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Okay, welcome to week two. I want to talk about the importance of procurement.

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So why is do you think procurement is important to an organization? I'd like you to take about 20
seconds or so and jot down a piece of paper why you think procurement is important. I'll come back in
about 20 seconds.

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Okay, so procurement generally is a functional organization and it's on an organizational chart

somewhere generally. And they basically responsible for buying goods and services. We're going to talk
more about indirection in week four but it can be raw materials and packaging, or it could be services,
such as advertising promotion for marketing. And basically they have basic things that they do, and
obviously the one of the most important ones is about supplier management and identification, and that
type of thing. We're going to talk about more about that in course four. Also negotiate and contract, and
we're going to talk about that in both course six as a well a little bit in course four, supplier
management. And measurement of suppliers is very important. And lastly, we're not going to spend a
lot of time talking about systems development, we'll highlight it in a few different areas. We could
probably do a whole course in it, our specialization, but we'll talk a little bit about why systems is
important. It basically makes procurement more efficient and effective.

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So why is procurement important to the firm, and I think there are four things. And I'm going to go
through each one of these individually, so I'm not going to spend time reading them here.

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The first one, is that suppliers are increasing both value and savings. In most procurement departments,
one of the number one objectives they have is obviously to reduce cost. There's less time talking about
creating value. We're going to give you a couple examples here in a minute, but it's very important. It
has a major impact on the corporation. So in most manufacturers, for example, 50 or 60% of their
manufacturing costs, right, are part of their revenues. So in Colgate for example, the cost of goods sold
in order to make manufactured products was about 60%. About two-thirds of those was raw materials
and packaging.

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So it's a very important. So if you can save money in buying those raw materials and packaging, or
services as it may be. They're obviously going to go directly to the bottom line. And then we've learned
and we'll mention this a couple times that you can get early involvement that can help you in the
product design. Thereby getting your products quicker to market.

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Second one, building strong relationships and driving innovation. So we've kind of got away from this
idea that you kind of just beat up suppliers to get a really cheap price. You're really working together in
various things such as joint cost reduction where may be potentially, you work together in joint cost
reduction, and just split it 50/50, right? And most of these arrangements are collaborative, and both the
supplier and buyer must benefit. And we've seen in as examples where suppliers actually contribute
very innovative or unique ideas that can help your top line growth.

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So an example I read long time ago that Procter & Gamble got the idea of swifter from a supplier. And
then they took that, and basically grew it into a billion dollar brand. So this can be very important to the
company.

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Proven quality and reputation, very, very important. And then basically, in the quality area you got to
have, you basically have to have quality when you buy those materials, right? Risk management is
another one, look at COVID-19, how people have to potentially worry about that risk and how they'd be
able to get their supply chains to run efficiently. But as far as the quality coming back to that which I'm
going to highlight here because I think it's very important, is you really need to understand overall
worst. The material coming from not just from your supplier, but you supplier's suppliers. We call it
basically supplier map and then we'll talk later about it in the course. But the bottom line is that supplier
quality goes directly into product quality. So as you and procurement, all right? You may get help from
other people identifying and evaluating suppliers. But in the end of the day, you're going to pick a
supplier and you're going to have to say this suppliers can deliver quality materials to us, right? And if
you don't do it, and I don't think generally they're going to blame this, the engineering or the quality
department. They come back to procurement say, what are you going to do to fix this problem? So I
think, they have certainly important input but it's very critical that you as a procurement person, make
sure you get the right quality. Reducing time-to-market. We don't generally think about this, right? But
we're going to talk about when suppliers involved in early product design, you can get your product to
the market quicker. And we also know through studies that have been done externally, that when you
do that, involving the supplier, you can get 20% improvement in material cost. You can improve the
quality and improve developmental time. Such as if you can take these things get it into the product and
thereby into the marketplace as a finished good, you can literally improve revenue for the top line.

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So I think the takeaway from this is that contributing to a competitive advantage, right? And most
people recognize that procurement can really contribute from a cost reduction standpoint. They
contribute in profitability. So for example, if I save a million dollars in material cost, the company can put
that money directly to the bottom line. Or they may choose to invest that money in let's say, new
products or advertising in order to help the top line growth. We already talked about the idea of maybe
suppliers bringing ideas in. And secondly, there's a lot of responsibility to growth like for example P2P,
which is procurement to pay. This is where you have a system in place, generally can be run by
procurement, can be run by finance. We have an overall system all the way from procurement, all the
way time to pay the vendor. We'll talk more about that in procurement processes, right? But the idea
here is that you have this very efficient effective process that allows you more time to do strategic
sourcing. Business process outsourcing BPO, we know that many of organizations have outsourced
customer service or they outsource payments to an outside vendor in procuremen'ts involvement.
Lastly, mergers and acquisitions, the idea that you're investing and going to buy a company or you're
going to merge. What's the value? Were you going to create value, and I was on many teams that I
would go out when I was at Colgate, and we would sit there and say, where can we create value for this
merger acquisition, right? And we compare contracts, who's got the best contracts? What can we learn?
What kind of synergy can we get from the two organizations together? So procurement is doing things
like that. And lastly, I think we've recognized that this really is an important discipline in the corporation.
And you can get certifications such as CPSM, certified professional procurement supply management.
This comes from in the US from ISM. Although there are other ones globally, but the idea is it's a real
recognition.

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So, what are come and sit takeaways from this, the importance to procurement? Well, the first one is
that the, if you have the right leadership, you can create a real competitive advantage for the firm. And
as we said, there are four different ways you can do that. Number one, you can deliver value and
savings. Two, building strong relationships with your suppliers that you can have a collaborative
relationship, and you can maybe drive an innovation. Three, got to bring quality and you got to be
responsible there, and reputational risk. When you have a rep, you've seen them in the paper to Wall
Street when there's a problem. It can come back to haunt you, so to speak. And we'll talk more about
risk management in course four, but you can really improve or have a problem in reputation. And lastly,
using time-to-market. You can help get things to market quicker and prove your top line. So that's it for
week two, we'll see you in week three.