Why Your Procurement Processes will Destroy Your Company (and Your Country)

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Why do we end up with so many purchasing disasters in corporations and in government? Ignore for one moment the influence of corruption. Why do big organisations take so long to place orders? Why do they choose inappropriate suppliers? Why do they pay so much more for products and services? Why do they end up with poor quality solutions?

Surely, if the Purchasing Departments do their job properly we should be able to eliminate these problems. However, I believe the problems are much more complex and the entire traditional process thinking in the “purchasing world” is off kilter. The total structures we use, along with the way in which we educate buyers, is simply wrong.

Robert C. Townsend, wrote his best-selling book ‘’Up the Organization: How to Stop the Corporation from Stifling People and Strangling Profits,’’ way back in 1970. In it he tackled the typical purchasing department. He suggested “fire the whole purchasing department. They cost ten dollars in zeal for every dollar they save through purchasing acumen. … If you must, have a one-man buying department.”

He rightly pointed out that purchasing departments have a knack of frustrating anybody in the organisation by introducing layers of bureaucracy. This frustration is certainly exacerbated by creating centralised purchasing departments far from the “coal face”.

Typically that Einstein you just hired has to wait three months for his or her new computer, because form B12165798#3 has not been properly filled out or the new piece of equipment that will save the company millions cannot be ordered as you have to have 13 quotes from companies that meet some obscure compliance standards.

Power and control

For a purchasing department head, centralisation gives him or her power and control so he can (in theory) focus on developing standards of quality, financing purchases, negotiating price, buying goods, inventory control, reverse logistics, etc. These buyers need to support lots of commercial skills for the empire to be consolidated and controlled.

Soon the overriding focus becomes the process itself. The most important functions look at issues such as compliance, contracts, controls and score sheets.

However for the user, he wants a buyer with extreme technical skills right at the location where things happen, so he has control regarding the stuff ordered (as close as possible to the “coal face”). He wants minimal bureaucracy – “just get me the right stuff fast” – with far less regard for commercial issues. The user has a greater focus on quality, maintainability, suitability and finding a supplier with a common culture.

Pervasive corruption

One core argument for centralisation will always be “we can then control corruption”. However there is certainly no proof that centralised purchasing or decentralised systems are better. In fact, you can argue that the final user is less likely to focus on kickbacks as he takes responsibility for execution and thus will live with the effects of corruption long after implementation. However if corruption is pervasive in the organisation, it will penetrate any type of purchasing process regardless of the structures.

We’ve all read about the 10 000 toilet seats floating around the USA military or the R250 million for R25 million work at Nkandla. The Government (National Treasury) has a great centralisation plan to combat this type of occurrence and plans to implement procurement strategies that they believe will save R25 billion a year.

Inflates costs

Their aim is to improve efficiency in spending programmes by reducing red tape, barriers to doing business with the state and establishing mechanisms to engage with stakeholders in public procurement, all through centralisation. Are they dreaming? Can they use their “honest endeavours” to achieve such objectives or will this create another bloated centralised infrastructure that is so far from the end user that it actually inflates overall costs?

Will such centralisation stop endemic corruption or does it simply fog up the entire process? Maybe the Chinese have a good strategy. If you steal more than 3 million Yuan from the state (around R1.5m) it is seen as treason and you could face the firing squad!

If the buyer’s core objective is to enrich himself, it really does not matter how the buying team is structured. Criminals will always find a way around the system. Stopping theft in whatever form requires a total focus on the culture of corruption. Clear visibility of the process helps. What also helps is if the end users are clearly involved in the process.

Resistance to integration

Maybe if organisations see purchasing as a single component of the overall supply chain, it will help buyers make more sensible decisions? Will seeing procurement as a component in the steps it takes to get the product or service to the customer improve the process?

In theory the “supply chain approach” must have merit, but there is a tendency for purchasing departments to corrupt and disrupt an integrated supply chain into the development of an even more powerful centralised department.

Personally I have grave doubts that any of the traditional procurement processes will improve the operations in large organisations. Bureaucracy is a cancer that spreads rapidly especially when underpinned by a centralised infrastructure.

Quickly the legalese and contractual paperwork overtakes the core functions of buying the right stuff at the right time and the right quality and at the right cost. Getting a 500-page contract signed, choosing the best “connected people” or trying to get a 10% discount on the wrong product soon becomes more important than the needs of the end customer.

Buck stops here

Robert Townsend was on the right track. Buyers must be located as close as possible to their customers. More importantly buyers need to also take responsibility for execution. If the purchasing guy is part of the team that is responsible when the final product is switched on and commissioned, he is much more likely to focus on buying stuff or services that will work properly.

That, in turn, means the buyer must have commercial and technical knowledge. Purchasing without a proper understanding of how the system is going to function and a clear focus on the end-user’s needs, is always going to end up with disasters.

Martin Bailey, Chairman, Industrial Logistic Systems,

www.ils.co.za