June 2024
Big Shopping
June 06, 2024 Filed in: Procurement
Big Shopping
What is "strategic" about strategic procurement? Paul Rogers started work when the default name for the function was 'purchasing'. Here Paul tries to distinguish whether anything procurement practitioners do qualifiers for the adjective 'strategic'.
One of the fascinating things about the evolution of the procurement function is the emergence of the word 'strategic' as an obligatory adjective to describe everything that we do. Gone are the days when departments were merely procurement departments. Now they are proudly labelled as 'strategic procurement'. What was once a 'procurement plan' is transformed into a 'strategic procurement plan', in the same way that a tadpole metamorphoses into a butterfly.
The ubiquitous use of the word 'strategic' raises the question; 'what exactly is strategic about procurement?' As I am hip to the happening vibe, I did what all self-respecting practitioners would do and raised that prompt with ChatGPT. The response was:
"Strategic procurement involves more than just buying goods or services; it involves aligning procurement decisions with the organisation's overall goals and objectives."
So the paragraph in the RFP for office supplies that is headed "background" transforms what would otherwise be a routine operational market enquiry into a strategic act? An article in the Harvard Business Review by Roger L. Martin has argued that a plan is not a strategy. Martin argues that many practitioners mistake planning for strategy and suggests that they are completely different things. Martin's definition means that nothing that procurement practitioners do can possibly be strategic. His article directly challenges the conventional wisdom replicated by ChatGPT. Let's look at some practical examples to explore the issues.
Example #1
A ‘strategic’ procurement department prepares and issues a request for proposal for office supplies. On receipt of the responses, they shortlist the two lowest bidders for subsequent negotiation and select the provider who performed best against their evaluation framework. Is this strategic behaviour? I think the answer has to be 'no'. It is an operational activity following prescribed rules, processes and policies and is unlikely to have any significant impact on the organisation's performance.
Example #2
Many years ago, I was at a procurement conference and the Chief Procurement Officer of one of the world's largest corporations explained that senior managers at the organisation had no idea what the word 'sourcing' meant.
She told them that "it is the equivalent of shopping."
"Oh, they said, now we understand. So what is strategic sourcing?
"Big shopping!" she replied.
Cue audience laughter. I didn't laugh. At the time I thought she was completely wrong, but now I think she may have been correct. In what sense is consolidating variety, harmonising specifications, aggregating volumes and issuing a competitive enquiry, strategic behaviour? I get that there may be a some influencing and change management to get to that point, but isn't that what managers are paid to do? How is that strategic?
The World according to Roger Martin
Martin claims strategy is:
"...an integrative set of choices that positions you on a playing field of your choice in a way that you win."
Martin argues that you can prove in advance that a plan will work but that you can't prove in advance that a strategy will work. In particular, Martin's definition suggests that strategy necessarily involves a formula for generating customer revenue. So what does that mean for the finance function? Or for HR, or for IT? It means that for these functions, and for procurement, there can be no such thing as strategic behaviour.
Example three
Two Australian airlines operated in a duopoly servicing multiple airports across Australia. One of the airports that both airlines flew to only had one supplier of aviation fuel. The cost of aviation fuel at this airport was significantly higher than at the other airports where there was competition for the supply of aviation fuel. The two airlines cooperated to invite a new entrant to the market for aviation fuel at that airport. In return for investing in setting up operations at the airport, the two airlines agreed to guarantee a minimum volume of business to the new entrant for a period of time. The revenue guarantee would more than cover the fixed costs and the only requirement the airlines had is that the new entrant priced below the level of the monopolist.
Is this strategic behaviour?
I think it is strategic behaviour. The market has been changed through the actions of the two airlines. According to Martin's definition, this would not qualify as a strategy as it neither generates new customer revenues, nor does it help either airline 'win' as they both benefit equally. But what this example highlights is the difference between issuing a request for proposal and transforming the market. One is a market interaction and the other is a market intervention.
Market interaction
The overwhelming majority of what procurement practitioners do is not strategic. That does not mean it isn't important or that we shouldn't plan what we're going to do and how we're going to do it. However, we cannot really argue that example number one is strategic behaviour. At best, it may be tactical, and it will normally be operational.
Market intervention
A market intervention is something that either changes the structure of the market (like in example three) or changes the orientation of one or more providers in the market towards the client. The key point is that after the intervention the market is different at least for one of the clients in the market.
ChatGPT > Roger Martin
The essence of the distinction is that ChatGPT classifies the alignment of operational behaviour to the organisation's overall goals and objectives as strategic. Martin sees strategy and strategic behaviour as exclusively measured in terms of business strategy. It is concerned with the markets in which the organisation operates, its formula for success and how it intends to win. There is not much scope for 'strategic procurement'.
Let's go back to example three. Imagine that the two airlines found operating at that airport to be marginal in terms of profitability because the monopoly supplier of Jet A1 charged a premium. It is not unreasonable to suggest that one or both might withdraw from servicing that airport on the grounds it was no longer profitable. Given airlines compete on multiple dimensions including the extent of their network, we can see that the intervention to reduce the cost of Jet A1 at that airport helps support and contribute to the organisation's overall goals by sustaining the ability of both providers to service the traveling public.
Big shopping or strategic procurement?
Nobody wants to reclassify the 'Strategic Procurement Department' as the 'Tactical Procurement Department' (or worse the ‘Big Shopping Department’!) But if we are honest about being strategic or behaving strategically, we need to do two things. Firstly we need to align what we do to the goals of the organisation. Secondly, we need to identify which parts of the spend portfolio are most significant and consider how we can secure unique advantages for our organisation that are not available to our competitors. Market interactions are unlikely to achieve that distinction. So what can we do to intervene into the market to create genuine competitive advantage?
What is "strategic" about strategic procurement? Paul Rogers started work when the default name for the function was 'purchasing'. Here Paul tries to distinguish whether anything procurement practitioners do qualifiers for the adjective 'strategic'.
One of the fascinating things about the evolution of the procurement function is the emergence of the word 'strategic' as an obligatory adjective to describe everything that we do. Gone are the days when departments were merely procurement departments. Now they are proudly labelled as 'strategic procurement'. What was once a 'procurement plan' is transformed into a 'strategic procurement plan', in the same way that a tadpole metamorphoses into a butterfly.
The ubiquitous use of the word 'strategic' raises the question; 'what exactly is strategic about procurement?' As I am hip to the happening vibe, I did what all self-respecting practitioners would do and raised that prompt with ChatGPT. The response was:
"Strategic procurement involves more than just buying goods or services; it involves aligning procurement decisions with the organisation's overall goals and objectives."
So the paragraph in the RFP for office supplies that is headed "background" transforms what would otherwise be a routine operational market enquiry into a strategic act? An article in the Harvard Business Review by Roger L. Martin has argued that a plan is not a strategy. Martin argues that many practitioners mistake planning for strategy and suggests that they are completely different things. Martin's definition means that nothing that procurement practitioners do can possibly be strategic. His article directly challenges the conventional wisdom replicated by ChatGPT. Let's look at some practical examples to explore the issues.
Example #1
A ‘strategic’ procurement department prepares and issues a request for proposal for office supplies. On receipt of the responses, they shortlist the two lowest bidders for subsequent negotiation and select the provider who performed best against their evaluation framework. Is this strategic behaviour? I think the answer has to be 'no'. It is an operational activity following prescribed rules, processes and policies and is unlikely to have any significant impact on the organisation's performance.
Example #2
Many years ago, I was at a procurement conference and the Chief Procurement Officer of one of the world's largest corporations explained that senior managers at the organisation had no idea what the word 'sourcing' meant.
She told them that "it is the equivalent of shopping."
"Oh, they said, now we understand. So what is strategic sourcing?
"Big shopping!" she replied.
Cue audience laughter. I didn't laugh. At the time I thought she was completely wrong, but now I think she may have been correct. In what sense is consolidating variety, harmonising specifications, aggregating volumes and issuing a competitive enquiry, strategic behaviour? I get that there may be a some influencing and change management to get to that point, but isn't that what managers are paid to do? How is that strategic?
The World according to Roger Martin
Martin claims strategy is:
"...an integrative set of choices that positions you on a playing field of your choice in a way that you win."
Martin argues that you can prove in advance that a plan will work but that you can't prove in advance that a strategy will work. In particular, Martin's definition suggests that strategy necessarily involves a formula for generating customer revenue. So what does that mean for the finance function? Or for HR, or for IT? It means that for these functions, and for procurement, there can be no such thing as strategic behaviour.
Example three
Two Australian airlines operated in a duopoly servicing multiple airports across Australia. One of the airports that both airlines flew to only had one supplier of aviation fuel. The cost of aviation fuel at this airport was significantly higher than at the other airports where there was competition for the supply of aviation fuel. The two airlines cooperated to invite a new entrant to the market for aviation fuel at that airport. In return for investing in setting up operations at the airport, the two airlines agreed to guarantee a minimum volume of business to the new entrant for a period of time. The revenue guarantee would more than cover the fixed costs and the only requirement the airlines had is that the new entrant priced below the level of the monopolist.
Is this strategic behaviour?
I think it is strategic behaviour. The market has been changed through the actions of the two airlines. According to Martin's definition, this would not qualify as a strategy as it neither generates new customer revenues, nor does it help either airline 'win' as they both benefit equally. But what this example highlights is the difference between issuing a request for proposal and transforming the market. One is a market interaction and the other is a market intervention.
Market interaction
The overwhelming majority of what procurement practitioners do is not strategic. That does not mean it isn't important or that we shouldn't plan what we're going to do and how we're going to do it. However, we cannot really argue that example number one is strategic behaviour. At best, it may be tactical, and it will normally be operational.
Market intervention
A market intervention is something that either changes the structure of the market (like in example three) or changes the orientation of one or more providers in the market towards the client. The key point is that after the intervention the market is different at least for one of the clients in the market.
ChatGPT > Roger Martin
The essence of the distinction is that ChatGPT classifies the alignment of operational behaviour to the organisation's overall goals and objectives as strategic. Martin sees strategy and strategic behaviour as exclusively measured in terms of business strategy. It is concerned with the markets in which the organisation operates, its formula for success and how it intends to win. There is not much scope for 'strategic procurement'.
Let's go back to example three. Imagine that the two airlines found operating at that airport to be marginal in terms of profitability because the monopoly supplier of Jet A1 charged a premium. It is not unreasonable to suggest that one or both might withdraw from servicing that airport on the grounds it was no longer profitable. Given airlines compete on multiple dimensions including the extent of their network, we can see that the intervention to reduce the cost of Jet A1 at that airport helps support and contribute to the organisation's overall goals by sustaining the ability of both providers to service the traveling public.
Big shopping or strategic procurement?
Nobody wants to reclassify the 'Strategic Procurement Department' as the 'Tactical Procurement Department' (or worse the ‘Big Shopping Department’!) But if we are honest about being strategic or behaving strategically, we need to do two things. Firstly we need to align what we do to the goals of the organisation. Secondly, we need to identify which parts of the spend portfolio are most significant and consider how we can secure unique advantages for our organisation that are not available to our competitors. Market interactions are unlikely to achieve that distinction. So what can we do to intervene into the market to create genuine competitive advantage?