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Consulting Whitepaper Procurement Strategies Long Term Effectiveness Short Term Wins 1012 1
Consulting Whitepaper Procurement Strategies Long Term Effectiveness Short Term Wins 1012 1
Rizwan Imtiazi
Rizwan Imtiazi is a Senior Consultant within the Global Consulting
Practice of TCS providing procurement operations expertise.
He holds a MBA in Purchasing & Supply Management and has
worked within a diverse range of industries and categories over a
17 year career. Some key Procurement projects he has been
involved in include the London 2012 Olympics and the largest
infrastructure project in Europe called Crossrail.
Rizwan is the founder of ESCIC, the first forum bringing together
the key players in the construction industry to address ethical
sourcing of construction materials and equipment.
He was its Chairman providing strategic vision and direction until
leaving Crossrail in March 2012.
Table of Contents
1. Introduction
4. Environmental Scanning
7. Recommendations
Introduction
At Tata Consultancy Services we have been considering how firms can most effectively use procurement
in their response to the current economic crisis. In this paper, we caution on the need to avoid short-term
strategies that may be detrimental to long-term effectiveness.
We draw on the theory of the Porters 5 Forces Model, and apply that to real-life procurement strategy.
We then discuss concerns and challenges, prior to making recommendations to help you avoid being
penny wise and pound foolish.
Potential
Entrants
Threat of
New Entrants
Suppliers
Bargaining Power
of Suppliers
Industry
Competitors
Bargaining Power
of Buyers
Buyers
Rivalry among
existing firms
Threat of
Substitute Products
or Service
Substitutes
Figure 1: Porters 5 Forces Model
We use Porters 5 Forces Model as a foundation and conclude that if the Model were used strategically,
some of the strategies currently being pursued may justify a rethink. Our rationale is that consistent use of
the Model in all businesses, beyond a short-term horizon, helps identify weaknesses of current strategy
and the adverse impact on long-term strategy.
Environmental Scanning
Research was carried out a few years ago on the impact of the economic crisis on procurement strategy.
We were amazed to note that the overwhelming response of those who responded was that they hadn't
changed their procurement strategy; on-going environmental scanning appeared to be a theory as
opposed to a practice. Five years into the crisis, we wonder if the same situation prevails. Theory suggests
that the 5 Forces Model provides a useful structure for on-going analysis of the findings of environmental
scanning. However, what we consider is whether a short-term approach to procurement strategy may
well be detrimental to long-term strategic want to objectives.
From the supplier's perspective, any shift by the buyer to a multiple sourcing approach, say dual sourcing,
means the supplier will have even less demand from the buyer, therefore increasing the supplier's risk - a
vicious circle of risk amplification.
Assume the buyer is clear that their primary short-term strategic objective is cost reduction. That
translates to strategies of 'reduce transaction costs' and 'pay less'. The buyer's knee-jerk reaction is to place
more pressure on suppliers and expect them to 'sharpen their pencils. There is a shift towards adversarial
and competitive sourcing; effectively dismantling the partnership ethos advocated since the 1990s.
The buyer exerts all the available pressure on the supplier. The supplier needs the business, so accepts the
need to price on marginal costs in the hope that fixed costs can be recovered from more benevolent
buyers who are taking a longer-term perspective. This also exerts additional pressure on the suppliers
agents to match their sales volumes targets. So effectively, the supplier is selling at a non-sustainable
price, one that just isnt economically viable. With both the supplier and the buyer adopting short-term
strategies, a long-term consequence could be, at best an exit of suppliers from the market, leaving a longterm monopoly and shift of power from the buyer to the supplier. At worst, the outcome could be a
failure of the buyer organization to source what is required to satisfy its customers.
Separately, given the short-term pressure on suppliers, they can be expected to defer their own
investment in both research and development and in production assets. Not only will they park R&D but
they will try to extend the life of their kit, say sequencing an extra few years. (We recently worked with one
organisation that should have replaced their operational equipment after five years but due to 'austerity'
had stalled replacement and stretched the life of the equipment to eight years; the problem was they
were incurring additional maintenance costs and their delivery was compromised, leading customers to
shift to alternative providers.) The buyer may of course feel this will not impact them until they recognize
that suppliers investment in R&D is an investment that benefits the buying organization in reduced costs
and innovation. So, while the buyer may have a short-term gain, they face a long-term cost too.
If we place this in a global context, we could ultimately be creating ingredients that obstruct a national
industrial strategy.
Now lets consider the threat of new entrants. We have discussed that removal of entry barriers should be
of benefit to the buyer. However, the current economic environment is itself a barrier to new entrants something buyers have little control over. If there is a lack of new entrants to the buyers market, the
buyer is starved of choice. This scenario exacerbates the adverse impact of existing supplier failure.
When we think of the threat of substitutes, we can view that in the context of alternatives to our existing
specifications. Once again we have an interesting dynamic. Is the current environment creating the right
circumstances for experimenting with new specifications? Ironically, that is likely to depend on the risk
appetite of the buying organization. Some organizations will be risk averse and resist experimentation;
others will welcome the potential for cost reduction and enhanced customer experience. The stakes are
high - will that be thrashed out in the procurement strategy?
Unaffordable pricing by suppliers which delivers a short-term gain to buyers but supplier failure and
ultimately the buyer having no supply source;
An increase in monopolies with a shift of power from the buyer to the supplier;
Loss of investment in supplier R&D which ultimately results in a loss of innovation through
procurement and the loss of the buying organization's competitiveness;
A short-term focus could lead procurement to ultimately compromising the long-term success of the firm
and even the supply chain. Quite simply, we could be creating dynamics that work against the buyer
when we reach the economic recovery; short-term gain leading to long-term loss. Or, in common
parlance, being penny wise and pound foolish.
The current financial crisis has the potential for procurement to demonstrate its real strategic
contribution. The profession stands on the edge of opportunity - but could that opportunity, wrongly
grasped, become procurement's nemesis? We feel that currently dominant procurement strategies
suggest that Porters 5 Forces is not being considered in the longer-term. While our discussion is highly
conceptual we feel it acts as a timely wake-up call; a wake-up call to both practitioners and their advisers.
Recommendations
Having considered the listed scenarios, which we believe present real risks to organizations, we present
our recommendations.
n
Ask when your strategy was last reviewed and consider the need for a refresh;
Ensure your procurement strategy is strategically aligned with the outcomes your organization wants
to achieve;
Put in place a mechanism to ensure that on-going environmental scanning is taking place and that
significant changes in the external environment, which could have an impact on your procurement
strategy, are reported to the Board;
Ask whether you have carried out due diligence of current strategic supplier security of supply;
Consider whether the longer-term risks associated with your short-term strategy have been
appropriately identified and risk managed;
While the current environment may well suit buyers, are you ensuring that your organization will still
be a preferred supplier when economic recovery arrives;
Ask whether you are pursuing a strategy which will create the right market structure when economic
recovery has been achieved;
Ask are your payment processes supporting or hindering supplier cash flow;
Ask are you doing all that is required to shape a long-term market that suits your needs.
Contact
To know more, contact global.consulting@tcs.com
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