Description
Procurement is the acquisition of goods, services or works from an external source. It is favourable that the goods, services or works are appropriate and that they are procured at the best possible cost to meet the needs of the purchaser in terms of quality and quantity, time, and location.
PROCUREMENT STRATEGY PORTFOLIO MATRIX
S.N.PANIGRAHI [email protected]
rocurement is a key back end activity in supporting and delivering goods and services for the organi z ation and its customers. Procurement processes may encompass best practice, probity, efficiency, effectiveness and economy whilst contributing to the organization’s vision, mission and Strategic Goals and Objectives. The vision and the core values act as the focus for all activities in an organization, including the procurement strategy, and its key policies have therefore are been aligned with them and with other corporate strategies. Business strategy is a road map guiding how the business plans to be successful. The purpose of Procurement Strategy is to state and practice the organization’s intentions and standards in achieving procurement objectives in line with the organization’s vision and goals in general and in particular corporate procurement vision. Broadly the Procurement Objectives are: To ensure timely delivery of cost effective quality products and services to meet the organization’s requirement and achieve value for money (“The optimum combination of whole life costs and quality”. This does not mean the cheapest!) through effectiveness, efficiency and economy in the delivery of goods and services by following good procurement practices. To ensure procurement supports the organization’s vision, mission and goals on sustainable basis. To enhance corporate competitiveness in terms of cost, quality and services by building supply capability to minimize supply risks, and maintain supply continuity. To ensure compliance of procurement with all statutory and regulatory requirements and organization’s policy / procedures. To develop sustainable relationships with suppliers and other relevant stakeholders. To promote local sustainability, supplier diversity and equalities, social inclusion, economic regeneration, community benefits etc. to uphold organizations values and reputation. To promote protection of the environment through environmentally sensitive procurement.
14 August 2013
P
These objectives may be achieved through a series of supporting “Action Themes”, including: • Putting in place a clear procurement policy and framework in order to ensure a consistent procurement approaches and practices; Promoting procurement excellence and efficiency by building capacity through imparting proper training and skill development Incorporating best procurement strategies and tactics in line with market realm and situational context; Effective supplier and contract management.
•
•
•
Procurement Strategy sets out how it will meet these challenges by setting a position statement and action plan for each theme. Let us discuss here approach to develop “Procurement Strategy”. PROCUREMENT TYPES : The foremost important step to formulate a procurement strategy is categorization. The word procurement refers to acquisition of not only goods but also services. Based on the consumption pattern of the acquired goods and services, procurement activities are classified into two distinct categories: 1. 2. Direct : production related procurement and Indirect : non-production-related procurement
Direct procurement relates to procurements of items those are directly consumed in the production of the goods. Direct procurement involves materials purchased for use in the manufacturing or distribution supply chain that are “directly” related to the production of finished goods. It encompasses all items that are part of finished products, such as raw material, components and parts. Direct procurement, which is often a part of supply chain management, directly affects the production process of manufacturing firms. In contrast, indirect procurement items are that does not result directly in finished goods – mostly concern “operating resources” that a company purchases to enable its operations. It comprises a wide variety of goods and services, from standardized low value items like office supplies, stationary, replacement parts, fuel & lubricants and various services like travel, courier, labor contracts to complex and costly products and services like heavy equipment and consulting services. Materials Management Review
Indirect (non-production goods) procurement may be further sub-divided broadly into MRO (Maintenance, Repair and Operation) and ORM (Operating Resource Management) items and Capital Goods & Services. MRO items include those purchases necessary to keep production running and prevent break downs /shut downs of production lines such as replacement parts and maintenance / services of machines. MRO orders are often single-sourced, from OEMs and purchased in limited quantities, are often listed as inventory, tied into the company’s inventory system ORM products and services used to facilitate daily business routines - the day-to-day necessities of the workplace, such as office supplies, stationary, furniture’s, computers and printers and services like travel, courier etc. which are mostly of high volume – low value items. Major workload of a typical purchasing department dedicated to these low-value, repetitive orders. The average level of productivity for this area is appalling, and it is one of the most labor-
intensive areas of modern business Procurement of MRO items is more complex than ORM products because of limited supply base, varying volumes, the need for regular scheduled procurement and critical nature of the purpose. MRO items are usually requires high levels of quality control and assurances from trust worthy suppliers with technical support and closed coordination, so that replacement parts are delivered quickly confining to high quality norms. Procurement of direct materials accounts for far fewer purchasing transactions (in numbers between 20% and 40% in manufacturing companies), but can account for up to 60% of a manufacturing firm’s total procurement expenditure. Direct procurement may be even more critical than MRO purchases because of procurement of huge volumes from limited sources through limited transactions having high values. In addition these materials may be specialized and made to order type, therefore creating even more complex.
PROCUREMENT TYPES
DIRECT PROCUREMENT RAW MATERIAL & PROD. GOODS
QUANTITY FREQUENCY LARGE HIGH IND. SPECIFIC COMPLEX / OPERATIONAL HIGH HIGH LOW HIGH
IN-DIRECT PROCUREMENT MRO / ORM ITEMS
LOW HIGH LOW VARIED / OPERATIONAL MODERATE MODERATE HIGH LOW / MODERATE SPARE PARTS; FUEL & GASES; LUBRICANTS; OFFICE SUPPLIES
CAPITAL GOODS & SERVICES
LOW LOW HIGH STRATEGIC MODERATE / HIGH MODERATE / HIGH LOW MODERATE / HIGH MACHINERY & EQUIPMENTS; COMPUTERS; CONTRACTS/ SERVICES
FEATURES
VALUE NATURE SUPPLY RISK IMPACT ON PROFIT/LOSS SUPPLY BASE (No.) BUYER LEVERAGE
EXAMPLES
RAW MATERIALS; CONSUMABLES
Indirect procurement has been a low priority compared to direct procurement, receiving lower access to investment and specialist personnel. There is now an increasing recognition of the level of savings that can be achieved from strengthening indirect procurement, and some organizations are looking to outsource indirect procurement services to improve the management of these important processes Materials Management Review
PROCUREMENT STRATEGY : PORTFOLIO MATRIX : A different risk / strategic importance based approaches needs to be developed for the various types of procurement activity. A standard “portfolio matrix” analysis divides procurement into 4 categories on a risk (strategic importance) and value matrix as follows.This strategy recognizes that different procurement types require different approaches and identifies how this can be achieved. Let us discuss here
August 2013 15
these Procurement Strategies. 1. HIGH VALUE / HIGH RISK : High-value/high-risk requirements are strategically important. Products like high value raw materials, large capital project goods, high value contracts / services etc. falls in this category. These items are highly critical in nature, high impact on business, have limited vendors, and a few transactions to enter. This category of items require following strategic approaches : · · A sound business case; Establishment of effective partnerships / collaborations;
· · ·
Sound planning and resourcing; Long term contracts; Project and risk management skills Leverage of volume &logistic advantage
2. LOW VALUE / HIGH RISK (BOTTLE NECK) : These are low value items but goods or services could be critical to the running of the organization. Low value raw materials, consumables, critical or OEM spares etc. covers in this category. Strategies might includemultiple suppliers and back upcontractors so as to ensure continued supply. Maintaining required stock levels of insurance items, long term tie ups are essential.
PROCUREMENT STRATEGY : PORTFOLIO MATRIX
HIGH
BOTTLENECK
LOW VALUE-HIGH IMPACT RAW MATERIALS / CONSUMABLES CONTINUED SUPPLY MULTI-SOURCING
STRATEGIC
HIGH VALUE-HIGH IMPACT HIGH VALUE RAW MATERIALS; LARGE CAPITAL PROJECTS / CONTRACTS / SERVICES. STRATEGIC DECISION COLLABORATIVE APPROACH
RISK
LOW
VALUE
ROUTINE
LOW VALUE-LOW IMPACT DAY TO DAY SMALL ITEMS READYLY – EASYLY AVAILABLE THRUST ON COST REDUCTION REDUCE No. OF SUPPLIERS CUT TRANSACTION COSTS AGGREGATE CONTRACT VALUE E-PROCUREMENT
VALUE
LEVERAGE
HIGH VALUE-LOW IMPACT THRUST ON COST REDUCTION INCREASE PURCHASE POWER ECONOMIES OF SCALE GLOBAL SOURCING E-PROCUREMENT
HIGH
LOW
3. LOW VALUE / LOW RISK (ROUTINE) : Low value / Low risk requirements (like day to day small items (ORM) and non-critical, low value MRO items: readily & easily available) can best be addressed by maximizing purchasing power to deliver better value for money. In most of the organizations, the ORM items are bought by ”maverick buying” approach — tendency for individuals, or often entire departments, to buy “offcontract” without taking advantage of negotiated company discounts. The major thrust on this category of procurement is on cost reduction and to bring in disciplined contractual buying. This can be achieved through development of framework agreements; consolidation / aggregation of procurement; centralized procurement and adopting e-procurement. The transaction costs account for a significant part of the overall cost in the acquisition of low value items. The introduction of e-procurement / outsourcing may free resources for front line services. 4. HIGH VALUE / LOW RISK (LEVERAGE) : Items that have a high value and low risk are high value MRO items,
16 August 2013
RISK
fuels and lubricants etc. There is major cost reduction opportunity available through economies of scale that can be bought in large quantities (consolidation) at discounted prices and increase purchase power (Buyer leverage), global sourcing and e-procurement etc. Buyer leverage, in business is the amount of bargaining power that buyers have when purchasing goods and services. The amount of buyer leverage relative to the bargaining power and leverage of the seller depends on the information that seller and buyer have about the product, the relative scarcity or abundance of the product, the availability of product substitutes, and many other factors. The relative leverage of buyers and sellers determines the price and terms of transactions and the nature of business relationships Most of the goods and services organizations buy fit into one of the four categories in the risk-valueportfolio matrix and the respective strategies may be adopted which ensures value formoney for the organization.
Materials Management Review
doc_339416005.pdf
Procurement is the acquisition of goods, services or works from an external source. It is favourable that the goods, services or works are appropriate and that they are procured at the best possible cost to meet the needs of the purchaser in terms of quality and quantity, time, and location.
PROCUREMENT STRATEGY PORTFOLIO MATRIX
S.N.PANIGRAHI [email protected]
rocurement is a key back end activity in supporting and delivering goods and services for the organi z ation and its customers. Procurement processes may encompass best practice, probity, efficiency, effectiveness and economy whilst contributing to the organization’s vision, mission and Strategic Goals and Objectives. The vision and the core values act as the focus for all activities in an organization, including the procurement strategy, and its key policies have therefore are been aligned with them and with other corporate strategies. Business strategy is a road map guiding how the business plans to be successful. The purpose of Procurement Strategy is to state and practice the organization’s intentions and standards in achieving procurement objectives in line with the organization’s vision and goals in general and in particular corporate procurement vision. Broadly the Procurement Objectives are: To ensure timely delivery of cost effective quality products and services to meet the organization’s requirement and achieve value for money (“The optimum combination of whole life costs and quality”. This does not mean the cheapest!) through effectiveness, efficiency and economy in the delivery of goods and services by following good procurement practices. To ensure procurement supports the organization’s vision, mission and goals on sustainable basis. To enhance corporate competitiveness in terms of cost, quality and services by building supply capability to minimize supply risks, and maintain supply continuity. To ensure compliance of procurement with all statutory and regulatory requirements and organization’s policy / procedures. To develop sustainable relationships with suppliers and other relevant stakeholders. To promote local sustainability, supplier diversity and equalities, social inclusion, economic regeneration, community benefits etc. to uphold organizations values and reputation. To promote protection of the environment through environmentally sensitive procurement.
14 August 2013
P
These objectives may be achieved through a series of supporting “Action Themes”, including: • Putting in place a clear procurement policy and framework in order to ensure a consistent procurement approaches and practices; Promoting procurement excellence and efficiency by building capacity through imparting proper training and skill development Incorporating best procurement strategies and tactics in line with market realm and situational context; Effective supplier and contract management.
•
•
•
Procurement Strategy sets out how it will meet these challenges by setting a position statement and action plan for each theme. Let us discuss here approach to develop “Procurement Strategy”. PROCUREMENT TYPES : The foremost important step to formulate a procurement strategy is categorization. The word procurement refers to acquisition of not only goods but also services. Based on the consumption pattern of the acquired goods and services, procurement activities are classified into two distinct categories: 1. 2. Direct : production related procurement and Indirect : non-production-related procurement
Direct procurement relates to procurements of items those are directly consumed in the production of the goods. Direct procurement involves materials purchased for use in the manufacturing or distribution supply chain that are “directly” related to the production of finished goods. It encompasses all items that are part of finished products, such as raw material, components and parts. Direct procurement, which is often a part of supply chain management, directly affects the production process of manufacturing firms. In contrast, indirect procurement items are that does not result directly in finished goods – mostly concern “operating resources” that a company purchases to enable its operations. It comprises a wide variety of goods and services, from standardized low value items like office supplies, stationary, replacement parts, fuel & lubricants and various services like travel, courier, labor contracts to complex and costly products and services like heavy equipment and consulting services. Materials Management Review
Indirect (non-production goods) procurement may be further sub-divided broadly into MRO (Maintenance, Repair and Operation) and ORM (Operating Resource Management) items and Capital Goods & Services. MRO items include those purchases necessary to keep production running and prevent break downs /shut downs of production lines such as replacement parts and maintenance / services of machines. MRO orders are often single-sourced, from OEMs and purchased in limited quantities, are often listed as inventory, tied into the company’s inventory system ORM products and services used to facilitate daily business routines - the day-to-day necessities of the workplace, such as office supplies, stationary, furniture’s, computers and printers and services like travel, courier etc. which are mostly of high volume – low value items. Major workload of a typical purchasing department dedicated to these low-value, repetitive orders. The average level of productivity for this area is appalling, and it is one of the most labor-
intensive areas of modern business Procurement of MRO items is more complex than ORM products because of limited supply base, varying volumes, the need for regular scheduled procurement and critical nature of the purpose. MRO items are usually requires high levels of quality control and assurances from trust worthy suppliers with technical support and closed coordination, so that replacement parts are delivered quickly confining to high quality norms. Procurement of direct materials accounts for far fewer purchasing transactions (in numbers between 20% and 40% in manufacturing companies), but can account for up to 60% of a manufacturing firm’s total procurement expenditure. Direct procurement may be even more critical than MRO purchases because of procurement of huge volumes from limited sources through limited transactions having high values. In addition these materials may be specialized and made to order type, therefore creating even more complex.
PROCUREMENT TYPES
DIRECT PROCUREMENT RAW MATERIAL & PROD. GOODS
QUANTITY FREQUENCY LARGE HIGH IND. SPECIFIC COMPLEX / OPERATIONAL HIGH HIGH LOW HIGH
IN-DIRECT PROCUREMENT MRO / ORM ITEMS
LOW HIGH LOW VARIED / OPERATIONAL MODERATE MODERATE HIGH LOW / MODERATE SPARE PARTS; FUEL & GASES; LUBRICANTS; OFFICE SUPPLIES
CAPITAL GOODS & SERVICES
LOW LOW HIGH STRATEGIC MODERATE / HIGH MODERATE / HIGH LOW MODERATE / HIGH MACHINERY & EQUIPMENTS; COMPUTERS; CONTRACTS/ SERVICES
FEATURES
VALUE NATURE SUPPLY RISK IMPACT ON PROFIT/LOSS SUPPLY BASE (No.) BUYER LEVERAGE
EXAMPLES
RAW MATERIALS; CONSUMABLES
Indirect procurement has been a low priority compared to direct procurement, receiving lower access to investment and specialist personnel. There is now an increasing recognition of the level of savings that can be achieved from strengthening indirect procurement, and some organizations are looking to outsource indirect procurement services to improve the management of these important processes Materials Management Review
PROCUREMENT STRATEGY : PORTFOLIO MATRIX : A different risk / strategic importance based approaches needs to be developed for the various types of procurement activity. A standard “portfolio matrix” analysis divides procurement into 4 categories on a risk (strategic importance) and value matrix as follows.This strategy recognizes that different procurement types require different approaches and identifies how this can be achieved. Let us discuss here
August 2013 15
these Procurement Strategies. 1. HIGH VALUE / HIGH RISK : High-value/high-risk requirements are strategically important. Products like high value raw materials, large capital project goods, high value contracts / services etc. falls in this category. These items are highly critical in nature, high impact on business, have limited vendors, and a few transactions to enter. This category of items require following strategic approaches : · · A sound business case; Establishment of effective partnerships / collaborations;
· · ·
Sound planning and resourcing; Long term contracts; Project and risk management skills Leverage of volume &logistic advantage
2. LOW VALUE / HIGH RISK (BOTTLE NECK) : These are low value items but goods or services could be critical to the running of the organization. Low value raw materials, consumables, critical or OEM spares etc. covers in this category. Strategies might includemultiple suppliers and back upcontractors so as to ensure continued supply. Maintaining required stock levels of insurance items, long term tie ups are essential.
PROCUREMENT STRATEGY : PORTFOLIO MATRIX
HIGH
BOTTLENECK
LOW VALUE-HIGH IMPACT RAW MATERIALS / CONSUMABLES CONTINUED SUPPLY MULTI-SOURCING
STRATEGIC
HIGH VALUE-HIGH IMPACT HIGH VALUE RAW MATERIALS; LARGE CAPITAL PROJECTS / CONTRACTS / SERVICES. STRATEGIC DECISION COLLABORATIVE APPROACH
RISK
LOW
VALUE
ROUTINE
LOW VALUE-LOW IMPACT DAY TO DAY SMALL ITEMS READYLY – EASYLY AVAILABLE THRUST ON COST REDUCTION REDUCE No. OF SUPPLIERS CUT TRANSACTION COSTS AGGREGATE CONTRACT VALUE E-PROCUREMENT
VALUE
LEVERAGE
HIGH VALUE-LOW IMPACT THRUST ON COST REDUCTION INCREASE PURCHASE POWER ECONOMIES OF SCALE GLOBAL SOURCING E-PROCUREMENT
HIGH
LOW
3. LOW VALUE / LOW RISK (ROUTINE) : Low value / Low risk requirements (like day to day small items (ORM) and non-critical, low value MRO items: readily & easily available) can best be addressed by maximizing purchasing power to deliver better value for money. In most of the organizations, the ORM items are bought by ”maverick buying” approach — tendency for individuals, or often entire departments, to buy “offcontract” without taking advantage of negotiated company discounts. The major thrust on this category of procurement is on cost reduction and to bring in disciplined contractual buying. This can be achieved through development of framework agreements; consolidation / aggregation of procurement; centralized procurement and adopting e-procurement. The transaction costs account for a significant part of the overall cost in the acquisition of low value items. The introduction of e-procurement / outsourcing may free resources for front line services. 4. HIGH VALUE / LOW RISK (LEVERAGE) : Items that have a high value and low risk are high value MRO items,
16 August 2013
RISK
fuels and lubricants etc. There is major cost reduction opportunity available through economies of scale that can be bought in large quantities (consolidation) at discounted prices and increase purchase power (Buyer leverage), global sourcing and e-procurement etc. Buyer leverage, in business is the amount of bargaining power that buyers have when purchasing goods and services. The amount of buyer leverage relative to the bargaining power and leverage of the seller depends on the information that seller and buyer have about the product, the relative scarcity or abundance of the product, the availability of product substitutes, and many other factors. The relative leverage of buyers and sellers determines the price and terms of transactions and the nature of business relationships Most of the goods and services organizations buy fit into one of the four categories in the risk-valueportfolio matrix and the respective strategies may be adopted which ensures value formoney for the organization.
Materials Management Review
doc_339416005.pdf