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As a manufacturer of custom components for OEM’s, we’ve been exposed to many organizations that each run engineering and procurement a little bit differently.
Our position, with an objective outside viewpoint, has afforded us the opportunity to see very clearly what works and what doesn’t in terms of how procurement is run. And what we’ve seen across this vast set of experiences are: organizations run procurement in one of two ways.
There are those who approach procurement strategically, and those who approach it more reactively. This article is meant to provide a breakdown of the differences, and showcase the practices that, when done well, can help make your procurement department a more strategic part of the business.
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The most common approach to procurement is one of reaction. And it typically looks something like this:
- Engineering works to design a part.
- Engineering will work with suppliers to build a prototype, and potentially even iterate through a rapid prototyping phase.
- Engineering tests the final part to ensure it works as desired, and gets ready to hand the part over for continued production.
- Engineering hands the part over to a procurement team (which can have various names like Supply Chain Management or Supplier Engineering).
- Procurement manages continued orders of the parts or components. When it comes time to order, for each individual component, they’ll scan their list of available suppliers with the correct codes, send out requests for quotes, and usually select the least expensive option (unless lead time is important enough to outweigh the lowest cost).
On the surface, that process totally makes sense for helping to keep costs down for the business. And that is primarily why many procurement departments function this way. However, in practice, it can cause a lot of problems, and even incentivizes very poor performance from suppliers.
Let’s break down some of the problems that can happen in this model.
Mistakes and Mismatches
One of the biggest issues is that it becomes very easy to order components or parts from a completely different manufacturer than the one who originally helped build the prototype in this model.
Depending on the complexity of the part, this can be a huge problem. For simpler, or more run-of-the-mill components, it doesn’t pose a huge issue. But for parts that were painstakingly designed between an engineering team and a manufacturer during a rapid prototyping phase, it becomes hugely important.
Changing suppliers removes all the history and understanding that went into the prototype that was vetted and tested. The process the original manufacturer went through to produce the part may have been unique or more on the creative side. This means what you get back from a new supplier may or may not meet the needs or specifications the part was originally designed to, since they have none of that information.
This item goes hand in hand with the one above. It stems from the same issue. Often what happens is that part production will suddenly get moved overseas, or given to the lowest bidder, in an effort to reduce costs, and ultimately quality is always what gets sacrificed.
When parts or components come back with quality issues, there are two major results:
- The components are quality checked when they arrive, found not to meet standards, and must be re-ordered, causing massive assembly or production delays (and ultimately dollars).
- The components make it into the finished parts, and they go out into the field. Then suddenly parts will fail, their lifespan will decrease, and you will have to replace them more frequently (or worse, initiate recalls).
In either case, you’ve sacrificed time and money, and potentially even brand reputation. You would have ultimately spent far less by ordering from the slightly more expensive supplier at the outset.
This particular model incentivizes the worst behavior from suppliers. In this model, simply being the lowest bidder is all it takes to win business. As a result, you’ll often find manufacturers cutting costs in any way possible in order to be the lowest bidder.
This usually translates into false promises and terrible service. And you end up with parts that don’t meet your standards and timelines that are promised but aren’t met. All of that costs you far more in the end than whatever you saved by going with the cheapest supplier.
Higher Total Costs
If you were to zoom out and look at your supplier costs over the course of a year in this model, you’d find they cost you far more than you thought. Calculating the costs of missed deadlines, re-ordering of parts that didn’t meet standards, and issues with product failures would highlight how much more you actually paid for the “cheapest supplier.”
In addition, this model causes you to miss key opportunities for larger-scale cost reductions. In this model, procurement teams are looking at each step in the part production process individually.
In some cases, suppliers in your system may have built vertically integrated processes that allow them to deliver you a finished product, combining multiple manufacturing steps, at a far lower price (and faster lead time) than sending each of those steps out to individual suppliers. But procurement systems aren’t able to recognize this and raise it to the attention of team members, and there is no way for anyone to directly compare these more comprehensive quotes with quotes for individual steps in the process. And so, huge opportunities to strategically reduce overall costs are missed.
Luckily, there is a better way!
The companies we’ve watched “do it right” all have a far more strategic view of procurement. As such, they’ve built different processes, and have incentivized their teams differently to foster a better method.
Strategic procurement teams do a couple of things very differently than the model above.
Engineering + Procurement Partnership
One important hallmark of companies that have a more strategic approach to procurement is the way in which their engineering and procurement teams work together.
In this model, a member of the procurement team is usually at least somewhat involved in the product design process. They’ll work collaboratively with the engineering team designing the part to select suppliers together that will meet the prototyping needs of the engineering team as well as the long-term needs of the procurement department.
These suppliers will then be tied to the parts they helped to build to ensure that, for the most part, the manufacturer will remain consistent during the shift from engineering to procurement. This helps immensely in reducing risks associated with quality issues stemming from changing suppliers, and incentivizes manufacturing partners to dig deep to help get a design right, knowing they’ll continue to get production work. It also helps increase confidence on the part of the engineering team that the part will remain true to their design when it hits the market or begins usage in the field.
Focusing on Supplier Relationships vs. Component Cost
Another big problem with the previous model is the myopic focus on reducing cost on a component-by-component level. It causes procurement teams to entirely miss the bigger picture cost reduction benefits of streamlining suppliers.
Depending on the volume of parts you order, and the capabilities of your manufacturing partners, streamlining suppliers and focusing on key supplier relationships can save significant dollars.
Building Relationships with Vertically Integrated Suppliers
Another thing organizations with a more strategic approach to procurement do is look for suppliers that help to reduce the organization’s risk. This is particularly important when sourcing manufactured parts and materials that need to be assembled.
Partners who simply provide a single step in a multi-step process are the norm in the more reactive procurement model. In this instance, procurement teams must manage shipping a single part between multiple vendors to ultimately get the manufacturing and assembly process completed.
On the flip side, strategic procurement teams look to use partners that are vertically integrated and can house multiple continuous processes under a single roof, meaning less shipping between vendors, less vendor-to-vendor misalignment, and ultimately both a faster path to market and lower total part cost.
Better Procurement and Finance Alignment
Aligning the procurement team with the strategic finance team allows for even greater “bigger picture” thinking.
Rather than focusing on small component-by-component savings, better aligning and integrating the procurement and finance teams helps to build a strategic procurement plan that aligns with the organization’s financial goals.
This type of cross-functional collaboration leads to behavioral changes across the organization, and fosters a better focus on the larger picture for procurement teams. It helps them understand larger savings are made by focusing on picking the right suppliers, rather than just the cheapest suppliers for a specific component.
Our vantage point and experience with a wide range of different procurement teams affords us an interesting insight. Most commonly we see the reactive procurement methods take shape when growing pains are an issue.
This typically happens when a company grows and they are struggling to keep the right incentives in place, and just trying to find ways to be efficient and cut costs. In contrast, the more strategic take on procurement must be a conscious decision, and when done well, always results in lower total costs, less risk, and a faster path to bring products to market.
You just have to be willing to invest the time in getting it set up correctly and building pathways for cross-functional collaboration.