Hélène:
Welcome to the Procurement Game Changers the podcast for leaders that make a difference.
Today we’ll discuss how to set up a procurement organization. And to discuss the topic I have the great pleasure to have with me today. Ricardo Gaxiola. Ricardo is the executive leader, sourcing process and analytics at Whole Food Market.
He is an experienced procurement professional in strategic sourcing, supplier development, and tactical and transactional procurement from the sourcing process to the logistics supply chain operation.
Ricardo has over 25 years of working experience with many companies. He is currently with Whole Food Market, a subsidiary of Amazon, which specializes in organic supermarkets. Welcome to the show, Ricardo.
Ricardo:
Thank you Hélène. Thank you for having me and happy to join this conversation on this interesting topic.
Hélène:
Ricardo, could you tell us what led you to procurement?
Ricardo:
It is actually an interesting story, Helene. I began my professional career working in the aerospace industry, particularly on the helicopter division of this big airspace group.
And one, my responsibility was to source and buy the minor and major components for the maintenance and repair of the helicopters. But the silver lining of my job was to have the opportunity to voluntarily ride helicopters on a test flight after each maintenance job.
So while I enjoy so much and learn so much by doing my job at the same time, I needed to ensure to work with the best supplier, ensure the best quality and control because literally I was putting my life in their hands.
Hélène:
So procurement is a critical part of any organization and I’m sure that you will agree with me, Ricardo. And managing the supply chain and sourcing raw materials or services are vital for successful operations.
So for companies that have outgrown manual procurement practices and need a more sophisticated solution, setting up a procurement organization can be doubting and that’s why it’s important to understand this necessary step for creating an effective and efficient procurement setup.
So what are the metrics to consider before making your decision on how to decide what activities should be kept internal versus those that could be outsourced? And what is the right time to invest in new technology? This is what we will discuss today.
Ricardo:
Yeah, I’m going to say there are different levels of procurement maturity in the organizations. But what I’ve seen in my experience, the more advanced procurement practices is in those industries dedicated to manufacture products because they have some internal dynamics that require more advanced sourcing and procurement organization to ensure timely manner supply of materials, or actually sometimes just in time.
Ensure the appropriate quality and perfectly understand all the different guard rails for the commercial agreements to monitor the relationship and keep the manufacturing costs and general cost of goods all within control. So I’m going to say basically the dynamics that require an advanced procurement organization.
Right time to establish a procurement organization?
Hélène:
It’s true that, I remember when I was working for Engie, so a gas distribution company, I had the opportunity to discuss with someone who was working in Airbus in the procurement space and they were so much more advanced than we were in that field, in particular in the supplier development.
We were not doing much, and they were really doing that for years, bringing suppliers from not so good to compliant to all the regulations in aerospace industry.
So yeah, that’s true. That’s probably one of the best places when you’re in procurement. But let’s go back to building an organization for a company. So if I am the CEO of a company, how do I know that now is the time to set up a procurement organization?
Ricardo:
That’s a pretty good question. It is coming to believe that it becomes more relevant to leverage the benefits of a procurement organization when your supplier database is increasing and the spend is becoming more important.
But in my perspective and experience, it should always be important to understand the correct administration of your spend, the implementation of metrics performance measurement and clear definition of order quality, operational and commercial conditions with the third party suppliers and commercial partners.
Because there are many opportunities you may lost by being reactive. So in my experience, it is important to implement this early in the process of your organization because when you have the time to be proactive and non-reactive.
What should a Procurement organization do?
Hélène:
That’s a good point. So since we’re talking about doing that in the early stage, what’s the bare minimum that a procurement organization should do?
Ricardo:
Well, one of the main indicators for a procurement organization or metrics of success is the cost containment, to deliver savings. They have to do that, that’s a must.
The procurement organization has to be able to contain the costs, to develop suppliers, to select suppliers, to source those suppliers, ensure the business continuity plans, ensure the material will keep coming, the services will keep coming. To identify strategic partners, to foster relationships and reduce the risk.
And this is one important risk because by ensuring the risk of materials and keeping the negotiations under control to maintain and cost containment. To monitor how the suppliers are performing, to monitor the commercial conditions and facilitate and provide a smooth relationship between the internal clients, because at the end of the day, those are the end users. And so maintain that relationship between the internal clients and third party suppliers.
So that I believe is the bare minimum that a procurement organization should do to really deliver the value of a sourcing and procurement organization.
Right size of procurement organization
Hélène:
So we have all those elements that we need to deliver, but what metrics can help determine the right size for the procurement group? So you say we need the procurement group, obviously we need all those activities to be done, but how many people do we need and how do we build that sizing actually? How do we determine that? What’s the right size?
Ricardo:
Depending on the number of categories that you have, the number of suppliers, materials, what is the spend that you have? If you are having those tactical and transactional activities under your control then of course, understand what is the level of automation of the procurement function.
There are different tools and different technology outside that you can source and find and implement within your organization to become more efficient in those tactical and transactional activities and have the right size. So in my mind, the number of categories and suppliers to manage is one of the indicators to determine the right size of your procurement organization.
Hélène:
Yeah, absolutely. And you mentioned before you have those activities, you have that number of suppliers that you have to build a relationship with and make sure the contracts are going okay and the commercial conditions are fine et cetera.
And then there’s the number of categories and you multiply a little bit all of this and you should have your numbers. However, there is also the game between internal and external. So how do you decide to keep internal or to outsource procurement activities?
Ricardo:
Typically, the transactional activities are the easiest to outsource. Those are procured to pay, cutting the POs, tracking the POs, tracking the invoices. And in general that transactional activity with the supplier is easiest to outsource. Why? Because you have already defined the guardrails and success metrics with the relationship with your suppliers.
So having an external third party or even an automated platform conducting the transactional activities represents a low risk under certain conditions. On the other side, the strategic portion involves other companies that require a deeper analysis of the market, the industry, the participant suppliers.
Those negotiations in some cases involve confidential information and it’s better to keep the strategic portion in house to have an internal cross-functional evaluation of the supply source prior to initiate the supply of goods and services. Does it make sense?
ROI in building a procurement organization
Hélène:
Yeah, that sounds a lot like make or buy strategy. So yes, it makes a lot of sense. No, I think that the confidentiality part is often overlooked when people are doing make or buy. And it’s not only at a very high level of saying, oh, I’m building my organization, I’m going to outsource insource. It’s also at a project level.
Let’s talk about the thing that I know, which is consulting. Sometimes the executives that are buying are underestimating the risk that they’re taking by working with an external consultant, especially on very strategic projects where it’s a little bit the more the merrier, right? The more people you get into the room, the riskier on the confidentiality level.
So yes, I think that makes a lot of sense. So yes, I understand. So now it’s time, I know what the bare minimum is. I know the size, I know what to internalize, externalize, but we know how it works. I need to justify to the top leadership, the building of that organization. How do we build the case for change? How do we justify the return on investment of building a procurement organization?
Ricardo:
Yeah, that’s an interesting question. There are different benefits like operational benefits and efficiencies, but I’m going to say the pretty straightforward indicator to build a business case for a procurement organization is the cost savings that you can deliver year over year.
But there is another, which I believe even more important indicator, which is the potential loss of business or sales opportunities because of the lack of materials or services. So that’s a pretty important portion.
So by reducing the risk, by creating or developing process relationship with the suppliers, by becoming the customer of choice to your supply sources, you reduce the risk. And of course you increase the sales opportunities for the company in general. So cost containment is a pretty straightforward indicator, but there is another component which is the business continuity, which is important.
Hélène:
Yeah, I was thinking about cost avoidance as well. I think that it’s not very often measured because it’s very difficult to analyze how much money you’re not losing by doing things right. But I think that there’s an element here where procurement is often seen only through the lens of savings, where actually because it allows the rest of the organization to function actually, to have everything. And not only direct procurement, indirect procurement too.
I was discussing with one of your colleagues, he was talking about what is the definition of indirect? And he was saying that’s everything you don’t know that exists until it’s not there.
And he was saying that when you come into a company, you expect everything to work. You’re expecting to have a desk, a chair, you expect to have a computer, to have light, to have heat. And all of this is dealt with by procurement and there’s all the things that make everything work. So it’s funny that it’s a so under evaluated, underrated function in the company.
Ricardo:
That’s pretty interesting. And yeah, you’re right. I mean there are different components of the cost containment. I’m not saying just by reducing the price that we’re paying on your invoices, but there are also rebates and other sustainability initiatives, the cost avoidance that you mentioned. Some different companies like this, there is an entire taxonomy to classify your savings and your economical benefits. But yeah, that’s pretty interesting.
Hélène:
So what resistance should you expect and how do you overcome them?
Ricardo:
This actually typically happens when you are deploying a sourcing solution, the resistance? Because the budget owners, which is actually the internal stakeholder, prefer to make decisions and use their trusted suppliers to reduce the risk of switching to a different supplier, to an unknown supplier. And this is one of the main resistances.
The way to overcome in my perspective, how to overcome this is to work side by side with the internal stakeholders and show them the benefits of running a competitive sourcing event in which we have the ability to perfectly understand the different participant companies and highlight their strengths and their areas of opportunity as well.
And evaluate them in a cross-functional and collaborative environment with the internal stakeholder, with quality areas, with legal, with different participants of the company. This is, and I believe it is not anymore just procurement deciding, but being the facilitator to conduct data-driven decisions and to work with the best integral solution for the company.
Digitalization in early stages of Procurement organization
Hélène:
I can totally relate to collaboration and being the facilitator. That’s how I see the role of procurement in an organization. And I think that it might seem a little bit different on some categories where procurement has a real role in, I would say a decisional role. Because when you have to discuss about furniture or stuff like that, yes you can make a decision, but from other categories more direct.
For instance in the chemical industry, procurement cannot decide what chemicals they want to use. Or in legal, they won’t decide what lawyer they will work with and what they will do.
So, I think that you’re right, collaboration is key. Working with the key stakeholders, building the relationship, making yourself just their go-to when they want to buy something, and they trust your choices and they trust the alternative that you bring them. I think that’s absolutely the way to go. So we talked a lot about the digital procurement and all of this.
To what extent, when you’re starting building a procurement group and you’re at the early stages of that, to what extent can you implement digital technology at that stage?
Ricardo:
I love that question. I’m pretty passionate about it because it is a must. In the world that we live today, it is a must to use technology in the sourcing and procurement function and organization because this deliver different benefits. That includes automation, standardization, compliance, and also helps to unload the burden of the tactical and transactional activities. And at the same time enhances the internal stakeholder experience.
So, by implementing technology in the strategic sourcing process, you have transparent processes and the ability to have different participants on the supplier selection process.
This also facilitate the decision-making process and the internal and external communication and the overall turnaround time. But it is important to understand when to implement this technology. What is the right fit, what is the right technology for your organization? And it is a common mistake that many organizations make.
Like buying some solutions that are not necessarily the right fit for the size of your organization or the requirements of your organization.
Procurement organization setup
Hélène:
Yeah, that’s a good point. And when we were preparing, we also discussed the fact that when you’re building an organization, it can be at the beginning everyone is adapting to the new ways of working. And you may not know yet what will be your organization in one year, one year and a half from now. And maybe wait a tiny bit to make sure that you know what will be the requirements that you are mentioning just before could be a smart move.
And so we talked about digital, we talked about sizing and so on. When you look at organizational setup, there’s usually two main ways let’s say. You have one way that is a centralized procurement with dotted lines to the business or functional lines to the businesses.
And then you have another setup that’s at the other end of the spectrum, which is a decentralized procurement dotted line to the procurement group and the CPO. So what’s your take on those two setups?
Ricardo:
Yeah, well we talk about the different maturity levels in the procurement organizations and within different organizations. So having a separate procurement pillar totally independent is a sign of a mature procurement or in general a mature organization.
Because in my perspective and experience, the benefit of having an independent procurement function provides the ability to make economic decisions and on how to conduct a relationship with external suppliers and benefit of the organization without the influence of a third party.
Because procurement should have the ability to work as a separated pillar of any internal influences. Those primary influences and drivers should be only to ensure the supplier of goods and services, to ensure the best quality and the best commercial conditions.
I’ve seen procurement organizations reporting to the COO or CFO and sometimes the pressure that comes from above does not really allow procurement to make the best decisions and bring the best conditions for the company. So in my perspective and experience, a sign of a mature organization is having procurement as a separate and independent pillar that makes decisions without any other internal influence.
Hélène:
That’s a good point. I think there’s also something linked to the rest of the organization. For instance, I worked with a company where there was a central procurement group, but then there were business units that were quite independent even on the material they were using and buying and the markets they were serving. And in that case it makes sense to have regional or decentralized procurement groups, but not for all categories.
Going back to what we were saying before, there are many categories and there are many suppliers to deal with. There is value in centralizing the management of some categories where you have the same suppliers because that’s where you have discounts on volume, you have economies of scale, you can build a list of preferred suppliers that make sense and that’s not too big because you don’t want to have a hundred suppliers.
So, there’s virtue in that. But when that’s not the case for organizational reasons or regional procurement practices or regional access to materials, then you can find a little bit in between. But ultimately, you’re right, the maturity is in centralizing everything that can be centralized, that makes sense being centralized. It is the mature stage of procurement organization. I agree with you on that.
Ricardo:
Absolutely.
Hélène:
So when you implement a procurement organization, how do you treat professional services and the need for collaboration? We said that before, you mentioned a lot about collaboration. You say that procurement needs to be a facilitator and we know that that’s true for many categories where you have that.
But for those categories such as legal or consulting or marketing, the knowledge of what needs to be bought is with the business lines, while the knowledge of procurement practices and what should be done and how the risk should be managed is in procurement. So how do you make sure that they do collaborate?
Ricardo:
Well if you think that all those different relationships with the third party or external companies is an intention of the company to invest money in that relationship and engage in a legal agreement, that’s something that must be evaluated as any other product or service. But you mentioned, there are certain trust relationships in which we need to consider other factors such as legal services or advisories for specific industries.
And I’ll pick as an example, the advisory services for government relationships. So that’s why it’s important to foster the internal collaboration, to have a perfect understanding of what the initial requirement is, how to conduct that relationship.
If this is something that you can run on a competitive bid or do you really have to go and find the best commercial condition by negotiating with a specific supplier. These government relationship advisors, sometimes they have some specialty. They have the relationships and that’s something you want to use, you need to use to conduct those relationships.
So it’s not something that you can go and try to find the best source for that. You want to work with that legal company, you want to work with that advisory company. So you need to, again, I’m going back to your previous question. You need to work closely with your internal stakeholder to understand all the specifics of the requirement.
Hélène:
No, it makes a lot of sense. It’s really understanding not only the specific need of what has to be done, but also what skills or relationships or other parameters you need to consider in the decision. And sometimes it means not running a competitive bid and just trying to get the best out of the relationship, building a long-term relationship, whatever the need is on the long run for the business lines.
Ricardo:
Yeah.
Hélène:
All right. So now it’s time for the takeaway. So what is the one thing that our listeners should remember from our conversation?
Ricardo:
I’m going to say, and I mentioned that before, being the customer of choice. Usually we’re so focused on understanding the value of the procurement organizations like true savings, through efficiencies, through ensuring supplier materials or services.
We’re so focused on that. But if the procurement organization or the sourcing organization is able to become the customer of choice for the companies we make business with, that is actually something that will ensure the relationship will run smoothly because your suppliers will prefer to work with you.
We are now living in a global economy in which the diversification of companies offering goods and services and buying goods and services is not just local or regional, that’s something global right now. So you have to become and show what is the value to the external suppliers to work with you. That’s my takeaway.
Hélène:
I think that’s a very good one. I have that saying it’s the big fish in a small pond. It’s not only that, but it’s about getting the extra mile from your supplier just because they like to work with you and not on: a oh, he’s my friend type of relationship, but more I like to work with them because they pay on time, they’re fair, they give us interesting work, they give us visibility on volumes and stuff like that. Right, thank you Ricardo. That was really super interesting. Thanks again.
Ricardo:
Thank you. And it was really nice to talk to you.
Hélène:
So now it’s your turn to tell us about your experience and your challenges when building an organization for procurement. Don’t forget to subscribe if you want to be notified when a new episode is out. Thank you for listening and hope you enjoyed this episode. And if that’s the case, don’t forget to give us a thumbs up.
So happy sourcing to you all.
Bye. And au revoir.
PS: To listen to our previous PGC episode CLICK HERE!
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