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March 7, 2016

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How much should one buyer spend?

 

 

A long-standing question facing procurement managers is how much should one buyer spend? Or actually be responsible for? In other words, what is the best way to both justify and allocate precious resources in busy procurement teams? Jonathan Dutton FCIPS explains for Supply Clusters members:

 

 

“What is the ideal spend that one professional buyer should personally manage?” This, perhaps, is the question I am asked most often. And there is no correct answer. Of course not. It depends.

 

Justifying our existence

The reason I am asked so often is that harried procurement managers want a sure-fire shortcut to justify headcount. Usually headcount-increases, but also to defend their patch in the face of indiscriminate cuts. Procurement is not exempt from universal headcount cuts during tough times. It is just usually far down the queue – bosses get that investing in procurement staff should save money in the end. But more about that later…

 

The problem in allocating heads-per-spend is that not all spend is equal. Mature spend is easier to manage than immature spend. And less resource hungry.

 

Generally, procurement managers are not great at winning the argument for resources. Though, it is much easier in customer-facing, revenue-generating departments. Procurement is readily perceived by the ‘C’ suite as a back-office function. So, there is no such thing as an over-resourced procurement team. Justification is a constant.

 

Maturity of spend?

  • MATURE spend is that expenditure that is already well addressed. It has benefited from previous heavy focus and had professional buying effort lasered upon it in the past. The 8th stationery tender perhaps? Or self-serve catalogue facilities in place for USERS. Or, perhaps, purchasing cards (corporate credit cards) issued to certain staff to meet certain needs with certain solutions and within certain parameters. Or you simply use a commercial aggregator (like Supply Clusters, of course) to benefit from others established corporate supply lines. Or, nowadays, just Bots doing the job instead of real people.

  •  

  • IMMATURE spend might be that spend which is yet to be fully addressed. In other words, it might never have been to market at all yet? Never been tendered. Nor really been professionally managed. Not channelled to an aggregator for immediate benefits. Certainly not yet automated. Examples might be construction or capital projects or key direct spend lines or suppliers with unique offerings.

On the indirect side, maybe slovenly categories that have most resisted the sweeping searchlight of procurement until now – think of legal services or marketing services.

 

So, immature spend needs more resources. Firstly, to control maverick in-house spenders. Then to establish market-tested supplier arrangements. Finally, automating the spending channel to maximise efficiency and compliance. Then, if the job has been done well, the category workload decreases as the procurement searchlight can sweep on to new priorities with new resource needs. Static or evolving spend profiles can, therefore, distort procurement staff ratios.

 

Surprisingly, procurement teams rarely manage all external spend in organisations. They have to ‘win’ the right to manage spend – starting usually with the least risky spend (stationery supplies) moving over time to the more sensitive areas (the strategic direct supplier lines that fuel business – like raw materials).

 

The spend that procurement does manage in a hands-on way is called ‘addressable spend’ and is normally a figure well below 40-70% income. Organisations with over 90% “spend under management” are world-class. That 30 % or less are just starting out really and often engaged in tussles with spend-owners for some element of influence or control on their spend.

 

 

Natural business cases

By their nature, INDIRECT spend lines (e.g. stationery supplies) usually warrant less attention than often more deserving DIRECT send lines (raw materials). And fewer resources. Except where implications demand better management that is (energy costs) or dramas play out and create corporate noise (travel management).

 

Or where some opportunity presents – when we can do much with virgin indirect spend, but little with well-established single-sourced direct spend lines perhaps; although these might need more TLC (or supplier relationship management – SRM), which can be resource hungry too.

 

The Kraljic Matrix helps buyers work out which category is which for your organisation. Which vendors are attention-heavy strategic suppliers? Which vendors are a bit of a time-wasting nuisance? And which strategies are best to deploy in each instance (covered in-depth on the JD strategic procurement masterclass).

 

 

The influence of corporate culture

A complicating factor is the buying organisation’s culture; a compliant and mature culture is more obedient and takes less hands-on spend management (some well-known large American IT firms can be like this). A less compliant or more immature ‘maverick’ spend cultures can make it difficult to herd the cats (many universities can be like this, and large ones spend heaps). It can also erode real savings dramatically, as we count only ‘fake savings’ instead of real savings.

 

A consequence of culture can be how many suppliers an organisation has? More take more management. Maybe 15,000 suppliers are fairly normal for large global firms. Though some national firms might have 50,000 on an old database that is never ‘cleaned’ and has multiple duplicate records. A better target maybe 5,000 or well less.

 

Often firms have only tens of strategic suppliers they really count on. And many more that are in effect commodity suppliers and can easily be replaced at any point. A Pareto is an ever-present for procurement spend – 80% spend with 20% of the suppliers; reducing the ‘tail’ of the 80% of smaller suppliers makes sense. But the number of suppliers you have (or want) is dependent on strategy…

 

 

The impact of corporate strategy

A secondary complicating factor is corporate strategy: some firms choose to MAKE their own stuff (often car manufacturers, for example), others choose to BUY their manufacturing by outsourcing it (like Apple famously do).

Or some brands need many suppliers (Subway have 55,000 stores needing fresh food daily) and other firms work hard to reduce supplier numbers (Toyota obsess over quality, and hence want fewer suppliers to control) and firms with sexy I.P. want to limit how many have their secret formula.

 

At a more micro level, some company’s still in-source travel (travel managers.) or vehicle hire (carpools) – requiring less procurement resource.

 

Some organisation CENTRALISE spend and run large procurement teams (Rio Tinto Procurement once had over 1,200 staff). Some state governments have large centralised procurement teams networked through each core department and associated agency. And central government process can create high workloads, as much for compliance or probity requirements as to save monies.

 

Others choose to DECENTRALISE – like Wesfarmers who has a famously lean head-office with one group procurement manager in Perth, yet have small procurement teams in around 100 or more of the businesses they own.

In procurement lore, a decentralised procurement network can be leaner but brings business alignment, customer focus, local service and a keen eye for profit. A more centralised procurement effort can mean more heads, but often brings greater professionalism, more efficient central systems and more initial savings, quicker.

 

 

Procurement as an instrument of policy

But, increasingly, organisations are sliding away from just value-for-money as the principal policy for their procurement effort, as it mostly has been for the last 80 years or so.

 

For example, new realities in the area of corporate social responsibility (indigenous procurement targets, the new Modern Slavery Act) can demand disproportionate resources. Due diligence with suppliers, and their suppliers, even whole supply chains takes a long time and much effort. Lots of resources.

 

Other targets in government arenas can be no less demanding – buying locally, buying the internationally most competitive, buying to boost targeted employment areas, buying from SMEs. Every time we expand the buying criteria, we boost the procurement workload.

 

 

Spend ratio trends

Research indicates most large companies spend between 40-70% of their revenues with their suppliers on third party provided goods and services (Proxima UK study 2012). A figure that is consistently growing as we continually outsource more and more – suggesting a need for more procurement people on board not less.

 

On the other hand, an efficiency dividend is surely due as we gather more spend under the procurement umbrella? Why should CFOs carry permanent overheads 12 months each year to only manage mature cyclical spend?

 

 

Is technology gradually taking over – automating procurement?

Yes. Stock-control or ERP systems, Purchasing Cards for users and self-serve web catalogues have long threatened headcount. And Robotic process automation (RPA) enabled by bots and A.I. is able to automate routine requisition and procurement tasks increasingly well. Voice-recognition (Siri and Alexa) are set to enable this far more.

 

But procurement staff need not worry too much – there is much to do that computers cannot do well at all: building relationships internally and externally, forging supply strategy, developing policy, negotiating with suppliers, risk management and value judgements being some.

 

Can we spend more to save more?

Yes. You don’t have to work in professional procurement to know that buying the cheapest option can be a false economy. Total cost of ownership (TCO) is more telling than purchase price. But that can take longer to work out.

And the wider you source, typically the more you can save. Though sourcing trips to Mexico, even China, need time and money to be invested.

 

Moreover, the harrowing cost of high-risk eventualities can dwarf any savings you ever made. A risk management plan can be your greatest economy. But they take time and effort to put together.

 

Driving customer value (new features and benefits) or competitive advantage (innovation) can add disproportionate contributions to the company’s top-line – and can certainly be well worth an extra bod or two in the procurement team if that’s what it takes? As they can yield much greater corporate benefit that shaving a few shekels off the price.

 

So, who does what today in Australia?

The Defence Department is the biggest spender in the land; over $35bn pa and more. Their old arrangement using a prescribed agency, DMO, ended in 2015 to be succeeded by the Capability Acquisition & Sustainment Group CAS-G who ‘address’ $14.7bn pa defence expenditure according to their website. But legacy contracts and long-term Capex (submarines, ships and F35s) push the figure up far higher. DMO had over 6,000 staff, CAS-G nearer 5,000.

 

Naturally, the defence contractors spend heaps. But do not have large teams in Australia – under 100, often nearer 25.

AusTender reveals many Australian government contract values, but federal departments have smaller procurement departments than you might imagine. The larger ones nearer 50 people than 100. Total federal government spending is around $35bn pa – and has a range of procurement connected policies (PCPs) and is largely governed under the CPR’s – commonwealth procurement rules, which influence other jurisdictions too.

 

State government procurement is largely organised by department/agency. And is well-formed and reasonably mature in most cases. But, again, have fewer procurement people than you might imagine – tens of people in each spending department – with the team in DTF or DPC often the fulcrum of any procurement strategy. Some larger spending agencies have more.

 

Local councils have small procurement teams. Typically half a dozen people. The largest (City of Melbourne, City of Sydney or Brisbane City Council) have more – say 20 to 40 or so staff. The smallest councils have no procurement staff at all.

 

In the private sector – how long is a piece of string? Many international companies have large teams overseas who can buy globally, smaller regional supplies teams for ANZ or the SE Asia region, or for Asia/pacific – with head offices often based in places like Singapore.

 

Within Australia, the resources companies have larger teams. But mid-range miners only about 30-50 or so. They seem to be offshoring some too – with Rio Tinto Procurement building a large buying team on the sub-continent. Local banks are galvanising themselves more around procurement lately – given rising margin pressure and major risk issues. They are growing addressability beyond INDIRECT towards direct financial services products too. Over 100 staff in some banks; usually less though.

 

But a typical Aussie procurement team in a decent-sized firm is only around 10 or 20 people – targeting typically $500m to $1bn spend. Telstra spends more and had over 300 staff – but today closer to 200 after cuts, I am told. They famously outsourced INDIRECT spend (and 55 staff) to IBM but more recently brought it back in-house.

 

One large national engineering & construction conglomerate has only 47 staff to cover $8bn spend – but are training thousands of engineers to manage contracts directly in a decentralised approach.

 

One small electronics firm in Adelaide has 6 staff for $22m spend – but they resell 80% of what they buy. The supermarkets have around 50 strategic procurement staff – but only buying non-merchandise; stock is bought within the business operations teams, not by procurement staff. This is normal in the retail industry.

 

Many firms have less than 12 staff and tend to manage under $500m. And not all procurement people too – some admin people, analysts, the odd supply chain person – so who counts in the number? The headcount reflects many factors within (ideally) a carefully crafted strategy.

 

The bottom-line

Generating real business value from the supply side (better, faster, cheaper, safer, greener) can be very worthwhile – but it is a business decision like any other. The calculation of potential return against a set investment; and sometimes a quite uncertain return at that.

 

A better question might be – how

 

So, in the end, how much should one buyer spend? Well, as I said, it depends…

 

 

 

 

27th September 2019

 

Jonathan Dutton FCIPS is the former founding CEO of CIPSA - the procurement peak body in this region. He now works as an independent management consultant specialising in procurement and has a non-executive role at Supply Clusters www.jdconsultancy.com.au

 

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