Procurement is hardly child’s play, considering the numerous interconnected tasks required for efficient and effective execution. Practitioners would enthusiastically argue that the procurement function has matured over the years – from scribbled orders on papyrus to a globally digital operation. It has gradually morphed into a critical corporate function which profoundly impacts an enterprise’s bottom line.
The accompanying graphic, created by Bill Michels, CEO at Aripart Consulting, was presented during the Horizon 2014 Purchasing Conference. Michels, pointing out the changes over several decades said, “Over time, the procurement function has gone from being transaction-driven through a variety of stages until today, when the real focus of the department is around being driven by the business strategies of the organization.”
Hardly child’s play.
Yet, wouldn’t it be interesting – and fun – to be able to explain procurement to a child, perhaps even using a universal business model with which they are likely to be familiar. For our purposes, we will parallel several current supply chain methodologies with the age-old street lemonade stand.
Procurement practices such as strategy development, inventory optimization, and demand forecasting are a few choice examples.
Fairly simple to describe: a plan of action to achieve one’s goals. A business strategy might differ slightly. Wikibooks would have you believe a business strategy to be, “formulating, implementing and evaluating cross-functional decisions that will enable an organization to achieve its long-term objectives.” And profits.
Lemonade Stand Translation: Mom or Dad, please purchase the necessary quantities –at the right price – of lemons, sugar and cups so that after I pay you back for your financial outlay of materials, I may keep what is left over (profits).
Too much inventory leads to lower profits, yet with insufficient inventory customer demands will fall short. According to Wikipedia, “many organizations that utilized inventory optimization reduced inventory levels by up to 25 percent in one year and enjoyed a discounted cash flow above 50 percent in less than two years.”
Lemonade Stand Translation: Dixie cups (or a reliable –let’s not forget quality– competitor) are a must have to sell lemonade. Help Mom or Dad understand that unit pricing might be best at buying 100 while understanding that damage may occur with storage. Sourcing the cups from a discount supermarket rather than the local gourmet shop might enhance the bottom line. Purchasing a small amount of cups, initially, will lead to less waste. But, good inventory management starts with good …
The term demand forecasting is fairly self-explanatory; what do you predict the estimated sales will be for your product. Most companies use historical data as input for their determination.
Lemonade Stand Translation: What does the weather look like? If this isn’t the first lemonade stand of our young proprietors they have probably learned that July is hotter than September; a great help in determining when and how many ingredients to purchase. Of course, allowing sufficient purchasing lead time with mom or dad is necessary to meet the demand of customers.
What about the competition down the street? Perhaps some benchmarking is on order. Where did they ever get those cute cups?
The list is endless.
The message here isn’t that Procurement is easy. It might be easy to explain, but its innate complexities render it an important function of the corporation. And if procurement isn’t your core competency, consider outsourcing it.
We are here to help.