Fiji needs to increase its productivity or face ever increasing irrelevance in a world where economic and social barriers to trade are decreasing rapidly. Much has been discussed in Fiji about the need to increase investment to increase labour utilisation and productivity.
An element of productivity which is seemingly ignored on the input side is the cost of purchasing goods and services. The act of taking possession of a good or service, or procurement, has developed rapidly along with supply chain management as a science over the last twenty years.
A nation which imports goods and services at the high level Fiji does needs to learn both these sciences and apply them, urgently.
Procurement is not a difficult science. It does however, like all sciences, have techniques to be learnt and applied.
A simple but effective technique to use as a buyer is the buying relationships matrix. Constructing this matrix allows a buyer to understand where their purchase is positioned with suppliers and develop strategies to suit.
The two dimensional matrix plots on one axis the product value, complexity and buyer strength from low to high. On the other axis the matrix plots market complexity, market risk and supplier strength from high to low.
When a purchase is low on the product value axis and high on the market complexity axis, the ability to attract the interest of suppliers is low. The likelihood is that contracts will be more important than relationships, due to the difficulty in sustaining senior level interest from the supplier.
When the purchase is low on the product value axis and low on the market complexity axis, the purchase often involves ‘commoditised’ products and services. The strategy is to automate arrangements and processes, so as to reduce transaction costs, variability and amount of time and effort required to maintain supply and renegotiations.
When the purchase is high on the product value axis and high on the market complexity axis, the preferred strategy is to develop and maintain strategic alliances or partnerships with sustainable high-quality strategic suppliers. Ongoing collaboration and review are essential and relationships are likely to be more important than contracts.
Multiple relationships between buyer and seller organizations are likely to be very beneficial, and should be encouraged and enabled between as many counterpart levels and functions as necessary to attain mutual understanding of operational issues and implications for both sides.
When the purchase is high on the product value axis and low on the market complexity axis, buyers have extensive choice because of the number of suppliers available and the competition between them.
Buyers can exercise volume leverage to get the best deals. More aggressive buying tactics are acceptable and purchasers should swap between the many undifferentiated yet adequate suppliers.
Another technique is to analyse existing purchases in detail, to understand what it is that the organisation is actually buying and to unbundle the purchases of goods and services to be sure that each purchase being made is exactly what is actually needed.
For example, when large organisations by PCs they typically buy a warranty service from the supplier. Whether this is explicitly itemised in the product cost or not, the cost will be factored into the price. An analysis of warranty claims over a period of three years may show however, that it is more economic to relace a PC which is not working and forget about buying the warranty.
Ask suppliers what a PC would cost without the warranty. Those who say “no difference” are not trying hard enough.
Typically, the right strategy used on the right products and services can reap dividends of reductions of more than fifteen percent of current purchase costs. The reduction in costs does not necessarily come from a direct reduction in margins.
True procurement practices will find ways between the supplier and the purchaser of reducing costs incurred by both parties often preserving the margin for the supplier.
In developing a procurement strategy it is also important to understand that buying covers a very wide spectrum. Strategic sourcing is at one end, and invoice entering at the other. This is a broad competence set and not all buyers can or should do both.
To develop procurement skills in your organisation start by really checking who is capable, and or willing, not who is available. Some of your best staff may not actually want to be developed into strategic relationship managers.
Obviously, good analytical skills are a mandatory requirement for anyone contemplating becoming a procurement professional, but so are communication skills, business awareness and relationship building.
Productivity improvements are vital for Fiji. The non labour input costs deserve as close attention as labour costs. Developing a procurement strategy and implementing it with skilled procurement professionals is a means of gaining productivity increases by buying smarter.
Kevin Dwyer is a Director of Change Factory. Change Factory helps organisations who do do not like their business outcomes to get better outcomes by changing people's behaviour. Businesses we help have greater clarity of purpose and ability to achieve their desired business outcomes. To learn more or see more articles visit http://www.changefactory.com.au or email kevin. firstname.lastname@example.org. au ©2006 Change Factory