For procurement to add real business value, it must be much more strategically driven. Frank Finelli, Managing Director at The Carlyle Group explains…
There is a change happening in the world of procurement, from purchasing to strategic sourcing. Companies that do this right are connecting purchasing to the strategy of their business and gaining a competitive advantage. All companies should develop a strategic sourcing capability, combining the right organisation with the right processes to create value.
All companies will claim they have a strategy, but the key question is whether businesses have processes where the strategy drives requirements for the business. Given a clear definition of what your company requires, your sourcing team can assess the marketplace for compliant offerings and available terms, which forms the foundation for your sourcing strategy for a particular category.
Successful sourcing is enabled by effective collaboration, where the sourcing team is very closely integrated with stakeholders across the business, particularly the IT team and the user community. This focus on integration is a new development and it works best when it is pushed from the top. When the CEO or CFO sees the sourcing folks as key enablers for value creation, this tends to drive the right processes – ones that drive accountability for outcomes. This is something that we at Carlyle have done particularly well.
When we consider investing in companies, we look to see if strategic sourcing can be a key value-creating opportunity for us. In some transactions, improving sourcing processes is central to the success of the investment going forward.
But there are many CFOs and COOs who don’t know where their companies are really spending money. Companies should have visibility and analytics to support their spend across direct, indirect and functional areas such as real estate and health benefits. They need to get industry benchmarks and track spend over time, so they know if they are doing a good job or not. Often the procurement function does not get enough visibility, which leads to people across the organisation sourcing their own supplies outside of established policies and agreements. This lack of compliance can result in increased waste, less effective controls, and wildly different pr icing in different parts of the same company.
We have a forum with around 80 companies that collaborate in purchasing, leveraging the expertise of sourcing professionals across our portfolio. When you have access to 50 to 60 information technology experts, who are sourcing systems, equipment, and so on, it can really provide a differentiated view that creates value.
We use supply management to aggregate spending from our portfolio companies to achieve greater scale, resulting in better pr icing, terms and service levels. It’s similar to a group purchasing organisation (GPO), but it’s more effective because Carlyle also focuses on best category practices and techniques to manage demand. Vendors are attracted to Carlyle because of the size of our portfolio and the new companies that are constantly coming into this portfolio.
While, unlike Carlyle, individual companies won’t have access to a portfolio of more than 100 companies, they should not underestimate their ability to develop broader
networks of relationships with their business partners. Individual companies should also pursue best practices for category excellence – whether in office supplies, transportation or even buying castings – and adopt compliance policies to eliminate waste.
My job is to provide tools for companies to create value. Carlyle’s focus on integrated, strategic sourcing across direct, indirect and functional areas is a key part of our value-creation tool kit.