Do we have enough resources to make change happen?

In a large organisation it is fairly safe to say that the more resources allocated to a particular issue or project then the more likely it is that you will make progress on that issue. But this can also create problems. If one issue is prioritised over everything else then it is likely that all the other issues will suffer through a lack of focus and resources. The traditional answer in such cases is that you should hire outside resources to supplement your current resource pool so that all the major issues can be dealt with in an adequate fashion. But even then bottlenecks are created. In many cases there will be a few key individuals that all the projects need to reference so that they understand the background to the issues at hand and use the experience of those key individuals to come to the right conclusions more quickly.

The danger in such cases is that the urgency to complete the programme overtakes all other requirements and increases the likelihood that you get outcomes that are “fit for purpose” rather than the optimal solution for that business. If you have used external consultants it becomes more likely that there will be very little knowledge transfer during the life of the programme. Once the external consultants have done their job they leave and the experience goes with them. This is most common with technology implementations. At one client they had brought in external expertise to implement a state of the art credit and collections system. While the technical implementation went extremely well the financial results post implementation were a disappointment. On further investigation it was found that much of the functionality that was available was not being used since the key individuals who were also key users had been inadequately trained and had not been part of the implementation process. At another client the external consultants did a flawless technical job of implementing supplier catalogues. Two years after the implementation was completed not a single supplier catalogue had gone live due to the lack of properly qualified and experienced procurement professionals within the client who could have set up the commercial side of the process.

This has become a particular problem with regard to low cost country outsourcing. Although the goals of the outsourcing programme may have been achieved, i.e. reduce back office cost, a lot of experienced personnel are lost from the parent organisation as a result of the process. The theory is supposed to be that the outsourcer’s people will work in close partnership with the client organisation to the point where this deep experience is properly replaced. In practice staff turnover rates in these outsourcing companies is very high. One reason for this is that many people employed to do process operator roles are grossly under-employed. For example, it is very common that people who work in shared service centres and outsourcer operations in Central and Eastern Europe will speak multiple European languages and probably have a master’s degree. But many of these people will start jobs, such as invoice clerks, doing extremely basic administration roles. So the work is not fulfilling to people who are more than intellectually capable. Secondly, many of these shared service centres are based in purpose built office parks that are often completely populated by other shared service centres doing almost exactly the same functions. So anyone with any experience at all will try to get a job for better money and they only have to move across the street. In some parts of India they reckon that wage inflation is in excess of 20% in these types of office parks since it is so easy for people to change job. Thirdly, these jobs offer a very limited career path. While it may be very possible to advance yourself within the shared service structure, it is usually not possible to transfer to other functions in the parent/client organisation that could provide a path of advancement to these well qualified people. So the only way of having a career is to leave for another company. There are of course the exceptions but there are not many. This means that the resource capability of the organisation is reduced in the long term and means it is more likely that other external resources will be required to successfully complete future change programmes accentuating the risk that future knowledge transfer will fail.

In smaller organisations the problem of resource capability is almost always compounded by the bottlenecks created by having only a small number of sufficiently capable personnel and by the lack of financial resource available to employ expensive third party consultants. It can also be a major cause of organisational growing pains: being big enough that systems and processes need to become more advanced in order to keep a growing business under control, but at the same time being too small to avoid those personnel bottlenecks and afford external assistance. This is why there are very few organisations in the modern world who have survived all the way from being a small start-up to being a corporate giant. Many decide that it is easier to cash in their chips and pool in with a larger operator who has already overcome these restraints. But there are those who succeed in passing that barrier and they tend to be extremely innovative companies not just because of the products they make or the services they deliver, but also in the way their business operates. Obvious examples in the digital world are Apple, Google, Facebook and Twitter. But there examples in the non-digital world too like Dyson and South West Airlines of companies built around a business operating model or invention that succeeds at every stage of corporate growth.

So it is better to ask if you have the optimal number of resources for your programme rather than enough. Too many is just as bad as too little. And it is always important to ensure that the right resources will be in place after the programme is complete so that the benefits of change can be sustained and even bettered in future years.

Do we have the right technical skills to make change happen?

So far we have focused on some of the softer skills required to create effective change, but there is no point in embarking on a serious change programme unless the technical capability exists to get tasks completed to a sufficient level of competency.

The best example in everyday life is buying a house. First you will talk to a realtor or estate agent to show you a selection of properties that might be of interest. When you find the right property you will need a lawyer to manage the paperwork and a financial advisor to get you the best mortgage deal. You will then need to get the house insured. If you then embark on some remodelling you will need an architect and a competent builder with the right variation of skills that can make everything happen. It would be a very rare thing indeed for one individual to do all these things themselves since most of us would not be competent. We need the right specialists or else our project could turn into an expensive money pit.

And it’s similar in the business world. A very good example would be the implementation of a new ERP system. It would be pretty obvious that you would need a group of technical specialists that are familiar with that ERP system and how it can be configured to suit the business. Many have also learned to their cost that a team of internal business specialists will also be required to help the external ERP specialists to understand the business properly so that the right configuration options are chosen. Will that mean that there will be major changes to operational processes such as how we input a sales order from a customer? Then we may need to hire specialist trainers and people with softer change management skills to ensure that operators understand the change that is coming down the road and are not anxious about the fact that things will be done differently. Are we going to be letting people go as a result of the changes that get implemented? We may need some human resource specialists who understand how employees need to be legally consulted about the forthcoming changes and what steps must be taken before making people redundant. And then all these people will need to be co-ordinated to ensure they are all doing the rights things in the right sequence at the right time. That’s an awful lot to get right.

This is why many companies will employ an external systems integrator who will have most of these skills under one umbrella. And some do, but unfortunately many don’t. For example many system integrators are very technically focused and are not well equipped in the softer skills of communication and training. The Big Four will have a distinct advantage in this area as long as you understand that you will get some experts and lots of academy members who are still learning their trade. And if you go for the umbrella solution you will pay the highest price for implementation. But you do mitigate the risk of not getting all the skills at the right level across the programme.

A vital question can be whether you recognise a real expert or not. Most of us have to rely on the quality of résumés and our own instinct for recognising the good people from the bad. If we go back to the house example, we employ lawyers, surveyors and architects since they all have important jobs to do and we trust their expertise since they have proven qualifications to do the job. But often that is not the case in change programmes. While there may be many programmes of certification they are no guarantee of success. For example, someone having a Prince2 qualification does not make them a good project manager. It only tells you that they have a qualification that they paid for and they should be able to remember the elements of technical project management.

It is an unfortunate fact that most companies only find out afterwards how expert the experts really were. Several years ago when working at a major aerospace client we asked what the standard payment term was for their suppliers. The answer was 60 days after the month of purchase. So you should get an average 75 days of credit on these invoices. But we were puzzled that the due dates on these invoices were all 60 days after the date of purchase while the actual payment dates were slightly short of the 75 days average. After some investigation we found that when implementing SAP that their system integrator had told them that automatic configuration of such a term was impossible. The client had no reason to believe that this was not true and so had implemented a series of workarounds that meant rather than running a single payment run every week they ran fourteen separate payment runs with each tweaking invoice receipt date parameters to approximate the correct payment term. It was a very clever workaround but was completely unnecessary. Anyone who knows SAP will tell you that you simply need to flag one check-box in one table to make all this possible. But it does display the danger of trusting someone to be an expert in their subject when they clearly were not. What is worse in this case the system integrator encouraged the client to fit into a suboptimal process to cover their own technical incompetence on this point.

That might seem like a very narrow point but the quality of implementation will be heavily dependent on the level of expertise of the implementer. This is where external quality audits or expert user groups can be very beneficial so that clients can cross reference their experiences in order to get a better implementation result. But many continue not to make such checks and live with the consequences for a very long time.

How are we motivated for change?

Whenever any change programme is initiated there are always those people who are enthusiastic early adopters of change. These are the same people that go out and buy the latest gadget, even though the reviews say that it will be full of bugs and that you would be much wiser to wait for the second release. Equally there are those people who will always be against any kind of change, even when the benefits of such change are completely obvious. But in reality the vast majority of people don’t really care about change as long as they are not adversely affected and that they have backed the winner.

Most people’s lives are not based around their careers, but are based around their families and their relative well being. So the fact that you want to restructure the company, create a shared service, outsource, implement a new system or change the way the company’s procedures operate is of no interest as long as two things are not threatened – their level of income and their security of employment. Most people work to live, i.e. to ensure that they and their families live in a state of relative comfort. They do not want to be the CEO of the company; they don’t have a career plan and equally they don’t want to become famous for leading the revolution against management. But they do not want to be seen to have backed a lost argument. So it should be fully expected that when the new programme is announced that most people will not respond in any demonstrable way. They will wait to see how things progress and will only become a follower when they see success being delivered.

Many companies will try to incentivise people with financial bonuses based on achieving set milestones. There is no doubt that this will have a short term positive effect on results, but study after study ever since Maslow has shown that money on its own is not an effective or sustainable long term motivator. It is very tempting to offer someone a pay rise to stop them from leaving the organisation, but the truth is that once someone has decided to resign their heart is no longer in the project or the mission. Emotionally they have moved on so even if they accept the pay rise you have only postponed the evil day.

And the more an individual is paid the more true this becomes. Most people can remember a time when they got their monthly pay cheque and then had to ration out payments, prioritising those companies that would take the roof off your head versus those who would not. If you are in this situation and your boss offers you a 10% pay rise then it’s probably going to be very significant to you. On the other hand if you have passed the point where you have to worry about paying the bills every month that same 10% pay rise is less likely to make a significant impact on your lifestyle. This increases the likelihood that more of your judgements will be influenced by non-monetary factors like how much you enjoy your job or how your job enables you to live the lifestyle that you want or whether you consider your job to be the pinnacle of your career or a mere stepping stone to that goal. Bosses often get this wrong and end up overpaying people to do jobs that they eventually leave anyway. This is not to discount money as a motivator, but it is unlikely to be completely effective unless there are other levers at play.

If you speak to most people who have been involved in a successful change programme they will acknowledge that there may have been long hours involved, lots of tense discussions and even a few arguments but they usually enjoyed the whole process and got a massive kick out of succeeding. There are even some people who don’t want to go back to the normal routine after the project is complete and want more of the change drug. There are now many people out there who have made a profession out of leading these types of change programmes without having any desire to do line roles or to end up as the boss of an entire company.

There will always be those who are ambitious for promotion and titles. Money is not their primary motivator. They will see a change programme as an opportunity to shine in front of others. Just like the majority of people mentioned earlier, they may not care about the goals of the programme but they fully understand how their star could rise as a result of the programme being successful and them being associated with that success.

And lastly there are those out there who simply want to do the right thing. This is usually a very small minority who will continue to do what they believe is best without any reward at all. These are the type of people who are often fantastic in either public service or charitable situations. They don’t care about reward or glamour. As a result, in the general business world, these people can be passed over for promotions and pay rises since employers don’t feel under pressure to keep these people. They are just taken for granted. This is a great shame since these individuals are most likely to be recognised as role models. So mistreating role models does not do much to encourage others to emulate their behaviour.

Since there are many different types of people in the organisation with many different personal drivers it would not be correct to assume that one framework of motivation will drive all individuals toward the organisational goal. It is incumbent on managers to recognise the way individuals can be motivated and to extract the best performance from all the team. Incentivisation is not always about money and does not always have a linear relationship with the scale of achievement. In one environment operators were given low value shopping vouchers for achieving financial targets. That scheme was very successful since it tapped in to people’s pride in winning something. There are other cases of very well paid people feeling very de-motivated because they lack a sense of achievement or purpose. So one size does not fit all and there is no magical formula for managers to understand who fits in the correct box. But the more experienced and emotionally aware managers will be much better at identifying the various traits and playing to the correct strengths.

Do we have the right skills for change?

Many programmes fail because the team lack the softer skills required to enable change to happen effectively. The key change management skills required are a clear understanding of organisational readiness, making sure that general communications are tailored to answer the specific concerns of the organisation, effective and frequent communication to smaller groups and clearly demonstrating that as events unfold that lessons are being learned and that the new environment will be better.
Trying to implement change without any of these factors being in play is disturbingly common and usually shows that the skills of the change team are overly focused on technical success or that the leadership of the change team lack these necessary skills. At a UK based IT distribution firm that had just taken over and Italian IT projects firm this is exactly what happened. The team had previously implemented SAP and rolled it out successfully to four other European affiliates. So when the acquisition came along they were very confident that they would take their ERP template and impose it on the acquired businesses and all would be well. The slogan of the company had been “speed over accuracy”, i.e. make change happen quickly and if it’s not perfect then we can go back later and fix it later. This philosophy had built up based on the fear that if change did not happen quickly, the solution being implemented might be obsolete by the time it was up and running. The acquired business was much larger, more complex and had a very different culture to the acquiring firm. But none of these vital differences were understood before a very quick ERP go live in the first pilot. Needless to say the pilot was a complete disaster. The operations of the acquired business stopped for over 3 weeks. It was impossible to process a purchase order, deal with purchase invoices correctly or to issue customer invoices. The change team had not listened to any of the concerns since they believed that they had a proven process template and they had been arrogant enough to think that because they were the acquirer their business model was always superior to that of the acquired.
On the technical side, they had seen any input that might have improved the process template as resistance to be ignored. In the acquired business, products would be purchased that would be specific to a client project. So to process a supplier invoice effectively there needed to be a project code. Project team members would need to allocate their time to each customer project, so a time allocation process was required. To produce a customer bill it was necessary to allocate the right costs and time allocations to customer projects and have an effective process for customers to sign off the relevant work done and costs incurred.
On the softer side, the team had misunderstood silence for compliance. They had just taken over a much larger organisation where many people were worried about job security. There was no communication strategy to tell people what the change might look like. There was no opportunity for most people to provide feedback on the proposed process changes and there was very little training given since the change team believed that using the new system was very intuitive – which it wasn’t. When the system was shown not to work in the new environment a series of clunky spreadsheet driven workarounds were devised to get the business back to basic operations.
Senior management were horrified by what had happened and they did understand that a radically different approach was required. As a first priority the first pilot would need to be fixed. It took several more months for a revamped technical team to fix the first pilot to a point where these workarounds were no longer required. Secondly, there would have to be a much more structured approach to how the new process template was developed, communicated, signed-off by the local affiliates and effectively tested by end users. Processes were written down in a format that all end users could easily understand. Service level agreements were drafted at a process operator level so that individuals understood what was expected of them and what they should expect of their colleagues. Training formats were devised where end users would learn about the physical process and the ERP tasks all in the same session. All this was tested with the first and second pilot organisations to ensure that processes and tasks were properly understood and would actually work. On the softer side a specific change management team was created to help understand people’s concerns and anxieties and to devise an effective communications strategy. That did not mean people suddenly vented all their frustrations, but it did create a process by which people could feed back their concerns and made it much more likely that their managers would not only listen to these concerns but feed them up the line. Communications were devised to answer some very basic questions like why was a new system required and what improvements were expected from this new process environment. Smaller groups were brought together to discuss individual issues on a purely confidential basis. This helped senior management to understand the level of anxiety that existed in the business and what issues they needed to focus on in order to address those anxieties. Newsletters were issued that communicated the progress that was being made and how the various forms of input had contributed to the change programme in a positive way.
All of this was then framed within a complete roll-out methodology focused on what we called “process testing”. After the second pilot went live successfully, there were still eight more roll-outs across Europe that needed to be completed in the following nine months. Process testing was an opportunity for each affiliate to test each business process at the operator level of detail and their opportunity to sign off on the model or to provide input to make those processes more robust. All the subsequent roll-outs were completed to time and budget with a satisfied business user community.

Is there a vision for change?

One of the prime responsibilities of leaders is to provide a vision to the organisation of the changes required to make the organisation better or to focus the organisation on staying ahead of the competition. But rarely are leaders called visionary and this leads to some very predictable problems. It is not enough for leaders to seek change in the organisation but they must also map out what that change will mean. That is vitally important to the members of the organisation. At some stage the design of any change gets too detailed for the leader to know every nook and cranny. It is therefore necessary that the people managing that detail understand what their leader wants so that they take actions that are in line with the leader’s vision.

This sounds very basic but is vitally important to the success of any change programme. At a nuclear services provider it was decided that all ERP platforms should be amalgamated onto one single and improved system. The constituent parts of the organisation had very different views of what an improved system would look like, but the vision described by senior management only asked for a single improved system without specifying the characteristics or purpose of that improved system. The programme ran into the sand after few months since no-one could agree on what the new system would look like and sufficient direction had not been given from above. Everyone at every level could see that the project was failing but the disagreement continued while senior management were unable to describe a realistic vision to the team. Eventually it was decided to hire an external programme director who had the experience and personality to get the programme done. He listened to the description of the original vision and then added the phrase “fit for purpose”. So it didn’t matter that they were not going to create the best system ever, but it was sufficient that they would create a single ERP platform that would be easily better than the systems that preceded it, but it only had to pass a “fit for purpose” test. The result was a system that did work, but whose parameters were driven by project deadlines and not the long term business need.

On the other hand, when senior management do have a clear vision for the business and this is communicated well then it is much easier for middle managers and process designers to interpret this vision into change that fits with the businesses’ longer term goals. At one IT company that was mainly involved as a reseller of electronics, they bought a much bigger business that was more focused on the delivery and maintenance of complex IT programmes and IT outsourcing. They realised that the company they had acquired was very poor at tracking profitability by project and they knew they had to improve their own systems quickly to be able to deal with the project accounting aspects of these complex programmes. Anyone familiar with running an IT projects business knows that technical or financial problems caused by poor project and cost management can mean huge losses. There was an imperative to get these things right. So the vision from management was to have a single ERP platform that would have simple processes, allow for effective project management and give visibility to projects’ financial status at any given point in time. When the design team got to their task they were able to quickly design the system with the necessary capabilities including effective project control processes. This shortened the timescale of the total project and delivered a system that was not just “fit for purpose”, but capable of delivering the cost synergies that were the prime logic for the two organisations coming together in the first place.

But there are many organisations where their leaders do not understand the importance of vision. That isn’t a problem as long as those leaders recognise their deficiency and employ someone with the necessary skills. But very often pride gets in the way of better judgement. Just because you have a particular title does not automatically mean that you are competent at your job. For those of you are unfamiliar, this is called The Peter Principle and states that “Employees tend to rise to their level of incompetence”, i.e. employees are promoted to the next rank by doing their previous job very well. Eventually they will be promoted to a job that they are incapable of doing well. The real problem can be what happens next. An individual will either surround themselves with competent people to disguise their own incompetence or will continue with the delusion that they remain competent. The later will make some terrible mistake and get fired. The former is very likely to continue to retirement with a simple strategy of not taking risks in order to avoid mistakes at all costs.

But many organisations are very slow to weed out these leaders. As a result the organisation can stagnate and even fall on its sword completely. In many cases these leaders genuinely believe they are great leaders of change because their immediate reports are very effective at reinforcing the myth. It would be a brave person who would tell his or her boss that they believe their boss could do better and that is why it doesn’t happen that often. And even when it does happen most bosses quickly discount the opinions of those with whom they disagree.

The biggest modern barrier to leadership that provides real vision is the short-term culture that has many businesses trapped. From an individual leader’s perspective there is no point having the best vision for change for the long term when you may be fired for having a few quarters of poor numbers. So the short term goals are prioritised making it more difficult to create the necessary mental space to think about how the business should develop and the plans that need to be in place to make that change happen.

Do we have the right skills?

The skills that allow procurement to really add value are all around sourcing of products and services. The skills and knowledge required will vary dependent of the category of spend and individual aptitude, but the right mix is required to be successful.
The starting point is to have quality data analyst expertise. Not everyone will be comfortable with downloading large amounts of transactional data and somehow making sense of all. Equally there is no point having someone who can crunch all the data without understanding what they are looking at.
Someone needs to be able to work with the business to determine the business requirement. The skills required in this area will vary greatly. For example, in aerospace companies it is very common to have whole engineering teams within the procurement function so that technical knowledge required understanding design requirements is on hand quickly. This will also be essential to perform true demand management in these instances. The opposite would be procuring more generic items like stationery where a high level of technical knowledge will not usually be required.
Market analysis skills will be required to explore the different possibilities of contracting that may be out there and the market constraints. For example, if you are buying spare parts it will be possible to buy parts from a distributor or the manufacturer or an alternate manufacturer. There will be a balance between price, service and product quality that will all need to be considered. Equally the whole category could be outsourced to a single management company. All these options have advantages and disadvantages depending on your exact situation, but it is important to have people who can think out of the box so that the maximum number of possibilities are considered. This will then become a major input to the formulation of a category strategy along with all the information compiled to date. The outcome of the strategy will be a description of a desired outcome in terms of how the goods are services should be delivered, preferred suppliers for the bidding process and a target level of savings.
Once the bid responses are received, it will be necessary to examine each in detail to understand exactly where and how savings are being offered. Different suppliers will do this in different ways. Some will offer simple price reductions, others will offer rebates and discounts dependent on volume of spend. But all the options will need to be evaluated so that a detailed negotiation strategy can be constructed for each supplier still in the game. Then the negotiator can do his or her job in way that tries to maximise the possibilities. Finally, once the deal is agreed it must be implemented and old agreements ended.
The right range of skills will deliver bumper benefits if applied to the right categories, but can take time to develop if there are gaps. But without these skills procurement cannot fulfil its potential.

What is the potential for reducing purchase cost?

All procurement managers will have targets and hopefully most of them are being achieved, but if you are the new leader you need to be able to answer some very pointed questions. What is the potential to reduce purchase cost? How long will it take to get to the bottom line? What is the action plan that will be required? What investments will be required to realise this potential? To get the answer right will mean fulfilling the maximum potential of the department’s spend profile.

To get the answer reasonably quickly many companies get external help from specialist consultants. The biggest complaint of many companies that have gone down this route is that it took too long, the benefits promised were not necessarily realisable and it was not always clear that the depth of work done had a real relationship to the eventual value proposition. In addition, it can be hard to replicate the consultants work once they are gone, usually meaning that you will be paying external people for what should be the day job rather than specialist expertise or insight.

Assuming the right skills are available, one of the most important things you can do is build a diagnostic tool from the purchase data in your ERP system. Dependent on the quality of the data you should be able to build a model that differentiates between suppliers, products by commodity type, payment profiles and spend volumes. It is common that ERP data can be missing or out of date. An example is commodity groupings. These were usually built when the ERP system was being implemented, so it can happen that they never change after that. If your spend profile has changed, it is possible that the commodity groups are no longer appropriate. Another example is item codes. There are still many companies who only hold inventory data at product family level. So it can be very difficult for procurement to understand the proper product mix within the family.

Projecting savings in each of the categories will depend on a number of elements. The first will be the numbers of suppliers in the category versus the volume of spend. The higher the number of suppliers, the more likely that saving can be obtained by consolidating spend into deals with one or two suppliers. Next will be the length of time since any deal was negotiated. If a deal was only done a few months ago it is less likely to produce saving versus if the deal was done three years ago. Then there is criticality. The less critical the spend the more likely it is that you will have a choice of suppliers and may be able to substitute various suppliers products. And finally there is the commodity itself. If the group is an openly traded commodity such as metals, grain or wood pulp, it is unlikely that you will have enough power to change market pricing. But at the other end of the spectrum there are categories like transport, office supplies, spare parts, facilities management and security where there may be more genuine opportunities.

Once all this is in place, it will be necessary to have a solid action plan that is rigorously followed, not just by procurement but by the stakeholders who hopefully have input to the plan. The last and probably most important element is having the right level of skilled resources.

Paying On Time

Most procurement professionals have no idea whether their suppliers are paid on time or not. There is usually no reporting on the subject and the only indicator that things may not be going to plan is when the supplier calls looking for payment. And there are many in procurement that continue to be blissfully unaware of why it is important to pay on time. When suppliers are not being paid or are uncertain when payment will happen this will inevitably increase the risk level of your supply relationship. This in turn will encourage your supplier to increase prices in the longer term. This is different from having longer payment terms. There is very little evidence to suggest that suppliers increase prices due to longer payment terms. But erratic payment patterns mean that your suppliers cannot plan their cash flows and you can become viewed as a risky customer.

The facts are that every company pays late, pays early and pays on time. It’s just that the proportion of payments in each category is different for each company. And it is very common that suppliers do not help themselves to get paid. The number one reason why many invoices are paid late is because the invoice was received late. In one case a supplier sent all their invoices for a month in a single box at the end of the month. As a result the invoices could not be processed in time and therefore late payment was very frequent. When asked why the invoices could not be sent on a more frequent basis, the reply was that could not be done as it would increase the cost of postage. So the practice continued.

And the even when the invoice does get to you the cost of an invoice error is massive. At a US retail chain, 23 million invoices were processed each year, mostly electronically. Only 4% of these invoices had some kind of problem, but that required over 200 people to be employed to fix all the errors.

Another issue that comes up often in the UK and especially in the US is float time. This is the practice of paying by cheque and using the slowest possible postage method to get the cheque to the supplier and then having 3 days between the cheque being deposited by the supplier and the bank giving the supplier value for the cheque. Intuitively it would seem that you can score extra days of cash flow off your supplier that will be to the good of your company. The reality is that if you employ this practice you are usually destroying value for your company, since you have made it more difficult for your treasury department to forecast daily cash requirements for supplier payments. This means that cash buffers must be kept on hand so that cheques will be honoured. This cash could have been invested by your treasury department or could have been used to reduce company debt. Instead it can sit in a zero interest current account. And using cheques also exposes you and your supplier to fraud. There are cases where cheques have been doctored by fraudsters and cashed. So the best thing is to pay electronically since it is better for your supplier, better for your own company’s profitability and safer for all parties involved.

To make sure that payments are happening on time solid reporting at a transactional level is required. With today’s ERP systems and reporting packages this has become a more straight-forward task but it still must be done. These reports will make everyone in procurement aware of both the payment profile of their suppliers and help to manage the overall supplier relationship. But if you don’t pay your supplier it is likely that you will not have a great relationship.

Is procurement really in control?

The traditional view is that you can be sure that everything is being fully controlled by the procurement process if every purchase is backed by a purchase order. While there is nothing wrong with purchase orders, the statement only represents a partial truth. We need to exclude those types of spend where a traditional purchase order is not appropriate since it is almost impossible to predict the exact requirement, e.g. energy bills. There are cases where a traditional purchase order is not appropriate since we follow a different process to control spend, e.g. purchase cards, catalogues and evaluated receipts. There will also be the incidents of retrospective purchase orders, i.e. the purchase order was completed after the invoice was received. This is a severe malpractice that should be stamped out firmly in every company as we have not only lost control of the spend, but we have also gone through a completely wasteful process to sign off the offence after the fact.

So it is necessary to ask a more exact question. How much spend is controlled by an authorised procurement process? The percentage of spend covered by an authorised process indicates not only the level of influence procurement has over the sourcing of goods and services, but also indicates the level of process compliance in the organisation in general.

One of the most heartbreaking things can be when a procurement organisation has all of these answers, but is unable to enforce compliance in the organisation. This is very common in decentralised organisations where procurement can become resigned to defeat due to the lack of support from senior management. This is also common in relation to non-core spend where various departments and plant managers will have their favourite suppliers who they perceive as providing a better service, better quality or even better prices.

In these cases the onus is on procurement to gain support for compliance by being able to demonstrate that value that is being wasted by these bad practices. The right reports must exist to understand the compliance landscape in fine detail and the value being lost as a result. At one firm, they developed a three strikes process. The first evidence of maverick spend would trigger a reminder to the departmental manager responsible for the purchase. In the second case, a stern warning was given iterating that this was unacceptable behavior and should not be repeated. If there was a third occasion, the invoice would be refused by accounts payable and redirected to the individual for payment and the individual responsible could be sanctioned under the company’s disciplinary procedures.

There are cases where the worst offenders can be senior management. And it’s a brave person who’s going to tell the boss that they are non-compliant. But it is necessary that the process is led from the top. Without visible and sustained leadership on compliance, it is all too easy to drift into bad practices and continue the path of lost value to the organisation.

Is procurement working capital aware?

Most procurement organisations are not properly aware of working capital and its implications. Historically, this has largely because most buyers have never been trained about the importance of working capital to their organisation and the part that they can play.

There are many who are totally unaware about working capital and are measured only on direct cost reductions. Many of these folks do not even know what working capital is and when they are initially told their first understanding will be that it is a finance issue. This is a great pity because procurement are the people who need to be most involved in making sure that we agree the right payment terms with suppliers and understand the impact on inventory holding through the deals that they agree with suppliers.

Very few procurement organisations know the true value of working capital to their organisation. For example, what should be the cost of capital applied to any calculation where there is a potential trade-off between terms and price? In most organisations, there will be several answers, most of which are usually incorrect. Most often, the reason for this is that the official cost of capital has not been communicated to anyone. There is also the case where the strategic need for cash for the organisation overrides any calculation. In other words, the organisation is willing to incur extra cost to conserve cash. Again, when this happens there is a reluctance to communicate the fact, causing procurement to behave in a way that is unintentionally against corporate objectives. In one organisation that had a huge cash pile, the company wanted to use that cash pile to extract further discounts from suppliers, i.e. pay quickly in exchange of a settlement discount. Nearly 40% of suppliers, especially small suppliers, signed up to the programme creating nearly €1 million in net savings. However, in another example, buyers were agreeing short terms for discount terms up to 3% on the understanding that this was required for corporate profitability. Unfortunately, it ended up strangling the cash flow of this rapidly expanding business since, at the same time, its customer terms were getting longer and longer.

But who really understands the inventory holding cost of the deals we close? At a diesel engine factory, there were daily meetings to discuss part shortages. The implication of these shortages were unfinished engines cluttering up the factory floor, late deliveries and delayed customer billing. When we reviewed which parts were causing the problem, they were very often very small value parts (nuts, bolts, washers) that had been set up on the ERP system to follow the normal purchase order flow. Because parameters such as lead time, safety stock and order size were all wrong, these parts would be frequently out of stock. The solution was to introduce a two-bin Kanban system (two bins, when one is empty the supplier fills it up) on the factory floor that did away with all the paper work and shortages and got rid of all the unfinished engines, significantly reducing work in process inventories and getting engines billed to the customer at a much greater pace, helping receivables. There are other cases where the solution may be to have consignment stocks or vendor managed inventory. In these cases it is vital that the trade-off between inventory holding and cost is properly understood or, yet again, we could end up unintentionally destroying value.