Procurement – it’s much more than getting the lowest price

If I tell people I now work in procurement, they are either confused (“what was that again?”) or indifferent. Indeed, procurement may sound like a simple task at first. All you do is buy things with your company’s money. Can’t be that hard, can it? Some people also wonder what we buy in Statkraft… So, after four months in procurement, I would like to give you my take on what I think is a crucial function in a company.

What we buy in Statkraft

First things first: what do we buy? Mainly we buy material and services needed to build and operate our hydropower plants and wind parks both in the Nordics and internationally. We buy construction work to build and maintain roads, tunnels, and dams. We also buy electrical and mechanical equipment such as turbines, transformers, generators and control systems. Finally, we buy a wide variety of services such as technical consultants, financial services, scientific consulting or legal advice. In total Statkraft has over 10’000 suppliers from countries all over the world. Our purchases are not only high in value – much of what we buy is also complex from a technical point of view. And on top of that there are important contractual elements to keep track of in order to secure the successful delivery of what we buy.

for illustration a video of the building of Ringedalen Kraftverk in Norway. Contracts were awarded to the following companies: AF Gruppen (dams, tunnels, roads etc.), Andritz (turbines), Hymatek (electrical and control equipment), Tironi (transformers), and Multiconsult (project)

So, apart from the fact that we actually buy a wide variety of cool stuff, what does procurement have to offer?

Procurement as a money-saver

Procurement can help to save a lot of money. An example: In my first contract, an internal stakeholder contacted my department for advice about a purchase for our headquarters in Lilleaker. He had successfully finished a project and was about to start a follow up project. He was very happy with the delivery of the supplier, so why not just continue with that supplier?!? He had already received an estimate but we decided to start a competition process anyway. The result: the same company delivered an offer at 20% lower price. This indicates that the mere fact of having competition can save you money. After negotiations the end price was nearly 30% lower than what it would have been without competition. You think this is a one-off? I’ve seen the same thing happen in three other contracts. According to Forbes, world-class procurement departments achieve savings of 20% compared to average companies – and they do so using less employees.

Don’t get me wrong, I’m not saying that good procurement is about squeezing the supplier until he’s half dead. This part of procurement is simply about not leaving money on the table. No more, no less.

Procurement as a strategic function

The more interesting and more important part of procurement is to develop a relationship with the supplier. In my opinion, procurement owns the supplier relationship just like the marketing department owns the customer relationship.

It is generally accepted that the customer relationship is a source of competitive advantage because loyal customers ensure a stable or growing and less vulnerable cash flow. They do so by impacting the revenue side of business. I argue that the supplier relationship is an equally important source of competitive advantage because it influences the cost side of business. How so? Instead of merely buying goods or services at the lowest price, companies with close supplier relationships work in collaboration with the suppliers to create smart solutions to a problem, and this affects the cost level of the business.

Let me make some examples. The supplier is the expert on what we are buying; he has a good overview of innovations in the field. After all, it’s his core business and not ours. If we as a customer specify a delivery too tightly without giving the supplier the option to propose alternative solutions, we might end up buying an outdated, non-standard or over-specified solution. Sometimes we might include some nice-to-haves in our specifications without communicating that they really are ‘nice to have’. These nice-to-haves may represent a significant cost addition that could have been avoided. Or we might make demands that we think are reasonable but they are anything but reasonable for the supplier. In one purchase I was involved in, I set a delivery time that I thought was fine. The supplier called me and told me that it was possible to meet that delivery time, but at a much higher cost because it would require them to accelerate their work processes. It wasn’t a big deal for us to receive the delivery a bit later so we changed the delivery time.

These examples all point to good and open communication as a necessary tool to find smart solutions. And that normally only exists if you’re have established a relationship. To draw a parallel that you might be familiar with: Would you tell your date after your first dinner at your place that the way he places the bowls in the dishwasher is highly inconvenient (like ‘really annoying’)? Or would you silently rearrange and bring up the issue at a later stage? I guess the majority of people would bring it up once the relationship is steady. In that aspect, business relationships are very similar to personal relationships: improvement points are brought up once the partners know each other better. Companies that treat suppliers like one-off vendors will always be silently rearranging the dishes. Companies that develop supplier relationships figure out the optimal solution to the task in collaboration with the supplier. That is efficient and produces the lowest total cost.

What do you associate with procurement? Let me know!

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