The burning question: why is it called “procurement” anyway?
It used to be called “buying,” then it was called “purchasing,” then “procurement.” For a while it turned into “supply chain management,” but it’s also been called “strategic sourcing.” Confused yet? There’s no need to be because whatever you call it, it’s always been about buying what your company needs. And while we’ve been quick to change titles, we’ve unfortunately been slow to adapt to new innovations.
Does everyone actually hate procurement?
Short answer? Of course not. What it comes down to frustration—frustration about the slow ability to adapt that leads to things like departmental silos and a lack of communication. One department might see the results of procurement and be disappointed with them, without understanding the underlying restraints and methodology that go into procurement’s purchases. In other words, everyone’s a procurement expert, but not everyone is actually a procurement professional.
Think about it like this: when you buy a car, or a refrigerator, or even your groceries, you’re doing the work of a procurement professional. But buying for a company with thousands of people and internal customers vastly increases the complexity of purchasing.
The definition of quality
Procurement teams spend a lot of time deciding what is the right product to buy. Sometimes they default by saying, “it’s all about quality,” but that’s a little more complicated than it seems at surface level. For instance, why would one person buy a Honda Civic and another buy a Mercedes Benz 300 series? They’re both quality cars but those qualities are quite different for different buyers. Procurement has to know if the quality of the product is meeting the quality standards of the customer.
The definition of quality is always different depending on whom you ask, and it can be very difficult to define depending on your internal customer. Determining what your internal customers’ specifications are for quality is one of procurement’s most important jobs.
The paradox of choice
Another aspect of procurement is what goes into deciding how many choices to give internal customers. A classic article, “The Paradox of Choice” stipulates that the more choices you give customers, the more likely they are not to purchase anything at all. You’ve probably encountered this when trying to decide what to watch on Netflix every night. That can be true with your internal customers too.
Roy Anderson, Tradeshift’s Chief Procurement Officer, uses an example of a company that saw its spend skyrocket on spiral-bound notebooks in August and September—not because their employees needed spiral bound notebooks for work but because their children were going back to school. In this example, what the employees were ordering through procurement was not helping the company in any way.
The once and future procurement: one tool vs. apps
The old way procurement solved problems was by trying to get a single tool in front of the whole organization, then forcing everyone to use it. The problem with this approach is that employees have diverse and specialized needs so the tool that might work for one department could be wholly inadequate for another.
The future of procurement is much more customer-centric: you need a suite of tools that meet the needs of diverse internal customers. The power of an app-enabled network is that it lets people use applications that are unique to their requirements. The result is better solutions for your company, your suppliers, and more digital activity to generate data, which allows you to create important analysis down the line.
Free for you: advice from the procurement pros
The first piece of advice Roy gives is to listen carefully to your internal customers. You can’t understand what they need unless you are willing to devote attention to them. When you do that, you can do a better job of balancing between the needs of the whole organization and the needs of your internal customers.
Roy’s second piece of advice is to communicate clearly with your internal customers. They need to understand why changes are happening and why it’s important to streamline processes, add accuracy, and get digital data. Without communicating how that can help deliver better services, it will just cause internal confusion and consternation.
Ron Volpe 0:32
I’ve got to admit, Roy, I’m a little uncomfortable with today’s title of our episode, which is everybody hates procurement, because I don’t hate you, and I don’t hate procurement. I thought I’d start off with a question: Why is it called procurement, anyway?
Roy Anderson 0:47
They call procurement the second oldest career (Laughter.) Procurement is basically buying and selling. Of course, they used to call it buying, and then they called it purchasing, then they called it procurement. And then they started to call it supply chain management and strategic sourcing. So we’ve been very quick with changing our title. Unfortunately, our underlying activity hasn’t changed as much or as easily. So…
Q: So Ron, what are some of the things that you’ve seen in the procurement space that cause animosity?
Ron Volpe 1:33
Yeah, so I don’t know of anything that would be as strong as say, “I hate procurement.” But certainly, I think, and I, we talked about it in Episode One, I think the natural internal silos that exist between within organizations and across organizations sometimes make it challenging. So look, procurement, you know, if they buy too much, we’ve got too much inventory. If you buy too little, we don’t have enough to ship. That’s a problem. I’m sure that procurement folks have a particular, you know, have a similar view of downstream supply chain folks. So I think it just brings back the fact that working in an integrated manner is really good for everybody.
Roy Anderson 2:15
Well, what I find Ron, is that everyone, when they go home, they are their own procurement group. So an individual no matter what role they’re in, whether they’re an advertising agent, or manufacturing, or an engineer, or inventory, when they go home, they buy their own house, or their own car, or their own refrigerator. And some of them think they’re very, very good at negotiation, and many of them are, but what people don’t understand is procurement is a radically different function associated with risk management inside of a company.
Let’s set the scene a little bit in terms of the scope of this problem. At one insurance company I worked for, there were 60,000 employees that we needed to supply products and services to. My entire team in procurement supply chain was 60 people. So not only did I have 60,000 internal customers, I also had 18,000 suppliers that we were doing business with in any given year. And then we had all the suppliers that wanted to do business with us.
A company like a Met Life spends billions of dollars a year… And I have 60 people trying to manage 18,000 suppliers, and we were trying to make major changes in the way the company did business. So our internal customers included those people that were in the r&d centers. They were creating the new products and they were creating the products with new suppliers having feed into this and therefore procurement needed to get involved in the early stages of activity.
We also had on the back end people like auditors to make sure that we followed all the policies and procedures and tried to figure out which supplier was potentially going to cause an ethical risk or a financial risk. Of course, our finance team was looking to lower the cost. So every chance they got, they went back to the suppliers to say, how do we get another five or 10% out of that cost structure in order to make their numbers for the next quarter. So there’s an awful lot of individuals that are really part of this. But the internal customer, the one that I’m trying please, they didn’t like to change. They were individuals who said: “I’m happy with my particular supplier, I’m happy with the relationship I have with that supplier.” And unfortunately, one of procurements major roles, was to try to rationalize that supplier base.
Let me give you a quick little story. So I was first in at Met Life and I had the opportunity of looking at their paper spend and they spent millions and millions of dollars into paper for policies and much of it ended up in the inventory. It had to be thrown away. So that was a whole nother issue. But the idea is, there were 100 printers in that environment, 100, and every time I went to look at the print supply base, there was an individual inside the company from the salesperson that was selling life insurance.
So that printer to the CEO had a friend, a next door neighbor, who was a printer, and we had 100 of them. So I was trying to get down to the right number of printers. At the end of a nine month effort dealing with hundreds of internal customers and hundreds of meetings with suppliers, Iwas able to get the spin down to just for suppliers that could do the entire work for the company saving eight to $10 million in the process.
But unfortunately, one of those suppliers was a friend of a high ranking radio personality at the time in New York City, and spent three minutes talking about how rotten the procurement manager was at Met Life, because I elected not to use his friend. So you have a lot of friendships that are built into the supply base. So that when you start changing that mixture, you get a lot of emotion tied into it. So sometimes that’s why people hate procurement.
Ron Volpe 6:55
Well, like I said, I definitely don’t hate procurement. And I particularly like you, so this is working. Listen, you said something at the beginning of your talk there that I want to build on. So you know, your notion that we’re all in procurement, let me tie into that. So when I think of let’s think of a carton of milk, I’m more concerned about whether it’s in the fridge in the morning than I am if we paid what we paid for that milk. Now, that obviously varies from person to person, and I would guess business to business in terms of what their priority is in stock price, etc. So how do you do the balancing of those? And does it look differently for big businesses?
Roy Anderson 7:35
That’s a great point. I mean, if you stay with a milk example, which I hadn’t thought about, but if you go in to get milk in the supermarket, there is a wide range of products, organic milk products, and whole milk and skim milk and little sizes and big sizes. So you have people sitting there trying to decide between one or another, and they’re the decision maker, and they still have a hard time figuring out what milk to buy. Well, is it better to spend another 40 cents for the organic? Or is it better to spend $2 more but get, you know, twice as much. So procurement spends a lot of time saying, is it the right product? People tend to buy more on what they like versus what they need. So is it the right product that we’re putting in front of those individuals and the right product?
People say, well, it’s all about quality. And, and I look at a car and say, well, is a Honda Civic a quality car versus a Mercedes Benz, you know, 300 series car? Well, they’re both quality, but their qualities are different. So one of the things that procurement works with, with the internal customers, the engineers, is, is it the right specification to meet the requirement? Now, that’s easier on product when you get to services, you know, what’s the right specification for someone that’s doing landscaping or painting? The definition of quality is always very, very difficult to define. Especially when you get to the legal services. And you would not believe how many general counsel’s have come to me and said, “Roy, you don’t want the low bidder in front of the judge, right?” But we don’t necessarily have to have your best friend who is the highest bidder in front of the judge either. And trying to tell them that maybe they’re being biased because they used to work for the company is not necessarily the way to a person’s heart.
Now, some companies have things such as diversity, if you’re working with a government, being a diverse supplier is important, can diverse has a very wide ranging everything from you know, disabled veterans to Native Americans? So do you have the right supplier that can produce the product at the quantity that you need? Is it the right price point, because companies that we know have gone out of business because their supply chain is too expensive, and when it’s too expensive, then they can’t afford to put it out and be competitive in the marketplace. So the right price does matter. And the right price is not always the highest price or the lowest price but it’s the right price for that quality of material.
Then of course, you mentioned the right time and if it’s brought in late. So I am always interested when you talk about the Olympics, right? The Olympics are there for basically two and a half weeks. Well, if any products show up a day before or a day after the Olympics, it’s obviously the wrong time. It’s missed the boat by ust being a few days late in that structure. So sometimes the right time is the most important issue, which is why companies like next day delivery services get so much business.
Roy Anderson 10:48
Let’s talk about risk for a second. Now, risk comes in lots of areas. Everyone knows about the Dakota airbags, right? That little item where explosives in the airbag were stronger than the components which then let shrapnel come out of the airbag when it deployed. That’s a risk nobody knew about until it occurred. And of course, billions and billions of dollars of activity based upon that level of risk. If anyone remembers the port strikes that were in Southern California, that almost stopped all of the goods and services—the fruits and vegetables that rotted on the docks, the toys that never made it to the store. Necause this was in the fall when all the toys make it for the Christmas season.
Those are the risks associated with a supply chain that have to be mitigated. So procurement spends a lot of time trying to make sure, do we have competitive suppliers? Do we have alternative solutions to be able to get the work done. So risk alone takes up an enormous part of a procurement groups.
Ron Volpe 11:56
That’s fascinating. I have a series of questions. I know we only have 25 minutes with this podcast. So look, there’s an article that I still carry around with me from 10 years ago called the Paradox of Choice that was published, and they talked about the fact that consumers don’t need as much of a choice as we sometimes provide them. And maybe it’s the same for companies as well. The example I gave you, and I’m interested to see if there’s a relational example from your experience, but my example is: there’s a grocer in Texas that I used to work with called ATP, they do a fantastic job. But if you look at their stores—and in Texas, the SKU mix on the shelves was very different than the stores ijust over the border in Monterrey, Mexico.
But what was interesting at the time, was that they were doing more revenue per square foot in Mexico than they were in Texas, but doing it with significantly less SKUs. And it just goes to reinforce the fact that sometimes less choice is better. So I don’t know if there’s an example you can give in procurement that kind of relates to that, or if that’s a problem you encountered in your career.
Roy Anderson 13:02
All the time. So one of the things that we would do with technology is try to create the right product mix and put it into catalogs so that people could find the right product easier and individual hosts. If you were going to give them two to three products of the same type, what you’ll find is that people would start ordering all three, then they would start ordering more than they needed times three. And it was always interest that the more choice we gave people, the worse the cost structure became. Because the amount you bought from anyone would go lower. Therefore the price would be higher, because you’re not buying as many of each there would be massive amount of overbuying because each individual would buy a little bit more than they really needed because they didn’t want to run out an example of that. Again, I hate using office supplies. But if you go through an office and you’ll see any storage cabinets, those storage admins would be filled with office supplies from years gone by that was never used and became an overbite. It became an enormous expense. Oh, Ron, can I tell you a quick story about office supplies that I found most interesting is that when we put in our first p2p system, and we were then getting a better understanding what people were buying, we saw office supplies. And I’m going to just pick a number of, say, $100,000 a month. And all of a sudden, we get to August, and the office applied budget went to $200,000 in going into the first of September, and it would drop back down and go back up to $200,000, the first to December. And when we when we dug into the like, why is it going up $100,000 it was because people were starting to buy spiral ring notebooks which weren’t for work, but they could very well be used for school. And then do people were buying an awful lot of masking tape and cellophane tape in and paper, things like that in December. So we started to find that people were using their their corporate funds to be able to buy things that maybe they were taking home versus using the corporate side. So we find it’s very interesting when you actually look into the details of what people buy, and how they buy it. And the more choice they had, the more the more opportunity there was to create problems.
Ron Volpe 15:19
Now, that’s fascinating. That’s fascinating. You know, you talked a few minutes ago about some of the challenges that are opposed through kind of turbulence in the market. And turbulence within companies. Just an observation. One of the things that I recently read was an article they talked about the fact that although companies in general, understand that there are new challenges in supply chains, and his new disruptions, and turbulences supply chains and procurement. The reality is that when they also talk to those same companies at a sea level, about how they were going to fix them,
the first three or four, we’re all kind of old school ways of solving problems. So it more of an observation that question, I just think there’s an opportunity for us to think very differently about how we face the challenges in procurement and supply chain, as you know, overall, in terms of building in resilience to kind of work through and manage through some of these challenge. Oh,
Roy Anderson 16:13
that’s, that’s so true, the old way, and say, the old way. So over the last 10 to 15 years, there was this concept of trying to get a single tool in front of an organization, and then force everyone to use that same tool. And what I heard was, we put in a requisition system, and my facilities group would sit back and say, you know, Roy, this doesn’t really work, we do project plans, and we, and we do roll out of diagrams and designs inside the company in order to do the right footprint for the company in terms of their office space. And then I say, your tool doesn’t help us with that. And then the advertising team would come back as an ROI, we have creativity that we’re dealing with, and work with agencies, and they don’t buy and sell the way you do. Making commercials is different than just a requisition with a product or service on top of it. And the legal team was saying, ROI, we deal with case man matters and case management. And that’s not the same thing as a requisition. So either, even though all of them were buying things they they were trying, we were trying to force them into one solution. And and now the future. And this is where I get so excited about the tradeshift capabilities is the future is being more customer centric, internal customer centric, so that you can have tools that meet the needs of the internal customer. So it makes it easier and faster for them to buy what they need. Because the tool itself is built for them. It’s built for the niche, the facilities worker and the the advertising person, and the legal person and the sales person and the manufacturing person. All those people have different needs. I compare it to went to a class and taught a session. And I looked at the group and I said, you know, show me what’s on your mobile phone. And not only did did these students that were in their late teens, early 20s, they would have totally different applications on their phone in between each, because somewhere, engineers and others were accounting people, they had different applications and certainly different applications. And I had on my phone. And that’s because individuals pick out applications that meet their specific requirements. And therefore, a toolset like tradeshift, which allows people to use applications that are that are unique to them that meet their requirements is going to create a wonderful result of more penetration of the spend more digital activity that allows people then do better analysis and better trending and therefore better solutions for the company, as well as the suppliers as well as the internal customers.
Ron Volpe 18:49
Hey, Roy, what do you think is the most misunderstood part of the procurement function? So for those folks that don’t come out of a procurement organization, what’s the biggest just misunderstanding that that those outside have about your function?
Roy Anderson 19:05
Oh, very straightforward that everyone thinks that all we do is go with the low cost that it doesn’t matter about quality or service levels, or relationships, or, but it’s all about cost structure. Now, interesting if you talk to the CFO, while the procurement people in the room, the CFO says, your ROI, your number one goal is to lower the cost of doing business. So yes, that’s always one of our goals. But it is always the highest priority is do we have the right product from the right supplier at the right quality at the right time with the lowest minimal risk and tell you I’ve been in big companies and little companies, small businesses, where delivery is the most important issue that says ROI, I make a break my, my solution, I make or break my customers based upon delivery by 8am that day. So therefore, delivery was their number one item, it didn’t matter what the cost was, at that time, because they didn’t get delivery, they lost their client, they lose their client, they lose their business, where others when you’re dealing with big companies, quality is the number one issue. So my, when I was at Raytheon, my CEO, at the time basically came in and says, Roy, don’t let a you know, $10 item stop my million dollar an hour production line. So the quality of that product if it broke, if it wasn’t up to speed, and it stopped that million dollar line, you know, did it matter what the price was because quality was absolutely the right right issue. I also worked for a company where their costs had gone above and therefore their profits were in the tank. They they weren’t making any money. And the issue was is they allowed every internal customer and every production line by what they needed based upon what they wanted. So their cost ballooned, literally 40, 50%
increases in their cost structure. And as you know, run most companies are running between, you know, supermarkets at 3% profit margins up to, you know, companies that have 10 or 15 or 20% profit margins. But none of them could live through a 50% explosion in their cost of goods. So therefore, you give people too much flexibility, their costs go through the roof, and they go out of business because of cost. So yes, Cost Matters. But cost is never the first thing on the mind, even though everyone thinks that’s the case.
Ron Volpe 21:23
I know. We’re wrapping up. And we have just a couple more minutes I talked to one question I wanted to close with is what’s the one piece of advice you to give for supply for procurement professionals out there and procurement leaders.
Roy Anderson 21:35
So one is to to very clearly listen to their internal customers and understand what the need is, but also have a communication I think most procurement groups don’t communicate well enough as to why they do what they do. And what are the restrictions and forces that are put upon that group to be able to optimize programs that although it’s almost like I come from a big family, and you know, if everyone had a choice at the dinner table to pick what they want, we’d have eight different meals going on. My mom was pretty straightforward. Whatever she put in front of you, that’s what you ate. So there was a balance between you eat whenever it’s put in front of you, versus everyone having their their own own meal in the procurement world. In the business world, whether a big company a little company choice adds cost and choice that only has cost of the product, but it costs more money for inventory and it costs more money for for shipping and it costs more money for disposal. So you have to listen to your internal customer. But more importantly, you have to be able to communicate with them so they understand why these things are happening and why it’s important to streamline the process and add accuracy and get digital data so that they can deliver better services faster. Well,
Ron Volpe 22:58
I can tell you I’m going to go online as soon as we done with this podcast in order my I heart procurement bumper sticker from my car is I am I am among the converted. So look, this is a great chat and we’ll talk on episode three.
Roy Anderson 23:11
Thank you, Ron. Have a good day. You too.
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