Thursday, September 23, 2010

Early to Bed, Early to Rise, Work Like Hell and....Customize?

An invigorating article on Tuesday about Honda's decision to NOT STANDARDIZE components across global auto models. In a strategy guaranteed to drive procurement puritans to drink, Japan's No.2 automaker will develop unique specifications for each of the seven countries where the next generation of the Fit sub-compact will be built and sold. Honda's purchasing head Masaya Yamashita reveals the primary drivers of the bold new sourcing strategy to be country-specific requirements and new design ideas from local suppliers.

The concept of customizing product specifications to the requirements of unique market segments is not new. The issue has always been how to manage purchasing, manufacturing and supply chain costs while doing so. The argument is that unchecked growth in specification variation works against all the traditional drivers of supply chain cost reduction such as purchasing leverage, inventory investment and set-up cost. So is Honda out to lunch with its sourcing approach for the new Fit? No, the company is just adopting the broader view of total cost of ownership to include the benefits of better tailoring the product to end consumer requirements and also down-specifying certain requirements based on country-specific usage environments.

In addition to just making sense I find the Honda article extraordinarily refreshing. Having been around the supply chain block for a few years now I know only too well how easy it is to regard certain strategies and practices as a perpetually and universally applicable best practice. A paradigm. Like any paradigm it makes you feel safe and comfortable, like you'll always have the answer. Thank you Honda for reminding us that paradigms are there for one reason - to break.

Friday, September 17, 2010

Lessons from the Public Sector

I'd like to welcome back to 1 Procurement Place guest blogger Barnali Dasverma. Barnali is a Manager at Treya Partners and has an interesting point of view about where the private sector can look to learn some lessons about improving the effectiveness and efficiency of procurement processes. Some of you may be surprised by Barnali's viewpoint, but then others may not....

Structure & Discipline in Procurement: What the Private Sector Can Learn from the Public Sector

By Barnali Dasverma
Manager, Treya Partners

“Yikes, what a haphazard sourcing process! You would never see this in the public sector!” Believe it or not, this was an observation I made after beginning my first private sector consulting engagement following a series of public sector clients. I was startled to come to the realization that there’s quite a bit the private sector can learn from the public sector. I’ve subsequently had the opportunity to serve more private sector firms and additional state governments and have had this conclusion reaffirmed. Specifically, my experience suggests there is a remarkable amount of structure and discipline in public sector procurement that many mid-market firms can greatly benefit from.

Bureaucracy Has Its Benefits: Processes

Bureaucracy has its benefits (as a consultant frequently engaged to tackle bureaucratic inefficiency, am I even allowed to say that?) and process standardization is one of them. One key public sector procurement practice the private sector can benefit from is a standardized RFP process. Many mid-market firms with unsophisticated procurement departments have an inconsistent approach to RFPs – each procurement staff member has his or her own RFP style and each procurement is run differently based on who leads it. In contrast, state governments typically have a well-defined multi-step process that everyone must follow, newbies and old-timers alike. If you’re a mid-market CPO working to optimize your procurement operations, begin with putting in place a consistent, best-in-class RFP process. Conduct vendor and industry analysis as a critical first step, call for requirements gathering that includes the alignment of specs with needs, require that all high profile procurements have a pre-proposal conference to obtain supplier feedback early on, have cost and non-cost proposals be scored by different evaluators to facilitate unbiased decision-making, and require that the procurement lead serve as single point of contact to limit the flow of information to suppliers. By formally requiring that all RFPs include best-in-class steps like these, you will ensure that your procurements are consistently exceptional.

This Is How We’ve Always Done It: Templates

While “this is how we’ve always done it” is a frequent refrain in state government and rarely music to a consultant’s ears, there is something to be said for not always reinventing the proverbial wheel. Far too often, we come across fledgling procurement departments in the private sector that whip up a new RFP whenever a procurement need arises, patching together portions of old RFPs to the extent possible, with the end result being a messy, incoherent solicitation document. Significantly, state government procurement departments are quite different in this regard and typically have contract and RFP templates (“boilerplates,” as they are often called) that all contracting officers must use. A powerful way to increase the efficiency and consistency of an unseasoned procurement team is to invest the time and effort in developing best-in-class templates for RFPs, RFIs, contracts (including standard terms and conditions that have been approved by your legal department), negotiation materials, and the like. Design the templates with usability in mind, carefully noting which portions must be tailored for each new procurement and which ones can be leveraged with little to no tweaks.

You Can’t Break the Rules Without Having Any: Policies

While procurement rules and regulations are sometimes followed blindly in government when they should in fact be challenged, they serve a valuable purpose and many private sector entities can benefit from them. Specifically, well-defined, and clearly communicated (and needless to say, best-in-class) procurement policies help minimize the gap between the CFO/CPO-level vision and the operational reality. For example, procurement policies defining delegation thresholds ensure that procurement staff members’ limited time is not spent on low-dollar value procurements, while requirements that procurement be involved in all RFPs of a certain contract value make sure that an organization reaps the benefits of having a high level of spend under management (e.g. application of strategic sourcing techniques to a broad range of spend categories, monitoring of supplier performance and internal contract utilization, etc.)

Who Knew? The Public Sector Can Teach the Private Sector A Thing Or Two

Having served as a consultant to six different state governments, I can tell you there are numerous ways in which the public sector can learn from the private sector – but that said, my experiences as a procurement consultant have taught me that it’s a two way street. Without a doubt, the structure and discipline we find in state government procurement is most certainly something that many of our mid-market clients can use.