What is world class procurement? That is the question that was asked last week at a conference that I was chairing. The topic was world class procurement in the NHS. Some people would argue that if an organisation has efficient and modern processes and procedures, category management, a highly qualified workforce, good information and performance measurement, great contracting and contracts management and continuous improvement then one is on the way to becoming world class.
30 years ago, when in the Cabinet Office, which is a UK government department that reports ultimately to the Prime Minster, I did a review of procurement in the private sector. One company particularly impressed me but for reasons that will become apparent, I will not give away its name. It had everything described above. Year on year procurement savings were being delivered – around 3%. If the target was exceeded, procurement staff got a bonus. Performance charts were on the walls of the corridor linking the offices of senior management. Surely this was world class procurement.
Then, a year later, a bombshell! A rival had cut its procurement costs by 20%. The company was no longer competitive. Its problem, it had been comparing itself with itself, not with what was happening elsewhere. It was not world class.
Another company I visited was a retailer, J Sainsbury. Procurement staff were given responsibility for sales. They were required to achieve a certain profit. So, they had to buy at a price that, with a set mark-up, would mean that the selling price of the products would be set at a price at which customers would be keen to buy. They would be penalised for products not sold. Opportunistic buying for stock required an extra mark-up to allow for the cost of holding the stock. That was real performance management, making procurement personnel responsible for the whole supply chain and ensuring it was profitable. At that time, Sainsbury was the biggest supermarket in the UK, and growing fast.
So, what is world class procurement? I would argue that in the private sector it is about success. If procurement costs make up a high proportion of product costs, then if the company is beating its competitors and growing fast, its procurement must be world class. If the company is not competitive, then its procurement is unlikely to be world class no matter how good the systems, processes, staff professionalism and awards it is receiving.
For the public sector, success is more difficult to define. Complex bureaucratic performance measurement can take the place of competitiveness. However, measuring procurement savings is often a challenge when the baseline is either not known or different public sector organisations have different baselines. Also, many contracts are one-off, so measuring ‘savings’ becomes esoteric and resource consuming. Procedures can take top position in the priority league and huge amounts can be spent training people. Complex contracts which protect the public sector against every risk, conceivable and not conceivable, can dominate.
However, perhaps the public sector is not so different from the private sector. Procurement and contracting organisations’ objectives should be aligned closely with those of the organisation which they serve. In the UK, procurement makes up 50% of organisational operating costs, so if the organisation as a whole is achieving its objectives, operating on continually reduced budgets, delivering year on year improvements in service, managing complex contracts that do not go wrong, then it is likely that the procurement and contracting organisation will be of high quality, possibly world class. That is the best performance measure that there is.