The Strategic Procurement Paradigm

By Scott Walls

This is a quick BLOG to introduce the concept of the Strategic Procurement Paradigm.  The SPP has been around for years.  It was created on the principles of reducing the net Cost Of Goods Purchased (COGP) by electronically integrating buyer/supplier process touch-points.  While the SPP decreased the direct Cost Of Goods Purchased (COGP) through electronic connections and spend negotiation, it had a less impactful effect on the net COGP due to the increases in administrative costs required.

The mid 1990s saw the emergence of spend management software vendors such as Ariba and Commerce One.  Many soon followed and the drive to leverage spend eventually worked its way into the traditional ERP in the form of what is know known as the Supplier Relationship Management(SRM) application suite.  The functionality of the larger suites and their integration with the “back-end” ERP applications (ledgers, projects, AR, assets, inventory, etc.) makes them the product of choice, however the administrative costs required to make this happen mute any real enthusiasm and have prevented this model from reaching its real potential (see The Total Supply Integration Paradigm for potential solutions).

The Strategic Procurement Paradigm has four high level steps:

1. Identify pools of repeatable spend not currently on contract.  This is typically done via BI tools by a business analyst.

2. Competitively auction pools of repeatable spend amongst like suppliers. This function is performed using the Strategic Sourcing application (often in concert with a supplier portal).  This same application can also be used to sell existing assets.

3. Automate buyer/supplier source to settle processes with key, contracted suppliers.  This is most often done via an eprocurement application connecting with some level of external catalogs and leveraging a newer, more simplified requisitioning user interface.

4. Continually drive increasing amounts of spend on contract via this process.  This is part of an overall business strategy to locate spend pools whose contract and integration benefits exceed the costs of integration and catalog maintenance.

SPP Benefits – This model provides a better requisition user interface, lowers the overall COGP, and allows buyers to remove the burden of constant sourcing (source once, place in central location for request/purchase, and move on to sourcing other items).

SPP Disadvantages – This model favors larger companies.  The cost of integrating and managing item catalogs, forms and/or connections adds up; particularly for the smaller company with a lighter IT and administrative support cast.  In addition, the simplified requisition UI does not mean it is simple.  Requesters still struggle with these pages.  MOST IMPORTANT – these applications require the requester to understand the cataloging method (internal item, punch-out, form, etc.) in order to know where to go and how to make the purchase.  These type of complexities limit adoption similar to if Amazon required book-buyers to understand architectural nuances prior to being able to order books.

 

About SRM Plus

SRM+ is a boutique procurement business consulting firm.  We provide procuring organizations with the strategic and tactical consulting services required to dramatically reduce operational expenses, create revenue streams (1 million per every 200 million in spend), and decrease their Cost Of Goods Purchased (COGP).  Whether defining a strategy, creating measurable objectives, designing / deploying solutions, or creating a continual improvement framework, SRM+ wants to turn your cost centers into cash centers.  Visit us at www.srm-plus.com.

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