

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Operational im

provement migratio

n path

Currentposition

The Optimal

The Ideal

Brad Pace from Logistics Bureau states: transportation and storage of products aroundthe world is a significant contributor to CO2 emissions. The non-household transportationsector alone contributed 10% of Australia’s total greenhouse emissions in 2004. This is inaddition to the contribution of the fossil fuel powered energy that assists with the storage andproduction of these products. (ABS Yearbook 2007) Government, industry and public responsesto the effects of climate change are becoming a major talking point throughout the world.Companies contributing to CO2 emissions are therefore increasingly being held accountable for their contributions. Whilst the EU has been a leader in such accountability standards,Australia is also moving towards a “user pays” system.

There are therefore many compelling reasons for understanding your supply chain’s currentcarbon footprint. Eventually all companies will need to understand this to operate in the new“Environmentally friendly” economy.

Carbon Trading comes in many forms, but is most commonly the term for a system allowinggovernments or regulators to impose a permit requirement for the emission of CO2. Thesepermits are given to carbon producing companies, based on a fair and reasonable assessment of emission requirements of that company, and equivalent in total to the stated emission aims of the government itself.

Carbon Trading is predicted to be operating in the Australian marketplace by 2010.(The Weekend Australian, Feb 10, 2007) Although this will largely centre on power generationcompanies in the short term, there is considerable debate about whether all companiesshould be involved – especially those with heavy involvement in the transportation sector.Knowing your supply chain’s current carbon footprint, and beginning the process ofreducing this, will place companies in an advantageous position when carbon emissionoutput becomes a tradable commodity.By Brad Pace. Source:

http://www.logisticsbureau.com/supply_chain_carbon_footprint_emissions_analysis.htm#More_Information

The message for energy producers and industrial and commercial (I & C) users is that afinancial environmental burden needs to be factored on top of increasing energy costs. Forexample, the price of Brent crude oil (the UK standard) has increased from USD 34.82 on7 March 2003 to around USD 50 today. The price did peak to around USD80 in July 2006.

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Legislation, such as that provided by the European Union, is a primary driver of physical and behavioural change in the supply chain. As a general principle, it is the responsibility of the individual EU Member States to transpose (apply) EU Directives into national law

and monitor their effectiveness. The EU has developed a number of market-based mechanisms in an attempt to influence the impact of CO2 on sustainable development. Under the EU’scarbon dioxide emissions trading scheme (ETS), emissions for the United Kingdom will be

capped at 246.2 million tonnes (2008-12). Allowances must be bought (at 18 Euros per tonne of CO2 generated during Phase 2 of the ETS) or offset against investment in approved

environmental projects around the world. Phase 2 of the ETS (2008-2012) place caps at 7% below that proposed by 10 of the 27 Member States of the EU.

CASE STUDY

At the same time, the cost of carbon permits will increase from 8 Euros (applicable duringPhase 1 of the ETS) to 18 Euros (for Phase 2 of the ETS).

During the 18 month period beginning in January 2005, the price of oil (Tapis) in Australiandollar terms moved from 38 cents per litre (cpl) to 62cpl, an increase of 24cpl.8 In the sameperiod, the average price of unleaded petrol in Australian capital cities moved from 97cpl to138cpl, an increase of 41cpl.9 That is, the price of petrol has increased at a faster rate than theprice of oil.

In Australia JOHN Howard is considering a voluntary carbon trading system - based on permitsto pollute - to encourage business to reduce greenhouse gases. But it will not put a "crude" taxon carbon emissions.

Ahead of the release of an industry and government discussion paper on what an emissionstrading system could look like, the Prime Minister favours a "permit" system rather thanimposing a price on carbon. Blog by Peter Martin. Source: http://www.energybulletin.net/25047.html

The message for energy producers and consumers alike is that unsustainable productionand consumption of energy may financially impact the organisation. For the supply chainprofessional, a potential change in the source of supply of a strategic item requires carefulplanning to minimise the risk of security of supply and the potential for increased costs.For example, legislation may restrict the supply of gas and electricity. At the same time,demand for bio-fuels may create supply constraints. A good example of this is thatgovernments in both the USA and China have stipulated that livestock have priority overbio-fuel users for corn feed-stocks.

In Australia, the Renewable Energy Act, also known as the Mandatory Renewable Energy Target(MRET), is to place a legal liability on wholesale purchasers of electricity to proportionatelycontribute towards the generation of an additional 9500 gigawatt hours (GWh) of renewableenergy annually by 2010. This level of generation is equivalent to more than twice the annualoutput of the Snowy Mountains Scheme.

For more information go to http://www.mretreview.gov.au/report/index.htmlIn the UK, government has set a target that 10 percent of electricity should be generated fromrenewable resources by 2010. Companies producing electricity from renewable sources such as wind and biomass generate renewable obligation certificates (ROC’s) that are tradable in asimilar fashion to the European ETS. Various measures to reduce carbon emissions have beenproposed, these include the use of nuclear power, clean coal technology and energy generationthrough renewable resources.

In influencing the strategic direction within their organisation, the supply chain professionalneeds to conduct an audit of the carbon footprint generated within the organisation, both at an operational level, and in relation to the end products or services delivered to the market. The goal of achieving ‘carbon neutrality’ in business organisations will apply to all industrial and business sectors. The Association of British Insurers recently stressed the importance of managing and acknowledging publicly the social, environmental and ethical risks thatcompanies face, and the inclusion of non-financial data in corporate reporting. For large energyusers (for example, extractive industries, steel and cement manufacturers) represented by the

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Energy Intensive Users Group (www.eiug.org.uk), issues take on critical strategic importance,with industry considering relocating globally to where carbon costs are lower.

Audits throughout the supply chain will identify operational target areas for increasing energy efficiency. It would be prudent to consider a holistic view of energy costs within theorganisation, as an audit may reveal many surprising areas of energy expenditure. In a businessclimate, demanding increasing agility and flexibility from suppliers and increasing use of theinternet for communications, transportation and distribution costs, will warrant close attention.

Earlier in this article we suggested that opportunities have been generated in the drive to a low carbon economy. The supply chain professional can influence the organisation to deliverenvironmentally friendly solutions and to support product differentiation or increased marketshare. Often these solutions are supported by lobbying and educational bodies. The EnergySaving Trust (www.est.org.uk) is a resource available to both I & C and domestic users. In theUSA, the Green Buildings Council (www.usgbc.org) is a respected resource for the sustainabledesign, build and operation of buildings.

This document has detailed the suggested environmental impact of operating in a high carbonenvironment and it has introduced some of the legislation in place to deliver lower carbonemissions. Some of the commercial opportunities available have been documented. This articleconcludes by informing the reader of technical solutions that have been proposed to deal withcarbon emissions.

Through the International Chamber of Commerce (ICC) UK Committee on Energy and theEnvironment, CIPS have been in dialogue with the UK Department of Trade and Industry(www.dti.gov.uk) and the UK Department for Environment, Food and Rural Affairs(www.defra.gov.uk) to assess possible solutions to carbon emissions. Carbon capture andstorage, sometimes referred to as carbon sequestration, is one technology which is beingexplored. This involves capturing and storing carbon dioxide which has been released duringthe burning of fossil fuels in underground facilities. The International Energy Agency believethat the cost of carbon allowances would have to rise to more than 45 Euros per tonne of CO2 before carbon capture and storage technologies are financially viable.

Sustainable development, and by association, sustainable procurement, will continue todominate the business agenda. CIPS through the Professional Practice Team will be trackingprogress on sustainability. We can be certain that the environmental landscape will changedynamically to meet the challenges ahead.

3. Global decisions in a Global Market placeRecent decades have seen rapid growth in the world economy. This growth has been driven in part by the even faster rise in international trade. The growth in trade is in turn the result of both technological developments and concerted efforts to reduce trade barriers. Somedeveloping countries have opened their own economies to take full advantage of theopportunities for economic development through trade, but many have not.1

Over the past 20 years, the growth in world trade has averaged 6 percent per year, twice as fastas world output. This has enabled consumers to access a wider choice of products from acrossthe world. This poses both opportunities for organisations in marketing their products in new

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1 International Monetary Fund

countries, but it also exposes them to increased competition.

Organisations are faced with major dilemmas in order to thrive and survive; tools such as theAnsoff matrix demonstrate the choices available.

The Ansoff Product-Market Growth Matrix marketing tool was created by Igor Ansoff, it was first published in the Harvard Business Review (1957) in an article called 'Strategies forDiversification'. The matrix enables marketers to consider ways to expand and or maintainan organisation’s market position by reviewing both markets and products. This matrixhelps companies decide what course of action should be taken given current performance.

The matrix consists of four strategies:■ Market penetration occurs when a company enters or penetrates a market with existing

products. The best way to achieve this is by gaining competitors' customers (increasing their market share). Other ways include attracting current customers to use more of yourproduct/service, with advertising or other promotions. Organisations that implement thisstrategy invest in relationship marketing with new and existing customers. Nationwide, a UKfirm, have adopted this approach in their marketing campaign by stating that their preferentialmortgage rates are not just available to ‘Brand new customers only’. They are promotingexisting products to both new and existing customers.

■ Product development refers to significant new product developments and not minor changesin a product already existing. The reasons justifying the use of this strategy include one ormore of the following: to utilise excess production capacity, to counter competitive entry, tomaintain the company’s reputation as a product innovator, to exploit new technology, and toprotect overall market share (Lynch, 2003). Frequently, when a firm creates new products, itcan gain new customers for these products. Hence, new product development can be a crucialbusiness development strategy for firms to stay competitive. Pledge (owned by SC Johnson)

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Market

Penetration

Product

Development

Market

DevelopmentDiversification

ProductsM

arke

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Present New

Pres

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New

developed cleaning wipes to complement their existing spray, cream and foam cleaners. Flashin the UK also launched a similar product and found that these new products were attractiveto young professionals and young families where time is at a premium and the avoidance ofbacteria and the spread of infection is important. They found that instead of replacing existingproducts, about 70 per cent of those who bought cleaning wipes also buy liquids and sprays.

■ Market development. An established product in the marketplace can be adapted or marketed to a different customer segment. Examples of this can include new markets in theorganisation’s existing country or new markets in new counties. Lucozade was first marketedfor sick children and then re-branded to increase their market share by targeting athletes.Another example is Tesco have opened stores in over 12 countries and are now seen as a truly global organisation.

■ Diversification is when a company moves away from its usual products and markets into newareas. Diversification is a high-risk strategy as it involves taking a step into a territory wherethe parameters are unknown to the company. The risks of diversification can be minimised by moving into related markets. The Virgin group, Tesco, Amazon and the Easy Group are allmodern examples of how diversification works. Virgin Cola, Virgin Megastores, Virgin Airlines,Virgin Telecommunications are all examples of new products created by the Virgin Group ofUK, to leverage the Virgin brand. This resulted in the company entering new markets where it had no presence before. Tesco and Amazon have leveraged their e-commerce capability byintroducing new product lines to new markets through the same sales channel. The internethas enabled companies to easily access new customers and market new products to existingcustomers. The risks of diversification is minimised by forming joint ventures to tap into the product and market information. Tesco have successfully implemented this with their pay-as-you-go mobile contracts in partnership with telecoms provider O2.

For every successful example of these strategies a myriad of failures can be found. Coca-Colalaunched a new recipe Coke back in the 80’s only for it to be withdrawn and the ‘original’recipe Coke re-launched. The historical (original) recipe is now a unique selling point for Cola-Cola. When McDonalds entered new markets they soon realised that their products did not have universal appeal; many Indians for example are vegetarian and do not eat beef so themenu includes items such as McAloo Tikka and Chicken Maharaja Mac. Equally, in France youcan enjoy a Croque McDo, in Hong Kong a Grilled Curry Pork Burger and the McArabia Chickenin Kuwait as new products were developed or tweaked in order to cater to different tastes.

In order to assess these risks, the Ansoff model should not be used in isolation. Combining itwith SWOT and PESTLE tools, will help identify the risks and opportunities associated with eachstrategy. Recommendations made on the basis of using only one of the models are not distinctand lack depth, it is therefore sensible to consult cross functional teams with a variety ofmarketing and strategy models to allow more informed decisions.

4. Managing change in the procurement functionThe most successful organisations are those that can manage change in the businessenvironment. The procurement function must be able to adapt to maximise its contributionfor its overall organisational effectiveness.

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Change is the only constant in business – both in the external environment and also within theorganisation. This article suggests a number of change indicators and assesses their impact onthe supply function. Comment is then made on procurement’s anticipation of, and reaction to,the changing environment.

Change indicatorsIt is important to recognise that change occurs in business, and that change needs to bemanaged effectively to lessen risk and deliver continuous improvement to the organisation.If procurement is at the heart of the organisation, the business drivers will impact upon theprocurement function. The reader is invited to consider the following drivers of change:■ Increasing customer demands in a customer focused organisation■ Changes in the availability and use of technology■ Innovation and creativity■ Competitiveness■ Profits■ Consolidation within industry, especially with the increase in the number of mergers

and acquisitions taking place.

The above business drivers will impact the organisation in prompting the procurement functionto react and adapt. Managing change effectively will depend on having 3 pillars of success:

■ Robust processes■ Systems■ People in Place

Before assessing these, the reader should consider John Kotter’s ‘Change Phases Model’, whichsuggests eight steps to successful change management.

The Change Phases Model1. Establish a sense of urgency2. Create a coalition3. Develop a clear vision4. Share the vision5. Empower people to clear obstacles6. Secure short-term wins7. Consolidate and keep moving8. Anchor the change

Impact on the procurement functionRecognising that the business environment is changing should alert the procurementdepartment to concentrate on the strategic alignment between the organisation and thedepartment. There are many books written on the subject of managing change in business.When applied to the procurement function, the CIPS Purchasing & Supply Management Model(visit www.cips.org under Professional Resources) is a useful framework for consideration.There is no right or wrong way to structure a procurement organisation in light of strategicchange, it will depend on several factors including how developed the procurement function is (benchmarked against other private and public sector organisations), and what the objectivesof the department are in its overall strategic plan. A main consideration is to give sufficientplanning to the systems, processes and people that form the foundation in order for thesuccessful planning and implementation of the change.

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Underpinning the function will be information technology systems appropriate to the needs of the department which will enable information to be collected in order to allow key decision making. Performance metrics would be used to measure progress; for example, balance scorecards could be used. Operational processes will also have to improve significantly. An increasing number of organisations are aligning their supplier base along commodity linesinstead of supplier alignment. The reader is encouraged to refer to the CIPS practice guide onCategory Management.

The third pillar of success is ‘people in place’. To complement good processes and systems,trained procurement professionals need to be in place. These people can be specialists in theirfield but they also have a good all-round business knowledge. Change needs to be managedwithin the procurement function. Its success will contribute to the ability of the organisation to survive and thrive.

5. So what have my suppliers ever done for me?In an increasingly competitive global marketplace, the supply chain professional needs tobe able to utilise innovative solutions which have been developed by their supplier base.

We all know of ‘good’ products and services. As supply chain professionals we will alsounderstand the importance of an effective and efficient supply chain being in place to supportour products in the marketplace. This article illustrates some of the benefits which can begained from working with suppliers and also introduces some management methodologies.

Suppliers are essential in achieving competitive advantage in the marketplace. ‘Competitiveadvantage’ means being better than the competition, whether, for example, through productdifferentiation or speed to market. This is best illustrated through the following example whichwas provided by the aerospace industry.

Two high profile projects in the world of aviation demonstrate the value of suppliers. Firstdeliveries of Airbus’ flagship super-jumbo jetliner, the A380 is due to be delivered in October2007, twenty months later than scheduled, at a cost of 4.8 billion Euros. The Airbus project wasone of the more complex projects, involving suppliers based in Germany, Spain, France and theUK. There were a series of delays, the final ones being due to problems around the installation of 500 kilometres of wiring required in each aircraft. The emphasis is not that there were delays,but that the whole project would not have been possible without using the collaboration of thesupplier base. It would also be these suppliers who would be called upon to rectify problemsand deliver according to contract. However, these problems and the drop in the share price areleading to restructuring in the company, with the supplier base due to be reduced from 3000suppliers to 500.

There are very few organisations that can function without a supplier base. For example, Boeingrelies on Mitsubishi Heavy Industries, Kawasaki Heavy Industries and Fuji Heavy Industries formanufacturing 35 percent of the airframe for the Boeing 787 Dreamliner. It is the suppliers whohave the knowledge to deliver leading edge technology to the customer. In this case, it is in theuse of carbon fibre technology.

The level of reliance on the supplier base will vary according to the type of business sector andalso on whether products are manufactured (in house or outsourced) or bought for retail. In the

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retail environment, there are some brands, such as Coca Cola that could be said to outsourcemost of their business activities to their supplier base, and maintain a centralised controlstructure.

Once we realise the importance of suppliers, what is the best way to manage them? A goodstarting point would be to follow aspects of the CIPS Purchasing and Supply Management Model(at www.cips.org). The overall business strategy will determine what is required from thesupplier base to deliver corporate objectives. In turn, strategic planning will determine whetherproducts are to be made in house or outsourced. The supply chain professional would then usetheir knowledge and experience of a range of tools, to segment the supplier base according tothe criticality of the product being sourced.

Resource allocation devoted to suppliers will depend on their value and potential to the buying organisation. For the most strategic suppliers, it may include access to the customer’sbuyer/supplier portal and joint partnership activity, to develop innovative solutions forcustomers. The supply chain professional needs to be trained to get the best from the supplierbase. This is the route to competitive advantage and CIPS is well placed to deliver it.

6. The Missing Step - Bringing a project to a closeThe skill sets required for procurement professionals are constantly changing; we are frequentlyasked to get involved or indeed lead projects and as a result we need to ensure our training is up to date. Considerable effort is placed on planning a project, building a business case,identifying resources and scheduling the timescales. One aspect of project management whichis often overlooked or even omitted is a formal closure procedure.

A formal post project review is important to determine whether the project;■ Remained in scope■ Achieved the agreed objectives and deliverables■ Kept to the scheduled timescales■ Did not exceed the budget■ Outcomes have been handed over thoroughly as ‘business as usual’.

This process helps to capitalise on any opportunities or threats for future business or projectswhich may have been identified during the project.

All the key stakeholders of the project should formally close the project, and appraise itssuccess. A report ideally, should be formulated following a brainstorming session whichidentifies lessons learned. The following list of headings can be used as a guide for structuringthe report.

Project Close Report

PurposeThis report is the Project Manager's report to the Project Board on how well the project hasperformed against the original planned cost, schedule and identified risks and dependencies, the business case and final version of the project plan.

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Achievement of ObjectivesThe report should outline the main objectives and whether or not they were met. It would bemore appropriate to summarise the overall success and include a detailed schedule in theappendix. Any reasons for not meeting objectives and any actions to be carried over also need to be documented.

Project PerformanceAn overview of how the project performed against targeted time, costs and resources, as well as how well the project ran according to the original plan. This is the time to review the teammembers and how they performed, were there enough resources? How were the teamdynamics?

Project OutcomesCreate a detailed list of the outcomes and changes that have been made or recommended.Refer to the original plan if any proposed recommendations were made and compare withthe actual outcomes.

Change ManagementThis section should include a final analysis on change issues received during the projectand should consider the following;■ The total impact of approved changes.■ Analysis for all quality work carried out.■ Post-Project Review date and plan.

Lessons LearnedThe purpose of the lessons learned section is to bring together any lessons identifiedduring the project that can be usefully applied to other projects. At the close of the projectthis section is completed and prepared for dissemination. As a minimum, lessons learnedshould be captured at the end of each stage of the project; and ideally a note should bemade of any good or bad points that have arisen in the use of project management toolsand techniques at the time.

The following points should be considered;■ Has every management control been examined?■ Have the reasons for all the tolerance deviations and corrective actions been recorded?■ Is lessons learned log being completed at the end of each stage?■ Is there an analysis of the success of quality reviews and other types of test used?

Suggested contentsThe Lessons Learned Report should contain:■ Which management and quality processes:

■ went well?■ went badly?■ were lacking?

■ A description of any abnormal events which caused deviations from plans.■ An assessment of any technical methods and tools used.■ Recommendations for future enhancement or modification of the project

management method.

■ Useful measurements on how much effort was required to create the various outputs.

The final review of the project can often be viewed as a negative process. Team members mayfeel that it is an opportunity to point fingers for less successful projects. The report willinevitably be subjective; the key to success is involving all key project stakeholders at every step of the process and gathering as much information as possible in order to produce the leastbiased case. Using the lessons learned report to kick off the next project will help preventhistory repeating itself and empower a much more motivated project team to deliver results.

7. What is a brand?The Concise Oxford Dictionary describes a brand as ‘a particular make of goods’, or as ‘anidentifying trade mark or label’1, but brands mean so much more to consumers and have a farwider reaching definition. Brands can define a personality or lifestyle; products become statussymbols and a ‘badge’ (the logo) to recognise success. Brands give organisations and theirproducts an identity, a set of beliefs or ethos. The co-operative brand through banking, travel,insurance and supermarkets promotes ‘selling products in a fair and honest way, and beingcommitted to supporting communities on our doorstep and beyond.’2 Also branded goods haveperceived quality; whether these are functional or emotional benefits, they provide assurance to the consumer that the product has more to offer and less risk than non branded goods andservices.

Influences of brandingCustomers are being ever more demanding in their drive for branded goods. Mass media and theinternet have opened up a global marketplace and spread brands to a wider customer base. Thisalso means that brands in local marketplaces have increased competition from their overseascompetitors. This has lead to highly sophisticated research in the field of branding and as aresult more sophisticated methods of influencing the customer. In addition, customers arebecoming more brand-aware through the media; increased access to information and socialchanges in lifestyle and education etc.

Globalisation and new and developing markets have caused proliferation of choice forconsumers. We are trading electronically as a consumer and commercially, far more frequently, so that strong brands become ever more important. When we can’t see, feel or touch productsthat we buy over the internet we rely on integrity and trusted brands as there are fewerperceived risks. Pro Active International researched 12,000 internet users and found that “over50% of respondents feel that the Internet is an important medium to make people aware ofbrands. Nearly two-thirds of the users are disappointed if they cannot find the brand they areinterested in on the Internet, while 75% say that they have encountered companies or brands on the Internet that they didn’t know before.” 3

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1 The Concise Oxford Dictionary Ninth Edition2 www.co-op.co.uk3 www.cim.co.uk

How does this affect our business?Organisations as well as consumers are ‘distance purchasing’ more and more of their goodsand services, as trends such as globalisation and low-cost country sourcing are on theincrease. Companies are trading in highly competitive marketplaces throughout the worldand rather like consumers, organisations are also trading electronically, therefore managersare faced with similar choices and their associated risks. New skill sets and knowledge arenow required in order to capitalise on potential opportunities and reduce potential risks.

How does this impact the procurement professional?Procurement professionals often face conflict with business units where products or servicesare over specified or non standard. Standardisation, variety reduction and value analysisexercises, allow procurement professionals to consolidate requirements, reduce acquisitioncosts, obtain volume discounts, and/or increase leverage.

How can we make a difference?■ Resistance to change usually occurs through a lack of knowledge, ignorance as to the impact,

poor communication or a perception that variety control and other such procurementinitiatives is bureaucratic. Improved communication channels and guidance materials canimprove awareness.

■ To limit proliferation and biases to branded goods, a procurement policy that includes typerestriction (reducing variety of materials) and supplier selection (reducing variety ofsuppliers) will provide a strong message to the business.

■ In Australia, the government have strict guidelines on buying branded goods in the publicsector; they are only to be used when it is not possible to draw a specification without usingthem. When referencing a brand, procurement professionals must accompany the brand namewith ‘or equivalent’ so as not to discriminate other brands.

■ Procurement professionals need to fine tune their persuasive and influencing skills andprovide evidence that a standard or non branded item can deliver equal benefits.

■ eProcurement systems with catalogued items can help to steer the organisation along astandardised path, and make it more difficult to procure non-standard items. The CharteredInstitute of Marketing surmise that “In a crowded, competitive market, brands will be thebeacons that guide choice not only for customers but for employees, investors, partners and all a company’s stakeholders”, it is now our role as procurement professionals to ensurethat these are fully informed choices.

The Knowledge Club - Issue #6 June 2007

8. Action Stations!No organisation really wants to operate a warehouse; it costs the organisation money, it uses upvaluable space and it requires accurate forecasting, the holy grail of logistics management.

However, given that there is a general necessity to carry some stock, the key aim of warehousemanagement must be to minimise the costs, this includes the space constraints and thenmaximise the value-added service for the customer, whoever that may be.

Many organisations have implemented very sophisticated warehouse management systems andmake use of complex IT based stock control systems in order to deal with them. What does this

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all mean to the procurement professional, and more specifically what does it mean to those inthe organisation which carry out procurement? The procurement professional can providesignificant support to the stock controller.

The real key to running successful stock operations is the supply of accurate and timely datathroughout the operational process; from the booking in to the booking out. It is critical thatthere is stock available when it is required, and then that the right amounts are ordered.

So why does an organisation hold stock?One of the biggest reasons is the existence of poor and uncertain supply markets. These arecaused by seasonality and demand fluctuations, scarcity of supply, such as a bad harvest andoften it can be caused by the insensitivity of a monopoly supplier. Another reason and probablythe least acceptable is poor demand, planning and sales information. The lack of co-ordinationbetween departments can cause an increase in unnecessary stock holding. For example, ifmarketing and sales do not understand the production department’s needs. Another goodexample is when the procurement officer buys in bulk to benefit from economies of scale or to meet the supplier requirements without taking into account the impact on warehouse space.

The following table shows the benefits and disadvantages of holding stock against the levelof service provided:

As you can see, there is a trade-off between higher service levels and higher stockholding costs. Generally, organisations strive to achieve service levels around 95% to try and avoid over-stocking, and also the possibility of stock-outs. For example, if the probability of a stock out is 10% due to scarcity of supply, then the service level is 90%. If this is not acceptable to theorganisation then alternative provision will be needed to make up the shortfall in the servicelevel. This is where the organisation’s procurement professional can make a real impact.

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High service level for externalcustomers (98%+)

High service level to production and otherareas of the organisation (98%+)

Providing a wide range and depth of stock for purchasing to sell

Savings made from bulk purchasing, butworking capital becomes tied-up. Storagespace and administrative costs will increase.

Buffer stock required to take account of:■ Scarcity■ Seasonality■ Poor supplier and breakdown in

relationships

Holding costs incurred, but savings madefrom not having production line hold-ups and down time

High costs of holding that stock in thebusiness

Level of Service Required Stock holding: Savings & costs

For each of the items of stock, a comparison of figures needs to be made of what is known as ‘Action levels’. Changes in usage rates, company financial policies, storage space availability.Market shortages ensure that these levels must be continuously reviewed in order to limit stockfailure. The success of the whole system depends on an action being taken when that actionlevel is reached. More often than not, stock failures are caused by human error such as a figurebeing mistyped, misread or missed out.

Most organisations use the following four ‘action’ levels to determine when an order has to be placed. These four levels as described below give an indication of how the procurementprofessional can support the stock controller:

■ Maximum stock levelThis is the upper stock limit and it is designed to prevent an over-stocking of any oneparticular item. Your Finance Manager will want to see this figure minimised as money not invested in stock can be utilised elsewhere, perhaps earning interest, known as theopportunity cost. Also, your organisation will have set some ‘liquid capital’ aside to fund stockinvestment, and if this amount is exceeded your Finance Manager will have another fundingheadache, which could then lead to borrowing more money at a further cost to theorganisation. Some suppliers will insist on minimum order amounts, which could upset thisbalance. The procurement professional can help the organisation here by using their negotiation techniques to keep the minimum orders to a minimum.

■ Reorder levelTwo factors make up the reorder level; usage rate and lead time. The re-order level willobviously have a bearing on how much is stocked and the costs of storage. ‘Lead time’ is thetime which elapses between an order decision being made and the delivering of stock to theend user. This includes the internal lead time such as requisitioning, price comparisons, orderplacement etc.

Reducing suppliers’ delivery times through effective communication and relationshipmanagement with suppliers, and also reducing the internal procurement cycle throughefficient procurement techniques such as e-auctions, framework agreements and e-purchasing,can significantly reduce lead times. This in turn reduces reorder levels and has a direct impacton stock holding costs

■ Hastening levelThis is typically an arbitrarily set level at which the supplier is contacted and ‘invited’ toconfirm delivery of the order on the agreed date. Your stock controller will be expectingdelivery no later than when the minimum stock level is reached. This level will give you anindication as to whether that is likely to happen or whether you will have to use any of yoursafety stocks. An increase in user demand will mean that the hastening level is sometimesreached soon after a new order has been placed. The procurement professional will need touse all of their skills and charm to encourage the supplier to deliver sooner than previouslyagreed. Equally, if user demand decreases, your stock controller may require a delay in delivery.This can be as difficult to handle as trying to increase the delivery time. The key to this ishaving an effective supplier relationship management strategy. Have a look at the CIPSKnowledge Summary on Relationship Management.

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■ Minimum stock levelThis brings us nicely back to service levels and safety stocks. This action level acts as thesafeguard against increased usage rates and supplier delivery problems. Is there a scientificcalculation for this figure? The answer I am afraid is ‘no there isn’t’. Why? Because it is basedupon an estimate of the importance or cost of a stock-out. The stock controller and theprocurement professional need to get their heads together and measure the effect of beingwithout stock, taking into account usage rate, for each of the stock items.

The procurement professional will support this decision making through market research,supplier engagement and development, and ensuring that they buy the best possible quality to avoid product failure, supply chain management etc. The level of service required has asignificant impact, therefore, on the action levels set, the lead times of suppliers, supplierrelationships, the make-up of the supply chain etc.

This makes the decision as to which service level to offer, fundamental to supply chainmanagement. The types of decisions which must be made in calculating the service levelmust be; response times, range of services, dependability of that service, boundaries ofresponsibility, and appropriate performance measures - all with the customer in mind.

9. Benefits of implementing an electronic contracts

management systemGood contract management promotes both good procurement practice and professionalism. As contracts are generally managed by business units, they are most effectively co-ordinatedthrough multi-disciplinary teams, and contract management systems allow self-service butprovide a masked approach to policing procedures, within a robust framework.

Procurement teams often suffer from a lack of visibility and therefore, control, over theirorganisation’s contracts. This is exacerbated by using manual paper-based processes wherelittle or no procurement involvement is considered. Organisations are exposed to variousrisks through poor contract management, including major financial losses.

Contract management systems vary from simple logging solutions to fully integrated suitesthat cover all aspects of the process from scoping a contract, pre-approved templates and alibrary of standard clauses, negotiation of price, terms and conditions, to measuring performanceand tracking commitments and finally to flag for renewal or termination. Practical benefitsinclude a pre-authorised set of terms that procurement and the business units can use withconfidence, negating the involvement of the legal team, as well as a workflow to alert to criticalperiods and the monitoring of supplier performance. Having one central location for everyoneto access management information, provides a better picture of the organisations liabilities toaggregate spend in order to put them in a better position for renegotiations. In addition to this,most of the systems are web-based so users can access them from any location and the real-timeinformation allows organisations to operate more securely, swiftly and confidently withinternational suppliers; this has never been more important as we operate within a globalmarketplace.

CIPS, in conjunction with the BuyIT network have produced a guide to implementing acontracts management system, as well as outlining the benefits. This article provides anoverview of the benefits of good contract management, especially when using a managedsystem. A full copy of the guide is available from www.buyitnet.org/Best_Practice_Guidelines/e-Procurement/valuefromcms.jsp

The benefits can be categorised under two headings; Strategic and Operational. PA ConsultingGroup claim that “Savings in the region of 10% to 25% of annual spend can be claimed, althoughthe scale and range of benefits will vary for each organisation.”

Strategic benefits■ The ability to capture and influence a broader spectrum of spend, to identify and categorise

services and products from existing contracts leading to better aggregation and negotiation ofimproved deals for the organisation. BP implemented a system to consolidate all procurementdata relating to its contracts. It is estimated that the system would deliver US$100M a year onan annual spend of US$15Bn, simply through smarter sharing of its procurement knowledgeand information.

■ The ability to manage contracts ahead of time so that appropriate action can be taken torenew or re-negotiate contractual terms. A recent report found that organisations that use a contract management system, achieve a contractual renewal rate of 90%, compared with an average of 60%.

■ Better risk management, improved service level performance and better linkage to the servicecredit regime due to visibility of the contracted performance levels being shared acrossbusiness units and the supply chain. [72%] of client organisations said that their suppliersnormally delivered performance to the SLAs when they were available.

■ The ability to access and use good practice standard contractual terms when creating newcontracts, avoiding the need to draft ‘from scratch’ new contracts. [e.g. several governmentdepartments and professional associations provide flexible access to over 1,000 differentvariations of their “standard” contract].

■ The ability to ensure improved availability of contractual documentation through publishing it securely online, instead of within physical paper-based archives. Empirical evidence showsthat the implementation of contract management systems technology can yield internalsavings of up to 50%.

Operational benefits■ Increased compliance with organisational standards for contract management and reduced

administrative overhead through the ability to automate and step through the creation ofcontracts.

■ A reduction in physical storage space requirements, by eliminating the need for physicalstorage of paper-based contractual documentation (for signed documentation that is scannedinto a contract management system, there needs to be adherence to international standardswhich ensure legal admissibility of signed documentation). For example, organisations canavoid the need to acquire additional office space through scanning contracts into a contractsmanagement system.

■ A reduction in administrative overhead by centralising and in some cases outsourcing themanagement of contracts. Organisations who use a contract management system achieve a contractual cycle time of 8 days, compared with an average of 25 days.

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In summary those organisations that improve contract management, aim to gain bettercontrolled access to all contract information from across all departments and divisions. The standardised approach enables business units to contract with suppliers with confidenceby providing templates and guidance material for specific contract types, sizes and complexities.Aside from these practical advantages, other additional benefits include improved supplierperformance monitoring and supplier relationships.

Complex contracts and projects can be managed more effectively using a managed system bytracking milestones and measuring progress against key performance indicators. The systemscan provide a roadmap for a project or contractual period and links can be made to more thanone supplier providing a holistic picture.

The BuyIT document is a valuable tool to help organisations build a business case for a contractmanagement system, as well as providing some guidance for implementation and managing thetransition both internally and externally. After all, the system is merely a tool, the users andsuppliers are the enablers for success.

10. Discovering what to count and making it really count!Measuring performance is both an art and a science. Get it right and operating performance,customer satisfaction and overall growth can boom; get it wrong and not only will you beunaware of how to fix problems, you may not even be aware of the problems you have.

A recent article in MIT Sloan Management Review by Michael Hammer, identifies “The 7 deadlysins of performance management and how to avoid them”. Hammer outlines the commonmistakes organisations make when measuring performance. We often measure what is easy, whatwe can see or what we what to see. This article will provide a summary of the common pitfallsof performance measurement detailed in Hammer’s report.

1. Vanity – By counting and reporting on what we know we do well and what we can easilyachieve we are unlikely to rock the boat or ever fail to meet that all important bonus. Cherrypicking those metrics we know we can achieve paints a rosy picture of both the organisationand its management team, albeit not necessarily the right picture. Hammer’s example of a metalrefiner demonstrates this point. The company measured performance on yield (the percentageof raw material processed into saleable product) where they achieved 95% success. Howeverthe company only sold high grade material, this figure was closer to 70% the remaining 25% was therefore waste and was not picked up in the metrics as quality was not measured.

2. Provincialism – Generally business units and departments set their own performancemeasures with little consideration for how they are linked with other departments in theprocess or indeed how they map for the overall corporate goals. An example of this is whereprocurement teams are measuring themselves on cost savings alone, whereas a corporate goalcould be to reduce the organisations carbon foot print by 20% over 2 years. Departments thatinterlink and cross functional teams need to set mutual goals based on the end to end process.

3. Narcissism – It’s not always apparent who benefits from some of the measures thatorganisations use. We often lose sight of the end customer and focus too much on internalprocesses. In this example Hammer turns to the retail industry and explains how one retailermeasured goods in stock. The process was measured up to the point where the items reached

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the store; however the availability on the shelf or shop floor would better reflect the needs ofthe customer and overall operational performance of the company.

4. Laziness – We often measure what we have always measured without much thought, or we measure what is easy and readily available. For example if you implemented a new e-procurement system it would be far too easy (or lazy as Hammer puts it) to simply use thestandard management information reports that come with the system. What would be moreeffective would be to find out what is valuable to your end customers and measure the successof that – whilst not falling into the trap of assuming what is valuable to them.

5. Pettiness – Often only a small part of a process is measured as managers can often becautious about sharing information. For example a manufacturer may wish to measure successfrom the point of raw material to the customer which may involve using a retailer, agent, alogistics company and distribution centre which may or may not wish to share crucial data toachieve the end results. As a result each organisation is limited to measuring a component partof the process rather than an end to end picture. Reasons for this could include a reluctance to share sensitive information, or fear exposing and admitting to weaknesses in the chain.

6. Inanity – When we measure people performance finding appropriate metrics can be moredifficult. We often appraise employees and / or offer bonuses for hitting such targets to ensuredelivery, so getting them right is paramount. For example call centre operatives could bemeasured on the number of calls they take in an hour, or answering the call within 3 rings;however they may rush though each call not resolving issues properly and leave the customerfeeling dissatisfied resulting in additional calls being made to further resolve the issues.

7. Frivolity – Often sophisticated measurement tools, balanced scorecards, dashboards andspreadsheets etc are produced in a pack and circulated to management teams as a box tickingor even worse finger pointing exercise. Much debate manifests itself over who was responsiblefor poor performance or conjuring up a myriad of excuses rather than investigating the rootcauses. Hammer says “If the other errors are sins of intellect, this is a sin of character andcorporate culture. When self-interest, hierarchical position and loudness of voice carry moreweight than objective data, then even the most carefully designed and implemented metrics are of little value.”

SummaryMany of the ‘Sins’ identified by Hammer are a result of a lack of a common understanding whatvalue is and looks like within organisations. Whether this is a result of a reluctance to find out, or developing metrics to fit or as a result of merely reporting on successes as this is what ‘theboard’ want to hear. In general, managers who don't know how to measure what they wantsettle for wanting what they can measure, especially when it is perceived as a box tickingexercise rather than being used as a strategic tool. We often talk of hard and soft measureshowever the hard measures, those that can be counted, are the quick wins and the softmeasures are in fact ‘hard’, in that they are difficult to quantify.

Like economists, managers place no value on work they do not pay for (say developingcustomer relationships) because they can't measure it. Work that has no quantifiable outputincludes some of the most important work that is done, e.g. working relationships that add realvalue to a business. On the other hand economists/financiers/managers place a high value on

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work that destroys value, because the cost of such work can be measured. Hence the paradox:tourism is a very good way of raising Australia’s GNP but also has detrimental environmental andsocial impacts....or, don't be concerned about customer satisfaction, get the telephone answeredin 3 rings and show that you've done your job well!

11. Introduction to successful e-TenderingIt is not uncommon for the traditional procurement cycle to take months from the initialformation of the specification, through to the award of the contract. The Aberdeen Group(http://www.aberdeen.com) suggests that:-■ searching for/identifying appropriate suppliers is 53% of total time■ managing/communicating preferred supplier list is 7%■ RFQ development is 10%■ RFQ response/receipt is 7%■ screening/sorting proposals is 20%■ contract negotiation 11%

The whole process takes, on average, 3.3 to 4.3 months. Countless man-hours can be inputalong the way from both the purchasing organisation and the suppliers taking part in theprocess.

e-Tendering (exchanging tenders documents electronically) can significantly improve theefficiency and time taken to complete a procurement project, many of the activities listedabove can be managed electronically and/or be automated.

e-Tendering portals (secure dedicated websites, specifically set up for the exchange ofinformation and tenders documents electronically over the internet) and systems should allowthe buyer to create, manage and transmit contract announcements (notices and adgenda)electronically. Tenderers can create and manage multiple profiles containingExpressions of Interest/pre-qualification information. Invitation to Tender (ITT) documentscan be exchanged electronically, and the assessment and award of tenders is usually automatic.

e-Tendering portals/systems can significantly reduce the numbers of hours and bureaucracyto create and award a tender. It also creates an electronic audit trail that can be used toprovide more effective management information, particularly in respect of the statutoryreturns local government departments are required to produce on an on-going basis.

For information on Competitive tendering and contracting by Public Sector agencies inAustralia use the following website link:http://www.pc.gov.au/ic/inquiry/48ctcpsa/finalreport/48ctcpsa.pdf

Benefits and Improvements to BuyersAlthough there may be overlap between the categories, the benefits and improvementsto the buyers generally fall into one of these areas:

Cashable■ The tender organisation can use e-Tender sites to advertise tenders which can result in

considerable cost saving from advertising tenders in more traditional forms i.e. National press■ The dependency upon, and cost of, sending proposals via post or courier is eliminated

Document Storage - no physical storage constraintsDocument distribution - Saves administration time and cost

Process Saving■ Process Improvements■ Receiving documentation electronically means circulating tenders internally across multiple

locations is simplified greatly■ If 200 people have registered to receive details of the tender and if 1 of those people ask a

question, then it is necessary to make everybody who has registered, aware of the query andthe answer – this is simple to do with an e-Tendering system/portal

■ Saves time handling large numbers of Expressions of interest and quickly reduces them to amanageable number

■ Supplier can update pre-qualification and insurance details held on e-Tendering portals■ e-Tendering portals may be able to make use of such technologies such as XML questionnaires

- the questions may or may not have mandatory options, which the tenderer must fill in beforethey can send the questionnaire back

■ Secure communications with suppliers can be data encrypted and time locked to protect allsensitive information

■ Improved continuity when staff are absent – information is easily shared via the e-Tenderingportal.

■ Automatically generates and dispatches common correspondence■ Encouraging suppliers to respond electronically saves time recording vital information and

allows the automatic score of responses■ Formal opening procedures - speeds up recording of bids■ Dramatic time savings allow more time to make professional, accurate buying decisions■ e-Tendering system can help compile year end reports for example in the UK, Higher

Education bodies have to submit returns to the Higher Education Funding Council of England(HEFCE)

■ Tender organisations can also use system for quotes i.e. UK Local Government bodies must get3 quotes for goods over £10K

Reduction in Overhead Cost■ The administration overhead of producing multiple bound copies of large paper-based

proposal documents is eliminated

Non-Cashable improvements/benefits■ Electronic submission can support environmental policies■ Total visibility of all tenders - greater management/audit control■ Project Management - Project access for remote users■ Compliance with e-Sourcing guidelines (as recommended by the eGov National

eProcurement project in the UK)■ Privacy, Authenticity, Integrity and Non-repudiation■ Document control - Freedom of Information

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■ Improved history function of procurements - All emails between the tender administrator and the tenderers are automatically recorded by the system

Buyers Viewpoint“The system should prevent insider dealings and fraudulent submissions, plus significantlyreduce construction tender programmes in the long term, through efficient supply chainprocurement” – Timo Partanen, of SDA, Project Manager on Several Audi/VW projects

Benefits and Improvements to SuppliersAlthough there may be overlap between the categories, the benefits and improvements to thebuyers generally fall into one of these areas:

Cashable Improvements and Benefits■ Visibility of all current and future business opportunities■ No cost to view opportunities and to register an interest - free access to the secure area

of the portal (there may be a charge from the contracting authority for issuing the relevantdocuments

Process savings■ Tender documents are easily accessed and downloaded from the e-tendering site.■ The online submission process is simple to use, the upload is quick and a confirmation of

receipt is usually issued■ Once a tenderer has gone through the pre-qualification process with the organisation issuing

the tender, it is likely that the tenderer will be asked only to update their own details, and maybe asked for further information which is not stored on the system resulting in less forms forthe supplier to fill in.

■ History log - keeps supplier up to date with the process■ No need to rely on third party delivery of documents■ More time to prepare their response, if a tender system is on a managed server and web based

the minute the supplier sends there response the buyer should be able to view it - the suppliercan therefore submit responses minutes before the deadline.

■ Project Management - all communications and documentation held on portal■ Suppliers can generally make changes to their submission, including adding or deleting

documents, at any time up to the tender opening date

Non Cashable■ Various ways to return documents■ Ease of use■ Data security - secure communications with suppliers can be data encrypted and time locked

to protect all sensitive information■ Supplier can update prequalification and insurance details held on e-Tendering portals

Suppliers viewpoint“e-Tendering makes communication between Newell & Budge and the Scottish Executivemuch more efficient. Our effort can now focus on the content and quality of our bids. Weno longer need to worry about the administrative elements of getting a bid submitted ontime” – Alison McLaughlin, Senior Account Manager for the Scottish executive, Newell &Budge.

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The risks1) If the system fails you should make provisions for putting a back up in place in the form ofemail, disk or even reverting to hard copy.

2) It is probably advisable to put a disclaimer on the e-Tendering portal viewed by suppliers for any misinterpretation of instructions or downloads they receive by the e-Tendering portal.

3) Make it so that suppliers are aware of what they are signing up for, for example by makingthem read a summary of important points before they register. A good example is that if, whenthey register, they are asked for an email address and it only gives the opportunity to add one,then they should be aware that if they give theirs and they are away they should give accessrights to somebody else. If they give a generic email address i.e. info@sales then there is achance emails could be deleted or re-directed to the wrong person. In this situation it mightbe advisable to get more than one person to register from the suppliers company.

4) It is advisable to hyperlink anything that is generic but important that the buyer wants thesupplier to sign up to i.e., Terms and conditions to the tender documents.

5) Include legislative points which might affect the award of the tender such as the Freedom of Information Act into the T&C’s.

6) It is advisable, on a web based tendering portal, to give the buyers access to a ‘view only’account for each supplier. So if a supplier is having problems with inputting information, the buyer will be able to see exactly what the supplier can see and talk him/her through the process.

7) Make sure that all parties are aware that the server clock gives the time that everybodyshould adhere to.

8) Ask for faxed/email (as soon as the network is back up) notification of proof from thesuppliers IT department, if a supplier claims they couldn’t access the e-Tendering portalbecause their network was down before making a decision to accept the late tender.

Things to avoid1) Avoid excluding potential suppliers who cannot access an e-Tendering portal via a website, if needs be, make hard copy ITT available.

2) Change processes for the better – don’t just implement the paper system as it is.

3) Don’t rely on paper, once the e-Tendering system proves it is working, switch off the paper.

4) Personalised letters etc; remember the point of the e-Tendering system is to makeinformation accessible to everybody so address letters generically i.e., `Dear Sirs’ etc.

5) Giving users access they shouldn’t have. Make access relevant to the user and bear in mindthat procurement should have overall control for example; procurement may be the only usersto have access to the final award of the tender.

6) Avoid making a final decision on the tender award before involving users, where applicable,to look at the quality aspects of submissions

Selecting an eTender ProviderConsider the following points;1) To avoid problems with loading up software on specific machines, having powerful enoughoperating systems etc, and giving people access, consider implementing a browser basedsolution.

2) It may be more cost effective to have a site licence for an e-Tendering system rather thanhaving an individual charge for each user licence.

3) Select a system that is free to suppliers (even if there may be a charge for the download ofthe tender documents themselves).

4) An e-Tendering system should give access to suppliers where possible for them to maintaintheir own data.

5) The e-Tendering site should be so easy to use that it can almost be used without instruction;however have on-line help and the ability to set up dummy accounts to see a view of thesupplier’s site, to give help if necessary.

6) It is advisable to write down the paper process in detail, to look to improve this process and then write a checklist of everything that you need an e-Tendering solution to achieve as achecklist before selecting a solution.

12. Key Performance Indicators (KPI’s) for Inventory Management in the Aerospace Industry

Inventory matters to everyone in a customer driven organisation – from suppliers (tier 1, 2 andall levels below), right through to end users in the customer environment. In the aerospaceindustry, the end user may typically be the civilian customer or the military pilot and crew,gearing up for mission ready capability. This paper does not focus on the technological solutionproviders, of which there are many, but looks at the KPI’s in the new business paradigm.

A changing world...The world of aviation has changed beyond all recognition. New business models are now beingused; some focus specifically on low costs carriers; others centre on the debate between the use of narrow versus wide-bodied jets.Inventory is of key importance in supplying servicefacilities at strategically dispersed global locations to allow aircraft servicing. For example theHAECO Group, based in Hong Kong, works with key original equipment manufacturers (OEM’s)to provide aeronautical engineering services to airlines such as British Airways. The airlinesrealise that being able to offer a ‘total care service’ gives a competitive advantage.

In a military environment, which of course is financed by public money operating under highvisibility, the success of tracking the movement of inventory is often the difference between life and death. This becomes even more relevant with the increasing use of rapid reaction, netcentric warfare.

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New players (with opportunities for collaboration and competition) are emerging within thecommercial airline business with a diverse geographical spread. China, for example, expects tohave an equivalent to the Boeing 737 by 2020, and 12% of all airline deliveries will be to Chinaat that time. This all leads to the crucial question, what are the implications for aviationprocurement professionals working within supply networks in Australia?

In an interdependent global environment, effective logistics management in the lean supplychain, can be the difference between profitability and ruin, especially in the aerospace industrywhere operating margins of only 4% are forecast to be generated by a profit forecast of $3.1 billion for 20071. Though profits are expected to rise to $7.6 billion, the aviation industryremains finely balanced.

Successful inventory management contributes to successful airline operations. In turn this canresult in increasing sales and resultant economic benefits for the regions in which the airlinesoperate.

Traditional internal indicatorsTraditional indicators for managing stock control include:■ The use of ABC classification for parts, according to their value and frequency of usage■ Measuring the number of stock turns■ Measuring service level responsiveness■ Recording the percentage of receipts processed daily

Individual suppliers and OEM’s will already have well developed processes covering the receipt,storage and onward distribution of goods. In Rolls-Royce Aerospace in the UK, a performancemeasure called ‘Scan and Adherence’ was used to record the accuracy of deliveries from thesupplier to Rolls-Royce.

All these traditional measures illustrate that competitive advantage comes from effectivemanagement of cash for procured goods and services. This is particularly true at a time wheninflation and interest rates are on the increase. The cost of holding stock subsequently rises, and can increase to the higher end of the 20-30% of the cost of the item, to store it for one year.Good inventory management reduces operating costs by reducing, as much as possible, thespace required for operations. This ultimately may make it easier to ‘see the wood from the trees’and gain market share and higher profit margins. For example, when delivering higher profitmargin service contracts, often a vendor managed inventory (VMI) system is used, together with third party logistics providers and appropriate information technology systems.

21st century stock control systemsMore complex supply networks and leaner operations operate in the new economicenvironment. Getting it wrong could have financial repercussions extending to tens ofthousands of dollars in an AOG (aircraft on the ground) situation. At one level, it could be argued that managing inventory is common sense. To a greater or lesser extent it is, but to gain maximum leverage, the inventory control system must be enhanced to include the end to end supply chain.

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1 Source: IATA, April 2007

Operationally, it is important to realise that different departments all have their own objectives.For example, the procurement department may consider gaining purchasing leverage by settinglarger minimum order quantities (MOQ’s). In contrast, those working in the stores environmentmay come from a diametrically opposed viewpoint. The key thing is to communicate effectively,both internally and externally to the organisation, so that at a strategic level a solution may befostered by good leadership and excellent operational execution.

Organisational KPI’s should be linked with that of the supplier base, so that everyone in thesupply chain is working to the same goals. This is particularly important in key supply chainactivities, such as managing the risk of vulnerability in the supply chain and ensuring thesecurity of supply. An example of this is the legislative impact of having obsolete stock and theincreasing expense in disposing of it (for example, those relating to hazardous substances andelectrical items). KPI’s need to be dynamic and in line with the business strategy, for example, to reflect that lean operations must not be at the expense of agility within the supply chain.

In a traditional analysis there has been much emphasis on the purchasing element of the supply chain. This article demonstrates the crucial importance of warehousing and logistics tooperational and strategic success. It is certainly worth focusing the spotlight and taking a closerlook over the long term.

13. Supply Chain Vulnerability and RiskSupply Chain Vulnerability (SCV) is ‘a point of weakness and/or possible threat to theSupply Chain Network (SCN)’. These complex networks may increase the number ofpotential weaknesses to security of supply, as may the use of other modern businesspractices.

Vulnerability only becomes a risk when that point of weakness is realised in some way.Examining the vulnerability of an organisation’s supply chain network can be used to identifysuch risks and weaknesses, and to produce mitigation strategies and corrective actionplans as part of managing risk in procurement.

Every employee concerned with supply chain management will be involved in managingthreats and risks arising from weaknesses in their SCN’s. Professionals at all levels need tobe aware that they should be continually identifying and managing risks in their area ofresponsibility e.g., at director level, threats are more likely to be strategic and affect theentire business, whereas at buyer level, the risk of supply disruption is likely to be moretactical but still important.

CIPS suggest:■ The SC must be managed totally i.e., both upstream and downstream in order to reduce SCV■ That SCV is actively managed■ That Procurement see this as a core competence and practitioners should enhance

their skills to manage SCV issues effectively■ SCV cannot be managed in isolation, it must be managed in a co-ordinated effort across

internal and external relationships■ Maximum transparency of the SCN is to be encouraged■ SC planning is a key consideration■ SC strategy has to support business goals and thus must respond to customer requirements

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Procurement/SCM professionals are encouraged to develop market sector strategies that enabletheir corporations to take advantage of developing technologies, whilst still retaining sufficientflexibility, wherever possible, to switch when appropriate, although once implemented it isoften very difficult to switch between technologies.

New relationships should be entered into with ample time being taken to identify cost andperformance norms, and to avoid vulnerability to cost increases and/or average to poorperformance.

CIPS suggest that wherever possible, the procuring organisation should adopt a partneringapproach to the important and vulnerable supplier relationships, as a way of mitigating the risksof SCV. Whenever an organisation is significantly vulnerable to the consequences of failure ofsupply, the appropriate style of relationship to manage a supplier would usually be partnership.

Having said that, too much of a focus on partnering can also introduce SCV on occasion.Partnerships and alliances can have a real competitive advantage at the outset of a relationship,but as time progresses complacency frequently creeps in and performance levels fall off. Oftenissues of supply performance are not addressed and lessons are not learned from mistakes, asthey are seen to be somehow in conflict with the spirit of the partnering relationship. This iscomplacency and “cosiness” in the Supplier/ Buyer relationship and it is the very antithesis ofhow best to make a partnership work. Partnership is an environment where the parties need to be more frank, critical, open and willing to learn from mistakes than normal because theconsequences of getting it wrong are so much greater.

Market place consolidation occurs in certain market sectors which can change the supply anddemand balance, reduce competition and pass power to the suppliers.

CIPS suggests that the SCV implications of sourcing strategies and implementation are assessedand monitored to take account of external market and/or supplier changes.

Supply Chain Networks can comprise of hundreds if not thousands of companies which maystretch the world globally and can be subject to numerous risks. These risks can be largelyclassified into two types:1) Weaknesses and potential risks within the SCN that impact on its ability to meet customerneeds. Instability arises when demand and supply are not aligned. Not only can price beaffected, but also the total cost, time and performance.2) Fragility of the SCN’s to external events/threats now and in the future.

As it is a network not a chain, activities (i.e. the travel between events) are as important as theevents themselves. To clarify, it is not just the activity steps that contribute to SCV but also themovement or transfer (of product or information) which also has SCV risk associated with it –i.e. goods moving physically, or important data becoming corrupted or held up. An example ofthis is that of the emergency services reliance on the public mobile phone network tocommunicate with key workers during the 7/7 London terrorist bombing atrocity. Immediatelyafter the attack, the network was overloaded and key workers could not be contacted. Thishighlights an inherent SCV resulting from an information transmission failure in the supplychain for the provision of the emergency service.

Consequently, supply chain risk management aims at identifying areas of potential risk andimplementing appropriate actions to contain them. Therefore it can be defined as: “theidentification and management of risks within the supply chain and risks external to a co-ordinated approach amongst supply chain members to reduce supply chain vulnerability as a whole”. (Ref: Supply chain Vulnerability, Executive report on behalf of: UK Department for Transport, Local

Government and the Regions by Cranfield University)

There will always be a tolerance built into any network (which results from the assumptions/design parameters made when they were set up) but if any effect causes an impact outside ofnatural tolerance, a point of vulnerability will occur. In complex networks there may be multiplepoints of vulnerability occurring at any one time in different parts of the SCN, and potentially a compounding effect may begin. For example; low inventory times; product advertising times;annual supplier shutdown = especially high vulnerability.

Supply Chain Vulnerability (SCV) has to be viewed in the overall context of business needs. Itsimportance must be related to its effect on shareholder value i.e. on its effect on the profitabilityand competitiveness of the business. Supply Chain (SC) is the process by which value is createdin an organisation. It therefore has to perform well.

This impact on shareholder value has prompted new corporate governance law (e.g. theCompany Law Reform Bill, UK Presidency, Regulations to implement the OFR S.I.2005/1011),which requires large organisations to have processes in place to identify and report real risks intheir supply chains.

CausesBusiness practices may have inadvertently contributed to increased vulnerabilities in the SCN.Some recent approaches to supply chain management have improved the efficiency of internaland external supply chain networks. Increasingly sophisticated techniques supported bytechnology have supported and enabled the following;■ Just in Time (JIT)■ Stockless production■ Lean manufacturing■ Supplier base reduction■ Globalisation■ Increasingly complex SCN’s■ Outsourcing■ Enterprise Resource Planning (ERP) system■ Partnerships

However, concerns have increased over the last few years that, in an attempt to become moreefficient, reducing or eliminating waste and buffers in various forms, and attempting to reducethe risks associated with poor supplier performance, has meant that other less obvious risks tothe supply chains have been overlooked.

Organisations have outsourced globally to focus on core competencies and seek out technicalinnovation and low cost resource, and this has led to a potential loss of control, visibility,transparency and increased distance from the market. Unwittingly organisations may havecreated, or become part of, supply networks that are increasingly vulnerable. As outsourcing

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can exceed 80% of all the processes required to deliver a product or service, the primary risksto an organisation’s success will increasingly arise from their SCN.

Similarly, techniques leading to lean supply networks may have become increasingly fragile and,as a result, those same supply networks may have significantly increased their susceptibility to externally derived risks (if for any reason there is a stock out of a product, for example) orexternal disruptions. Such disruptions can have a significant - if not catastrophic – impact on the organisation.

Sourcing and supply base management also have an effect on vulnerability by increasingdependency on fewer suppliers. This can be a hidden consequence of outsourcing, supplierrationalisation or product harmonisation.

Practical Steps to Improving SCVSenior procurement professionals must therefore take positive actions to identify SCV’s andmanage the resulting risks, practical steps include:■ Learn from previous experiences of SCV (“how well is our process working?” . Use all

non-conformance events as a way of checking if the SC network is working as expected. Learn from these events; use them to improve SC understanding and resilience.

■ The best source of information when finding these practical steps is to learn from previousexperiences inside the organisation. The buyer should be constantly checking on how well the current supply process is working. Whenever there is a non-conformance event, thisshould be fully analysed in order to discover what went wrong thereby learning from themistakes.

■ A close knowledge and understanding of markets and suppliers will enable easier and moreproactive management and increase awareness of emerging SCV issues

■ Learn from the experience of others (Benchmarking).■ Prioritise effort via Risk Evaluation (see the CIPS Knowledge Summary for Risk Management

on www.cips.org)■ Assess the impact of SCV versus the likelihood of it happening in order to determine the

impact on the customer and set priorities for time and attention. It is not necessarily thebiggest value supplier but the biggest risk supplier who has priority.

■ Avoid doing too much at one time, prioritisation is vital.■ Cause and effect. Actions have reactions. We cannot assume a benefit (e.g. changing supplier

for a saving) has not got a cost or a consequence. For example how the supplier will respondto recover margins after a significant price reduction.

The following all contribute to SCV and need to be effectively managed.■ Quality control systems■ Planning and forecasting■ Risk management policy■ Ethics■ Supplier selection

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■ The effects of the specification on downstream supply. Output based specifications are much more likely to address the most important and basic need to accurately reflect therequirements of the final consumer, at the point of supply handover within the SupplyChain/Network. This focus potentially brings much greater alignment of specification toconsumer needs.

■ The supplier should then build the Supply Chain/Network to deliver those outputs (whichcan then be codified in terms of both specifications and service level agreements) rather than building the Supply Chain/Network to meet a Specification which may result indistortions to supply. The supplier will increase SCV if it does not closely match thespecification. An example might be a buyer of plastic components arranging a rebate deal with a plastics company which has the effect of directing its injection moulders to agrade/type of plastic which is different to the type they are used to and thus increasing SCV because of performance, quality, accountability and relationship issues.

■ Get rid of silos (departmental focus) – take a virtual team approach. Ensure effective workingcross-functionally (across departments), internally and externally, effective communication andmaximum transparency. A good example of multi-functional working is that of cross-functionalteams at BAE systems, where commercial, procurement, technical, logistics and sometimesothers work together in a co-ordinated approach to managing and solving supply problemsfrom design to manufacture and delivering of original equipment to customers as well assupporting customers with training, repairs and spares support after the original equipmentsale. Supplier and customer ‘teams’ involved in this multi-functional approach could beincluded too.

■ Ensure effective re-sourcing (quantity and capability)

Vulnerability is a point of weakness that can lead to a business risk. Therefore, managingSCV requires an understanding of business risks and how to identify and manage these.

Risk can manifest itself in a number of ways; the main types of risk are;1) Commercial Risk – such as allowing suppliers to contract on the basis of cost plus,inappropriate choices of shipping terms for imports and exports.2) Process – reconciling supply with demand.3) Operational – not having materials.4) Strategic – inappropriate product for market.5) Financial – insufficient funding/fraud. Foreign trading and currency transactions notbalanced.6) Knowledge Management – lack of key knowledge of markets or IP infringement.7) Contractual – exposure to liquidated damages.8) Reputation – brand damage.9) Compliance.

Many organisations will be looking at business planning including Business Continuity Planning(BCP) as a way to manage risks. SCV’s should be managed within the framework for riskmanagement, and therefore the Procurement Manager involved in this should work closely withthe relevant functions within their organisations (working across functions and departments).Procurement professionals should look to their external suppliers to replicate risk managementpractices within their own business i.e. it is an external as well as an internal view.

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The white paper ‘Achieving Resilience – Best Practices in Business Continuity’ written by AT&Tin co-operation with the Economist Intelligence Unit (EIU), found 3 key findings from extensiveresearch they had supported 5 universities to conduct. The objective of the research was to help organisations identify and quantify risks and vulnerabilities in the supply chain and thenimplement procedures, strategies and tactics aimed at ensuring business continuity. The keyfindings of the research are summarised as follows:■ The news media headlines may focus on single catastrophic events, but smaller, more

mundane risks are usually responsible for business disruptions. As a result, companies areshifting their focus from disaster recovery – the restoration of damaged assets – to businesscontinuity planning (BCP) – the uninterrupted provision of operations and services to end-user customers.

■ Information technology dominates thinking on BCP, and industries that are heavily dependenton IT tend to be furthest along the BCP path. However, IT should not push aside otherelements of BCP, such as communications with employees, alternative work processes andinteraction with customers.

■ A static business continuity plan will not protect a company from disruption. An integratedand ongoing enterprise-wide plan, with assumptions that are regularly tested and that keeppace with the risks prevalent in the business environment, is needed to achieve this goal.

■ Increased use of IT, the globalisation of supply chains and the integration of networks ofcompanies into “extended enterprises” have helped reduce companies’ exposure to acatastrophic “single point of failure” disaster. An extended geographic footprint and an increase in information flows within and between businesses, mean that companies candiversify and manage risk more effectively than ever.

Unfortunately, these same trends can spawn less dramatic, but equally damaging risks oftheir own. As more enterprises rely on extended supply chains, for instance, managers arecoming to realise the true impact of supply-side disruptions. It is necessary therefore, fororganisations to be aware of where the vulnerabilities are in their supply chains, thesources of risk and how those risks can be managed to increase control and confidencein the supply chain.

14. Understanding Supplier RelationshipsWe regularly measure supplier performance through a collection of metrics, but rarely do wetake the time to understand and invest in the role of socialisation in measuring effectiverelationships. Sophisticated systems, complicated charts and dashboards are commonplace butdo they tell us the true story? Can we quantify every aspect of performance? Albert Einsteinonce said “Sometimes what counts can’t be counted and what can be counted doesn’t count”.

Manchester Business School turned to anthropology in order to understand socialisationmechanisms that explain the way people work together and communicate most effectively.Relationships are not just about getting from A to B, but more about the route we take to getthere. By mapping, in detail, the process steps between buying and supplying organisations wecan gain a better understanding of the way in which we operate, the barriers, critical points and how the external environment may effect us. Not enough emphasis is placed on this andrelationship implementation. In the UK we see relationship management as something we do inaddition to the day job; Japanese manufacturers however see relationship management as whatthey do.

P&SM professionals need to examine the desired output and design an appropriate relationshipto fit. Relationships are complex and can rarely be pigeon holed into a 2x2 matrix. They are notstatic and are based at a product not a firm level, so a portfolio of relationships will be requiredfor each supplier. A relationship strategy model is required in conjunction with a traditionalKraljic model in order to select the most strategic relationship for the job.

Professor Paul Cousins from Manchester Business School, stated at a recent CIPS event that“Relationships are a series of processes based on outputs and deliverables driven by resources”so what organisations need to balance, is the least amount of resources for the maximum gain.Seem harsh? Well as Milton Friedman put it “Businesses are in the business of business”; this is the paradigm in which we work. Businesses are opportunistic and must often make harsh(yet ethical) business decisions; there is however a strong distinction between, personal andbusiness ethics. This results in a dichotomy between pushing suppliers away but wanting morefrom them, and yet we still claim that we are collaborating?

Do we really understand what strategic looks like?Cousins explained that strategy is a Greek word stratégos, which derives from two words:"stratos" - army & "ago" - which is ancient Greek for leading/guiding/moving to.

In order to be seen as truly strategic and valueadding P&SM professionals must understandwhat is important and what value looks likewithin their organisation. To be strategic everydepartment must be aware of the pressures and priorities of the organisation in order to‘lead/guide/move’ them to these goals. This isoutlined below in the Strategic Supply Wheel.

All aspects of the Strategic Supply Wheel must be considered at the same time, not inisolation. It’s not about linking measures toperformance but more about how we managethe relationship and link it to what we wantto achieve. By mapping the relationshipprocesses we can ensure that common goalsand aspirations are made clear from end toend. What is often unclear is what value is tothe organisation until things go wrong. BAA was probably unaware of the effects of theirrelationship break down with Gate Gourmet until it was too late.

As procurement professionals we are often too focused on our own objectives and strive forwhat we perceive is value. Truly strategic P&SM teams map their own goals and aspirations totheir own organisations. Cross functional teams are often the worst examples of this; designmeasured on design, procurement measured on costs. You are only strategic if you sharecommon objectives and collectively deliver what the organisation requires. The focus for allteams is the corporate goals and shareholder value so therefore teams should be measured as a collective not as individuals.

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A miscommunication of goals between buyer and supplier is also common; Cousins’ examplebeing Mike Crone, Director of Supplier Management and Carrier Relations at Energis. Crone setup the supplier academy where he invites suppliers to exchange information and ideas, some ofwhich are then implemented in the organisation. Suppliers enjoy working with Energis as theyknow they are being heard and everyone is working towards common goals. This collaborativeapproach had lead to the Energis procurement team now advising their suppliers on how todeal with their own suppliers.

Another example discussed was BP. Their strong alignment of goals is very closely mapped withinternal teams and suppliers to the extent that it is difficult to distinguish supplier from buyer.This aspect of buyer supplier relationships is ever more important as organisations begin tooperate in a global market place. Other considerations, or barriers, will also come into playwhen dealing with cultural and language differences.

To summarise, relationships can not be seen as a concept, but are a process that need to bemapped in detail in order to be fully understood. They can be conceptualised by tools such as a2x2 matrix but further analysis is required for their implementation. Socialisation methodologyin conjunction with performance metrics is required to obtain a full picture of the effectivenessof the measures and how they are improving business performance. Once the relationships havebeen identified the appropriate resources, skills, systems etc need to be assessed and put inplace. These implementation steps are critical for success; it is potentially damaging from the outset to rush into a new relationship without it being thought through. And finally,procurement and managing supplier relationships is not about new sexy techniques and buzzwords, it’s about delivering what the organisation wants, and understanding the meaning ofvalue to their organisation.

15. What is Procurement and Supply Management?CIPS could find you a definition from a dictionary, a text book or a theorist, or it could describe what good procurement and supply management practitioners really do. Procurementpractitioners shape the profession through their skills, knowledge and attitude, and these arethr principal factors for successful organisations. After all, money, land and buildings don’t havefeelings, or contacts or networks or know-how or rights; people do, and those facts have abearing on how organisations operate.

In a recent article in The McKinsey Quarterly, entitled “The Talent Factor in Purchasing”, itdetailed the results of a survey taken of procurement professionals from over 200 organisationswhich investigated what talent looked like in the profession. It found that “top performingorganisations hire better people in sourcing, set clearer performance aspirations and createstronger sourcing cultures to encourage procurement professionals to align their activities with corporate strategy”. These strong foundations are often overlooked because of a drive to be different, to stand out from the crowd and to be one step ahead of the game, instead ofbuilding on accepted practice and doing what they do best. The high performing procurementorganisations in this survey realised that managing people, talent and knowledge was where itall starts, and policies and processes naturally follow.

HSBC adopted a buyer development programme to post procurement professionals to otherprocurement teams world-wide. They found that “The fundamentals of buying are the same in any language – it is the intangibles you learn.” Buying is buying, but product and market

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knowledge increase performance. This knowledge sharing programme aims to increase theprofessionalism of buyers and procurement departments world-wide. The key to the success of the project – people. See the CIPSA White Paper on The Definition of Procurement, availableon the Professional Resources page at www.cipsa.com.au

Changing times – or are they?Procurement, like most professions, is often confused and bombarded with new trends, buzzwords and so called ‘hot topics’. Some say that the profession has undergone a drastic transitionand is now seen as a strategic partner within organisations; but when it comes down to thegrass roots has much changed really?

Automation and self service through e-procurement and e-sourcing tools has provided manyprocurement professionals with a veiled policing of polices and procedures, guiding compliancewhilst promoting the preservation of ownership. This structure has allowed procurement teamsto reach a wider audience, and thus capture and influence a broader spectrum of spend. Thepractices are the same, but the tools and approaches have evolved as we work in conjunctionwith those business partners who still retain ownership of the relationships; the role ofprocurement is now increasingly about the providing of guidance and a robust framework for the business in which to operate.

Procurement’s structure has become more transparent in that leading organisations are nowdeveloping procurement professionals into internal consultants within business units, whilststill maintaining a central reporting line. This internal consultancy role is fundamentally aboutraising the awareness of good working practices and the skill sets procurement professionalshave to offer, whilst still allowing opportunities for individuals to be innovative and creative.

Challenges aheadWhilst it is clear that the nature of the profession remains the same, procurement and supplymanagement professionals still require new skills and have to adapt any existing ones in order to achieve recognition at Board level and be seen as adding value. To be seen as truly strategicand value adding we must understand what is important, and what value looks like within theirorganisation. To be strategic, every department must be aware of the pressures and priorities of their particular organisation in order to be able to guide them to these goals. Truly strategicprocurement teams will map their own goals and aspirations to their own organisations; thefocus for all professions needs to be the corporate goals and delivering value to its shareholders.

Gone are the days of the “ho-hum” ideas about being an efficient administrative process or somekind of guard dog on supplier price; now it’s about knowing and pursuing senior managementinitiatives, speaking finance first, and supply second; finding ways to improve the business coststructure as well as to bring growth and new revenues.

Join “The Professionals”There is much debate as to the question ‘what makes a profession?’, Ben Smith, the WesternAustralia winner of the CIPS Australia National Essay Competition, discusses how procurement is becoming more recognised as a profession. Harvard Business School set out some criteria in a recent article “Is Business Management a Profession?” and CIPS promote these amongstpractitioners. CIPS have developed a common body of knowledge; a system for certifying that individuals possess such knowledge to practice proficiently; a commitment to use this

knowledge for the public good and not for profit maximisation, and provide a code of ethicsthat members have an obligation to uphold through their day to day business. The article byJonathan Dutton in Issue 13 of Procurement Professional makes a case for Procurement as the fastest growing profession in business. Download it now from the Publications page atwww.cipsa.com.au

Why choose procurement?The variety that procurement roles have to offer, makes this an exciting area and time. The scope and choice within the profession is what make no two jobs the same. The procurementprofession provides opportunities in which individuals can develop a wide range of skills andexperience across all business disciplines.

What do you get if you choose a role in procurement? You choose variety. Chooseempowerment. Choose making a difference. Choose leadership and influencing people. Choose coaching and training colleagues. Choose delivering value and making a difference.Choose a job. Choose a career. Choose procurement.

Other related articlesCheck out other interesting articles and white papers on the CIPS Australia ProfessionalResources section relating to what procurement is and what makes it a profession.On the Resources page of www.cipsa.com.au download the white papers, 6 Essayson Procurement and The Definition of Procurement.

The Knowledge Club - Issue #7 September 2007

16. Building a winning teamAfter four years of waiting, the 2007 Rugby World Cup is here. This tournament, with particularfocus on the New Zealand All Blacks is an ideal platform for a sporting analogy for building agreat procurement team.

How do a group of individuals develop into a team which in turn will develop into a highperforming unit? Various methodologies and methods of analysis may be used, but this articlefocuses on the people, processes and systems that need to be working in harmony in order to deliver results at the individual, departmental and corporate level.

The people within that team will exhibit a variety of skills, competencies and attitudes.Supporting these attributes will be the processes and systems which are in place. In thesporting context, the rugby squad could be considered as the ‘procurement team’, withbackroom staff providing the vital support function Michael Porter describes in his Value Chain.The processes could be viewed as the strategic link between the organisation and procurement(or between the national rugby union federation and the members). The systems would includethe information technology infrastructure running through the backbone of both organisations.

Rarely do managers have the opportunity to develop a team from scratch. Often the team isinherited and it needs to be moulded in order to maximise its potential. In the traditionalmindset, the All Blacks and the commercial organisations would be required to deliver resultscontinuously over short, medium and long term - the company required to meet financial

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expectations annually; the public expectation for the All Blacks to win all of their Tri-Nationsgames. Being able to think beyond the traditional mindset is important to give the team theedge. The Rugby World Cup, which they have not won since 1987 is the All Blacks’ priority. That is the focus, from the senior echelons of the game in New Zealand down to the provincialplayers. Part of this focus was the withdrawing of players from the Super 14 games to keepthem fresh. In the commercial organisation, all too often objectives are projected over thecurrent financial year, with less emphasis on three and five years ahead. In the 1990’s Japaneseorganisations derived competitive advantage by being allowed to plan over longer horizons.

Great teams know what is required of them. They understand the organisational vision and theirrole in contributing to organisational objectives. Both teams will know where they want to getto; the procurement team will be delivering excellence within the organisation – the rugbyteam winning the tournament. Achieving excellence in sport, as in business is a dynamicprocess. In the global marketplace, the bar is consistently being raised. Competition within thesame industry may be global, for example, the top four rugby union teams (All Blacks, Wallabies,Les Bleus and the Springboks) are all located on different continents. This could also be true of a trans-national company.

Graham Henry, the All Blacks manager will have benchmarked the performance of the team at a number of levels. Team performance as a whole may be benchmarked against organisations ina similar ‘industry’, for example, by using the International Rugby Board team rankings. At thehighest level it is not good enough to just focus of benchmarking the team.

At the world class level, individual players will be compared to others who are playing either insimilar positions or those with the same levels of responsibility on the pitch. For example, as acaptain, how does Richie McCaw, compare to Stirling Mortlock? In another example, how doesAnton Oliver compare to Al Baxter (both props)? By this gap analysis process, it is possible toestablish what needs to be done to be as good as the current best team.

The manager knows the vision. The next step is to get the blend of skills right within the team.In larger procurement teams there would be a blend of people specialising in strategic andoperational roles. The operational roles may be further divided between pre-contractformulation and post-contract supplier development. For the sake of simplicity, the rugby team will have specialist ‘forwards’ and ‘backs’. To win the match the whole team has to worktogether. Though specialist skills do exist, the ‘forward’ player would be expected to make atackle in open play if so required. In the context of the procurement team; on occasion theoperational experts might be ‘forwards’, striving to achieve operational excellence in executionof the corporate strategy. The strategic experts may have identified the opponent’s weaknesses,and in a business context conducted a SWOT analysis, perhaps taking into account theopportunities presented by prevailing weather conditions. The studies of Meredith Belbin, a management theorist, are used in developing teams and analysing team dynamics.

Having strength in depth within the squad is another characteristic of a top class team. Forexample, Dan Carter, the First Five Eights (known as the ‘fly half’ in the Northern Hemisphere),has competent understudies in Luke McAlister and Nick Evans, both of whom would be goodenough to make the England national team. Similarly, the expertise within the procurementteam might, for example focus on negotiation skills. In an ideal scenario, three people within the team (to match the sporting analogy) will all have different levels of expertise. Building an

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excellent team means using the right person at the right time for the right job. In the sportingworld, this might mean the use of a squad rotation policy. In the procurement team this couldbe putting the most appropriate person forward to interface with the supplier at a particularpoint in the supply chain cycle.

Aligned to ‘strength in depth’, good teams look at succession planning, at managerial and teamlevel, to enable long term consistent success. It is no good for all squad members to reach theirpeak at the same time and possibly lead to performance problems in the long term (ashappened with the England team).

Sport psychologists would suggest that what differentiates the performance of top athletes from the rest of the pack is their mental resilience and agility. These are precisely the qualitiesrequired of high performing teams. Self belief and the desire to win might be all that separatescompetitive teams. It is no coincidence that top sportsmen and women are able to perform well in the business environment.

This article has suggested some of the characteristics of great procurement teams using sporting analogies. These include linking individual objectives with those of the department andorganisation. Benchmarking against the best is important to identify the skills gap that needs tobe closed. Succession planning and having ‘strength in depth’ within the team were suggested as key contributors to long term success; and perhaps most importantly, mental strength, andthe willingness to think ‘out of the box’ were key attributes of winning teams. The competitiveenvironment is dynamic and all teams would do well to remember that excellence inperformance today may not be sufficient for tomorrow. The New Zealand All Blacks have beenused as the sporting analogy as they are the best in the world, but just as in business, they areaware that the bar is constantly being raised.

17. e-Procurement Initiatives for Marketing ServicesMarketing Services are often one of the last services to be considered for e-Procurementinitiatives due to their complex nature. Procurement Professionals need to sell the benefits toget marketing departments on board.

Purchasing and Supply Management (P&SM) professionals often face conflict with businessunits when trying to roll out e-purchasing initiatives. Marketing, along with legal, HR andfinancial services are no exception to this, probably due to the majority of e-procurementactivity being directed towards goods rather than services. Goods are simpler to describe,quantify and are easily catalogued. Not only are services more complex in their make-up and life-cycle management, but they are also typically managed by business units, by managers with little or no formal procurement training. P&SM professionals now have the task in hand to persuade the business of the benefits that e-purchasing solutions can bring to services.

What does e-procurement have to offer services?Many e-purchasing providers have developed their offerings to become more intuitive andadaptable for procuring services. This drive may have been more influenced by Sarbanes-Oxleyregulations rather than customer-driven demands. Not only do e-procurement tools aidadministrative compliance, they also drive the organisation’s sourcing policy. It is often theprocesses that join the systems in the P2P process that require a deeper understanding; bymapping out detailed processes links can be identified.

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Often premium prices are paid for services and full benefits are seldom yielded. Self servicethrough e-sourcing and procurement solutions has allowed business units to retain ownershipof spend and supplier relationships, whilst the systems guide compliance and add some rigor to the process. This will allow procurement teams to have more visibility over spend areas inwhich previously they would not have had involvement.

Services that are leading the wayMuch headway has been made with regards to buying travel, temporary labour and consultancyservices. This has enabled e-procurement to move away from being viewed as a simple front-endrequisitioning tool. However, services such as conferences, events management and advertisingcampaigns are still yet to make a real impact. Pierre Mitchell, head of the e-procurement practiceat the Hackett Group says that “Compared to physical goods, services are much more abstractand bring a whole level of complexity that isn’t seen in manufactured components andmaterials,” he says. “There’s no easy equivalent of an ‘item master’: the description is the servicerequired, the unit quantity is either one or the dollar amount involved.” The services that havelead the way can be argued as being the ‘low hanging fruit’, travel and contingent labour caneasily be linked to external sites and timesheet recording systems and can be quantified at setprices or rates. Although software providers have increased their offering in terms of automatingmarketing activities and tracking campaigns, they have concentrated mainly on the ‘campaign to cash’ cycle rather than ‘purchase to pay’. Linking these e-marketing tools into the moresophisticated (services procurement and contract management) packages is key to engagingP&SM professional skills at a much earlier point of the process.

What can P&SM Professionals do to make a change?Services are often multi faceted, and, when broken down, are made up of a combination of goods and services. In order to gain buy-in and confidence from a department such asmarketing, their requirements should be broken down and those aspects that can becategorised, (such as print, mail shots etc) can be sourced via an e-auction and catalogued ontoan e-procurement system. Demonstrating the benefits and potential cost savings in these areaswill result in confidence which could lead to the capture of more complex service aspects.

I-SAVE is a piece of research carried out by Oracle and CIPS in conjunction with The Universityof West England to show how organisations can achieve significant cost reductions in theirprocurement to payment processes. The research investigated typical savings that can beachieved throughout the P2P process and along with the top and bottom ranking savings bycommodities. Interestingly the top 10 savings were all goods, and training and security serviceswere featured in the bottom 10; this may be due to the nascent relationship with e-procurementand buying services, but it identifies some significant opportunities.

I-SAVE suggests a list of key enablers and inhibitors that will help P&SM professionals achieveoptimum results from their P2P processes. It is worth considering this list when devising astrategy for engaging departments such as marketing.

Key enablers■ Having appropriately trained people.■ Having a developed approach/methodology for supplier sourcing.■ Rationalisation of the supply base.

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■ Having clearly defined process ownership.■ Having strong internal change leadership.■ Learning from best practice organisations.■ Developing strong supplier relationships.■ Using specialist tools and equipment.■ Using enabled software.■ Having technology enabled suppliers.■ Having robust communication infrastructure.

Key inhibitors■ A lack of internal resources (funding, people, infrastructure).■ They only undertake short-term initiatives.■ They are very risk adverse/have resistance to change/not a follower or leader of change.■ It is not appropriate for their organisation or business unit.■ Lack of awareness of what is possible/has negative perception of what others have achieved.■ The need to do something is not a priority.■ Not having a champion.

The I-SAVE brochure, along with other “e” related documents is available to download from theCIPS Professional Resources pages under the e-business section.http://www.cips.org/professionalpractice/insightguidence/e-business/(You must be logged in as a member. If you do not have your password please email marketing@cipsa.com.au with a new password to be reset for you).

18. Pick the bones out of that - The Fishbone techniqueImagine yourselves face-to-face with your suppliers after considerable delays on a project whichhas caused you both to incur additional costs and frustrations. Discussions continue aroundtermination of contracts or levying damages claims against each other as per the contract bothof which will cause long term damage to your relationship. You are both frantically looking forsomething to save the project, your reputations and the previous great working relationship you had.

How do you identify the problems and painlessly rectify them? One way could be the use atechnique which has been around for over 40 years.

Dr Kaoru Ishikawa was a pioneer of quality management processes in the Kawasaki shipyards.He is well known as one of the founding fathers of modern management and in the 60’s createda visual guide to analysing problems, the cause and effect diagram known as the FishboneTechnique. The diagram provides a graphical representation of how a number of causes cancome together to produce a particular effect.

In our example of contractual delays, there is a real need to identify what the probable causesfor this could be and also what other information needs to be gathered in order to deal with the issue. The following takes you through the steps of developing a diagram using our example:

Step One - PreparationTo get your thoughts clear and to make sure that you have defined your problem (effect)correctly, hold a ‘brainstorming’ session to identify potential causes. The ‘brainstorming’ team

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should consist of representatives from all stakeholder groups including suppliers. A list isprobably the easiest way of doing this. The use of post-it notes to itemise potential causes is alsoa good way of doing this. It doesn’t matter if the causes are big or small just get them recorded.

Causes for delays

Once this is done, identify the key categories. You will find that this will automatically becomeobvious. Ishikawa said that these usually fall into four categories: Materials, People, Machines andMethods.

Step Two – Developing the Fishbone; clearly define the effect you want to solve

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Detail discrepancies in contract formulation

Acts of GodSupply issues

Breakdown in relationships andcommunicationChange of staffIncorrect informationlack of understanding of contractPerception of contract decisions

Legislation changesDependency on other activities (Priorities)Financial difficultiesPriority of contract

Materials People

Machines Methods

Financial difficultiesIncorrect informationChanges in staffActs of GodDependency on other activitiesLack of informationDetail discrepancies in contract formulation

Lack of understanding of contractLegislation changesBreakdown in relationship and communicationPerception of contract decisionsSupply issuesPriority of contract

Lack of understanding of contractLegislation changesBreakdown in relationship and communicationPerception of contract decisionsSupply issuesPriority of contract

Delays to

Contract

Completion

Step Three – Define the major categories of causeArrows leading from the main arrow represent each of the major categories of potential causes.Typically this is no more than five otherwise it will become confusing making it a very poortool. In the case above, we have used Ishikawa’s suggested categories but you may find otherssuch as environmental or legislative

Step Four – Break down the major categoriesUsing your lists, insert each of the sub-categories shown, under the major categories on yourdiagram.

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Delays to

Contract

Completion

People Methods

Machines Materials

Delays to

Contract

Completion

People

Incorrect information

Breakdown in relationships

Changes in staff

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Step Five – Why might each item be a cause of the problemThe next ‘BIG’ question to ask is ‘how each of the items under the main categoriesmight be a cause of the effect’? - in this case the delays. Now, add these suggestions tothe diagram. It will be clear by this stage that a large surface or space is required todevelop the fishbone diagram. A large whiteboard or a roll of butcher’s paper is ideal.

Final StepsConsiderable time could be required to create a complete diagram. Once you have all agreedthat there is nothing left to add, discuss what it indicates. Collect as much information as youcan on every cause. This can be time consuming so you will need to collectively determine how much each potential cause realistically contributes to the effect.

Collecting objective and subjective data is a skill in itself and will be addressed elsewhere.Keep the diagram safe for future reference.

If correctly undertaken, this approach will have the added advantage that your supplier alsofeels engaged. This will, in turn, improve the relationship you have with your supplier and istherefore another step towards solving your delays!

19. It never rains but it poursJonathan Dutton visited CIPS in the UK in July during the wettest summer on record. The MetOffice recorded rainfall in the UK during May to July at 387.6mm, the wettest since recordsbegan in 17661. Many homes and businesses had to be evacuated by boat as they becameinaccessible. The knock on effects has been phenomenal and as some businesses have closed or become bankrupt, others are riding the crest of this summer wave. This article provides someexamples of how organisations need to ensure that they build robust supply chains with watertight contingency planning.

The most obvious directly affected businesses are farming and those businesses into which flood water has entered. Cadbury Schweppes have had to close their Sheffield factory due toflooding and have issued a statement explaining that “employees on site are currently leading anextensive clean-up operation. We have now evaluated the extent of the damage to the buildingand manufacturing equipment, and believe that it will be a number of weeks before the factoryis fully operational.” Access to these areas was limited for a number of days, slowing down theclean up operation, as well as preventing the movement of goods in and out of the area. Also in

Delays to

Contract

Completion

People

Incorrect information

Breakdown in relationships

Changes in staff

Misalignedobjectives

Lack of DataManagementSystem

1 www.metoffice.gov.uk

this area a major shopping mall reported up to five feet of flooding to the ground level of over50 stores, including a large food court which has been closed since mid June. For the smallerindependent retailers this could be a ‘make or break’ time. Similarly in the farming industrycrops have been ruined, and others have had to be harvested before time and drying outprocesses put in place on whatever crops could be salvaged.

On a more positive note Hunter, a gumboot manufacturer, have been operating at full capacity.Glastonbury rock festival this year was a complete wash out as the festival, which is held infields in South West England turned into a swamp. The mud did not deter the 150,000+ partygoers and stall holders sold out of gumboots, rain coats and dry clothes; sun hats and sunglasseson the whole remained unsold. Also benefiting from the wet weather is the Dominos Pizzagroup. The biggest competitor for this industry is the summer BBQ (sales of which are alsodown) so sales are up considerably.

Organisations must consider the risks of events such as this and how they can directly andindirectly affect business. We often think that an occurrence such as this won’t effect us andtherefore do not plan. A good example of this is the foot and mouth crisis in the UK in 2002when a UK shoe manufacturer had not considered the lack of available cow hides and its impact on production. Modern organisations operate in a very commercially pressured globalenvironment. Competition is strong, and to remain efficient and competitive we tend to operate on a just-in-time basis. Organisations have become very lean and therefore the slightestdisruption to any element of their supply chain can have devastating results. There is often noplan in place to weather a major movement in organisations’ operations.

Industries have also become consolidated and thus if one major player is affected, the knock-oneffects can be catastrophic. This makes switching to alternative suppliers who have the samecapacity almost impossible, especially when non standard products are being used. Generallythere is little slack in these manufacturers’ capacity either so finding a supplier to switch to may be impossible. The packaging industry is one example where there are only a few largeconsolidated businesses. Organisations must become adaptable and risk aware and have theability to turn to contingency plans at short notice.

As more organisations operate globally the risks increase again. The recent Bernard Matthewsexample, albeit on a small isolated scale, where the H5N1 bird flu had spread between its UKand Hungary operations and potentially even further, demonstrates how quickly pandemicscould spread on a global scale. A major event across the globe can have an major impactinternationally.

Most organisations have a Business Continuity Planning (BCP) process in place for IT systemsand more and more are realising the need to broaden this. Supply chain vulnerability is of majorconcern to all organisations, the IT industry have been leading the way for a quite some timebut new risks such as terrorism, freak weather and pandemics now pose new problems toorganisations increasing the need to constantly review these processes.

Supermarkets are already considering BCP plans for a possible flu pandemic. They predict panicbuying and increased requests for home delivery; they envisage enforcing a limit on customer’sbulk buying items such as bottled water and milk and will look to standardise the productsoffered. Restricted movement zones also pose major threats to supply logistics; your site may

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not be directly affected, but what are the risks to your suppliers, or supplier’s suppliers? Thisclearly illustrates the need to consider both upstream and downstream possibilities and howthey interrelate.

Organisations must re-evaluate their plans after events such as the UK flooding, the South EastAsian Tsunami, food and mouth and bird flu incidents. We can learn how far reaching the directand indirect consequences of these events have been and apply them to new and existing risksin our plans.

20. Savings at what cost?Procurement can often suffer from a lack of exposure in some organisations. It is sometimesseen as a ‘back end’ or administrative function that simply processes purchase orders. It is toocost focused and is a stickler for following policies and procedures meticulously. This has onlybeen reinforced by measuring P&SM professional’s performance predominantly on cost savings.

Driving down costs time and time again is not sustainable and even it it were, there are oftenconsequences for doing so. So yes, you can achieve you 20% savings target but at what cost?P&SM professionals need to start looking at value propositions rather than just cost savings.Forward thinking procurement teams align their targets to the corporate strategy or theirstakeholder’s goals in order to deliver true value. The problem is that the board and shareholdersoften still want to see a difference to the bottom line and savings for them is a way of achievingthat; yet paradoxically long term investment in supplier relationships is more likely to deliversustained shareholder value – just not in the short term.

Beating suppliers up on price is not a bad strategy, but it is also not one that can be applied toall situations. Negotiation is about power and influence. What P&SM professionals need toestablish is which way the scales of power and influence are swinging and choose theirappropriate strategy. Gung-ho P&SM professionals often boast of dramatic cost savings but whathave they sacrificed as a result? Will that supplier be as willing to help them out in a crisis nexttime? Will they even be interested in applying to tender the next time the contract is awarded?Or even worse will they cease to exist as a supplier as a result of falling margins? What was thefull cost of that achievement? It’s about selecting the most appropriate sourcing strategy to suityour organisation and ensuring the right techniques are implemented.

Professor Paul Cousins of Manchester Business School highlights this point in his paper ‘To be ornot to be – the dilemma of strategic supply chain management’. Cousins uses a UK retailer casestudy to demonstrate the pitfalls of using a heavy handed approach with suppliers when thesourcing strategy is a more collaborative approach.

“The supply function in a large UK retailer spent over a year negotiating long-term agreementswith suppliers following an aggressive re-sourcing programme. After the negotiations werecomplete and the contracts were running, the suppliers each received a letter from the CEOdemanding a10 per cent price reduction across the board. This letter was sent without theknowledge of the supply function.

The result was mayhem with suppliers refusing to supply and threatening legal action. Thesupply function became very demoralised and disillusioned with senior management and a greatdeal of money was wasted setting up deals that were not going to be realised. In order to

survive the firm needed to reduce costs – that is, follow a cost-focused approach. Converselysupply was implementing long-term strategic collaborations. There was a mismatch betweenwhat the firm needed to do and the role supply adopted. This occurred because the strategicpriorities of the firm were not communicated to the supply function (until too late).”1

There has been a significant movement from focusing on a price tag to assessing the total costof ownership (TCO) when making a purchase. Spreading the message to other businessdisciplines about the difference between cost and price has been an uphill battle for years.Maybe this was the wrong message? Or maybe we just omitted one piece of detail – risk. TotalCost of Relationship (TCR) strategies look at TCO plus risk. From a sales perspective this hasbeen around for years. By bundling service elements into a product, you are increasing theattractiveness to the client and increasing the perceived or actual benefits. For example,nowadays when you book your car in for a service there are drop off, collection and valetservices included. Software companies will offer implementation and maintenance programmesreducing the risk factor for the client. So we need to not only measure our suppliers on thesebenefits, but start measuring procurement teams on obtaining them.

‘Procurement has grown up’, says Professor Lynette Ryals from Cranfield University, in her paper‘Holding up the mirror: The impact of strategic procurement practices on account management’.A shift from short term price reductions to long-term relationships with our suppliers isdelivering more sustained shareholder value. Yet the vast majority of relationships (approx 70%)are still at arms length. She goes on to say that many organisations suffer from supplier delusionas they may believe they are in a partnership arrangement with a customer however, the buyingorganisation has a very different picture. Suppliers and P&SM professionals often pour time,money and effort relentlessly into relationships with customers that will never be anythingmore than ‘arms length’.

Ryals lists the following as major success factors for relationship management and suppliermeasurement. These factors are also key for measuring a procurement team’s performance.■ Trust and commitment; relationship continuity■ Investment in the relationship■ Dependence on the relationship■ Communication■ Personal relationships■ Reciprocity and fairness■ Shared benefits

Forward thinking procurement teams look to add value to their organisation and not just cutcosts. CPO’s and managers need to change their mind set on how they measure their team andtheir supply base in order to steer P&SM professionals away from being too cost focused. Thiswill require investment in relationship management and a fresh approach to dealing withsuppliers. Individuals, their attitudes, methods of communication and behaviour, all have animpact on relationships and no policy or process can steer every individual down the samepath. Decide what is important to your organisation, design a strategy to meet that objective and deliver it!

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1 Download this paper and podcast at www.scmrg.com

21. Skills Transfer: I know something you don’t knowOne of the most effective and (often overlooked) sources of learning and developmentmay be the consultant sitting at the desk next to you. Why not use this very resource tomaximise the benefit from the consultancy fees your organisation is paying to developyour own team?

Organisations spend significant sums on sending their employees on structured trainingcourses, however there is often a ‘disconnect’ between the training and the workingenvironments which can inhibit the application of new skills. Skills transfer, when usedeffectively on a consultancy engagement can be much more dramatic if they take placein the context of the working environment because the issues will be relevant to yourteam and organisation. The consultant is already on site with your team, there is no needfor days spent out of the office and all the travel and expenses costs associated.

However, before rushing into an agreement for skills transfer on each and every one ofyour forthcoming consultancy requirements, it is important to ask the question, ‘howuseful will the skills be in the future?’ There may be no point in agreeing to a commitmentto skills transfer if the consultant is working on a one-off never to repeated issue.

It is worth bearing in mind when discussing skills transfer that this is not a one way street.Whilst working on the assignment the consultant will be looking to maximise their skillsand knowledge gain, to create future opportunities. It should be possible to agree that theskills transfer element of the contract will be delivered to your organisation at little if anyadditional cost. After all, the consultant is not paying for the skills and knowledge gain thatthey are benefiting from in undertaking the assignment. It is not unusual for a consultantto accept a reduced fee where the potential value to the consultant of the skills andknowledge gain is such that it justifies a fee reduction.

Even if skills transfer is discussed and agreed at the outset of the project, it often happensmore by chance than by a structured activity being reviewed throughout the assignmentwith other agreed outputs. Once the assignment is underway it is all too easy to lose sightof the requirement for skills transfer as project deadline day approaches.

The type of skills that can be transferred will vary from assignment to assignment but willmostly fall under the categories of Tools and Techniques, Behaviours and Technical skills.Several examples are given below:

Why should skills transfer become an integral part of engaging a consultant?■ It reduces the reliance on the consultant for repetitive assignments which can in turn,

release budget to engage the consultant on a more innovative value add activity.

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Data gatheringData analysesApplication of analysisStakeholder Management

Influencing skillsEngagement stylesPresentation skillsTeam working

ManufacturingHRFinanceProject Management

Tools & Techniques Behaviours Technical skills

■ It can give access to leading edge tools and techniques and their effective application.■ It can give access to skills that would be very expensive to gain by other means.■ It can be cost effective.

How to ensure that skills transfer is an integral part of the assignment.■ Include skills transfer as a required output in the specification.■ Request that the bidding consultants address how they will deliver and measure skills

transfer in their initial proposal.■ Identify who the recipients of skills transfer will be within the organisation, giving

consideration to who will be able to deliver most benefit if they are to be the recipient of the skills.

■ Ensure that both the internal recipient and the consultant are able to anticipate what isexpected of them, how the skills transfer will be measured and are aware of what indeed to anticipate.

■ Skills transfer should be included in the contract as an agreed output. Define what is to be transferred, how it is to be transferred, by whom to whom and how its success will bemeasured. It should be borne in mind that there are limitations as to how closely this can be defined as there are many intangible aspects to skills transfer.

■ Consider using a balanced scorecard approach to the measurement of the contract andinclude skills transfer.

How can skills transfer be delivered?■ By working in joint teams with the consultan.■ By observation of the consultant’s actions and behaviours■ Formal training sessions■ Mentoring■ Coaching■ Hold review sessions during the life of the consultant’s assignment

Measuring Success■ Review the level of knowledge and skills transfer against the agreed criteria during

the post assignment review.■ Were internal personnel willing to learn from the consultant?■ Can the activity be carried out in the future by internal resources without reliance on

consultants?■ What, if any valuable new insights or capabilities have the consultants left you with

to help, now or in the future?■ How will those new skills be used to add value/gain benefit?

Do not miss the opportunity. The consultant has something that you need but do not have,(otherwise you would not be engaging the consultant). Make sure they leave some of itbehind!

22. Stuck in the middleIncreasingly, organisations are being approached by so called ‘vendor neutral suppliers’ offeringto “take away the pain” of managing a network of suppliers for a given category whilst alsomagically delivering a wealth of savings.

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But what do vendor neutral suppliers do? What are the pros and cons of their offer? Do theyoffer an appropriate supply model for all categories of spend? Are they here to stay or “thisyear’s model?”

A ‘vendor neutral supplier’ manages a panel of suppliers. It is this panel of suppliers who directlydeliver the goods or services that the customer requires, not the vendor neutral. The ‘vendorneutral supplier’ manages and pays the panel of suppliers, the customer manages and pays thevendor neutral. Vendor neutral supply models are becoming increasingly prevalent in thetemporary staff and training markets.

Potential Advantages■ Frees up P&SM professionals time to concentrate on strategic value add supplier relationships.■ Enables transactional savings delivered through dealing with one supplier rather than a myriad

of suppliers with differing transactional capabilities.■ Gives improved and standardised management information.■ Enables improved sourcing through use of a provider who is solely focused upon the

category in question.■ A vendor neutral provider does not have its own product that it needs to sell regardless of

whether that is the optimum solution and will source the most appropriate solution.■ The provider can leverage the spend of a number of customers and (hopefully) pass on the

benefits.

Potential Disadvantages■ The loss of a direct relationship with, and knowledge of, the supply market.■ Resistance from and loss of existing suppliers who are reluctant to deal through an

intermediary but which the buyer wishes to retain.■ A vendor neutral provider may not be a member of the appropriate professional bodies/

regulations as they are not a supplier of the product or services in their own right.■ The benefits realised may not necessarily be passed onto the buying organisation.

What type of categories lend themselves to this model?:■ Non strategic.■ Non core.■ Those with low level of category knowledge in the buying organisation.■ Those with a high number of transactions with relatively low value per transaction.■ Those with low leverage on the part of the customer.

Vendor Neutral in PracticeA major distribution company had an increasing need for temporary labour in its nationalnetwork of 20 sites. Whilst the company had a P&SM professional with responsibility fortemporary staff this was not the only category for which they had responsibility.

The company had contracts with 40 suppliers, most of which were set up at the specificrequest of the individual site managers. Additionally there was a significant level of off contractnon compliant spend with suppliers selected by the ordering managers at each site. As many as 50 managers were engaged in ordering and many orders required a call to several suppliersbefore the requirement was fulfilled. More than 2,500 invoices were being processed each year.Also a high level of resource time was tied up in trying to resolve aged debt issues where norecord of bookings existed but suppliers were chasing for payment.

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The company was faced with the dilemma of how to achieve transparency in its spend, reduceits total cost and achieve consistent levels of supplier performance. One considered option was to put the increased focus from the Procurement department into the temporary labourcategory. Also, the company was due to go through a major capital expenditure programme toinstall equipment which would enable it to bid for work in new markets. The decision was takenby the Procurement department to focus its resource on the capital programme as this was seenas strategic to the company. The Procurement department contracted through a competitive bid process with a vendor neutral provider to manage the supply of temporary workers. This resulted in:■ A reduction in transaction costs by receiving only one electronic invoice per month

for all bookings.■ A relationship with one supplier only which could be effectively managed.■ A reduced panel of 20 suppliers with standardised pricing and KPI’s.■ A single on line ordering process.■ A 10% saving on spend through standardised pay rates and agency margin.■ An improved management information.■ A 99% compliance with process.

Of course this is an example of a success story as there is plenty of scope for gettingit wrong through selecting the wrong category, poor specification of requirement andchoosing the wrong provider to name but three.

Master VendorA variant on the vendor neutral supplier is the master vendor. The distinction between a mastervendor and a vendor neutral supplier is that the master vendor will be the primary source ofsupply and will use a panel of secondary suppliers to fulfil a proportion of the orders. Onedisadvantage of the master vendor is that the secondary suppliers may only be used when themaster vendor is unable to fulfil the order for ‘hard to fill’ orders. This will make it difficult tokeep the secondary suppliers on-side and motivated, and may lead to unfulfilled orders or areluctance on the part of the secondary supplier to commit their best resources. To avoid asituation like this, clear parameters should be set for the allocation of work and there shouldalso be transparency to demonstrate that the parameters for allocation are being applied.

Vendor neutral suppliers are likely to remain a feature of several supply markets. Asorganisations look to concentrate their P&SM focus into areas with real value-add it is anincreasingly attractive option to place categories of spend that have multiple low valuetransactions, and multiple vendors, through a vendor neutral supplier to free up resources to concentrate on strategic areas of spend. However it is imperative for success that therequirement is properly defined and appropriate performance measures and reviews are put in place.

23. It’s not how fast you walk, but the way you walkIn May 2006, Don Thompson passed away in a London Hospital aged 73. You may not know hisname, but in 1960 he won World recognition as the Olympic 50 kilometres walking champion.The games that year were held in Rome and the heat was a fierce over 30 degrees. He crossedthe line winning his gold medal wearing sunglasses and a French legionnaire’s hat. He wasknown as ‘Il Topolino’ or Little Mouse by his Italian Fans. He prepared himself for the games by exercising in his bathroom in Kent, UK which he filled with heaters and boiling kettles.

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This preparation allowed him to improve his capacity and win by 17 sec. from Ljunggren in an Olympic record of 4hrs. 25m. 30sec. Previously at the 1956 Melbourne Olympic Games hehad collapsed during the walk and was 5th at the time with 5000mtrs to go. He identified hisweakness and carried out an action plan to correct that weakness. We are unable to ask Donwhy he wanted to compete and win, but we can guess that there may have been many reasons.Just as individuals in your organisations will have different views on what motivates and engagesthem in their work. One of the most effective tools of motivation is to a competencyframework.

‘Competency’ is defined as behaviours that someone must already have, or must acquire to input into a given situation in order to achieve high levels of performance. In Don Thompson’scase this was the ability to perform in an unnatural situation for him; the searing heat.

The idea of organisations identifying competencies for their employees emerged in the 1980’sas a response to organisational and societal changes. Competencies are created as an indicatorto employees from the organisation of their expected levels and areas of performance. Thesecan also be used to identify areas for improvement or praise.

Not all organisations will see the need, or indeed have the resources to develop a frameworkthat defines the specific competencies their individuals require. If you were going to adopt yourown framework, you would have to use a step by step process which will clearly identify theright competencies for the right person. The process below does just that and is a good startingpoint. The dialogue following the diagram will help to explain the process, but you will need toidentify the right framework for you.

Set clear goals

Choose a competency

framework to suit

Create personal

development plan

Develop knowledge

skills and competencies

Reassess leaders

competencies

Evaluate the

contribution to your goals

Adapt the competency

framework

Identify individuals devel-

opment opportunities

Assess the individual

against competencies

Step 1: Set clear goalsAsk yourself why you need to develop competencies? Are these aligned with the strategic goals of your organisation and your team?

Step 2: Select a leadership competency frameworkIdentify the competency frameworks which are available, for example the National Operational Standard for Supply Chain Management (http://www1.cips.org/documents/NOS_SCM_Standards.pdf). CIPS have been involved in a programme of developingstandards within ‘supply chain management’ of which procurement is an inherent part. Thesestandards which were developed by the Polemics project, are innovative, creative and reflect‘good practice’. They were developed with input from senior practitioners, employers,educationalists, and other professional bodies.

The standards are government funded in the UK and are part of an initiative by the Departmentfor Children, Schools and Families (previously the Department for Education and Skills) toimprove professional standards of practice within the work place in both the public, private andvoluntary sectors. However, you would need to select the competency framework that bestmeets your organisation’s requirements.

Step 3: Adapt the competency frameworkYou will need to build into the framework a level of business relevance. You would do this byadapting an existing model which has been proved successful and is already widely used. Asurvey by the CIPD, Learning and Development annual survey report 2007, highlighted that 85% of all frameworks were either designed in house or in house with consultants, despite thefact that many of the subjects included in all the frameworks fell under generic headings. Don’treinvent the wheel.

Step 4: Assess individuals against the competenciesThe competency framework is a series of signposts leading the individuals to a particulardestination. However, each individual starts out from a different point and therefore has adifferent journey. The famous quote from Alice in Wonderland by Lewis Carroll explains thisconcept well:

‘Would you tell me, please, which way I ought to go from here?’‘That depends a good deal on where you want to get to,’ said the Cat.‘I don’t much care where--’ said Alice.‘Then it doesn’t matter which way you go,’ said the Cat.‘ --so long as I get SOMEWHERE,’ Alice added as an explanation.‘Oh, you’re sure to do that,’ said the Cat.

Step 5: Identify individual’s development opportunitiesThese include:■ self development■ reading■ structured workshops■ coaching■ projects■ shadowing

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■ mentoring■ external training programmes■ action learning

Identify and/or design the kinds of opportunities needed to develop the required competencies,taking into account the current commitments and individual learning styles of the peopleinvolved. Much has been written about learning styles but in essence there are four types oflearning style:■ Visual (learning by seeing i.e. formal training, video)■ Auditory (Learning by hearing i.e. seminars, webinars)■ Reading/Writing (learning by processing text i.e. e-learning, guidance material)■ Kinaesthetic (learning by doing i.e. on-the-job training, simulations)

Step 6: Create Personal Development PlansMatch the individual’s development needs with the opportunities available. Individuals shouldproduce their own action plans to develop the required competencies. This should integratefully with staff development and performance management processes. Personal developmentplans or PDP’s need to be highly specific, stating exactly what improvement in performance isrequired, by when and the action to be taken in order to reach the target.

Step 7: Develop knowledge, skills and competenciesYou will have already identified the right course of action for the individual, also during thisstage will need to put it into play. For example, attend the training course, participate in thegroup discussions, work within a cross-functional team, read a Harvard Business Review articleon Leadership, be mentored by a colleague or any other of the many developmentalopportunities available.

Step 8: Re-assess the individual’s competenciesAt certain milestones within the individuals plan, there will need to be a reassessment ofcompetencies in order to identify whether or not the planned improvements have been, or arebeing, achieved. There are many ways of doing this; such as 360° assessments, self assessments or using a coach.

Step 9: Evaluate the contribution of the programme to your goalsThis should be straightforward if you were clear about your goals at the outset. Some of theevaluation may be quantitative (e.g . competencies) and much may be subjective (e.g. what did the individuals perceive as the benefits to themselves). Different tools and techniques(assessments, questionnaires, focus groups, analysis of external reports and indicators etc)will be required to do a thorough evaluation.

SOME GENERIC ACCOUNTABILITIES AND PERFORMANCE STANDARDS

1. Leading PeopleTo select, motivate, develop, lead, empower and support staff, in accordance with theorganisation’s commitment to the highest standards of employment practice, to maintain a highperforming, effectively utilised and diverse workforce capable of delivering service performancestandards and objectives.

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Performance standards/indicators:■ communication of departmental/service/individual objectives;■ establishment of key systems to meet Investors in People standards;■ staff attitudes/morale/development via employee feedback;■ staff absenteeism levels;■ meeting equality targets;■ co-operative relationships with trade unions;■ compliance with relevant legislation e.g. health and safety, equality acts.

2. Service Co-ordination and ManagementTo formulate, agree and implement Senior Management Plans to deliver the corporateorganisational and service objectives specified in the Corporate Plan; to co-ordinate anddirect a grouping of services ensuring that they are effectively and economically deliveredto meet the organisations core values, defined performance standards and Value for Moneyprinciples.

Performance standards/indicators:■ achievement of relevant specified organisation and service priorities;■ achievement of planning timetables and targets;■ specification of quality and performance standards for all services;■ achievement of quality and performance standards;■ results of Value for Money Reviews undertaken;■ illustrative evidence of effective collaboration across services.

3. Corporate FocusTo contribute to the strategic direction of the organisation through effective membership,participation and input to the Departmental Management Team and Corporate WorkingGroups in order to develop and achieve the Core Values and Corporate OrganisationalPriorities of the Corporate Plan.

Performance standards/indicators:■ translation of Corporate Plan into Departmental/Service Plans including core values and

corporate organisational priorities and policies;■ implementation of corporate policies/plans/initiatives to agreed timescales;■ achievement of cross-cutting services;■ identification and support of strategic level partnerships;■ evidence of promoting the organisation’s services.

4. Managing ResourcesTo plan, authorise, monitor and review the departmental/service area resources within theorganisation’s defined parameters and procedures, in order to meet budget commitments,service demands and sustainability and to optimise efficiency, effectiveness and value formoney.

Performance standards/indicators:■ compliance with budget timetables, financial regulations;■ evidence of resource prioritisation, utilisation and maximisation

e.g. asset management and procurement;

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■ delivery of service level and improvements within budget;■ projects implemented within budget, to schedule and effectively reviewed;■ evidence of targeting of resources in line with corporate priorities;■ evidence of sustainability as an element in all decision making e.g. EMAS;■ opportunities taken to secure external monies.

NB. There may also be specific financial indicators (via national performance indicators)related to the particular cost/value of services e.g. rates of return, unit costs, cost per clientpopulation/activity, income generation.

5. Managing InformationTo contribute to developing and implementing departmental information management,communication and technology strategies to ensure that the organisations services aredelivered in the most cost effective way.

Performance standards/indicators:■ evidence of contributing to departmental information management and technology strategies;■ conformance with corporate information management and technology/strategies/guidelines;■ conformance with standards for accuracy, timeliness, consistency and integration of

information;■ having and meeting departmental communication plans;■ meeting communication strategy objectives.

6. Democratic SupportTo play an active role in enabling the democratic processes to take place by establishingeffective relationships with stakeholders and developing and supporting political arrangementsand processes to assist stakeholders in achieving open, responsive and accountable governance.

Performance standards/indicators:■ responsive and effective relationships with stakeholders;■ adherence to stakeholder protocol;■ compliance with Democratic timetables and cycles;■ evidence of effective support of decision making processes;■ handling of issues taken through decision-making processes.

7. Community LeadershipTo contribute to developing relationships with the wider community to understand theirdifferent needs and to develop partnerships with public, voluntary and private organisations inorder to put in place non-discriminatory structures, processes and services to meet and supportthose needs in the most effective way.

Performance standards/indicators:■ community or client feedback on effectiveness of arrangements/services;■ arrangements for consulting/engaging with the diverse community a round the organisation;■ evidence of a range of approaches and initiatives in service delivery;■ evidence of targeting of resources in line with corporate priorities;■ positive relationships with partners.

The Knowledge Club - Issue #8 December 2007

24. Contract Management and Performance MeasuresYou’ve completed your tender round, seen a short-listed few in the beauty parade, negotiatedthe best deal and sealed it with a contract. So the hard work is over - or is it? How do you nowensure that what was agreed is in fact delivered?

Supplier performance monitoring and contract management ensures that the benefits agreed in the earlier stages are maximised. The ability to measure the performance of the supplier -sometimes called vendor rating - and to provide feedback, is critical to successful contractmanagement and supplier development.

Performance measures to cover all aspects of a contract should be designed to suit therequirements of a particular contract and should be set out in the contract documentationto ensure suppliers are fully aware of both the measures and the measurement methodologybefore any contract is awarded. It is important that the performance measures selected provideclear and demonstrable evidence of the success (or otherwise) of the relationship. Issues suchas the following should be covered:■ cost and value obtained■ performance and customer satisfaction■ delivery improvement and added value■ delivery capability■ benefits realised■ relationship strength and responsiveness.

It is important to ensure that the actual metrics selected are not over-specified, that they are asfar as possible, readily obtained from the direct performance of the contract and that they arefocused on issues such as those outlined above which impact most heavily on the organisation.

Once chosen, the performance measures are the focus for contract management. They form the framework on which information needs and flows and contract management activities aredeveloped with the supplier.

They should not be seen as a method of control, but to measure the performance of a supplier.Suppliers should always be encouraged to improve their performance and incentives canencourage improvement.

There are a number of themes which could be used to measure supplier performance:■ product quality - Mean Time Between Failure (MTBF), Mean Time to Repair (MTTR),

percentage of delivery rejects, warranty claims■ service quality using Service Level Agreements (SLA) – call-out time, customer service

response time, performance against agreed delivery, lead times■ cost savings

There are three aspects of performance measurement;■ gathering of information from the supplier - e.g. from IT systems■ gathering feedback from users – through questionnaires, surveys etc■ understanding the supplier’s own experience of dealing with the organisation.

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Performance measurement can be an expensive and time-consuming activity and so should be carried out on a prioritised basis, proportionate to the value and importance of the contractto the organisation. Suppliers of high value, high risk goods and services should be closelymonitored, possibly involving frequent regular meetings at the supplier’s premises. Goods andservices of low value but significant importance to the organisation may require less frequentbut regular monitoring. High value or volume and low risk items may require less attention.

Service Level AgreementsOne contract management tool that is commonly used is Service Level Agreements (SLAs).These can be used internally between departments to provide a linked service betweendepartments to ensure optimised flow of a process. These are generally an informal ‘promise’between two departments to ensure that their part of the process is completed to an agreedtime and standard. External SLAs such as those for bought-in or outsourced services may havecontractual implications. They are generally a schedule or part of a schedule to the buy-in oroutsource agreement.

The purpose of SLAs and setting service levels is to enable the customer to monitor theperformance of the service received from the supplier against agreed standards. It should beunderstood that service levels should be agreed and benchmarked for both customers andsuppliers and should be:■ established at a reasonable level, if they are set too high they will attract additional charges■ prioritised by the customer in order of importance and on an agreed scale e.g. critical, major,

urgent, minor, etc.■ easily monitored ie. objective, tangible and quantifiable■ unambiguous■ open to re-negotiation

There are advantages and disadvantages in using SLAs. Among the advantages are:■ The service providers and the customers are clearly identified■ Attention is focussed on what a service actually does as opposed to a belief about the service■ Customers have a greater awareness of the services received and the additional services that

can be provided■ Customers’ real needs are identified and the associated costs are made clear■ Services and service levels adding value can be more easily identified and distinguished■ Greater awareness of costs/benefits of services and levels■ Service level monitoring is facilitated■ Failure reports enable improvements to be readily introduced■ Understanding and trust is created between customer and supplier

Disadvantages include:■ Joint drafting of SLAs, negotiation and measurement processes can be costly■ Potential increase in bureaucracy■ Internal providers are seen as suppliers and not colleagues■ Training needed to overcome resistance to the introduction of SLAs

Don’t let all the hard work in the tender and negotiation stages go to waste. By monitoringsupplier performance you can ensure that what was agreed is indeed delivered.

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25. Negotiation: Winners and Losers?Negotiation can be defined as: "To communicate with the objective of reachingan agreement by means, where appropriate, of compromise."

CIPS believes that negotiation is a key skill of the procurement professional. The ability tonegotiate effectively is so fundamental that without it, an effective procurement service cannotbe provided. Although some people have a natural flair for negotiation, it is a skill which notonly needs to be learned through professional training, coaching and experience, but requiresrefresher training at five-year minimum intervals as appropriate for their role. Procurementprofessionals should undertake to lead, or at least advise, in any negotiation with suppliersrequired by their organisation.

There are of course, different approaches to negotiation. Adversarial negotiation, also known as ‘win-lose’ negotiation is where the parties have essentially decided their positions before thenegotiation process starts. Negotiations proceed on the basis that every time one party wins a point the other side loses. Now largely discredited, adversarial negotiation may however besuitable in cases where there is no desire by the parties for anything other than a one-offrelationship, or where a quick and simple solution to a disagreement is required.

Partnership negotiations on the other hand are characterised by both parties trying to arrive atan agreement through constructive dialogue; the parties view themselves as partners rather thanadversaries. Whilst partnership negotiations are more time – consuming and difficult to conduct,they are often beneficial in that they assist in the development of long-term relationshipsbetween the parties.

A partnership-style approach is far more likely to constitute effective negotiation, characterisedby Fisher and Ury in their book ‘Getting to YES’ as wise (ie. satisfactory to both sides) efficient,(as no more time-consuming or costly than necessary), and harmonious, (ie. assists in thepromotion of constructive relationships between the parties).

Some writers have suggested that the adversarial/partnership dichotomy is too simplistic andthat in the real world, negotiations are in practice much more complex, as suggested by StephenCovey in his book ‘The Seven Habits of Highly Effective People’. He proposes six possiblenegotiation scenarios as follows:

Win/Win: Mutual benefit is seen as the essence of this scenario; all parties are committedto reaching agreement.

Win/Lose:The implication here is: I win, you lose. By treating negotiations as a competitionboth sides lose sight of the fact that the two parties are interdependent.

Lose/Win: An attitude of capitulation – such individuals have little courage of their convictions,are easily intimidated, and easily fall victim to the win/lose mentality.

Lose/Lose: This tends to be the outcome when two win/lose people face each other. Lose/Loseis the philosophy of adversarial negotiation.

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Win: People with this mentality do not necessarily want others to lose; as long as their ownends are achieved what happens to others is seen as of no consequence.

Win/Win: Here, if a mutually satisfactory solution cannot be found the individuals concernedare happy to agree to disagree and a ‘no deal’ situation is the result.

Misunderstanding can’t be totally avoided, but the risk of it occurring can be minimised.

Especially in partnership negotiations, simple misunderstandings can easily erode or destroy any trust which the parties have built up between them. It is often the case that open andhonest discussions at an early stage will go a long way towards reducing the risk of anymisunderstandings which could well be damaging to a satisfactory outcome to the negotiationprocess. It is also advisable to check understanding throughout the negotiation. A simpleexample is the terms of business which the buyer may wish to insist on with his suppliers.Presented to the seller at an early stage in the discussions will put him fully in the picture andclearly demonstrate that the buyer has nothing to hide. Far better than the seller discovering late in the negotiations that he finds the buyer’s conditions to be unacceptable.

Similarly, and from the buyer’s viewpoint, it is preferable for them to be made aware of allrelevant details as early as possible. For example, the maintenance charges which the sellermight make for the goods or equipment which are the subject of the contract. Regardless ofnegotiation style there is more often than not an imbalance of power and hence bargainingposition between the parties to the negotiation, which should also be considered andanticipated. Thus the buyer will be in a position of strength where:■ Demand is not urgent■ Suppliers are keen to secure the business■ There are a number of suppliers in the marketplace■ Few firms other than the buyer require the goods or services being supplied■ Demand may be satisfied by a number of alternatives■ The buyer has a reputation for prompt payment■ The buyer is well informed as to the supplier’s financial situation and other factors to do with

their business

As might be expected the Supplier is in a strong position where in general the opposites of theabove conditions apply:■ Demand is urgent■ Suppliers are indifferent about the business■ The Supplier is a monopoly or near-monopoly situation■ The supplier is well informed about the buyer’s negotiating position■ The supplier owns technical expertise and equipment which few others possess

26. The new CIPS year and a brighter future for procurementAs the new CIPS year begins and the new President Ron Jarman commences his year in post,‘Leadership for the 21st Century’ is the theme. It’s not only a personal interest to Ron, but it fitsin with the CIPS strategy. Ron states that “Leadership is the bedrock of all major organisationalinitiatives. It is at the heart of some of the major trends we face as procurement professionalssuch as globalisation and CSR; and will be the success factor for launching the profile ofprocurement for the future.”

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A new CIPS Knowledge paper on ‘How To Promote the Procurement Function’ is beingdeveloped and will be available to download in the up and coming weeks. The paper isimportant for all procurement professionals at all levels. Everyone who works in a procurementrole is a leader at some time, whether leading negotiations, leading cross-functional teams,leading category strategies - all the way through to leading teams. If we want to positionprocurement properly in organisations we need to play the role of leaders in them. It’s notabout waiting for everyone to be told to use procurement, but to get them to want to use it and understand its value contribution to the organisation. This article will provide a sneakpreview into some aspects of the paper and will explore the importance of knowing who youare before you can lead and influence others.

It is important to ensure that the business has a clear understanding of the procurementfunction and where it is heading. The following extract from Alice in Wonderland demonstratesthis point nicely.

Alice came to the fork in the road."Which road do I take?" she asked.

"Where do you want to go?" responded the Cheshire cat."I don't know," Alice answered.

"Then," said the cat, "it doesn't matter."- Lewis Carroll, Alice in Wonderland

The perceptions and inertia surrounding what procurement is all about does not stop with theexternal customers. Often procurement professionals’ judgment on the most important aspectsof their role can become clouded by the burden of heavy work loads and a lack of time. This isreinforced further by organisations setting hard targets and KPI’s based on cost savings alone. Ittakes bravery to put our heads up above the pulpit and admit that we aren’t where we shouldbe, or we’re not clear how to get there – that’s if we even know where we should be!

Procurement professionals often talk about providing the business with a framework in whichto operate, but the first step is to start with ‘who am I?’ You need to be sure of who you arebefore you sell yourself to others. The power of self awareness brings with it an aura, aconfidence or arrogance. Once you are sure that where you are heading is right, then comes apassion, a drive and ambition to achieve. These are the most powerful characteristics requiredfor influencing people. Until procurement teams achieve this state they may be able to dictatefrom a top-down position, but they will find it difficult to influence upwards and get a voice onthe board. Although probably anecdotal, or indeed an urban myth, when the toilet attendant atNASA was asked what he did, his reply was to point to the moon and say I put men on that.Similarly a cleaner at Ford was asked by a member of the senior management on a site visit,‘What do you do?’ They replied, ‘I make cars’. Knowing that you have a clear vision or goal that has a direct contribution on the business inspires passion and pride in ones work. Theseexamples demonstrate how well an organisation has communicated their goals and engagedwith all departments at all levels. These are the business values that procurement teams need to base their strategies on.

Re-orienting procurement in your organisation is not easy. It takes time and demandscommitment and might require investment in training and technology. Effective procurementhelps organisations to win and sustain competitive advantage. Upgrading the procurementprocess can be one of the best investments an organisation ever makes, provided that is, that

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from the outset, it is backed by the very top. CEO’s and other senior managers need to askthemselves the following 6 questions, and procurement teams need to have the right answers to them:

1. How much of our turnover is spend on bought-in goods and services? How does thepercentage compare with that spent on manpower and facilities

2. Who is purchasing key goods, services and capital items within our organisation? Do theyhave sufficient knowledge and understanding of how the supply market works? (not to beconfused with product knowledge)

3. Is the procurement operation governed by a set of bureaucratic regulations or can our peopleoperate in the market in a manner that meets the needs of the business? Are they trained todo so?

4. Do we have a procurement department in our organisation? Do they procure the pencils or the plant? Would we trust them to procure the more important purchases?

5. Are we confident that we will be able to purchase key goods and services economicallyin the future? If so why?

6. Do we purchase everything in the same way? Do we have different methodologies forhigh and low value and high and low risk purchases?

27. Organisational Change in Response to Sustainability IssuesMuch work has been carried out at the Institute over the past two years to look at how in the current climate organisations adapt to geo-political, macroeconomic and environmentalchange to survive and thrive. Hence the emphasis in much of what has been written is that for organisations to be sustainable they need to restructure to cope with change and develop both the social architecture and organisational mindsets to match. Moreover, the procurementleadership (and associated teams) need to wake up to this change, since the world we live in is one that moves faster, across more dimensions and with more complexity than ever before.

We are all familiar with the organisational structure. The organisational structure often emergesafter some degree of in-fighting amongst its elite and an examination of alternatives, andtherefore since the organisational structure is one of many alternatives it could be construed to be almost arbitrary.

The common belief is that an organisational structure is good, since it shows departments,positions, reporting relationships and so on. In reality, one could argue that the organisationalstructure is the bane of 20th century business thinking and management. Once anorganisational structure is laid over the business, instead of organising the business, the businessis constricted by a straight jacket, and management of it and changes to it to cope with therealities of the world can never be managed properly. Hence silo cultures, turf wars and so onmilitate against the organisation, acting as a team trying to achieve a common goal. Therefore,additional management structures for business processes, information systems, accounts,performance management, administration, and other needs are laid over the business creatingmore unsolvable problems.

Given that the pressures of globalisation and increased competition require organisations tocontinually adapt to change, then organisations need to change their outlook, and must becomemore adaptable as they face two demands - execute your current strategies today - adapt themto survive tomorrow. Most organisations are best at executing their current activities - very few

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can do both well. The barriers to adaptability I believe are rooted in organisational ethos.Overcoming these barriers requires a rethinking of the organisation’s “social architecture” – thecombination of individual behaviour, structure and culture, which ultimately determines anorganisation’s long-term performance and hence the sustainability of it as an entity.

A move toward sustainability, to survive and thrive (the individual, the environment, theeconomy) has the same characteristics of a fundamental shift that will redefine entire industriesand even broader economic systems. The reasons are simple. The environmental and socialcontexts in which businesses operate are changing in very basic ways. Access to resources isbecoming more restricted. Water is being privatised globally. Ecosystems are being simplified in both species composition and structure. Weather patterns are becoming more extreme.Disparities in wealth are increasing as poverty grows globally. Power is being consolidated.Capital is more ‘footloose’ than ever. Increasing economic interdependencies mean thatproblems become highly “contagious”. Witness Dubai, the gateway to the west, on an east – west‘point to point’ flow into the economies of Europe, the US and Japan. Here we can see first handhow emerging economies are becoming global players in their own right. India and China arethe sources of capital, research, product innovation and so forth. All these elements relate todifferent aspects of sustainability. And together these and many other factors are presenting an increasingly compelling rationale for sustainability-focused organisational change.

Given that there are four types of change open to organisations: incremental, developmental,transitional and transformational, organisations have to choose what they are going to do andwhen, based on their understanding of sustainability issues and their effects on the externalbusiness context. The matrix detailed below is intended to represent how all organisations(public and private) respond to change.

CIPS feel that this might prove useful in its examination of the subject as an Institute and inhelping us decide how to focus on the ‘helping organisations’ aspects of our wider remit. Overallsustainability concepts articulated by our ‘survive and thrive’ maxim at CIPS offers a new set of issues that have the potential to define and differentiate businesses in the coming years.Sustainability– focused organisational change initiatives offer a range of benefits. A cursoryglance at the issues at hand, as articulated by Wendy Becker of McKinsey & Co. at the PremierConference this year, as well as our own work in this area, makes quite clear that the challengeis how to change existing companies and organisations.

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In considering the above we need also to consider five key organisational trends. As has alreadybeen eluded to, our world moves faster, across more dimensions and with more complexity than ever before. The features we are seeing which require consideration by organisations inconsidering their futures include: the global context; increased diversity; flexibility; management“flatness”; and the networked nature of modern business.

Global ContextIncreasingly organisations are operating globally via their sales, manufacturing, research andmanagement. Add to this the fact that there has been a movement from direct exports to havingsales offices in different countries, to having manufacturing to all functions spread across theglobe. And finally we need to recognise that we are experiencing an increasingly globalisedlabour market which is a direct consequence of: reduced cost and improved quality ofinternational transportation and communication; the search for unsaturated markets; andexploitation of regional cost and expertise differences.

Increased DiversityThe workforce is increasingly more heterogeneous sexually, racially, culturally, individually etc.The increase in diversity amongst the workforce has become a source of both innovation andconflict and has created increased communication problems. Cultural issues result in a need toaccommodate different styles of interaction; dress; presentation; and physical appearance as aconsequence of changing demographics and the globalisation of the labour market mentionedabove.

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Efficient Business:■ Takes a developmental approach

to change■ Has a narrow eco-efficiency focus■ Adds new product lines■ Implements programmes to reduce,

re-use and recycle

Revolutionary Business:■ Undertakes transformational change■ Has an integrated sustainability focus

(financial, environmental and social)■ Seeks to obtain closed loops

regarding materials and products■ Works to develop a ‘lease-not-buy’

model■ Effects change at all levels

(corporate, industrial and societal)

LOW HIGH

Degree of organisational responsivenessU

nd

ers

tan

din

g o

f e

xte

rna

l o

r co

nte

xtu

al ch

an

ge

LO

WH

IGH

Business as usual:■ Has a focus on compliance■ Makes adjustments to product prices■ Gradually expands into new markets

Reinvented Business:■ Undergoes transitional change■ Undertakes M&A as a competitive

response■ Responds to poor market

performance by executive turnoverand extensive redundancies

FlexibilityFor an organisation to operate effectively in the modern era, it needs the system and processes,and people that can respond differently and quickly to different situations; fewer detailed rulesand procedures; greater autonomy and encouragement for individuals capable of working ontheir own initiative. There is also a greater demand for customisable employment relationships,including telecommuting, job sharing and appropriate pay for skills. With a greater awareness of demographic trends there is an increased focus on lifetime employability, not lifetimeemployment. This in turn reflects differentiated customer needs - filling them exactly is a sourceof competitive advantage; increasing diversity in the workplace and an increased pace of changein technology and markets.

Flat organisational structuresThese flat structures will predicate fewer levels of management; require that workers areempowered to make decisions; and ensure that there are fewer differences in responsibility(not in pay) across levels. The foregoing is a consequence of the rise in knowledge of workers inall organisations. The demise of the “industrial” mind set, and the need for speed, makes it helpfulto empower employees to make decisions, which means fewer managers are needed! Moreoverchanges in information technology means less need for the communication and controlfunctions of middle managers. The globalisation issues highlighted above means intensifiedcompetition, which increases the need to cut costs (as procurement people we are acutelyaware of this).

NetworkedDirect communication across functional and organisational boundaries will debunk the oldfashioned chain of command. We will see a rise in cross-functional team structures which willincrease the need to outsource activities and downsize organisational structure. There will be acorresponding increase of strategic alliances with competitors and others – you will now haveorganisations that are your competitors, customers and collaborators all at the same time!

Close coordination amongst organisations (e.g. JIT systems) and information sharing (opencomputer systems) will be a prerequisite for this, as will across the board contact withcustomers, not just official boundary spanning activities. We will witness too an increaseddemand for both customisation and decentralisation due among other things, to newinformation technologies, especially groupware, client-server and distributed computing; fast-changing customer needs and competitor offerings; and finally more complicated productsthat require better integration of manufacturing, design, and marketing functions.

The figure on page 67 gives an idea of how these issues and their impact might look figuratively,(this is borrowed from work carried out by Steven Borgatti). The dashed arrows with light greyheads mean "creates the need for", while the solid arrows with greyheads mean "causes" or"enables".

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As a follow on from the foregoing, it might be useful to consider some ideas regardingsustainability frameworks which are aimed at bringing about organisational change and theirbenefits:■ The promotion of cost savings through the elimination of waste and increased efficiency

through competent functional teams acting ‘appropriately’■ The encouragement of innovative thinking about product cycles and new markets■ The establishment of action-oriented, goal-setting processes■ The alignment of corporate (and functional) strategy around changed organisational sets of

understanding regarding sustainability■ The fostering of a systems view of the organisation (i.e. widening the focus from traditional

bottom-line concerns)

The very dynamics of organisational change are tricky in themselves. Although change initiativescan be risky, there are a number of common reasons why they flounder. Perhaps the mostsignificant is the difficulty organisations have in shifting their structures as rapidly as contextualchanges require. This will result in an ‘inertia’ which counters the need for change and highlightsagain the importance of perceiving change and acting on it in a timely fashion.

Moreover, there are many very real reasons for structural inertia, both inside and outside theorganisation. Internal barriers might include sunk costs; difficulties in gathering and sharing dataand information relevant to a change initiative; and employee resistance to changing the statusquo. As Machiavelli puts it “… the innovator has for enemies all those who have done well underthe old conditions, and lukewarm defenders in those who may well do well under the new.”Externally, issues such as financial barriers to entry or exit from markets, the regulatoryenvironment and a lack of change in the broader sets of relationships on which all organisationsrely will act as constraints to anyone trying to bring about change. In fact the last of these issues,relating to the aspects of relationships, is the most significant. Fundamentally changing theorganisation will require support for change from a web of suppliers, customers and partners.The entire business network across its whole supply chain, all of which will have theirimbedded institutionalised structures, needs to turn to meet the change.

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flexibilitycut costs

flatorgquicker

response time

fast paceof change

differentiatedcustomers

workforcediversity

increasedcompetition networked

fast changingcustomer needs

complexproducts

betterinformationtechnology

globalization

saturatedmarkets

exploit regionalcost/expertise/needs

differences

better communication,and transportation

technology

changingdemographics

(Source S. Borgatti)

These realities underline the importance of perceiving problems early on; of picking up on theweak signals; connecting ideas; and recognising the importance of what’s happening and actingdecisively. Acting on the internal issues and integrating with a broad set of players across,amongst other things, the procurement chain. Success will require thinking on an appropriatescale and setting some audacious goals. But if survival and future prosperity depend on it thenbig ideas and big action is paramount.

The changes that sustainability requires are quite possibly risky as they will ultimately affect thevery core and fabric of the organisation. However the issues discussed in this short paper can be mitigated, to facilitate successful organisational design. And not taking action may well be thegreatest risk. Failed strategies are, more often than not, the result of’ ‘sins of omission’ (what hasnot been done) rather than sins of commission’ (what has been done). Just as it is worse to denya truth than accept a falsehood few meaningful options are created by inactivity. But herein liesa dilemma, the disinclination to change means that any opportunity for learning and showingone’s worth is missed.

28. Resolve to ResolveIn all commercial relationships there will be times when the parties disagree. Manydisagreements will be on relatively minor issues and capable of early resolution. Timelyresolution of issues in a buyer-seller relationship can save time, money and relationships. Issues which are allowed to develop into contractual disputes are time consuming, expensive,unpleasant and can ultimately destroy a relationship that both parties have invested aconsiderable amount of time in.

It is far better to create an environment in which both sides of the relationship are committedto dealing with issues in an open and honest way to ensure an early resolution that is acceptableto both parties. Negotiation is by far the quickest, most cost-effective, relationship-savingapproach to settling issues and should be considered before moving into a more formal processsuch as court proceedings.

Over time what starts out as a minor issue can be amplified:■ as more people become involved■ as time passes, the impact of the issue on the performance of the contract is increased■ as the issue is passed from one person to another a perception that the issue is bigger

than it really is takes hold■ as more senior personnel are dragged into resolving the issue it builds in importance■ if the issue is bundled with a range of other unresolved issues, the sum of which is more

damaging to the relationship than the individual issues

If early resolution is such a good thing, what stands in the way and preventsit happening?:■ emotion and personal pride■ a blame culture■ lack of early identification of the issue■ lack of clarity as to who is responsible for resolving the issue and has authority■ hoping the issue resolves itself■ individuals hoping the issue is unnoticed by anyone else

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As recently reported in “Supply Management” 2/3rds of the 75 respondents to a study by lawfirm Field Fisher Waterhouse (FFW) said emotion and personal pride often stood in the way of aquick resolution of commercial disagreements. Nearly half admitted personal dislike of the otherside had led them into litigation. And 97% said most businesses underestimate the time and costrequired to fight commercial disputes

What can we do to promote early resolution of issues?■ promote relationships which encourage open and honest debate allowing early identification

and notification of issues■ have a process for issue resolution in place■ aim to resolve issues at the lowest appropriate level in both organisations, allowing early

resolution by the people who know the facts and are affected by the issue and can implementthe agreed corrective action

■ escalate to the next level in the process if resolution is not found within agreed timescales■ do not get personal■ do not attach blame to individuals■ have a consistent approach to resolving issues■ where personalities clash, involve others who can look at the issue dispassionately and resolve

Once the issue has been resolved and any agreed actions put in place to prevent a recurrence itis time to put the issue firmly in the past and move on!

29. That tender time again“It’s time to go out to tender again”. This probably sounds a familiar phrase, but are we beingdriven by arbitrary timescales and process rather than a real understanding of why we are goingout to tender?■ Indeed should we go out to tender at all? *■ Have we identified what we want to achieve from the tender?■ Have we structured the tender in such a way that we stand a good chance of meeting ou aims?

Buyers should not be under the illusion that the mere act of going through a tender process willdeliver benefit to the organisation. Rather, they need to have a clear understanding of what theyaim to achieve from the tender.

Should we go out to tender?■ Is there sufficient competition?■ Has there been sufficient change in the requirement and or the market since the last time we

went to tender, or are we likely to go through the tender exercise and end up with the sameresult as before?

■ Do we have agreed aims for what we want to achieve from the tender exercise?■ Is there a genuine desire to change suppliers should an offer that is better than the incumbent

suppliers be received? To tender when there is no desire to change is not good practice andwill give the supply market a negative view of the organisation

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* It is recognised that public sector buyers are governed by public procurement regulations which dictate that they must go out to tender periodically, however the other points of this article are still relevant.

What do we want to achieve from the tender?Without clear aims we are unlikely to deliver benefit through the tender. The aims of the tendershould be agreed by all key stakeholders. It may be to achieve one or a combination of thefollowing:■ reduce costs■ identify additional capacity■ identify innovation from the market to give competitive advantage to our own organisation■ replace a failing supplier

Will the tender deliver?In order to achieve our aims the tender exercise needs to be constructed to enable us to do so.For example, if one of the aims is to seek innovation from the marketplace, the specification orbrief needs to give room to allow for new approaches and should state that new approaches areactively encouraged. An outcome specification where the desired end state is expressed givesscope for tenderers to put forward innovative solutions based on their experience, skills andknowledge. Whereas an input specification which closely specifies “how to” will inhibitinnovative solutions.

For example:

Sufficient time should be allowed for the process in order that quality proposals can bepresented and properly assessed.

The tender process should be clear:■ What medium is to be used for communication: electronic or paper-based?■ Will there be a presentation?■ If there is to be a presentation will all tenderers be invited or just a short list?■ What level of detail is required in the written proposal document?■ Who should any queries be referred to?

Have we achieved the aims and what will we do better next time?

At the conclusion of the tender exercise a review process with key stakeholders is beneficial toimprove future tenders.■ Did the tender deliver the stated aims?■ What could have been better?

In addition to internal stakeholders, tenderers should be asked for their view on the tenderexercise:■ How was the tender exercise for them?

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Deliver diversity training to 100 employees1 tutor per group of 202 day course6 hours per day, standard presentation(provided) with PowerPoint slides to include 20 minute video on day 1

Raise awareness of diversity in 100employees.Employees will be able to

■ explain the principles of diversity■ apply the principles in their roles■ comply with legal requirements

INPUT SPECIFICATION OUTCOME SPECIFICATION

■ What could have been improved, especially to allow them to put forward their “best” tender?For example, were the timescales sufficient, the process clear, questions answered fully andpromptly?

Public sector buyers are required to debrief the unsuccessful tenderers and it is good practicefor private sector buyers also. An open and honest debrief will help the tenderer to put forwardan improved bid the next time. In summary, a well constructed and effectively managed tenderis needed to deliver benefit to the organisation.

30. Standing on the Shoulders of Giants – Trends in ProcurementIn this the 75th year of CIPS it is appropriate to reflect on how modern procurement thinkingand practice came about. What motivated Swinbank and others and what was the world order inthat era? At the same time as the British Industrial Purchasing Officers Association (BIPOA) wasofficially formed in 1932, the Graf Zeppelin began its regular route to South America, a Mars barwas sold for the first time and Aldous Huxley published his now famous book “Brave NewWorld”. At that time the founder and first President of the BIPOA, Leonard Swinbank produced a booklet regarding the ‘Association’ entitled “The first years work”.

In this seminal document, Swinbank set his readers two propositions: “was there a need forsuch an Association?” and if so, “what could members get out of it?” He asked his readersto reflect on the following, “…when has the Purchasing Function been appreciated bymanagement, even though during the last ten or fifteen years industrial management hasbeen at its wits end to reduce production costs in order to combat the steadily increasingpressure of competition within industry?” He went on to say that “Purchasing Officers mustno longer remain passive, but assert themselves and be prepared to take their proper place in industrial life”.

This very reason for the establishment of the ‘Association’ has remained its central tenet. It wasformed in order to secure recognition for the procurement function and to arrange propertraining for its members. Over the years this organisation has changed in make-up, name andlocation but Swinbank’s vision has remained more or less the same. Things have substantiallychanged for the procurement profession and there is undoubtedly recognition for theimportance of the function. A recent AT Kearney study into the Assessment of Excellence inProcurement shows that CEOs are expecting the procurement function to deliver on valuecreation as much as cost reduction. The same study indicates that 50% of top organisations areusing procurement expertise to achieve corporate goals. So the question remains, what is themodern procurement practitioner doing?

It has been long understood that in many organisations, the procurement function has shifted in focus from tactical and reactive to strategic and proactive, as Swinbank wished. Moreover,technology has automated many of the more procedural aspects of the function and as supplyside management has evolved, the higher levels of value generation and added value haveopened up. The debate over corporate governance and the reaction to Sarbanes Oxley has alsohelped this tactical outlook move as organisations have a requirement to strengthen theirinternal controls. Clearly procurement has the capability to add value from a wide range ofinitiatives and processes, both tactical and strategic, if managed and lead well. However thechallenge for the Chief Procurement Officer (CPO) is to identify which activities will have themost beneficial impact, taking into consideration the specific strategy of the organisation, its sizeand sector.

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So let’s take a closer look at how the procurement practitioner can deliver on additional valueto their organisation, and beyond the organisation out into the supply chain. Much has been saidabout how procurement adds value to the organisation, but let’s examine some of the mostimportant issues in a bit more detail:■ Working cross-functionally with departments such as Marketing, HR and Operations to

improve product and service quality. Embracing this opportunity brings about the creation ofoutput and outcome specifications leading to no product recalls for any of your products;

■ Guiding the organisation in its make or buy decisions, for example the decision to outsourceservices such as call centres, perhaps improving the levels of customer services provided;

■ Managing supplier relationships in order to reduce the time to market and cycle time. Forexample, managing a just in time process with your key suppliers;

■ Gathering together market knowledge and carrying out market analysis in order to gainassurance of supply so that there are no time delays;

■ Ensuring that suppliers are aligned with your own position on sustainability which includeshuman rights issues; diversity of labour force; environmental protection and development;fairness and transparency;

■ Supporting the organisation in research and development activities, particularly increasedNew Product Development, and in doing so creating an environment which allows suppliersand the organisation to be innovative, efficient and effective.

The modern mindset, that of the 2007 descendent of Swinbank’s Industrial ProcurementOfficers, is that their role is central to the success of the organisation. This is precisely whatLeonard Swinbank envisioned. Those involved in procurement today owe a lot to those officersin 1932 that could see a need to raise the profile of the function and were brave enough to puttheir case to the business and establish the concept of the procurement professional. ClearlySwinbank’s vision has paid premiums not only to us working inside procurement, but also to theway in which business is conducted and how organisations marshal their resources to operatemore efficiently and profitably, in both the public and private sectors. Swinbank’s contributionto procurement and business in general must not be underestimated, and in his honour CIPScontinues to present the Swinbank Award to those individuals who have contributed to thedevelopment of original thinking and impactful contributions to procurement.

Today it is increasingly the case that procurement professionals lie at the very heart of anorganisation’s value proposition. Gerard Chick, Head of Knowledge Management at CIPS says“Within the supply side we need pride and passion in our profession and this comes throughour mindsets and how we apply our knowledge.” There is a claim too that in procurement weneed talent; and that in this ‘talent war’, procurement is losing out to other more ‘attractive’business disciplines – good people are hard to find. Yet in truth these good people are all aroundus – inside (and outside) the profession. So here’s to the next 75 years.

“If I have seen further, it’s because I have stood on the shoulders of giants”– Sir IsaacNewton

31. Wii three kings of orient are…The Christmas shopping rush is upon us. Parents are already struggling to find the latest gadget,toy or fashion item as retailers across the globe sell out. The Nintedo Wii game console is one ofthe highest in demand this Christmas. The Telegraph newspaper reported this week thatWoolworths in UK has received up to 200 telephone calls a day from anxious parents who fear

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they have left it too late to buy the console this year. A spokesman for Nintendo said: “Nintendois working at its maximum production level to supply as many Wii hardware units as possible.The demand has been unprecedented, it may outstrip supply.” In fact, Reggie Fils-Aime, presidentof Nintendo America, has publicly admitted that they can not meet demand for this Christmas.1

As procurement professionals it is important that we keep stock-out situations such as this to aminimum by forecasting and planning demand. Demand planning is the management processwithin an organisation which enables that organisation to tailor its capacity, either productionor service, to meet variations in demand, or alternatively to manage the level of demand usingmarketing or procurement strategies to smooth out the peaks and troughs. Demand drives theentire supply chain from suppliers to manufacturing, marketing, inventory, distribution andservice to customers. An organisation needs to be able to forecast demand accurately, but to do this one needs to understand demand patterns and how factors such as new products,competition, and changing market conditions affect these patterns. This understanding canhowever, only be reached by a free and plentiful flow of information up and down the chain as illustrated overleaf:

It is unclear whether the lack ofavailability is due to capacity on themanufacturing side or whether thereis a bottleneck in the supply chainon a component part. Every itemthat makes up the product is criticalto its manufacture. Some parts willbe available from more than onesource and therefore present less of an issue if the supplier fails todeliver, and some components maybe bespoke and therefore will onlybe available from one supplier.

However, that is not to say that one type is more important than the other. Parts of the Londonunderground were purportedly ground to a halt once because of a bolt that was out of stock.Anecdotal or not, this example is a truism and demonstrates that all direct goods and materialscan be critical to production, regardless of their sophistication.

So why have Nintendo not kept high levels of stock in anticipation of the Christmas demand?Organisations keep optimum levels of stock that they calculate against demand so as not toincur the additional costs of holding stock. There are two major types of holding costs:a) Costs proportional to the value of the inventory, including:■ financial costs, such as the interest on capital tied up in inventory■ insurance■ losses in value through deterioration, obsolescence and pilferage.b) Costs proportional to the physical characteristics of inventory, including:■ storage costs, e.g. storage space, stores rates, light, heat and power, labour costs relating to the

handling processes involved■ clerical costs associated with storage records and documentation.

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1 “Nintendo Wii sold out before Christmas.” By Gary Cleland. Daily Telegraph 15/11/2007

MRP

Goods & services DRP

PurchasingResearch

MarketingResearch

Pull of goods & services

Flow of materials

Flow of information

SUPPLY

MKT

CUSTOMER

MKT

OperationsCould be lengthy process!

Procurement Operations

MERCHANDISING

Marketing 3rdparty

– Demand Management– Planning– BOM

The total costs per annum under each heading will be expressed as a percentage of themonetary values or quantity of the average stock held. This is then off-set against the cost of a‘stock out’. These are the costs which arise through being out of inventory, and include forexample:■ loss of production output■ costs of idle time and of fixed overheads spread over a reduced output■ cost of action taken to deal with the stock-out, such as buying from a stockist at a higher price,

switching production, or obtaining substitute materials■ loss of customer goodwill through the inability to supply, or late delivery.

In addition to this there is the loss of reputation and damage to the organisation’s image,although for Nintendo this will probably have minimum impact. As for the additional hypeand publicity surrounding the lack of availability – well you just can’t buy publicity like it! Wehave seen the same pattern year after year and this generally is in connection with toys, fromThunderbirds Tracey Island, DS Lite, and Hot Wheels to the good old fashioned Barbie doll. Thepower of the media and increased hype over that ‘must have’ item seems to have exasperatedthe situation further. Although some sceptics speculate that the charade is a marketing ploy inorder to increase demand further. So get your list to Santa early next year to avoiddisappointment.

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Author CreditsAll articles are written by members of the CIPS Professional Practice team.© CIPS Australia Pty Ltd 2008

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