To become more profitable, you need to either increase your turnover, become more efficient & effective or lower total costs. Even better if you can do all three. And there is an, often overlooked, way Small and Medium Enterprises (SMEs) can achieve all three by simply focusing on improving one specific area of their businesses. It may surprise you that it’s your Procurement operations I am talking about. Read on to find out why and how.
When you know something just isn’t right with Procurement
If you are a leader in a growing SME, you know that growth comes with its own challenges. You may have observed any of these issues that tell you things aren’t optimal when it comes to dealing with suppliers:
- A disproportionately high number of suppliers, given the company’s size
- Non-procurement staff spend disproportionate amounts of time on trivial sourcing related activities
- Frequent supplier performance issues and subsequent “firefighting”
- Year on year increase in total external spend beyond what can be justified by company growth and inflation
These, and many other issues, are symptoms of trouble in the procurement area. And they are a warning that things are about to get a lot worse if something isn’t done. That’s because, as your company grows, so will the magnitude of these types of problems.
Why procurement should be one of your priorities
SME leaders may not consider sorting out procurement problems a priority. But it’s actually really important because those problems have a direct negative impact on the bottom line of your company. If you want to earn more profit there are essentially three things you can do:
- Sell more (and charge more, if possible)
- Become more efficient and effective
- Lower total costs
Good procurement practices and processes can contribute to all of these. That may, at first, seem counterintuitive. I’ll explain, in more detail, the impact good procurement can have and then give you a step-by-step approach for getting to the root causes of procurement-related issues in your company. Only once you have correctly diagnosed the root causes, can you start implementing meaningful change.
How good procurement practices help you sell more
Procurement is about buying. So, what does that have to do with selling more? In the Goods For Resale (GFR) space in the retail sector, the link is quite obvious. Procure the right stuff that will fly off the shelves, and you will make more money. But what impact does Procurement have on sales outside the retail sector?
No company is an island. Companies depend on other companies. And the better you can manage your supply chains to quickly access the supplier innovation that will set you apart, the more of a competitive edge you will have. The sharper your competitive edge, the more you will sell – and the more you can charge. To leverage the power of your supply chain in this way you’ll need really good procurement practices and processes. By that, I mean supplier management that focuses on building powerful long-term relationships.
How good procurement makes your company more efficient
There are two aspects to this:
- The effectiveness of the procurement processes themselves, and;
- the positive impact procurement can have on other processes throughout your company.
Ineffective procurement processes, or lack of process, wastes everyone’s time. Procurement becomes a reactive hurried exercise fraught with delays, errors and bad decisions.
So, it’s clear that ineffective procurement processes have a negative ripple effect throughout your company. But the converse is also true. Make those ineffective processes effective, and you will see a positive ripple effect throughout the company.
Procurement can also have a more direct positive impact on processes. For example, an empowered Procurement function will be able to support leaders in the make vs buy decision and in deciding whether to outsource certain business processes or keep them in-house. These types of decisions can have a profound impact of how efficient and effective your company is, and, therefore, on how much profit you will make.
Lowering costs intelligently
Lowering costs is probably what Procurement is best known for. But contrary to popular belief, it’s not about getting lower prices from suppliers. In fact, “saving” money without considering the bigger picture can actually end up costing you more, as explained in the article When saving money costs you more.
The “bigger picture” that needs to be considered, is how total costs are impacted. For example, when a machine is purchased, costs such as installation, maintenance, running costs, decommissioning and financing need to be factored in. Looking at costs through this lens of Total Cost of Ownership (TCO) encourages purchasing decisions that help create a larger profit margin.
How to fix procurement problems
Your current procurement approach may not yet be helping your company sell more, operate more effectively and lower total costs. If it isn’t, how do you change that? How do you fix Procurement problems?
It depends on what’s actually causing these problems. We all know that treating a symptom only produces temporary relief. What you want is to effectively deal with the root causes to fix these issues once and for all.
That’s not as simple as it sounds, though. Once you start taking a closer look at your business, you will likely observe multiple issues that tell you things are not okay in the procurement area. Each of these could have a number of inter-linked causes contributing to them, and underneath those causes, there could be more layers of contributing factors.
So, how do you make sense of this mesh of causes and symptoms so you can confidently identify the root causes? Because once you have identified them, you can focus your limited resources on dealing with those root causes. That, in turn, will relieve or completely eliminate symptoms long-term.
The 7 root cause analysis steps
To help you drill down and identify those root causes unique to your situation, I am sharing these 7 steps which I have learned, used and refined over many years. I have found these key principles effective in many different environments – in non-profits, large multinationals and small companies.
Step 1: Identify as many symptoms and causes as possible
This is to create an initial view of what you are dealing with. What are the symptoms and causes observed? At this stage, you will not yet have clarity of all cause-and-effect relationships. The objective, for now, is to get a feel for what’s not working optimally.
What is the current understanding of the problem? Does the problem cause problems elsewhere in the company? If so, that should be mapped in the analysis to understand which areas of the business are impacted. This will also make it easier to involve people when relevant.
Step 2: Prepare and research
You cannot carry out an effective root cause analysis on your own. Other affected stakeholders need to be involved. But before you involve them, it’s helpful to first have thought through the problem, the symptoms, likely contributors and impact on the wider business. This initial draft view is also needed to form an opinion on who should be invited to the session.
The business impact should be quantified – at least approximately. So, research is required before a wider team gets involved in the root cause analysis. This research would typically involve data collection and selective interviews.
Step 3: Form a team
A small team of relevant stakeholders should make key contributions to the root cause analysis. To determine who those stakeholders should be, consider who is affected by the problem. Who owns various aspects of the problem and who is likely to contribute to the solution of the problem?
Step 4: Analyse
Part of the team’s role is to brainstorm causal factors and come to a consensus on the relationships between these factors. That includes making sure all the contributors (causal factors) to a given symptom have been identified. This work is a prerequisite for identifying the root causes. The inputs from a relevant and diverse team help look at symptoms, problems, root causes and solutions from all angles. For symptoms with many complex contributors, the team may want to use a fishbone diagram analysis.
A root cause analysis should be as deep as it can be – never shallow. So, when the team thinks it has identified the root cause, it should try to go even deeper. The 5 Whys methodology, pioneered by Toyota, supports this thinking. Repeatedly (5 times) asking “Why?” helps identify contributing symptoms (causal factors), i.e. one level down in the root cause analysis.
But “depth” in the root cause analysis can also be achieved by going one level up, i.e. by identifying the impact of a symptom. To go that one level up in the root cause analysis the team needs to ask “so what?”, rather than “why?”.
Step 5: Prioritise
A root cause analysis is likely to identify multiple root causes. And a likely scenario is that you won’t have enough resources to work on all of them at once. It’s, therefore, essential to prioritise which root causes to work on first using an “impact vs effort” 2×2 matrix, such as the PICK matrix. Pareto is another prioritisation tool to use. It will help you assess which root cause is responsible for 80% of the undesirable outcomes.
Step 6: Develop solutions
Consider whether it makes sense to also intervene at levels higher than the root causes. Will it accelerate progress to address a root cause and a symptom? Are there clusters of sub-symptoms (causal clusters) that merit direct attention? Once interventions to address the problem are developed, consider whether each intervention completely eliminates the root cause or reduces its occurrence. If it’s the latter, are more interventions required?
Step 7: Plan implementation
When developing solutions, identify who is responsible for implementing the solution and by when. Who is accountable? Who needs to be consulted? And who needs to be kept informed? This information can be captured in a RACI matrix. The responsible person should then develop a project charter outlining things such as the scope of the project, who needs to be involved, high-level timelines, objectives, key risks, etc. This charter, in turn, forms the basis for the development of a fully-fledged project plan.
It’s worth the effort!
Identifying signs of what’s not working optimally in your procurement approach, teasing out the root causes and then planning to fix them, helps create a solid foundation for profitable growth. It takes time and effort, but the high Return on Investment is well worth it.
