Have you been squeezing your lemons properly?
I recently remembered this analogy I heard from someone at Cranfield University some years back. I think of it as ‘Squeezing the Lemon’ and it is a great way to explain how organisations waste the resources and opportunities available to them, particularly in procurement.
Think back to when you last took some time out to cook something from your favourite celebrity chef’s latest book. The chances are at least one recipe included squeezing half a lemon into the mix. So you cut your fresh, juicy lemon in half and start creating your masterpiece putting the other half in the fridge, perhaps wrapped in cellophane ready to use later. Months go by and one day while reaching for the milk to pour on your cereal, you notice the other half and throw its shrivelled, lifeless carcass into the bin. What a waste of flavour!
Is your procurement only producing 50% of its potential?
In its simplest terms, procurement is about buying the goods and services (both direct and indirect spend) a business needs. Good procurement, therefore, must mean to get the best value possible for that organisation through those transactions. The problem is that for most businesses this simply means driving down the cost and hitting budget targets. This turns potential partners into commodity brokers, running on tight margins, with zero room or incentive to start adding value. In any buyer’s mind: where there is no profit there is little motivation for investing in a relationship. Going back to our recipe analogy – there is the first half of your lemon.
Ironically it is these scenarios where buyers like to refer to their ‘strategic partners’ but the reality is the procurement team have got what they wanted from the supplier in nailing them on price but to placate the supplier they award a meaningless title. The expectation is the business should engage with the ‘Strategic Partner’ to derive value from their expertise that will help them be even more successful. This model rarely manifests.
The fact is that any supplier worthy of the title ‘strategic’ will have an abundance of expertise, experience and ideas within their organisation. If that supplier saw its customer as a ‘valuable partner’ they would have a huge incentive to invest their extra resources to add value, create zest, and develop a proactive relationship. Not wanting to let one of their best customers go elsewhere they would ‘go the extra mile’ in an emergency, suggest a better alternative when asked about a new product, and ensure their best staff are attending to this ‘key’ account.
Waste the flavour and lose the lemon!
Sadly though the supplier’s resources are overstretched as a result, and the opportunity to create more profitable buying relationships is lost. This has further impact on the security, audit trail, governance, suitability, and quality of the products and services that an organisation purchases. The other half of the lemon, left festering in the fridge, is the wasted opportunity that most buyers rarely get to enjoy because they focus on squeezing margins. These companies overestimate the actual value of cutting costs, and are usually highly critical at review periods when value outside this break even or low margin work is not delivered – very strategic!
The real danger, for a buyer, is that a competitor might steal its ‘strategic partner’ away by squeezing the full lemon and gaining a truly strategic advantage in the marketplace – something often ignored by the arrogance of procurement professionals working in large enterprises.
Two sides to the lemon: Cutting costs or increasing profits.
No one ever places the other half of a lemon in the fridge intending to forget it and waste its flavour. Likewise, procurement departments that get stuck in the ‘commodity rut’ probably have good intentions around becoming more strategic. The problem is that concentrating on the cost-cutting side of the operation is counter-productive and always results in the extra value being missed. The key is to focus on the value suppliers can add, not just the costs which you can reduce.
In most cases truly strategic purchasing engages with the business and focuses on the business objectives, not merely the procurement savings targets. Taking a more co-operative approach to procurement will lead to far greater profitability and the development of a more long term, sustainable supply chain.