Strategy Formulation & Implementation
In all well managed organisations in the private sector there will be a short-term business plan and a long-term business plan. The latter may focus on five years, but can be longer. The public sector is subtly different because of the vagaries of political direction and shifting sands with strategies. In either case there is a powerful incentive for procurement to formulate and implement a strategy that locks into the business plan.
BFL have been engaged in many situations where the procurement strategy is vague or non-existent. For example, there has been little thought to the supply market and where the ideal supplier s may be. That could be within a short distance of the buying organisations location(s) where goods and services are required. It could however be that the ‘best’ suppliers are off-shore. Taking the latter situation we know of one large national retailer who would only trade through the UK agents of off-shore manufacturers. In another case we know of a retailer who created a procurement unit in China.
The procurement strategy would, of course, give due account to the nature of contracts placed with suppliers. Short term contracts are unlikely to deliver real value for money because the supplier is unable to plan for the longer term. However, long term contracts have the great benefit of offering lower cost because contracts can be negotiated on the supply side. The contractual detail can cover off the business interests of all parties by acknowledging that contract termination may occur. Should it do so what are the consequences? That is the strategic question that must be answered.
In the shipbuilding sector we were retained by a Merchant Bank to advise on a strategy for four shipyards. Procurement was an isolated function in the business, contributing very little to strategic affairs. For example, they had no input into the bidding side of any of the businesses. In consequence, when tenders were successful the buyers were faced with unrealistic demands for short-term deliveries. They were also faced with quotations that had lapsed in validity, In effect the shipyards profit was eroded even before any work had commenced! One of the consequences of this was that the Group of shipyards were heading for administration unless dramatic changes were made to tendering and procurement. A project was taken as a model and the tendered prices were challenged before our client submitted their tender to their client. The costs were driven down by over 10% on the basis that the new procurement strategy would be founded on creating long-term trading relationships with key suppliers of goods such a scaffolding, painting, dry docking and temporary labour. These purchases were common denominators in most contracts.
The procurement strategy will need expert knowledge of the commodities being purchased. This is why category management can be a welcome solution.
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