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6 ways to kill business with Procurement. Part 2: narrow-framed TCO

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It is procurement who claim to be the champions of the approach for always assessing the Total Cost of Ownership. But if you forgot it by now – procurement professionals are still only people. narrow framingIt is hard enough to navigate through natural biases, let alone the traps that the salespeople set to buying colleagues. I have provided one example in the picture. You will have seen similar situations with three sizes of pop-corns or coffee servings at the shops. However, falling into such “small” traps would not be enough to kill a business, right? Let’s see what would kill a business.

A company ran a tender. They were buying a check-weigher for a meat processing plant. Check-weigher is a machine that checks if the weight of the packed product is accurate. The requirement from the technical department was 98% accuracy – due to due to regulatory requirements. There were two suppliers left in the process [1]: table2

  • Supplier A submitted the required 98% weighing accuracy machine for £1m.
  • Supplier B offered a 99% weighing accuracy machine, priced at £2m.

The buyer also compared: critical spare parts (prices, schedule of changing), engineer callout costs and frequencies, secured downtime warranties and all other possible cost drivers. Overall Supplier A was cheaper over the investment lifecycle time by £1.2 million. Framing the situation like this (project-width framing) makes the decision very simple and obvious.

However, there is a different way to look at it. In this case, the buyer went to talk to business analysts and the commercial department. They worked out the numbers: the weighing accuracy difference would pay for itself in approximately three months of full capacity running [2]. To view it from a different perspective: had the buyer not checked this detail, the company could have potentially lost up to £18 million of revenue. To recap: the company could have lost eighteen million pounds. Do you think this could be a significant enough number?

Saying that you analyse the total cost of ownership is not enough. Do you frame your TCO from a business perspective? I would welcome a discussion on different framing ways for various situations. Are you wondering how stationary buying might be framed differently? Are you working on something and would welcome a different approach? Please comment and share – I will share my views and I am sure the colleagues from the network will add to it.

If you missed it, the first way to kill a business with procurement (by buying not needed items) is here.

[1] The numbers provided in the example are fictional and for illustration purposes only.

[2] The supplier A was given a chance to review their offer and technical specifications.

6 ways to kill business with Procurement. Part 2: narrow-framed TCO

6 Ways To Kill Business With Procurement. Part 1

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…and I mean it. Procurement can bring the company to the point of no return. And there is more than one way to do it. One quick stab in the back or “death by a thousand cuts” – you can choose a method closer to your heart (ironic, right?). So the next time you even think about complaining that “your CFO does not love you” – take a second look at the list below and consider if potentially any of the phenomena analysed below apply to you and your function.

A Recipe for failure

If you read “Outliers” by Malcolm Gladwell, you will know by now that a success or a failure is rarely an outcome of only one factor. Most of the time, it is a combination of a few of those. In my experience, procurement is frequently guilty of more than just one of the below:

  • Unnecessary purchases.
  • Narrow framed TCO approach.
  • Contractual suicides.
  • Laziness
  • Business bottlenecks.
  • Poor objectives (which can be implied or self-imposed).

If you identified only one of the above and think that you are off the hook, think again. Those are the factors that your department can influence directly. However, there are always external factors that work as multiplicators of the failure. Think about fraud. Think about suppliers, genuinely abusing the situation, and overcharging the clients. Think about supply chain and risk costs. External factors, not managed properly, could become strong enough to cause issues to a business. But if a CPO adds additional internal obstacles – you have a recipe for failure. Let’s review the first one today and others in my next posts.

Unnecessary purchases

Many of us at least sometimes find ourselves staring at the wardrobe with a blank face and only one thought in the head – “nothing to wear, again…”. It’s just that the closet is not empty. We buy things – gadgets, vitamins, tools, gym membership – and never use them. Or use them so frequently that the gym administrator does not recognise us in the photo on the member pass.

I am not sure if this will surprise you, but the same rules apply at work. Really! Let me give you some examples. IT license list being the first one. I bet not all companies analyse the functionality of the software that different stakeholders buy across the organisation: there are plenty of duplications and lost negotiating power. I bet that not all of the organisations stay on top of various users that have licenses – and overpay for things they do not need. I could continue. I know, I know, these would not kill the business.  It is difficult to track the ones that really would. And there is a good reason for it. I mean, would you brag about something that is not going to get you an award?

However, the European Union publishes the findings of public procurement audits. Official conclusions say that approximately 5% of all spend could be a waste of money. A lot more than that were simply very well covered. Lifts that take you to no-where and other Italian adventures with EU money (Patrick Browne, “Five insane ways EU money was blown in Italy”, thelocal.it). MEPs charging for the offices that do not exist (Jonny Wrate, occrp.org). Donkeypedia and many more. Most of these projects cost millions. Consider how many private businesses work with a much smaller margin than this… I realise that some of these projects are under investigation for good reasons – but someone approved the plans in the first place! And paid for them!

Lift-in-Italy-to-nowhere-557323

Most of the times, it is not the procurement department who initiate such purchases. But many times, they participate – if not lead – the procurement process. In the time of increasing popularity of inclusive and engaging company cultures, procurement should be able to speak up if they see strange requests coming through, surely? Yes, people are wasting money on the things they do not need. And yes, procurement could help stop them if they wanted.

Have you witnessed unnecessary purchases in your organisation? What were they? If you want to share your experience anonymously, text you story to me and I will upload to the comments without specific details.

I will post explanations about other phenomenons in my blog later.

Stay safe and stay healthy!

 

 

6 Ways To Kill Business With Procurement. Part 1

Types and levels of proofness

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For instance, I blog under Futureproofitable: that is future proof and profitable in one word. You can buy things cheap. But if they are of no use – you are not getting far as a business.

The same rule applies across all of the organisations (private or public). You can have the strongest Procurement processes and function in place, but if the decision itself to buy something is wrong, then nothing can save you.

There are few levels of proofness, as I categorise it:

  • Idiot proof: if you know there is a risk of completely failing at the task or a project, just do not do it.
  • Future proof: you know there is a risk, but you choose to address it in advance.
  • Future proof and profitable: you know there is a risk, you choose to address it in advance in a way so that you can turn it into revenue stream in the future.

I will be sharing more examples in the future as I come across them. Today, I already have a bit of a library gathered. Here’s one example.

A PFI object. A health institution. You would expect the highest standard of cleanliness and hygiene. And still… you come across an artwork hanging from a ceiling like this:

ceiling art.jpg

Can you think of all the things that can go wrong? Cost of cleaning it? More like not affordable to clean? And if you cannot afford to clean it – what kind of risks are you exposing everyone to?

What has that got to do with future proofing? Here you go:

  • Level 1, #idiotproof: don’t do it. Just don’t. It adds no value, costs a fortune itself, the maintenance costs even more; without maintenance – it becomes a source of various risks.
  • Level 2, #futureproof: make it machine washable. I am not suggesting I know HOW to do it. But if you really need it in the first place – make it machine washable.
  • Level 3, #futureproofitable: make it machine washable “hall of fame”: hang a small artwork in the name of everyone who has contributed through charity to the purpose of the object.

Do you have any examples like this?

Types and levels of proofness