Buying goods and services through a robust procurement process leads to lower overall costs in the long run. It ensures that there is strong competition between suppliers and that companies come to the table with the right products at the lowest possible prices, matched to the client’s exact requirements. Or does it?
The mantra is that by levelling the playing field there will be more potential suppliers and that the greater competition will lead to lower prices. There are two diametrically opposing processes at work however. The purchaser wants lower ticket price, or preferably a lower lifecycle cost or total cost of ownership, whilst the provider wants to maximise their return on the capital invested in the business.
For there to be strong competition, there needs to be a vibrant and sustainable market for the goods or services that are being purchased, yet the development of a complicated and protracted procurement process leads to a high entry cost. This will obviously favour suppliers with structures that can accommodate the bidding process and that have sufficient turnover to absorb the cost of such a venture. By its very nature this means that larger companies are more able to bid for this kind of business and so are more likely to be successful. Clearly this means that the smaller organisations are less likely to win contracts and are, therefore, less likely to be successful and survive. This means that over time the entry level requirements of the procurement processes create less competition, which means, according to the mantra, higher prices for the buying organisation.
A second issue is that for suppliers to maximise the return on the investments that they have already made it is better for them to supply products that they already have developed, rather than supply products which they need to develop. With smaller and more agile suppliers effectively ruled out by the process, the larger more stable companies can focus their sales effort on their ready made offering. Selling a product in which you have already sunk all of the development cost is much cheaper than selling one where you have not. So an outcome of this process is that innovation is stifled which leads to the purchasing of less than ideal solutions, whilst also reducing competition, which guess what, increases prices. What perhaps is worse though is that by buying a solution that is not ideal but is available, the operational cost of the organisation will increase leaving everyone scratching their heads.
We all know that for a supplier to be successful it needs to grow its revenues, maximise its margins, control its costs and its capital investment. Selling something at a lower cost goes against these drivers and so suppliers will be encouraged by the procurement process to appear to be keener on these aspects of the business that are in the tender and make their money by returning greater margins on those aspects which are not in the tender. For a procurement process to work fully, therefore, the buying organisation needs to know every possible aspect of what is being purchased which is just not possible. A common approach to overcome this is to provide a list of the most frequently purchased items to allow suppliers to bid against. Suppliers will cut their margins to the bone on these products as they know that this is not really what people will buy in the longer term. Users will very quickly get sick of using cheap and inferior products and will start to buy ‘off-list’ at much higher and more profitable margins for the supplier. Suppliers will learn to play the procurement game and skew their offering to appear to be supplying at lower cost whilst overall retaining their margins.
Our approach to procurement needs to be reworked. It needs to focus on widening competition by making entry to the process easier and much cheaper. It needs to focus on desired outcomes rather than defined product sets and involve the users of the products and services much more. It needs to concentrate on the overall cost of the product or service, including running cost, training cost, ease of use, replacement cost etc. Ultimately it needs to be a process that allows purchasers and suppliers to work together to achieve common outcomes that allow both parties to achieve what they are setting out to do.
Thoughts from a Guerrilla Worker 