Procurement: The real value is in the post-contracting activities

In this excellent article from DILF “Procurement at a Crossroads – Disrupt or be Disrupted’, Soren Vammen, CEO of DILF and Lars Bjerregaard Mikkelsen, Professor at Aarhus University, make the case for procurement to become, not ‘strategic’, but actually and genuinely relevant to their organisations. They suggest CPOs focus on answering the question “Are we business relevant or not?” and be less obsessed with status and positioning in the hierarchy. The whole article is worth your time, but one section caught my attention, and it refers to the post-contract period in contracting and relationship management. Those who know me well will appreciate my long-time interest in SRM (including, to be clear, supplier performance management, risk, innovation-capture, and other sources of value), and while I whole-heartedly agree with Vammen and Mikkelsen’s sentiments, I particularly like the contrast they draw between the pre-contract ‘tactical’ buying (even through sometimes advanced strategic sourcing processes) and the more ‘strategic’ post-contract relationship management for value beyond cost. I’m going to quote them directly:

“If we look back on the last 10-15 years the majority of companies have been working with strategic sourcing, strategic procurement and many have tried to implement category management. We think there has been misperceptions about category management because nearly all the resources have been thrown into what we would call pre-contracting activities – that is a tactical buying process with spend analysis, category profiling, market analysis and strategy drawing until you contract. We would label it sourcing and it’s a tactical process.

If we agree on that sourcing is the pre-contracting process, what is then the post- contracting bit? The whole supplier management part! The post-contracting activ- ities include securing that you get what’s agreed in the contract, the on-going dia- logue and the projects you do with some of your suppliers. We haven’t seen a lot of those activities in the average company. They fuel all their resources into the pre- contracting activities, but loads of research confirms that majority of the real value is in the post-contracting processes. If you look at the research from John Henke from Planning Perspectives it is obvious to see that those who are full-loaded on the post-contracting activities and do it well, score much higher than those who traditionally have been more loaded in the pre-contracting. When we look at big companies as for example Unilever, Kraft, Big Pharma etc. we can see, that they are now investing heavily in the post-contracting activities.

Still many companies are working hard on their sourcing processes – to get it aligned and agree on ways of working. You can say that the supplier management part is still kind of a green field for most companies and that is also where you find the biggest gap between the mature and the average companies.”

Their comments certainly reflect my own experience of companies’ application of supplier management practices. Whilst efforts to improve SRM competence continue to grow, there is a hell of a long way to go before it reaches the frankly modest levels of strategic sourcing practice evident in most procurement organisations. And perhaps we shouldn’t be surprised that it’s taking so long, as strategic sourcing as a method has been around for the best part of thirty years, with still much room for growth in its maturity. SRM is running behind and, realistically, will do so for some time to come, but those CPOs who embrace it enthusiastically and with purpose will yield superior value for money from supplier relationships – perhaps to level that’s genuinely going to create competitive advantage for their employers. Some sectors have been doing it well for years; it’s about time some of the others caught up.

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