KPMG Consulting: Changing the way Absa procures

KPMG Consulting has concluded the first phase of a procurement transformation initiative at Absa that produced savings of R47.2 million against third-party spend for the 2001/2002 financial year. A further R27.1 million rollover from existing implemented ideas will be saved in the new financial year, resulting in a total bottom line contribution of R74.3 million by the end of the financial year.

These savings represent quick wins and help to set the scene for the development and transformation of the procurement function at Absa. This involves changing the way an organisation views and manages procurement to ensure that demand is managed effectively, sourcing is optimised and supply processes are efficient. The objective is to ensure that the organisation understands the elements of its buying from third-parties and how to effectively manage the total cost of ownership of its commodities.

The project was initiated in September 2001 after KPMG developed a business case highlighting significant opportunities for savings. Short-term efforts were focused on identifying immediate savings on goods and services purchased from external parties in order to ensure that the longer-term transformation process is self-funding.

In addition to achieving immediate savings, the first phase of the project has contributed to longer-term benefits for Absa, such as better understanding of external spending, a stronger focus on supplier management and a greater degree of accuracy in forecasting savings opportunities.

"The true cost savings in the procurement function will not necessarily come from negotiating with suppliers for better prices, but rather from managing the demand points and through effective supplier sourcing and development," says Grant Brewer, General Manager: Group Procurement and Logistics at Absa.

"To achieve significant cost reduction a company needs to eliminate wastage in the cycle of demand, sourcing and supply in such a way that the results are measurable and all decisions take into account the principle of total cost of ownership."

The next phase of the project will focus on the implementation of policies and procedures, as well as the launch of the new procurement organisation structure. An important aspect of this process will be to manage the adoption of new procurement practices, as well as the entrenchment of new behaviours in the way Absa procures and utilises its goods and services.

Absa Procurement will also start developing commodity strategies, sourcing through cross functional teams, streamlining the selection of suppliers and vendors, negotiating effective contracts, and buying within these contracts to leverage off Absa`s collective buying power.

"Market perception is dominated by the belief that technology will often fix business problems but, while it can substantially aid the process, it needs to be reinforced by a strong business strategy," says Keith Fairhurst, Partner for eBusiness at KPMG Consulting. "Therefore, the emphasis of procurement transformation is on strategic sourcing, and the structures and processes that support this. The enabling technology can only be selected and implemented once the business issues have been highlighted."