Measuring the Maturity of Procurement Practices

Many companies today are deploying a myriad of procurement strategies, including:

• Applying reverse auctions to all commodities
• Apply strategic alliances with all commodities
• Outsourcing of key business processes

• Leveraging and supply base reduction

Not all of these strategies have been successful. In fact, there is perhaps some confusion regarding how to proceed and which strategies are appropriate at what times. Clearly, there is a need to understand what makes sense, given the relative maturity of procurement organizations. The reality is, many organizations are very new at outsourced relationships, and like any technological innovation, we need to learn how to apply the new technologies and strategies.

John Seely Brown, the recently retired Corporate Vice President of Xerox and President of the Palo Alto Research Center, published a paper in the Harvard Business Review in Jan/Feb, 1991 (‘Research that Reinvents the Corporation’) which draws an interesting distinction between ‘technological innovation’ and ‘local innovation’. Technological results from research on the knowledge base(s) underlying the products or services that a company sells in the marketplace. ‘Local innovation’ results from research on ‘new work practices’ within the firm that contributes to operational efficiency & effectiveness. If that is so, then maybe ‘local innovation’ is what happens in the new and emerging area of what we call “Good Procurement Practices” – that is, getting the products to market more quickly, by improving business processes in this area

It is important to note that “Rome wasn’t built in a day”. Organizations typically proceed through an evolution in the evolution of their procurement practices (see Figure 1) – beginning with quality and cost teams, then moving towards cross-location international teams and supplier reductions (as well as focusing business on key customer accounts). In later stages, global sourcing and distribution systems provide full visibility to materials throughout the supply chain, cost is managed on a system-wide basis, supplier capabilities are improved through joint efforts, and customers and suppliers are integrated into NPD efforts. Organizations may also re-consider which activities are not “core” to their business, and decide to outsource those activities for which they are NOT world-class.

Click here for a larger version of the image.

The question of how far you are to the right in this maturity grid is not as important as understanding the relative baseline of where you need to go. Moreover, pharmaceutical companies need to measure the “maturity” of their purchasing function, in order to set strategic priorities for training, education, and organizational development. Unless you have a baseline set of metrics, it is difficult to know where to go. One way of assessing this is through the assessment of the relative “maturity” of your company’s procurement chain processes. These can vary substantially across a wide variety of business processes – that are fundamentally defined and design, plan, source, make, deliver, and sell. The Supply Chain Resource Consortium at NC State has developed a very detailed approach to measuring and defining the relative maturity of these processes – ranging from Ad Hoc, to Defined, Linked, Integrated, and Extended. Each of these elements is measured at the business process level – as either a strategic process, team-based process, or operational (day-to-day) process.

A good example is that of strategic alliances. One of our modules addresses whether there is a process in place to create, execute, and manage strategic alliances with outsourcing partners. It is one thing to say that “yes, we are doing that”, and quite another to validate that:

1. There is a process that identifies specific responsibilities, ownership of tasks, and associated metrics to monitor the health of these relationships,
2. There is a process in place to ensure that strategy-causing communication is enabled and is not stalled by misperceptions of information barriers and/or confidentiality,
3. Engagement of all relevant parties is ensured and promoted by top management to ensure that effective mutual purpose is the outcome,

1. On-going sharing of information regarding changes to the business are effectively communicated on a timely business to ensure that all parties can react in the appropriate manner.

This is but a single example – there are many more.

I expect that the distribution of most companies, quite frankly, would be skewed towards the lower levels – simply because it is so difficult to progress. My experience has been that it takes organizations normally eight to ten years to move from the left to right on this grid. This hypothesis can certainly be challenged. However, if you really take a hard look at your processes, benchmark internally as well as externally with other organizations, you have the beginnings of a baseline set of metrics for understanding how to set a vision for the future.