Supply Chain Finance (Part 3): How A Misdirected Overemphasis On Process Undermines Best Value Purchasing

Posted on March 7, 2011

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In the previous installment in this series, I talked about the fact that it has became abundantly clear that addressing the challenges that vendors face when they decide to pursue government contracts, is not something that can be solved from the supplier side of the equation.

For example, and citing the AMEX study results yet again, on average it takes a supplier 19 1/2 months at a cost of $89K per year to win their first contract . . . keeping in mind of course that there are no guarantees that they will actually win a contract.

The problem according to Colin Cram, who just this past Friday was interviewed on BBC Radio 4 regarding the application of the concepts he proposed in his paper  Towards Tesco: improving public sector procurement, is one where the emphasis on process improvement has actually undermined government efforts to make best value purchasing decisions.  Surprised by this revelation?  I’m not.

 

Click to listen to Cram Interview which starts at the 17 minute mark

Referring specifically to the practice on the part of consultancy firms in the 1990s to push process-centric vendor rationalization strategies – an inherently flawed approach that is still being recommended by some today, Cram contends that the purported cycle time savings and corresponding volume reductions were overblown.  In fact, the 30 year plus public sector veteran indicated that experience clearly demonstrates that an emphasis on process improvements centered on rationalization, and transaction reduction would at most provide savings in the 1% to 2 % range (and even less within the public sector).  A far cry from the tens of millions of dollars invested by end-user organizations in the hope of realizing the big payback that was never to come.

While SAP is not the only ERP-based vendor solution to consistently miss the mark, its implementation failures are amongst the most noteworthy as outlined in the 2007 paper SAP: Procurement For Public Sector.

Furthermore, Cram would add, the overemphasis on process has to a certain extent become a crutch for non-imaginative buying practices where adherence to belt with suspenders, risk averse rules often times takes precedence over best value decision-making.

I would certainly have a difficult time arguing this point with Cram simply because I experienced this contradiction of purpose first hand back in 2005.

It was at the height of the Federal Government of Canada’s Way Forward controversy that I received an e-mail from one of the most senior executives within The Treasury Board Office regarding my assertion that the proposed savings of the initiative were unrealistic.  To this day, I have to re-read the e-mail several times to actually believe what this gentleman wrote.  Basically, he wrote that “you may very well be right about the savings projections,” but because we “followed procedures in selecting the vendor” we did our job.

The senior exec in question has since retired, with the majority of those involved with the Way Forward program being fired or transferred to other assignments.  The initiative, after countless millions of dollars of taxpayer money being spent, was quietly euthanized 4 years later.  The salient point however is that Cram is right on the money in terms of his assessment that most of the procurement policies and processes are actually driven by auditors or non-purchasing personnel whose main focus is to minimize risk and balance their budgets.  Or to put it another way, process is supposed to serve the interests of the buyer in the real-world versus the buyer serving the interests of a process that in the majority of instances has little if anything to do with the actual procurement of goods and services.

This segues into the other two major factors that according to Cram, tend to derail most public sector initiatives, with the first being the absence of purchasing personnel, even from the CPO level, in the decision-making process as it relates to automation and savings initiatives.

In the long run this mindset, which still exists within a good percentage of organizations today, reduces for all intents and purposes the role of a purchaser to one of functional necessity versus being a strategic contributor to an operation’s bottom line.  I wrote about this in an August 3rd, 2007 article (Procurement’s expanding role and the executive of the future) in which I made reference to a comment by a purchasing executive who had participated in a CPO Agenda Roundtable.  Here is the specific excerpt from that article:

How an organization views the role of its procurement department differs from one company to the next.  One panelist made the following observation when asked if the shortage of talented people was the greatest constraint a CPO faces: “the context, history and the culture of the company is important.  Take a specific category as an example.  I moved to Nestle from a company where procurement was heavily involved in any new capital expenditure project right from the start.  Now I find myself in a situation where we have very limited involvement to actually influence the buying decision.”

The final point that Cram raised during our trans-Atlantic interview this morning is that in the end government requires an entrepreneurial performance spirit in which objective standards are set based upon a much broader understanding of the whole by avoiding the convenient and sadly familiar silos of segmented thinking.

This holistic view in conjunction with a process-oriented approach that reflects the best practices that inevitably lead to the best value results and, a more proactive purchasing professional attitude, will ultimately remove the barriers that represent a daunting and in some cases insurmountable barrier to entry for the vast majority of suppliers.

Colin Cram offer’s a 2-Day Acquisition Review Session for all levels of Government at a flat fee of $5,000 US plus travel.  Remember to contact Colin Cram directly at colin.cram@talktalk.net for further details including session specifics.

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