Procurement practice often looks like this: The departments formulate their requirements and make a short list of potential suppliers. Procurement adds suppliers to this list, puts the goods or services out to bid and negotiates the bids until a contract is entered into. The only discussions between Procurement and the Departments requiring the goods or services prior to the RFP are limited to adding to the product descriptions, qualifications of suppliers or logistical questions.
Back to the beginning
Ebner Stolz consultants start with the configuration of the requirements, where there is significant savings potential that has often remained untapped – particularly at small and mid-sized companies.
By contrast, in sectors such as the automotive industry, cost management begins with the configuration of the requirements. Direct early action on materials costs from the time they are incurred has an effect on the future cost of the goods themselves. The task of the Procurement Department should not be limited to carrying out the RFP; instead, they should work closely with the technical departments and other users. Together they should always scrutinize every part, every material and every service. Is there really a need for this quantity or size, or these functional or quality features? Might another solution be sufficient? What alternative specifications might be more efficient? Which version can be more effectively integrated into the company's value chain?
Problems with Formulation of Requirements: too late, too imprecise, implemented solo
Procurement at many mid-sized companies is still traditional because it has always been done that way – in other words, it is fairly passive. Long established, "well-worn" structures and behaviors prevent efficient business: Often, the departments are not clear enough in indicating their requirements. Particularly when services are to be procured, this can result in more than was needed, with the related high costs. Because people who do not specify exactly what they need often pay more than they need. The folks in Procurement often receive an order that is on such a short timeframe that they have no other choice than to fill it halfway. To figure out the function level, quality level or the scope of the need is not even in the realm of possibility.
The Solution: New Structures, Interdisciplinary Cooperation
Structures must be created that promote cooperation on a level playing field. This will affect the organization by enhancing the value of Procurement. And it will also affect the procedures, which must be changed so that the folks in Procurement are involved in the planning stage for the requirements. To do this, workers in Procurement, who tend to have a commercial background, need to enhance their technical skills - either through training or through greater involvement with engineers and other technicians. This can turn a traditional "bean counter" into a strategic thinker who contributes ideas by thinking outside the box.
But you shouldn't underestimate the kind of push-back you may face, because these ideas will turn ingrained procedures and organization upside down. It is difficult to initiate and implement these kinds of changes from the inside out. What you need is professional, lasting Change Management.
Ebner Stolz has successfully helped Procurement departments streamline their organization on many occasions. These changes take at least six to twelve months. "A project like this requires a lot of time and patience. But our clients whose Procurement department we've restructured like this have repeatedly told us that the time and effort has paid for itself many times over," comments management consultant Harald Göbl. At the end, the consultants are able to pull back because the old ways of thinking and acting have changed for good and the processes are firmly implanted. As André Grotstabel, another management consultant at Ebner Stolz, puts it: "By being open to restructuring and a new way of thinking and communicating, you can tap significant potential - potential you won't even find at many other top companies."
An Example from our Practice
The company produces baked goods such as crispbread, cookies and granola bars. The packaging of these foods accounts for a large share of the costs. For years no one questioned the specifications for the wrappers and paper that they used; the exact same ones were always ordered. Ebner Stolz began putting the procurement procedures and organization on the test bench. The consultants took a look at the packaging and asked questions like "Does the wrapper have to be so thick? Does the overlapping of the wrapper have to be so big? Can the products be packaged more tightly? Can the seams be closer together? Is it possible for the wrapper to be thinner?" In the end they were able to reduce the materials by 10% and to cut costs by 25% without altering the quality of the packaging or the product. The product labeling was also enhanced in a similar manner. In addition, by standardizing the formats, colors and print, the company was able to reduce the variety of option significantly and thus increase volume. The supplier passed along the reduced costs of printing and set-up by lowering prices by more than 30%.