Procurement Strategy by Derek Hendrikz

Procurement Strategy
derek
hendrikz

Copyright © 2014
Derek Hendrikz Consulting
www.derekhendrikz.com

The Interdependence of Delivery
Support
Delivery&
Production
Customer
Management
Effectiveness
Strategy
Efficiency
Policy

Do our cost calculations correctly
reflect reality?
Do our cost values effectively
represent the effort which was
spent to manufacture a product
or deliver a service?

• There is no way to directly measure costs.
• Cost measurement is always an indirect process,
sometimes very indirect.
• Behind cost measurement are human beings who can
make mistakes and misinterpret the rules.
• In worst cases, there could be humans who have an
interest in distorting cost values.

• Activity-based costing struggle to locate activities to overall
organisational functioning.
• Balanced scorecard methodology has generic perspectives that do
not necessarily represent the essence of the organisation.
• Strategy cannot be linked to organisational action, resources and
cost, because strategy represents +- 20 to 30% of what happens in
the organisation.
• Current organisational structures are ‘one-parent’, two-dimensional
structures.
• The organisation reports to people and not to outcomes.
• Senior management do not understand the essence and nature of
mission and vision.

•Structure;
•Systems; and
•Culture.

Strategy
• Goals & Values
• Resources &
capabilities
• Structure &
systems
• Culture
• Competitors
• Customers
• Suppliers
• Substitute
Producst
• New Entrants
• PEST

Communicating & Linking
•Communicating & Educating
•Setting Goals
•Linking rewards to performance measures
Clarifying and
Translating the Vision
and Strategy
•Clarifying the Vision
•Gaining Consensus
Planning & Target Setting
•Setting Targets
•Aligning Strategic Initiatives
•Allocating Resources
•Establishing milestones

The Procurement Mission…
We acquire goods and/or services at
the best possible total cost, in the right
quantity and quality, at the right time, in
the right place and from the right source
for the direct benefit or use of our
organization, generally via a contract

The Strategic Outcomes of Procurement:
1. Vendor Selection;
2. Vendor Compliance Management;
3. Acquisition; and
4. Contract Management (SLA & Works)

The Structure of Procurement Strategy
Supply Chain Strategy
Procurement
Strategy
Strategic
Sourcing
Manufacturing Strategy
Lean
Manufacturing
Quality Management
Organisational
Strategy
Inventory
Management
Transaction
Management
Supplier Relationship
Management

Making the Procurement
Decision www.derekhendrikz.com

Integrative
Supportive
Independent
Passive

Strategic Levels in Procurement
Passive:
The procurement department does not have its own strategic direction and
primarily reacts to requests from other functional areas.
Independent:
The procurement department has adopted strategic practices, but has not
aligned these with the organisations corporate strategy.
Supportive:
The procurement department has adopted strategic practices and is
supporting the organisations corporate strategy through their use.
Integrative:
The procurement department has become an integral part of the
organisations corporate strategy and is actively working with other
functional areas to implement that strategy.

Vertical Integration:
Vertical integration takes place where the organisation
performs as many activities in the supply chain as possible,
from the supply of primary materials to delivery to end
customers.
Outsourcing:
This is the practice where an organisation focuses on doing
what it does best (its core competencies) and using outside
suppliers to perform and supply all other ‘non-core’ activities.

• Provides management with maximum amount of
control over performance and cost.
• Retaining in-house expertise.
• Full utilisation of in-house assets.
• Reduced risk in continuity of supply.
• Reduced risk of commercial secrecy or
confidentiality.
• Increased quality control.

• Reduced Cost.
• Access to suppliers expertise.
• Increased capacity, leading to faster and more
flexible supply.
• Reduced capital employment.
• Reduced headcount.
• More accurate operating cost.
• Concentrate on core business activities.
• Reduced inventory.

Project-
based
Work
Process-
based
Work
Outsourcing
Insource

Overhead
Cost
Variable
Cost
VS
Enhanced through in-
sourcing
Enhanced through out-
sourcing

Pro’s & Con’s

• Supplier much more responsive to customer needs.
• Reduces the amount of inventory held by the customer.
• Stronger relationship with suppliers.
• Increased supplier involvement & commitment.
• Strong customer / supplier relationship.
• Suppliers involved in planning activities of the customer.
• Push for supplier to build their capabilities for future customer
requirements.
• Suppliers involved in drawing up specifications.
• Suppliers involved in product design & development.
• Customers can use suppliers in-house technologies & expertise.
• Customer to receive more cost-effective and higher quality designs.

• Fosters competition amongst suppliers.
• Enables customer to play suppliers of against each
other in order to achieve lowest possible price.
• Lowers risk when there is a problem with existing
suppliers.
• Lowers risk of supplier holding the customer
ransom.
• Lowers risk of inability to supply by one supplier.

HIGH
Risk
LOW
Critical Items/Potential Bottlenecks
Example: scientific equipment
Goal: quick turnaround, minimal disruption of day-to-day
operations
Natural owner: user’s department
Role of Procurement Office: support for user’s
department
Strategic Items
Example: capital improvement
Goal: maximum value for money
Natural owner: user department
with advice from Procurement
Officer
Role of Procurement Office: part
of cross-functional team
Routine Items
Example: catering supplies
Goal: efficiency of process, cost reduction
Natural owner: user department with advice from
Procurement Office
Role of Procurement Office: leads sourcing (user’s
department leads execution
Leverage Items
Example: office supplies
Goal: lowest price
Natural owner: Procurement
Office
Role of Procurement Office:
centralised procurement, with no
exceptions
LOW Savings Potential HIGH

Bottleneck items:
Here it is important to ensure that supplies are not interrupted.
Strategic items:
Here the emphasis is on co-operation of suppliers.
Routine items:
Here the emphasis should be on the most efficient way to procure the
product.
Leverage items:
Here it is important to find the best deal.

Bottleneck items:
Specialist manufacturing equipment.
Strategic items:
Expansion of factory space.
Routine items:
Safety gear.
Leverage items:
Stationary.

• Low Risk
• High Cost
• Low Risk
• Low Cost
• High Risk
• High Cost
• High Risk
• High Savings
Potential
Strategic
Items
Bottle
Necks
Routine
Items
Leverage
Items

Procurement Strategy by Derek Hendrikz

Procurement Strategy by Derek Hendrikz

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