Purchasing strategy isn’t the sexiest part of the FD’s role. But streamlining your buying policies – and getting the whole company behind them – makes a big difference to the bottom line.

1 Get it joined up.

Getting a coherent buying policy instilled into a business is the key to the savings that so many procurement programmes promise. “Remember there should be no purchasing activity that goes on in the business that passes unchallenged,” says Guy Strafford, client services director at procurement consultancy buyingTeam.

Out on the front line, Ad Witjen, financial controller at global energy group Impress, agrees. He says ensuring you deal with suppliers properly can make all the difference. “We have 43 plants across the world, and only 25 suppliers have two plants in common,” he says. “Enforcing compliance with a standard policy is an issue. We’ve had a situation where we’ve done a global deal with a major supplier and a year later they’ve come back to us and said only 20 per cent of our plants’ procurement was on contract. The other 80 per cent of their purchasing went to local suppliers. So we lost leverage with the supplier.” To counter that, Impress implemented an e-procurement system from software provider Marrakech to make sure the head office process was properly adhered to. And so far it’s worked. Lesson? If you have a plan, stick to it – and make sure others do, too.

2 Consider a software solution.

Rodney Bond is the management accountant at Martlet Homes, responsible for the company’s purchasing strategy. He says compliance with it has been greatly improved by the introduction of new technology (he uses a Requisoft product). “We service over 5,000 homes, so we buy in a lot of products and services,” says Bond. “Now we’re looking to set up an electronic exchange of data with suppliers. We know that we need to build up trust with them, but sorting it out electronically means you cut out transactional errors. And you get to allocate costs accurately. It also means you get decent management information – the FD has the ability to see what exactly is going out.”

What does Bond see as the main benefit? “It gives you control over costs,” he says. “Our system controls the flow of information. Purchases all have to go through a budget-holder. What that means is that no-one can bypass the controls you’ve put in place. So you can say to a supplier, ‘unless you’ve got an official signed order with a number, we won’t pay’. It still anyone can order or purchase something – but if it’s not signed off by the budgetholder, it’s not getting bought.”

A word of warning: fancy systems won’t make any difference if they’re not used correctly. “Remember – e-procurement is not the end objective,” says Strafford. “It’s just a tool for driving more value out of purchasing.”

3 So get the right people.

Rohan Hewavisenti, FD of Breast Cancer Care, says just relying on a process is not enough. “Good procurement is more to do with the attitudes and abilities of staff rather than systems or procedures,” he says. “Bureaucratic procedures are often an attempt to control incompetent staff who will invariably not comply anyway, while more competent, entrepreneurial staff can be stifled by the bureaucracy.”

Wijten agrees. “A more advanced purchasing system actually makes it tougher for procurement staff. Far from reducing the demands on employees, it increases them. You need a higher level of expertise to get the most out of the system.”

As Roy Ayliffe, director of professional practice at the Chartered Institute of Purchasing and Supply (CIPS), admits, there is a shortage of procurement experts. “This area has come much more into the limelight recently – and the government is taking it seriously,” he says. “So there’s lots of recruitment, especially in the public sector. That’s created a shortage of talent.”

Strafford advises casting a wider net in the search for suitable personnel. “There needs to be a broader gene pool within the finance function of people qualified to do the procurement job,” he says. “FDs should be looking for different skill sets. Consider what kind of knowledge and expertise you’re after. Is it category knowledge? Maybe you need a bit more – a good analyst or an account handler? Or a
contract negotiator or tender manager?”

4 Is it worth outsourcing?

Like many “non-core” areas handled by the finance function, procurement is increasingly an outsourcing play. Strafford – despite the fact his company offers a third-party procurement service – admits outsourcing has to be handled carefully. “It could cost you more initially,” he says. “But in the long run it will probably save you more.”

Any contract has to be organised properly. Remember, control is always an issue in outsourcing. The main risk is a divergence of interests between the FD and the service providers. Sometimes that only emerges over time, so you need to structure your contract with flexibility built-in. The KPIs and the service level agreement (SLA) need to be tougher and tighter than they would be for an internal project. And you need to keep a close eye on what the service providers are doing.

Outsourcing is mainly for the bigger boys, it’s true. But it is filtering down to smaller companies. “One of the biggest benefits is that it allows you to see, in one place, what value you’re generating and what costs you’re saving,” says Strafford. “But there’s not much point going down the outsourcing route if it’s just a case of needing to add more bodies. You might as well just do it internally.”

5 Get on board with suppliers.

Procurement isn’t just an internal issue. There are business partners to think about. And bringing key suppliers into your purchasing strategy can reap rewards. “We use the procurement system to make sure we can form relationships with our suppliers,” says Rodney Bond. “That’s all about driving down costs, through leverage mainly. We’ve formalised it because we wanted to find out where exactly where we were spending money. That makes it easier to form partnerships with the suppliers.”

Terry Courtney is FD at Newcastle-based Pearson Engineering. As a manufacturer, ensuring suppliers are integrated with the business is crucial. “But there are no quick wins,” says the FD. “It relies on relationships developed over many years. When we’re up against it, we find it useful to bring them on site and explain the situation. At those points, the personal touch makes a big difference.”

6 Don’t be afraid to re-tender.

Contracts are there to be re-negotiated, so don’t be afraid to take a second look at your existing arrangements. Edward Gower-Isaac, FD of AIM-listed Pixology offers one example of how this policy can deliver.

“The quickest win – and a salutary lesson in procurement to me – was when we swapped stationery suppliers recently to a new and cheaper provider,” he says. “The old supplier complained and came back to us straightaway, matching the new provider’s prices. But I refused to return the contract to them because I was so incensed that they had been happily overcharging us for years and believed that our business was theirs by right. So now we keep suppliers honest by benchmarking their services and prices at least annually and re-tendering where necessary.”

7 Get a CPO.

The CIPS has been championing the role of the “chief procurement officer”, although Ayliffe warns that the role needs to be properly integrated into the organisation. “Firms can hire a suitably qualified CPO to spearhead the move to a more joined-up strategy,” he says. “They must have a background in the area, and will need to get buy-in from colleagues on the importance of streamlining the procurement strategy and process. Some CPOs work alongside the FD, with an equal status within the business. In my experience, that’s usually the best way to do it. If your CPO is subordinate, the chances are it won’t work as well.”

Which just leaves us wondering: if it was the “chief commissioning, contracts and procurement officer”, would that mean you had a C3PO at the boardroom table?

The FD's view: procurement in the public sector

The public sector is leading the way on best practice in procurement. Phil McNaull, FD of Heriot Watt University in Edinburgh, talks us through the issues for higher education (HE) purchasing.

“Universities have a duty to abide strictly by the spirit and letter of UK, EU and World Trade Organisation law. This imposes increasingly onerous obligations in terms of competition law, restrictions on post-tender price negotiation and disclosure of commercial information under the Freedom of Information Act. Universities are also essentially liberal organisations, where academic freedom has to co-exist, sometimes uneasily, with harsh commercial realities.

“The chief procurement officer (CPO) must deliver best value from non-pay spend, both to the university as employer and, as a result of the Gershon Review and Efficient Government targets, to the public sector generally. So he needs to be compelling, diplomatic, articulate and commercially astute.

“Heriot Watt’s approach to procurement combines investment in systems and investment in people. We’ve operated an e-marketplace since 2004, which provides full req-to-cheque automation. This complements a mature corporate procurement card programme and use of Oracle e-Financials to exert control over purchases. It has also been at the forefront of Scottish HE in its use of e-tendering and e-auctions – all of which support a market segmentation approach to acquisition. The emphasis is therefore very much on driving down and driving out costs.

“On the HR side, the university attracts high-quality procurement professionals, still a relatively rare breed. We expect them to ‘hit the ground running’ and make an immediate contribution. All procurement staff are encouraged to continue learning through internal and external courses – with the results monitored for cost-effectiveness. So although HE is not ideally suited to lean procurement, by combining investment in systems and people, we can achieve a surprisingly quick ROI on both.”

Quick wins in procurement

”Review and renegotiate with existing suppliers on a regular basis,” says buyingTeam’s Guy Strafford.

”Invite a minimum of three suppliers to tender for each new or existing contract. This should focus not only on cost, but also on specifications and service for which you might set parameters in the ITT.”

“Consolidate or change suppliers where duplication is identified.”

“Create preferred supplier lists.”

“Challenge and scrutinise the addition of new suppliers to the approved list.”

“Review contract terms and conditions to ensure minimum notice and cancellation periods (where beneficial), allowing more flexibility in your purchasing.”

“Periodically review approval procedures, ordering and invoicing to ensure the buying process supports your broader objectives and drive for process efficiency.”

“With photocopiers and other office equipment, purchase outright rather than with lease finance,” says FD Rohan Hewavisenti. “Beware the upgrades on office equipment, and new suppliers taking on your existing leases. Office managers are often blinded by the sales spiel without analysing the numbers.”

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