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Episode: 503 |
Niul Burton:
Strategic Sourcing and Procurement:
Episode
503

HOW TO THRIVE AS AN
INDEPENDENT PROFESSIONAL

Niul Burton

Strategic Sourcing and Procurement

Show Notes

Show Notes

Will Bachman and Niul Burton discuss procurement and strategic sourcing. Procurement is the function of acquiring goods or services as inputs to a company’s operations. Strategic sourcing is a subset of procurement that focuses on the sourcing of goods and services in order to maximize value and efficiency. Niul explained that procurement involves identifying, negotiating, contracting, and working with suppliers on an ongoing basis. He also discussed the importance of understanding the needs of the company, the market, and the supplier in order to ensure that the best deal is being offered. Finally, Niul stressed the importance of building relationships with suppliers in order to ensure successful and long-term collaborations.

 

Functions of Procurement

Procurement is the process of buying goods and services from external suppliers. Strategic sourcing is a subset of procurement that takes a big-picture perspective to maximize value from spending. Other functions within procurement include contract negotiation and purchase to pay, which is the day-to-day operational execution of requisitions, purchase orders and invoicing. Third party risk management is an evolution of procurement that includes managing risk for external suppliers, licensees, and distributors.

 

Strategic Sourcing to Drive More Value

Strategic sourcing is an evolution of the procurement function to drive more value for an organization. Historically, purchasing was simply a department that executed purchase orders. Now, strategic sourcing is focused on creating value, as more than 50% of an organization’s revenue goes out to their supply base. To manage costs and drive value, procurement and the relationship with the suppliers creates a tremendous opportunity. Procurement is now also doing more supplier risk management, which is a subset of third parties. Strategic sourcing is focused on understanding the current market, developing the right supplier relationships, and creating a competitive environment to drive the best value for the company. The process typically includes conducting a market analysis, negotiating with the suppliers, and implementing a contract.

 

Strategic Sourcing – A View on Spend

Strategic sourcing is a way of taking a new view on how money is spent. It involves centralizing contracts and purchases, standardizing specifications, and creating competition in the market. A former client of Niul was a big manufacturing company which had 36 different agreements for different sites, each with different terms and conditions and pricing. Strategic sourcing enabled them to look at the situation from a bigger picture view, and negotiate a commercial relationship with the supplier which was worth $1.5 billion over five years. Some of the levers used to create more value included consolidating skews, reducing the number of vendors, and having one standardized contract. Other strategies included aggregating volume, aligning to industry specifications, creating new competition, and process improvement.

 

Timestamps

00:01 Procurement and Strategic Sourcing 101 

02:07 Exploring the Different Functions of Procurement

08:12 Leveraging Value Creation Through Process Improvement

09:25 864 different strategies that can be deployed in strategic sourcing

12:13 Assessing the Procurement Function

15:47 Category Management

30:59 The internal process

39:38 The difference between RFI RFP and RFQ

 

Links:

https://www.beroeinc.com/podcasts/niul-burton-procurement-digitalization-journey/

https://niulburton.com/

 

CONTACT INFO:

Niul@NiulBurton.com

https://www.linkedin.com/in/niulburton/

 

 

One weekly email with bonus materials and summaries of each new episode:

 

Unleashed Niul Burton

SPEAKERS

Niul Burton, Will Bachman

 

Will Bachman  00:01

Hello and welcome to Unleashed. Unleashed is produced by Umbrex. You can learn more about us@umbrex.com. You NB RTX. I’m your host will Bachman. And I’m here today with Neil Burton, who is a true procurement expert. He’s been a senior partner in procurement at several top consulting firms. Neil, welcome to the show.

 

Niul Burton  00:24

Thank you. Well, I pleasure to be on.

 

Will Bachman  00:27

So Neil, what I was hoping we could do today is do a bit of a procurement 101 session and sort of an strategic sourcing 101. And maybe you could help orient me by starting out with a bit of a definition of what is procurement, what is strategic sourcing out of those two terms relate, which is a subset of the other.

 

Niul Burton  00:51

So let me try and do that. I think that first of all, strategic sourcing should be a subset of procurement. Procurement broadly, is the function of acquiring goods or services as inputs to a company’s operations. So whether it goes through the procurement function, or it’s handled, by by the, the other functions, there’s obviously an activity that goes goes on to identify, negotiate, contract with and work with suppliers on an ongoing basis. And that’s essentially what procurement is. Strategic sourcing is a subset is a discipline, a methodology that probably first started evolving about 30,000,000,030 years ago, I guess, the beginning of my career, which was to take a much more kind of strategic, big picture perspective of how a company was was spending its money and selecting its suppliers in order to maximize the value from that spend.

 

Will Bachman  02:07

Okay, and are there other parts of procurement that are not strategic sourcing, maybe downstream and strategic sourcing? Like what are the other kind of major functions within procurement?

 

Niul Burton  02:20

Yes, so I guess, at a simple level, you’ve got you start off, you know, the, the the front end, what are the what are the needs and the requirements that you’re trying to satisfy? You then select your suppliers, which would be the strategic sourcing, you contract with them. So there’s a contracting exercise, and then you have the day to day operational execution of what we call purchase to pay. So if you’re a user in an organization, you have a particular need, you create a requisition, maybe online, in the system that requisition converts is approved converts into a purchase order, which is sent to a supplier and the supplier then fills that purchase order, and invoices for those goods or services. That’s current, what’s what’s typically called P to P or purchase to pay. And all that is, is within the the realm of procurement.

 

Will Bachman  03:21

What about enterprise risk management or third party risk management? That kind of pieces that part of contracting or where does that fit in?

 

Niul Burton  03:33

So that’s a kind of a somewhat more recent evolution. Sometimes, third party risk management sits within procurements. Sometimes it’s adjacent to it because there are third parties other than suppliers that need to be you know, maybe their licensees or their distributors, that also need to be managed from a risk perspective. But within the procurement function, there is now an increasing focus around the risk management that comes with the relationship with the supplier. Whether that is cyber security risks associated with that supplier if you’re giving them access to your systems, whether it’s quality risks, operational risks, business continuity risks. So procurement is doing more supplier risk management, which is if you’d like a subset of third parties, because there are as I say, there are other third parties that you’re usually dealing with.

 

Will Bachman  04:37

Okay, great. So, let’s now focus on strategic sourcing. Give me kind of the 101 What is strategic sourcing? I’ll let you lead you know, probably want to cover what it is, what are the different pieces of it, what’s the kind of the typical process you know, beginning to end? So, I’ll let you start wherever you think is right to Give me the intro.

 

Niul Burton  05:02

Yeah, so strategic sourcing was, was really an evolution of of the what used to be called the purchasing function that procurement function to be able to drive more value for an organization. So historically, purchasing was was simply a department that executed purchase orders, they were told by, you know, by manufacturing or by operations, hey, this is the supplier we want to do business with. Now, this is what we’ve already agreed Can you just put the purchase order together to cover it to cover the T’s and C’s. And what was happening, then in the past, it was all very transactional or relationship driven. And that meant that there was a huge opportunity to, to create more value. In most organizations, more than 50% of the revenue that comes in, goes out of the door to the supply base. So in any situation where you’re trying to manage costs, and drive value, Will, procurement and the relationship with the suppliers creates a tremendous opportunity. And so strategic sourcing was really taking a a totally new view of how you were spending your money. So give you an example, perhaps of how this might work. Former client of mine big manufacturing companies, sites across the country, worked with a supplier to deliver services to their sites, they had 36 different contracts, for the 36 different sites, all with different T’s and C’s, different pricing, just really independent agreements, which typically is great for the supplier, but it’s not great for the customer. And the opportunity here was to say, you know, rather than looking at it at a site basis, and say we spend $10 million a year on this service, and we want to contract for that $10 million. We want to think about this as our entire organization. And we know that we’re not buying it this year, but we’re going to be buying it for five years out. So now we want to come to the market and say, you know, we have a a commercial relationship here, that’s worth one and a half billion dollars, you know, how to how to how does the suppliers want to bid for that business so that we can get the best value, which may not just be price, and maybe, you know, services, and another innovation and other capabilities that the supplier can bring. So what we’re strategic sourcing in, from a big picture point of view, try to take us from that transactional buying to a much more big picture strategic relationship to drive value as we were spending our money.

 

Will Bachman  08:12

What are some of the typical levers for generating more value? And I’ll give a couple just to kind of see, what’s top of mind for me. One might be, hey, this strategic sourcing function might say, do we need to have all these different skews? Or can we consolidate? Do we have to have 15 Different ballpoint pens that we order? Or can we just get one standard, you know, black ballpoint pen and ever get one gets the same? So we can drive volume on that thing? Another one that I’ve heard about is can we reduce the number of vendors maybe like in your example, so that we can deal with fewer larger vendors and have you know, deeper discounts or more strategic another one might be, you know, in your example, even if it’s the same vendor, instead of having 36 contracts, could we have one contract where it’s standardized? And then it’s maybe less even expensive for us to manage it? Because we don’t have to have 36 contracts and we have more visibility, or maybe you get greater reporting. But those are just sort of three that I’ve heard about what’s a longer list of other types of value creation that strategic sourcing would do?

 

Niul Burton  09:25

Yes, so there are a lot of different levels. Connie, actually has what they call the chessboard, which has eight by 864 different strategies that can be deployed in strategic sourcing. I don’t know all those 64 Off the top of my head, but but I think so aggregating your volume, not only standardizing and simplifying your specifications, but aligning to industry specifications. So, we would often talk about customers that were gold plated their specifications. And that meant that the suppliers were having to go through, you know, additional different steps and costs in order to satisfy those needs where, you know, standard industry standard specifications might be might be sufficient. creating, creating new competition is another lever. So early on in the days of strategic sourcing, Adam Opel was doing a huge program to drive out costs. And they had traditionally bought their components. Within Europe, whether that was in Germany and Austria from Italy from the UK, their strategic sourcing program started inviting bids from South Korea, and from from other Brazil from from non traditional sources, so creating new competition into the environment was was very powerful, even though they may end up finally, sourcing from their traditional suppliers, they had shaken up the shaking up the industry can be process improvement. So the way that we’re perhaps communicating requirements forecasting requirements. Receiving the materials, paying the bills, is another opportunity for improvement. Except some agreement of innovation, I worked with one client who said, Hey, Bill, we’re spending x billions of dollars with you, we would like you to allocate X percentage of your r&d budget to the issues that you you and I, you and us agree, issues that that that worth investing in, that we can benefit directly from. So it’s really, you know, looking to fundamentally change the relationship with the supplier. Not just how you select the supplier in the first place, but how you’re going to work with the supplier, day by day on the on an ongoing basis.

 

Will Bachman  12:13

If you’re asked to come in and assess the procurement function of a company, maybe during the due diligence, or at the beginning of a project, when you’re doing current state, what are the sort of five or 10 questions that you ask that you look at, to assess how good a procurement function is, maybe there’s a standardized sort of six levels of maturity or something like that. Tell me about how you assess a function.

 

Niul Burton  12:40

So was probably seven or eight dimensions that I would typically be looking at in a procurement function. So the first one is around, you know, that business strategy? And how were they? Are they aligning with their business partners and their stakeholders? So So procurement is a means to an end rather than an end in itself? So one of the questions is, you know, what, what’s the strategy? How are you intending to deliver value to your organization? How are you engaging with the other supply chain functions? How are you engaging with marketing? How are you engaging with with HR? How are you engaging with finance in order to make sure that you are aligned, and you’re accomplishing the bigger goals of the business and then figuring out how that cascades into the procurement function. I’m looking at the organization in terms of how we organize typically, the three buckets in procurement organization is the business Dziedzic team, which is doing category management, strategic sourcing, maybe some contracts, management, supplier relationship activities. And then there’s the operational part of the organization, which is handling that p2p purchase to pay daily transactions, which if you can imagine are in the hundreds of 1000s or millions a year. And then there’s a kind of a support team that’s defining what center systems and technology are we’re using to support our processes, how we training and developing our people. How are we measuring our performance benchmarking ourselves? So I want to assess those three groups within the organization? And then what does governance look like? how are decisions being made? Is this a dis fully decentralized organization? Is that a center led organization where the center is driving what happens in the business units? Or is it a fully centralized business? I would look at the processes, the three kind of key areas of Category Management, strategic goals, contracting, supplier management and second and then the p2p is the third. And a fundamental piece of that is under whether the company understands its spend. And there’s pretty good tools away trouble to now available now. But how well does a company understand what the money is going out the door and we used to talk about it as a spend cube, which is like a three dimensional database, where one dimension is, is the category. The second dimension is the business unit. And the third dimension is the supplier. So how well does a company understand how its spending its money? And then how well is the function enabled from a people development learning capability? And from a tools and technology point of view? Those are the areas that I think about as I want to assess a procurement function.

 

Will Bachman  15:47

Talk me a bit more about category management. What would a director of category management or what does that function do is, how is that different from strategic sourcing, or maybe it’s the same.

 

Niul Burton  15:59

It’s it’s the the terms are used somewhat synonymously, they’re not really entirely the same in my mind, but there’s a huge a huge overlap. So. So again, talking about managing the value. And as one of my clients said, he came into the position to run the procurement function. And prior to his joining, or taking on that role, they’ve been very much a focus on the transactions and being able to execute those purchase orders and get delivery of the of the goods or services. But they didn’t think about how they were spending that money. They were simply making sure they were spending it efficiently. And his comment was, I’m going to, I’m going to change my focus from managing my $60 million dollar budget of how I execute those transactions, I’m now going to focus on the $6 billion of spend, and how I derive value from that. So category management is thinking about the entirety of the spend, how do we better manage that for the benefit of the organization? And one of the first steps? After understanding, you know, the all the dollars that are going out of the door, is how do you define the categories. And from my point of view, you actually want to define the categories from a supply market perspective, oftentimes, there’s an inclination to think about it from an internal point of view. And companies want to define the categories and the way that they think about it, or they use it. But to have the biggest impact on with the supply basis to think about it from a supply based point of view. So if you have in front of think of a good example category, where we may think about it as one category, but in practice, the supply market views it as as three different things. So we’d like for example, we internally, we might think about it as a category. But in practice, the hardware suppliers are totally different from the software suppliers. And we want to think from a category management point of view, we want to think of our spend in a way that we understand all of our software, versus all of our hardware, versus all of our services, because we’re gonna go to market to drive value in three different areas.

 

Will Bachman  18:27

So for like McDonald’s, instead of just saying, Okay, well, let’s think about all of the costs of a Big Mac. Right? The supply market doesn’t think that way. You want to say, Okay, what’s our beef spend? And what’s our, you know, let us spend and our bun spend, or some or flour, right? Because the market doesn’t think about supplying Big Mac ingredients.

 

Niul Burton  18:52

That’s exactly right. And if you go to the beef supplier, and you you structure your your business, your opportunity in a way that is most attractive to them, then you’re going to get the best deal.

 

Will Bachman  19:08

Okay. You mentioned supply chain earlier. What is the relationship between the procurement function and the supply chain? Seems it’s definitely connected around that operational piece, you know, buying stuff on a tactical basis? Is it often the same executive? Or do you have one exec who’s in charge of procurement someone who’s in charge of supply chain and how did this overlap?

 

Niul Burton  19:34

So I think it typically in a manufacturing situation, you want procurement as a part of the supply chain organization. And I it’s in the slides that I’ll send to you Well, there’s a model called the supply chain operational reference model, which has been around a long time, but articulates the main components of supply chain which is planning And then buying, making and shipping, I guess distribution in simple terms. And so in that context buying is in support of what’s being planned and what manufacturing is going to need. And so procurement really is a component of a broader supply chain. Particularly when you’ve got that now that physical supply chain that’s taking place, it becomes a little bit less clear when you’re thinking about, like a financial institution, because they don’t have supply chain in quite the same way. And procurement is probably a bigger, bigger component a bigger concern because of the amount of dollars that are being spent. But but but I think of procurement as being a cloud of supply chain.

 

Will Bachman  20:59

What would you say for perhaps, perhaps a manufacturing company so we can kind of keep it targeted? Or though you can alternate? If you have other? If it depends by the industry? What would some good KPIs be key performance indicators? If you’re assessing a company looking at the procurement function, what do you typically expect to see as the KPIs

 

Niul Burton  21:24

so it tends to fall into that kind of strategic operational setup. Again, from a strategic point of view. I think every procurement organization continues to be measured on their year on year costs, cost savings, which is a big part of what’s driven through the strategic sourcing program. I’m also but in order to kind of know that I’m doing that well. I also want to have some I want to track the extent to which I’m doing category strategy reviews on a regular basis, I want to be tracking the extent to which we’re having supplier, supplier reviews with our strategic suppliers on a on a regular basis. And I also want to track how much traction my agreements have within my own organization. So there’s a thing we call Maverick spend. So if you can imagine the procurement organization is putting in place these agreements with selected suppliers across the categories that we’re buying. But, but individuals out in the organization oftentimes can still go out and buy something independently. So if I if for me, if I don’t have the right strategy, or if I haven’t implemented the strategy effectively, I’ve got more of that Maverick buying going on around or outside the procurement function, which I want to, I want to minimize. And then I also want to I also want to get a, like an NPS and net promoter score from my business partners, how, how supportive Do they feel, as we’re working with them in selecting the suppliers and managing suppliers that they need to work with? And then from then, from a transactional point of view? What’s my what’s my cycle time on POS? What’s my autofill rate? On my on my POS, what’s the invoice accuracy on my POS, I think more and more, I want to look at what I call the touchless order. So it’s all automated was when the user creates a requisition, they can find the item they want in a catalog. It’s approved, the PIO automatically is sent to the supplier, the supplier fulfills the order. The invoice is correct. and is therefore approved automatically and the supplier gets paid from procurement on that doesn’t actually have to individually touch that transaction at all. That that’s another area that you know is a is a good thing to measure because it shows how well we’re automating our transactions.

 

Will Bachman  24:26

Getting specific on consulting a lot of listeners of the show our consultants and they often are trying to one of the steps is to kind of get through procurement right to get signed up. So a couple questions bundled together here one is any tips you have for particularly smaller vendors like independent management consultants, any tips on getting through the procurement process? And kind of related to that is is it possible do you think for An independent consultant or a small boutique firm, to just go directly to procurement and say, hey, we’d like to get on your preferred vendor list as professional service firm, we offer this service that, you know, company like yours would buy. And you know, and probably needs and proactively kind of get listed. The much more common scenario is some executive finds the consultant, they say, Okay, I want to use this person, they pound the table, they go to procurement says, you know, I want to get this person on boarded. But is it possible in your view to kind of go reverse and first approach the, you know, find the person in procurement who’s responsible for professional services category, and then see if you can get, you know, on the on their list?

 

Niul Burton  25:48

So let me answer the second question first. In terms of getting getting on the, on the list, I don’t think that that would be a fruitful way to go. Because I don’t think that whoever in procurement is the gatekeeper for consulting services. I think rarely are they pushing those kinds of names or capabilities back to the business partners. I think it’s different if you’re an Accenture or a Deloitte right, but, but for the folks that, you know, that you know, talking about, I think, I don’t know that I would, I would not put the time in to try and get onto a preferred provider list. I think that I don’t know that that would be fruitful. But because I think most of the, if not all, of the buying from the smaller boutique kind of consulting firms is happening where there’s a relationship with with the executive that needs the service. So that’s where I would focus my time and attention is finding the buyer, the decision maker on the buy. I think, separately, though, in terms of working with procurement, and I saw this, the last firm that I was with is that oftentimes people would view procurement as the enemy, which was not not a not a healthy way to try and navigate the process. So I think, and they would try to avoid working with procurement. My approach is to try and engage with procurement, they oftentimes they have a process they have to follow. So work with them on that and try and build a relationship with the individual in procurement, who’s the who’s the gatekeeper, because they want to people want to work with people, they like the same as everybody else does. So if you can build a relationship, you’re much more likely to be able to navigate the procurement process that’s being imposed successfully and have a friend on the right side. And if you can get, you can build that relationship, then it’s going to make it much easier to get your your contract agreed and your rate agreed and so on.

 

Will Bachman  28:10

What goes on inside the accompany when an executive finds a consultant, or an individual or a boutique firm, either way, and they’ve already talked to the person they got, you know, they already kind of agreed on the scope of work and everything. Walk us through what goes on inside a company, when that procurement goes to their point of contact, you know, the head of procurement or a director and procurement says, Hey, we want to onboard you know, Jane Smith, advisory firm. What happens then?

 

Niul Burton  28:46

So it’s gonna vary a little bit on the culture. Some organizations have got a much more structured culture, and then maybe resistance to trying to use a firm, that’s, that’s new to the organization. But typically, you know, the executive who wants to retain a consultant a owns the budget, and B is senior enough that they can you know, work outside the system a little bit. So, you know, if it’s an it’s an, the CFO, or the EVP, or an SVP says, hey, you know, I’ve got this business issue, I want to use this help, I’ve got a budget for it. I just need help putting the contract together. For the most part, while procurement might be a little ticked off, that they get pulled into the process, after the fact, I think it’s pretty rare that they’re going to say, and you can’t do that. Now, I think, you know, so I have some clients on the manufacturing side, that are more structured and rigorous, and, and, and may say, No, this is our preferred provider. But most organizations I’ve been in it. If it comes to procurement as a done deal, although grumble, and they might be kind of jerks going through the process, they’re not going to stop the EVP or the SVP getting what they want.

 

Will Bachman  30:16

Yeah. And then what should you normally do? And then sort of what? Or let’s say that they say, Okay, well, we’ll grumble a little bit, but fine, we’ll do it. What is kind of actually happening there on the inside? So? I mean, I know from the consultant side, what I see, they’ll send you sometimes, okay, you know, sign off for like, very IT security checklist, or they’ll, you know, they’ll ask, you know, different stuff like vendor setup forms, and so forth. But what’s kind of going on the inside? Are they putting you into a system? Are they going through different, I really running like a credit check on you, or, like, what sorts of things are happening on the inside that I might not see.

 

Niul Burton  30:59

So I think you’ll probably see some part of the process where, where, where it impacts you so so they’re going to probably send you some kinds of some kind of contract or statement of work with standard terms and conditions, there is going to be there may have an insurance requirement that you carry so much of insurance. They they want to put you in the system, because they want to streamline and automate the process as much as possible. So many cases, people, like in a Rebbe solution or Cooper solution, you’ll be you’ll be in the system, as a as an approved vendor. So when your invoice comes in and is approved, you get paid automatically out of the system, they’ve got all the details that they need, they’ve got the W, H, O, W nine, whatever it is. So all the paperwork is there. So there’s, there’s, you know, there’s this kind of checklist that they have to complete, depending on what services you provide. You mentioned cyber security, you know, insurance, perhaps NDA, perhaps you the data that you need to have in order to get to get paid. Those are the kind of all the things that they’re trying to complete. As you come on, as you come on board, and the more organized structured clients will say, Look, you can’t start until we have all of this done. Sometimes you can negotiate some of that. I mean, in the past, I’ve had clients come to me and say, We want you to carry $5 million of insurance. And I come back and say, Look, we’re carrying a million, this is the work that I’m doing. I don’t understand why you need more than that. And they’ll say, Yeah, that’s fine. A million is fine. So I think they’re trying to get you set up, go through that checklist, make sure everything’s in place. Some things there’s some latitude, you know, like the cybersecurity probably not so much latitude, as they get you set up. But once you’re in what I find, often then you can say to another executive at the same client, hey, I’m already in the system, it’s easy to do business with me, because I’m already set up and ready to go.

 

Will Bachman  33:18

Awesome. Let’s talk a little bit more in detail about strategic sourcing. And I know you’ve put together kind of one on one training for some of your clients. So give me maybe a bit of a case study what would be an example of strategic how strategic sourcing works, maybe a classic example at a manufacturing company, if they were perhaps less mature in that function, and they’re coming in and they’re upgrading, strengthening it, what are what’s something that you would do early on to start putting some more strategic sourcing rigor in place? You Yeah, let’s just I’ll let you take that wherever you like.

 

Niul Burton  33:58

Okay. So so in order to get rigor, you need a consistent methodology. And we used to have what we call the seven step methodology. When I was at Kearney, I think McKinsey has a five step PwC has a 12 step there’s but but having a clear methodology of a step by step that you’re going to go through so if I, if I try to think of a case study, and this first one that comes to mind, we did photocopiers that a client of mine, and they were spending I think it was around $25 million a year for photo copiers. And they thought, okay, maybe here’s an opportunity to drive some drives and benefits. So let’s take a deep dive. So we started looking, the contract is was about 10 years old, and have gone through a series of automatic renewals, so it hadn’t gone out to market for 10 years. And then we started looking some more and we go well, not only are we You know, leasing the copiers from them, but we’re buying the paper and the ink from them as well. Even though we have a separate office supplies supplier that could could deliver that to. And then we find that because executives felt that it was too far to walk down the hallway to go to the copier, they’d actually independently bought, you know, from Best Buy or whatever, a desktop copier. So there was lots of other copiers floating around that weren’t part of the part of the network. And the default on the copiers was one sided. And it was easy to copy in color. And so we started to kind of peel this back in terms of not just what was our contract with for printers? But how are we using these printers? And what kind of costs was that driving into the system. And so what policy changes that we need. So we worked with the various business partners, so they understood the what we were trying to try to do mainly finance because finance had an interest in, in driving costs down. But we were able to come up with a strategy, once we had this full understanding, we were able to come up with a strategy where we separated out the bid for the machines from the bid from the supplies. And we started putting policies in place around efficient use of printing and minimizing printing. And we bundled all that together, including sales sales, if I go back to the methodology, the first step in the methodology is kind of an internal analysis and understanding requirements and usage and expected future demand and so on. Understanding who we’re working with the second step is understanding what’s happening in the supply markets and how technology is changing. And then we pull that together and you develop the strategy. So in this case, it was separating out the lease from the supplies. And then putting policies in place. We then went out to market, we got bids from multiple equipment manufacturers, and we’re able and we’ve represented it as a multi year exclusive business opportunities. So significant dollars that they can either win or lose. We, we got bids separately for the supplies, the paper and the and the toner. And we included the office supplies, supplier as well as the equipment suppliers in that we got agreement to change policies and have the default as double sided black and why No, I desktop printers would be approved, etc. And through all of those changes, we ended up with the same supplier for the machine. So we didn’t have to change out the machines. But we took 36% out of the costs. Amazing. So that’s kind of a simple example of strategic sourcing where you think about it in a much bigger picture than just leasing machines.

 

Will Bachman  38:12

In a typical strategic sourcing, maybe for manufacturing, is there a step in there where you tried maybe historically been buying from one supplier? Is it a standard step to kind of scour the universe and look for all of the suppliers in the universe that could be potential vendors for that? Or, you know, maybe looking at all your other vendors and seeing if they also could sell you this, you know, this particular widget?

 

Niul Burton  38:43

Yes, yes. Yeah, that’s, that’s a very good point. So, so you want to understand the universe of the supply base. And, and in some cases, you’ll go through a couple of steps in determining who you want to actually solicit bids from so. So we would go through what we called an RFI, where we would look for a fairly streamlined set of information for potentially a large number of suppliers to see how well qualified and interested they were in the business that we would be offering. And we would do an RFI and potentially downselect on the supply base before we would go to an RFP.

 

Will Bachman  39:27

Talk to me about that about the difference between RFI RFP and RFQ.

 

Niul Burton  39:38

So an RFI has a tip it’s a request for information. So it’s we’re not really soliciting a bid, but we’re trying to get information and understanding around a certain set of criteria. It might be capacities, volumes, locations, quality commitments, those kinds of that kind of information that you need to know in order to determine whether a supplier is indeed capable of providing the services that you’re looking for. an RFQ is a request for quote, which in my mind is pretty simple. It’s like, what’s the price for this product? And then a request for proposal, in my mind is a bigger business question. How can you help me satisfy my requirements, and you might have, you know, open ended questions in there. It’s not just about a price, but it might be a service level commitments, willingness to provide, you know, nearby warehousing, just in time delivery, traceability, and it’s more kind of, say, open ended, so that the supplier can actually propose new ideas in terms of how they can differentiate their services and provide better value to you. So I worked with one client on a gas client. And they were looking for bids on scaffolding. And we we created the proposal to send it out to the scaffolding providers. And one of the one of the bidders actually had a number of recommendations about how to streamline activities and take out some significant costs. It by changing the way that they were planning, and scheduling and installing the scaffolding. That’s cool. Because because the way that I would talk about it is nobody understands this business better than the supplier. And so getting ideas and innovation from the supplier can be extremely fruitful.

 

Will Bachman  42:00

So, you typically start with, if you have a large number of vendors, you might start with an RFI request for information, just to get a sense of who might be qualified. And then a smaller number of people, you send them a perhaps an RFP, unless you’re just wanting to get prices on, you know, this specific item that you know, you know, you want to get you don’t want to fuss around, then you can just do an RFQ request for quote, how much is this widget XYZ. But if it’s like a bigger kind of strategic issue with lots of potential dimensions, you do an RFP?

 

Niul Burton  42:37

Yeah. So I would argue that if it’s true strategic sourcing, that the RFP is the tool that you want to use. If it’s simple small s sourcing, then maybe you’re using an RFQ to satisfy a particular need.

 

Will Bachman  42:53

What is part of the one on one and strategic sourcing that I haven’t asked you about yet that we should cover? Before we wrap up?

 

Niul Burton  43:05

Good, good question. So I think a couple of pantomine, as we were talking, one was mentioned the knowledge of the suppliers, one of the things that I’ve always found really effective is inviting the incumbents in to explain their business to us. Because there’s a massive education, both in terms of how their business works, but how we work with them. And oftentimes, I mentioned the gold plating earlier on, right, oftentimes, we are driving costs into the service, because of what we do. Another little anecdote was working different oil and gas company. They were buying these huge turbine machines heavily engineered, and each time they ordered a turbine, they were custom engineering it to the specific requirements of that particular need. And as a consequence, they had like a two year lead time on these turbines, which was impacting the the ROI on these big projects. And they were working with them set up this executive level conference over a couple of days to talk about the business relationship. And the supplier came in and say look, you know, you you do all this customer engineering, which means that we have to deliver custom custom work on our end and that’s what’s driving a lot of the lead time. So but if you look at it, you basically order six different types. And if you could just agree on those six unique specifications for Arctic tropical offshore onshore whatever it was, all right, we could reduce your lead time down to a year. Now, so that was that in my mind is strategic source. because you’re fundamentally changing the way that you work internally, in order to engage with the supplier to drive a lot of the inefficiencies and costs out of the process and benefit both parties. So that was one example of talking to the suppliers. The other piece is not shortchanging that transition, right? Because you go through this process, you may end up selecting a supplier that’s not your incumbent today, because of the what they’re willing to enable to do for you in the future. But transitioning from your incumbent to a new supplier can be a major undertaking, where you need to pilot verify quality, whatever. And so understanding the lead time that goes into that, and the time and the effort that’s going to have to go into that adds to the overall time period. And typically strategic sourcing in my mind, is about a six month exercise might be less for something like photocopiers it might be more for heavily engineered equipment. Oftentimes, I hear folks saying we’ll do this in three months, we’ll do this in two months realistically, in order to do all the work that’s necessary. It’s a six month exercise.

 

Will Bachman  46:19

Talk to me a bit more about the procurement organization. And they may just not be one standard organization. But maybe there’s a few alternate typical ways. But what are the maybe you just sort of give us an example for a midsize manufacturing company, you know, maybe one to 2 billion in revenue, something what would a procurement organization look like? In terms of how many people what are the different departments? What are the different titles?

 

Niul Burton  46:52

Yeah, so manufacturing tends to be more structured, so it tends to be more centralized. And then, so you’ve got typically a chief procurement officer, working either for a chief supply chain officer, non manufacturing, often for a CFO, under them, as I mentioned a bit earlier, typically have category management, which often will have strategic sourcing as a part of it, contracting, and then p2p operations in a CSV function that’s helping to define processes and metrics and development and so on. In terms of scale. I’m not sure if I’m a good judge, that’s that size. Most of my clients have been bigger than that.

 

Will Bachman  47:42

All right, what the bigger clients and what’s the typical thumb rule? If there is one for for every billion dollars to spend, you need this many people in your procurement organization?

 

Niul Burton  47:54

I would I’m going to struggle on this one a little bit. I think probably, if I look at one of the big oil companies you’ve probably got in procurement alone 100 1000 People of which are the you know, it’s a relatively small percentage that works on the category management, strategic sourcing. And many more people working on the transactions, quality, accounts payable, invoicing, expediting. In some cases, warehousing gets included in the procurement function depends. So but it can be it can be a big organization.

 

Will Bachman  48:42

Neil, this has been a fantastic discussion for listeners that want to find out about your practice and follow up with you. Where would you point them online?

 

Niul Burton  48:53

So online, I have a website. It’s Neil burton.com, which is spelled NIU L, b u r. T. O n.com. Which gives an overview of what I do and an easy way to link with me if you have any desire to do so, or my email is Neal at Neal burton.com.

 

Will Bachman  49:15

And take a couple minutes and tell us a bit about your practice. So what sort of clients are you serving now that you were previously a partner at large consulting firms? Now that you’re an independent consultant, tell us a little bit about the types of work that you’re doing.

 

Niul Burton  49:31

Sure, so my my work is essentially split between two areas. One is I’m working with some procurement solution providers. Either AI or SAS, technology, providers that are up and coming and looking to see how they serve procurement organizations more effectively. And then the second area I work in is supporting CPOs and the director Reports, either on kind of general, I guess, advisory in terms of you know, how to go about design approach or procurement transformation. Or in some cases, some specific components of that procurement transformation, whether that’s one area where I’ve done some work is helping organizations go through strategic sourcing of professional services, which is a confluence of my experience working in procurement with my experience working in large professional services organizations.

 

Will Bachman  50:39

Fantastic. And I think that you mentioned that you would have some kind of one on one slides on the basics of procurement. And we might send those to us. So we’ll include a link to download those slides in the show notes.

 

Niul Burton  50:55

fantast. Fantastic. Yeah. And I’m sure, I’m sure there’ll be plenty of opinions on my view, government. So I’d be happy to happy to hear feedback as well.

 

Will Bachman  51:04

Thanks a lot, Neil. This has been a great discussion listeners, if you are so inclined to give the show a five star review on iTunes. But otherwise, don’t worry about it. You can review the show on iTunes and it does help others discover the show as much appreciated. Neil, this has been great. Thanks so much for your time.

 

Niul Burton  51:24

Thank you. We’ll really appreciate the opportunity.

 

Outline

Beta

What is procurement and what is strategic sourcing?

0:01

What are the typical levers for generating more value?

8:12

Organization of the procurement organization.

13:32

The relationship between the procurement function and supply chain.

19:10

Advice for getting on the preferred vendor list.

24:26

The difference between procurement and procurement.

29:30

Step-by-step methodology for developing a strategy.

34:08

The difference between a proposal and a request for proposal.

40:18

Strategic sourcing and the procurement organization.

44:26

 

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