The "Procurement's Trilemma" and how to tackle it
Does the word "Trilemma" even exist for anyone to even begin comprehending the title of this post? The answer is yes. Webster's dictionary succinctly describes it as a state of things in which it is difficult to determine which one of three courses to pursue.
You may ask upfront -- does the word "Trilemma" even exist for anyone to even begin comprehending the title of this post? The answer is yes. Webster's dictionary succinctly describes it as a state of things in which it is difficult to determine which one of three courses to pursue.
What is procurements' trilemma then? It births from the fact, that in every for-profit organization, the procurement function is expected to compulsorily meet three goals:
(1) Drive cost reductions every year from third party spend, typical target is =>5%.
(2) Make suppliers provide exceptional service, innovative solutions and liberally invest big financial sums at short notices.
(3) Get most favorable credit terms from suppliers, the longer the better.
So here is the snag with these goals. However hard you try, you cannot achieve all three together. When you achieve any two, the business deal negotiation positions and BATNA (best alternative to a negotiated agreement) force you to sacrifice the third.
Is there a remedy to deal with this trilemma? The answer is yes and no both. No, for those organizations which believe that good suppliers are only those who help them achieve all the three goals. Typically, FMCG and retail organizations exhibit such practices with their procurement functions mostly reporting into finance function. On the other hand, organizations where business strategy is crafted to work with few credible suppliers and help them grow their businesses profitably, seal supplier contracts that help them achieve two out of these three goals. Automotive, aerospace and high tech manufacturing firms typically exhibit such business behaviors.
Smart procurement buyers make sourcing decisions that lead them to achieve two goals trading off the third sometimes and rightly so. However, this realization must come to their overseers that this is the best procurement can do and it is they who need to reconsider the need to continue to have all the three goals mandated on procurement to deliver for each contract.
Do you have any experiences to share? Feel free to expand.