Materials function has evolved over time to supply chain management. It has encompassed all organization spends under its preview except bad debts, employee etc.
During one of my earlier job, this function was known as materials function and main responsibilities were material vendor selection, vendor registration, price negotiation, material receipts, warehousing and vendor evaluation.
All other services procurement related to sales, marketing, facility, customer service function were not part of the material function. These functions were procuring their services e.g. housekeeping, canteen, maintenance, stationery, printing, bill board, advertising, call center etc. directly. Each function had their own budget and would manage their vendor selection, negotiation, services acceptance, bill verification and finance will pay the vendor invoices. The functional head exercised control on who to buy and how to buy from. This spend was out of scope of material function!!
The services procurement system lacked transparency, excess spend, manual purchase order and delayed vendor payment. Each function head would not want to let go this power. Services procurement was out of scope for material function. Every time there was a complaint or issue related to services payment or audit objections. The CFO and CEO were clueless till one day we purposed services procurement through Material function. Functional heads would not agree.. it will lead to delay, bureaucracy. We had to overcome their objections and agreed to SLAs.
During this initiative, it was decided that all services except employee salary, distributor commission will be negotiated through materials function starting from vendor selection, price finalization, PO issuance, invoice processing.
Our materials function was evolving and we would soon be reporting to the Supply Chain Director instead of Finance Director.
As procurement head, my role was to build consensus within each function and agree on the transition plan for services procurement through material function without any business disruption. Reluctance to let go was everywhere in the user function.
The team needed to gear for this change and build trust with the user function as well as services partner. Over next few weeks we agreed a transition plan and also collected data on existing vendors, scope of work, contract validity etc.
We agreed for advance purchase order (PO) on quarterly basis to ensure correct provisioning as well timely invoice submission with the partners, who were informed “No PO No Work” rule.
User will initiate the services purchase requisition(PR) and supply chain will issue PO upon PR approval. Partner will directly submit invoices at payment help desk. User will certify the services availed against a valid PO. User will certify the quantity and SCM will verify the rates.
Post these validation the invoice will be forwarded to finance for payments release. Partner will deal with SCM for PO and payments.
All those contracts which were nearing end of contract, user will provide the scope and RFQ will be floated through SCM for price re-discovery. User function was tasked to ensure technical validation and SCM to complete price negotiations and award contract to the qualified partner.
During next few months we transitioned all services procurement e.g. call center, printing, marketing, facility, rent spend through SCM. This brought all opex spend except bad debts, employee salary, distributor commission through supply chain function.
The services procurement through SCM led to better spend control, transparency in vendor selection, opex reduction and timely payment to partners.
Change was difficult for SCM as service negotiations are a different game as compared to materials. Different skill sets are required. Understanding scope, efforts are the key to reach a better deal. Effort based costing served a good benchmark to support negotiations. We identified these challenges and held trainings with vendors to deep dive the services offer as well as visit their office to gain insights.
Through the services procurement drive, we brought an additional spend of $60 mn. The overall drive also led to reduction in the first year and also paved way for future opex spend optimization efforts.
CEO sponsorship, consensus building, coaching and mentoring, effective communication were the pillars to lead this transition smoothly and successfully. Transformations are always about people and their objections need to be overcome through trust and SLAs.
