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Challenging Specification: One More Way for S&P Function to Generate Value for Businesses.

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Purchasing function is an indispensable element in the overall lifecycle of product and service specification management and should be leveraged to achieve maximum synergy and value for the business in conjunction with all functions involved in the process.


Over a ten year stint in sourcing and category management I came across differing opinions over the involvement of purchasing agents in process of goods and services specification improvement. Some people believe that the purchasing department needs to only focus on the commercial aspect and not be an intrusive element by challenging the specification (except for clarifications). Although, this misconception is expected amongst requestors or internal clients, I cannot get over the fact that there are supporters of this idea in the ranks of sourcing and procurement function. A few years ago I even had fierce debates around this with a procurement coach and former practitioner, delivering a training session on S2C fundamentals.

Fortunately, role and perception of procurement function within an organization has significantly metamorphosed and is still progressively being acknowledged as a function which is designated not only to drive savings, but also bring extra value, increase profit and revenue for an organization. Of course, there was a time when procurement professionals put major efforts into benchmarking and negotiations, as these activities were deemed to bring greatest value. However, this approach has been superseded by a more complex one, requiring comprehensive analytics and deep understanding of category or commodity specifics, including all cost and value drivers. Certainly, one of those drivers is a service or material specification, and a purchasing agent intensively engaging with supply market, interacting with its players and having access to recent innovations, is capable to contribute in this area.

I fully agree with the statement that, "The most vulnerable aspect of the product or service specification development is the failure to use the full creative capabilities of potential suppliers. One of the biggest mistakes of purchasing executives in an organization, is their failure to get involved in the requirement development process. This pattern of avoidance is a holdover from the days when purchasing was a reactive, clerical function, limited to issuing and maintaining custody of documents that confirmed other departments' decisions".- HBR, David N. Burt and William R. Soukup.

Nevertheless, I regretfully admit that the role of purchasing agents in the process of product and service specification creation or development, is still notably underestimated in most organizations. Whereas, in fact, their support for technical issues is critically required in indirect and non-industrial categories, where there is hardly ever an employee within an organization who has direct technical responsibilities such as engineers, technologists, R&D, etc.  These are areas where they can take the lead in the process of managing specification and deliver outstanding benefits. However, there is a plethora of case studies on brilliant solutions designed and implemented by purchasing within direct categories, which has led to disruptive outcomes and changed the history of brands.

Internal clients rarely have specific targets pertinent to procurement or an entire supply chain function, like cost optimization or sustainability, therefore his/her way of thinking around specification improvements differs from those of a purchasing agent. That is why a synergy from combination of procurement and other functions efforts should lead to positive outcomes. Below there are some success stories that can validate the given viewpoint.

From my personal and most recent experience of challenging the specification, I can recall myself managing a project which involved buying displays (product stands with shelves) for a market leader of beauty and cosmetics industry. The lot delivered previously had been made of plastic which according to the marketing department had a premium look, corresponding to the brand positioning and reputation in the market. The Internal client had been fully satisfied with the current specification and was extremely reluctant to any change, especially towards cheaper production materials. One can imagine their reaction when I came over with an idea to entirely shift plastic for cardboard. Naturally, a big "NO" was the response to this proposition. Hence, additional means were required to prove the concept.

A range of meetings, workshops and sample tests had taken place. The sample was approved and the total lot was ordered only after it passed a two month testing period in field conditions. Outcomes of the project have brought back the peace in the team, being eminently positive for all stakeholders involved: 

  • Several hundred thousands of USD (43.8%) of yearly savings in production and design cost due to shift from plastic to cardboard and    standardization of specification;
  • Significant savings on delivery and storage cost - 329 palettes instead of 659 palettes, 7kg per piece vs. 13 kg per piece (25,7 tones weight reduction); 
  • Production sustainability improvement, since cardboard is environment friendly material compared to plastic;
  • Logistic sustainability improvement (CO2 emission reduction) due to decrease of pallets quantity;
  • The last but not the least - safe brand image, satisfied internal client and increased level of trust towards the purchasing department.

This case study also demonstrates a change management process as a denominator for achieving the intended outcomes of the initiative. Its importance should not be underestimated while proposing any changes of specification to internal clients and stakeholders.

Savings & Improvements
From experience with Infosys clients I can introduce the case, in which wooden pallets for transporting products globally were replaced with a cardboard ones. This also required redesign of pallets loading process with adaptation of transporters and forklifts forks to be able to lift and move around new cardboard pallets. These efforts resulted in significant savings for the client as the weight of each pallet was reduced by 15 kgs while transporting thousands of pallets via airfreight.

Here are a few more examples of how reputed companies delivered remarkable savings and enhanced sustainability trough specification changes.     

  • Danone France removed the outer cardboard packaging of Activia and Taillefine yoghurt saving €2.5 million.
  • Alter Eco, a French fair trade company, also reduced cardboard packaging of its chocolate bars from 220 g/m2 to 205 g/m2 (a 7% reduction).  Saving 1.5 euro cents per bar, amounts to a significant saving considering that the company is selling around 3.6 million units per year.
  • PUMA launched the "clever little bag" reducing paper consumption by 8,500 tons, saving 20 million Mega joules of electricity, 1 million liters of fuel oil and 1 million liters of water. During transportation 500,000 liters of diesel are saved and lastly, due to the replacement of traditional shopping bags with the lighter bag the difference in weight saved up to 275 tons of plastic.

Risk & Compliance
Triggered by increasingly globalized economy and growing competitive forces organizations apply such approaches like low-cost countries sourcing which is typically partnered with uncertainty and high risk exposure. Most of the risks are related to specification of stuff being acquired.

In 2007 Mattel Company suffered a crisis when a supplier used lead-contaminated paint on Mattel's toys, resulting in a 20 million product recall with an overall cost of over US $100 million. Senior purchasing managers are aware of this risk, to a point where it is their main drive and deciding factor while contemplating the implementation of a procurement initiative.

There are numerous other examples that show the economic consequences of supply chain issues. In each case the brand reputation of companies were affected by events involving safety, environmental or social issues with suppliers. These events have also led to significant direct costs (recall of products, financial penalties) and/or indirect costs (decrease in market share, sales and market cap, product boycotts) for these companies. Purchasing function is capable to effectively anticipate and prevent such cases using its proficiency in risk management. 

Better Options  

While main benefits from specification improvements are traditionally seen in savings, better quality, increased efficiency, compliance and sustainability, one also needs to view it from a different perspective.

E.g. If you have been buying a product or service that sits in the proprietary quadrant of such category management tool like day one analysis and you change the specification so that you shift to generic, then you open up the entire marketplace and increase your options. By doing this, you can effectively move from buying in a difficult market (where choice was limited) to an easy one. To identify such an opportunity, a category manager's expertise is essential.

As mentioned, there are positive trends for us and the acknowledgement of purchasing function's contribution to technical support is on the rise. More and more companies are becoming interested in recruiting sourcing and procurement SMEs with an MBA in engineering and other technical background. Furthermore, this support extends to new product development process where the purchasing agent also ensures effective interaction with supply market, leverages all options available there and helps anticipate risks.

Therefore, I have no doubt that the purchasing function is an indispensable element in the overall lifecycle of product and service specification management and should be leveraged to achieve maximum synergy and value for the business in conjunction with all functions involved in the process. Comprehensive outlook of purchasing at product, service being acquired and business overall helps to spot things that may not be tangible for other functions and this can yield very positive outcomes.

Quoting Elizabeth Green, "Sometimes the most ordinary things could be made extraordinary, simply by doing them with the right people". I believe sourcing and category managers are the ones capable to help other functions, owning specification creation and development process, see beyond the horizon and generate breakthrough solutions for product or service specification. 

Comments

Very good understanding and rendering. Sharp insights and thought process.

Very nicely written and agree with many of your statements Roman. One way to overcome the internal resistance of blocking Procurement Professionals in alternative specification discussions is to attract people from the business into Procurement. These people have the business knowledge and therefor speak the same language which is required to challenge the current/existing specifications.

Fantastic post Roman. Without clear description of commodities and unambiguous specifications that all suppliers can understand at same level, purchasing process is meaningless. However, many a times, stakeholders themselves do not know specifications and just put in PR/PO/sourcing request the details that their favourite supplier provides ! Keep writing. You have a knack.

A brilliantly written, well articulated post with some wonderful insights and case examples. Indeed correct material or service specification can go a long way in creating product/ service understanding leading to finding the best fit alternatives/ or products resulting in double digit savings. Looking forward to more posts from you

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