Reading the newspapers these days is a depressing business. The Sunday Times of 8 June reported that South Africans should brace themselves for possibly the toughest time in 10 years, and that experts predict 18 to 24 months of hell for small businesses. The difficult trading conditions will affect big businesses and consumers alike.
Under these circumstances, all managers are under pressure to find ways to cut costs and effect savings. Of all the activities in businesses that are now under scrutiny, there is one traditionally back-office function that could actually make a significant difference - procurement.
The very raison d'etre of the procurement function is changing from being administrative to being strategic. Procurement staff members in most large organisations have traditionally been regarded as buyers, responsible for sourcing suppliers and negotiating the best deal they could for their company.
The buyer often relied on long years of industry or company experience and gut feel rather than any scientific measurement and analysis. In other words, instead of proving that a buying decision makes business sense, the buyer would rather revert to "That's the way I've always done it", and "We've worked with them for years".
Now, however, the procurement manager is expected to deliver meaningful, sustainable savings on purchases and to track and control financial exposure. In effect, he must practise strategic procurement and justify his department's existence.
Where to begin
The very raison d'etre of the procurement function is changing from being administrative to being strategic.
Paul Maddison is MD of Realyst.
The first step in this process is to get a holistic view of where the money goes - to suppliers, contractors or partners - and where savings can be made.
For instance, between 60% and 80% of manufacturers' final product costs come from external suppliers. The Aberdeen Group reports that companies that use automated contract management systems report a reduction in material and service costs of 2% to 7% [1].
This might not seem much. But imagine, for instance, a large manufacturing company with an operating expenditure of R1 billion that may spend as much as R600 million on raw materials for its operations. At a 2% reduction in material costs, the company can save R12 million. Considering that material costs come straight off the bottom line, such savings, consistently achieved, can make a big difference to company performance.
But for strategic procurement to be sustainable, savings in themselves are not enough. If software and systems can give the purchasing professional access to financial information and control, the question is raised: what does he do with the information at his disposal?
He needs to respond to the critical drivers in South African business - cost, service delivery and BEE - and deliver critical management information. The creation and deployment of an automated contract management system forms the basis for obtaining this information.
Many contract management software OEMs and OEDs advise that a contract management solution should incorporate a powerful analytical component, but analyses and reporting per se do not guarantee business benefits. A contract management system, like any management information or ERP system, is only as good as the way in which it is used - the way in which the information that it delivers is applied. Data on any system is wasted if human intelligence is not applied to it and meaningful decisions taken.
Shining example
Absa Bank's chief procurement officer, Ian Russell, is an example of the new type of procurement professional. Leading the field, he is in charge of purchasing for SA's largest banking group, with a department of 600 people and procurement spend of R9 billion to manage.
In April 2007, Absa announced it had awarded IBM a R1.1 billion three-year contract for the supply of technology services, centralising Absa's IT systems with one, carefully selected supplier. One of the benefits of the deal, as outlined by Russell, is that the banking group expects to reduce costs by at least R138 million over the duration of the contract.
Russell said the deal is a clear demonstration of the value that can be unlocked from leveraging the synergies and global buying power of the Barclays Group, of which Absa is part.
If the modern day procurement officer in business or government thinks of himself and his role as that of a strategist rather than a buyer, then this mindset will produce results that will make him indispensable to his organisation and enable it to survive these extremely difficult economic conditions.
[1] Vishal Patel, The Contract Management Benchmark Report: Procurement Contracts, Aberdeen Group.
* Paul Maddison is MD of Realyst.
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