Webster's definition: To obtain, especially as a result of some degree of effort. To bring about or contrive.
The simple and common notion of "procurement" is "buying" or "purchasing." But careful examination of Webster's definition -- "some degree of effort", "bring about", "contrive" -- reveals that there is much more to it. These words imply objectives, planning, investigation, analysis, ingenuity and a certain amount of production. Our goal here is to dig into those nuances within the context of the LML -- to better understand the critical role procurement plays and leverage those insights to create competitive advantage.Reset View
What are we procuring?
When we speak of procurement in the Logistics Management Lifecycle (LML) environment, it is important to understand what we are procuring. If we are in the traditional purchasing and buying mindset, we might be procuring transportation services, warehouse space, consulting services, forwarding and customs brokerage, etc. But if we are contriving or bringing something about with some degree of effort, then we are doing much more, such as:
- driving waste out of supply chains
- accelerating sales velocity
- improving the quality and availability of information
- collaborating across enterprises and entities
- shortening the cash to cash cycle
When procurement is focused on bringing these things about, purchasing goods and services is done for very different reasons than just "getting the lowest price." As a simple example, let's look at the common activity of procuring transportation from Point A to Point B. The purchasing mindset says -- "I need to get the lowest rate." But when viewed in the context of 1-5 above, it is not that simple. Buying at the lowest price might violate the real objectives if the carrier:
- has erratic and unpredictable service that drives up the cost of in-transit inventories
- is slow in quoting and responding to special requests
- has antiquated information systems that limit visibility
- does not have the open technology architecture to share information via the Internet
- does not provide timely proof of delivery, has poor billing processes or less desirable payment terms
Any of the above can easily generate costs that exceed the amount of money "saved" by getting a lower price.
How do we procure?
That depends on the scope and dollars involved. For the purposes of the LML, we are only considering larger, more strategic decisions. These decisions tend to be more complex and recently conducted a tender for:
- North America to and from the Globe
- All divisions
- All modes of transportation
- 12 candidate providers
Analysis in this environment requires strict conformity to the bid structure by all candidates.
Sell Side Challenge : The problem for candidate providers is just the opposite of the Buy Side Challenge. Unlike enterprises (customers), service providers cannot dictate the form in which they receive a tender. Unfortunately, each enterprise has its own bid structure and idiosyncrasies -- different naming conventions, surcharges, service requirements, lane definitions, etc. -- to which the service provider must respond in order to compete for the business. The "sell side challenge" is that the variations from tender to tender turn each one into a major project and headache for Sales, Pricing and the P&Ls affected within the scope of the bid. Sales and Pricing must manually interpret each tender, find the appropriate service/price response for each line, key the data, submit it to the appropriate P&Ls for edit/approval, proof it and send it back to the customer -- hopefully in the original format. This takes major senior level resources that are occupied mainly in getting the response done by the deadline. Little time is left for proper analysis and optimization. The net (and negative) results are:
- lower sales velocity
- higher human resource costs
- lower yields
- fewer wins
- fewer repeat invitations to bid
How do we improve the procurement process?
The answer to this lies in overcoming the buy side and sell side challenges. Fortunately, some Internet native technology tools are emerging that tackle these head on. These tools enable enterprises to automatically generate tenders directly from shipping profiles in their ERP systems, analyze the responses (even if the format has been altered), optimize their selections and capture the resultant agreements in a relational database for use in the Execution and Audit & Pay stages of the LML.
Service providers derive value from these tools by automatically -- receiving and translating the tenders, populating them directly from the rate database, collaborating on-line across P&Ls, and generating the response in the exact format required by the customer.
Some key benefits of employing such tools are the following:
- Increased competition and service/price options because more candidates can effectively be invited and evaluated
- Lower supply chain costs through optimization
- Lower costs to conduct the tenders
- Better execution later in the LML due through the resultant rate database
For Service Providers
- Reduced human resource costs -- fewer and less senior people required to generate responses
- Higher yields due to better analysis and decision making by the senior people freed up above More wins through higher quality and more competitive responses
- More invites to future tenders because of strict compliance to tender rules
Final thoughts on procurement
Procurement is by far the most strategic element in the Logistics Management Lifecycle. These decisions require the involvement of corporate leadership, not just management. To be effective, major procurement decisions must align with corporate business objectives for the long as well as the short term. Enterprises must select providers who fit their requirements from a business standpoint, as well as a solution standpoint. This can often mean selecting the candidate that is not the lowest price respondent to a tender.
For service providers who want to win more business at higher yields, it is imperative to demonstrate business and solution fit. Timely, compliant, competitive and well reasoned tender responses help do just that. They show the prospective customer that you understand their requirements and have done the work to generate maximum value in your response -- beyond just the pricing. At a strategic level, enterprises are more likely to do business with providers that instill trust and confidence through high business acumen and corporate professionalism.
So no matter what your role in the process, hopefully this article has shown the critical importance of procurement and provided some insights on how to leverage tenders to your competitive advantage.