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ОглавлениеReimagining the Procurement Function
In light of the remarkable weight of procurement operations within industrial budgets, it is quite clear that the procurement function plays a central role in organizational charts. Nonetheless, because of budgetary constraints or of imperatives tied with shareholder demands, this function is all too often reduced to a simplistic search for the minimal level of investment. This implies that more often than not, we observe that acquisitions don’t follow a rationale of clear and anticipated amelioration of value-generating processes for the organization, but rather derive from short-term calculations; this creates a situation where procurement appears primarily as a factor that aims to conserve shareholders’ interests through a reduction of CAPEX.
It is therefore quite clear that the generalized practice of the procurement function as it can be observed in recent years is in stark contradiction with the policies encouraged by the adepts of industrial Asset Management. We will thus try to go over the issues and the perspectives that derive from the modus operandi of procurement managers in order to bring forth an innovative and rational perception of what the procurement phase should become in order to comply with the requirements of a true “Asset Management” line of sight.
What is it that we find so reprehensible in the historical posture of procurement agents? And why do we oppose their practice so stubbornly? The answer is truly quite simple, but it shines a light on some of the cultural and internal rationales that have a lasting impact on corporate decision-making.
It is crucial to consider the very specific situation of the procurement phase in the overall life cycle of industrial assets. Indeed, this segment is regarded as being neither under the responsibility of engineers, nor under that of operators. It is a function whose limits are very well defined and almost partitioned—which comes with a fair share of problems. De facto, procurement has always operated in an isolated manner relative to the rest of the life cycle. Yet, the theory of constraints demonstrates that the optimum of the sum is not equal to the sum of the optimums; this means, in this context, that it does not suffice to adequately administer the procurement segment in an isolated manner in order to improve the global performance of the organization. For the enthusiasts of Asset Management, this is a systematic problem whenever one seeks to realize a function’s optimum without laying a simultaneous view on the entire life cycle.
No one is exempt from such pitfalls: in my own experience as a manager, I’ve conducted procurement deals without giving preliminary thought to their long-term impacts. I’ve done so without a hint of embarrassment, as it seemed at the time that I was doing what I was meant to do. Indeed, what is it that is expected from a buyer? Based on undeniably variable technical criteria, his role is to identify and select the correct service or the right product, in compliance with current specifications, and always at the lesser cost. Regardless, it seems obvious that the role of the buyer should be broader and more proactive: his function should come close to that of an internal consultant, or in other words to that of an agent capable of assessing the needs and wishes of every segment of the organization in order to establish a coherent line of action and to keep expenses under control. And de facto, there have been many procurement managers who have exercised their job in this fashion; however, over time, the increasing weight of economic pressures has reduced the role of buyers to a mere speculation on prices.
This rationale has reached a climax with the contemporary trend of public-private (or private-private) granting or Internet auctioning of infrastructural equipment or even complete infrastructural installations. This approach turns the notion of value extraction from the assets (dear to Asset Management thinking) into a mere calculation on instantaneous cost (contrary to the notion of life cycle) on a deal settled for the lowest bidder. We should even point out that some agents in the business seem to be very pleased with this trend, despite all its inherent flaws.
It is undeniable that firm control over procurement costs constitutes a crucial advantage for maintaining the financial health of an organization endowed with a heavy capital-intensive assets fleet, both in the industrial and infrastructural sectors. Indeed, purchases represent the equivalent of up to 80% of the organizational turnover in sectors such as the automobile or the distribution industries. It is no wonder, thus, that the price of the assets in which they invest appears as such an essential factor for industrial leaders worldwide. However, all too often this prevalence of the economic aspect tends to overshadow other trends that should also be considered—most notably, that of reliability. We are faced here with a certain organizational culture, very widespread nowadays, which has shunned all strategic and systemic vision in favor of a restrictive short-termism.
As we’ve already suggested, an exemplary purchase should respond to a definite need at the lowest possible overall cost, rather than at the lowest possible price. It should be noted that according to this definition, the procurement price is a secondary factor. However, it is the most prevalent in real-life procurement decisions, whatever else one would be inclined to believe. This rationale has led countries in which production costs were the lowest to gain situations as the “factories of the world,” for the simple reason that these states spoke the language of industrial leaders: that of the lesser cost. This geographical displacement of global production has generated a remarkable and generalized qualitative degradation of assets. Indeed, one should consider that the production realized from the assets depends on three modulable parameters: namely cost, timeframe, and quality. However, it is an often neglected fact that it is only possible to modulate simultaneously two of these distinct parameters. When buyers prioritize assets produced at the lesser price, it is only logical that the machines’ quality should decrease accordingly. Caught in a twisted game of which “minimal investment” is the golden rule, managers—the internal clients of the buyers—are bound to go from disappointment to disappointment as they are increasingly resigned to do without efficient machines (in the Asset Management understanding of the notion).
By solely focusing on prices, the buyer favors his own interests; he strives towards the optimum of the “procurement” function to the detriment of the needs of other segments of the organization (and all too often, he does so in good faith). Yet it is obvious that these segments, which themselves heavily depend on the buyers’ decisions to reach their own realization, must be taken into account at the time of the procurement-related decision-making. Too little consideration is given to the well-informed opinions of engineers and operators—in fact, buyers and organizations often reenact purchases previously denounced by these agents. Hence the input of life cycle costing, and of a quickly-developing array of methodological tools. By monetizing the financial impact of an asset across its entire life cycle, one obtains an increasingly precise notion of the purchase’s profitability, as long as one considers its entire existence within the organization. However, design-to-cost remains the predominant method for assessing costs, whereas life cycle costing is still a marginal trend, or at the very least applied in a timid fashion—this will be developed in coming chapters.
Agents of the “procurement” function cannot take the entire blame for this situation. From the perspective of enterprise sociology, the so-called “buyer’s mindset” is in fact determined by exterior factors such as corporate pressure or the lasting influence of a culture that rewards quick successes. Nonetheless, if this explains why the buyer cannot be an internal consultant (since he is not required to heed the needs of other segments), he should at least learn from his mistakes—which rarely seems to be the case. De facto, mediocre assets are becoming the norm within the industrial sphere, and operational expenses (OPEX) are on a rapid rise. The OPEX we are discussing are not those that are originally budgeted, but those that are eventually spent throughout the budgetary year, not to mention the shortfalls tied with unplanned production stoppages; these are such tremendous wastes of funds!
Buyers are buying irrationally—and quite stubbornly so. One cannot help but to think of Albert Einstein, who defined insanity as the act of “doing the same thing over and over again and expecting different results.”
When one engages a reflection of procurement processes, it is essential to discuss the question of the regulations imposed on the public markets. Indeed, we could synthetically assert that the public market regulations in most countries dictate that procurement be realized at the lesser price, following the cheapest bid. Disregarding the reasons supporting this present condition of the public market, it is quite clear that if the economic world embraces Asset Management in the near future, these regulations will quickly become totally obsolete.
To support this assertion, one could enumerate a number of points:
• What is known as the “negative elasticity” between low CAPEX and the consequently very high OPEX in the remainder of the asset’s life cycle. In other words, when equipment is bought for a period of at least 10 years in this fashion, the probability of not enjoying a functional and qualitative operation of the asset rises spectacularly. Allow me to detail this claim by providing an example closely tied with the concept of LCC: in the public transportation sector, it is common knowledge that by the time a piece of rolling stock is decommissioned, the value of the initial CAPEX will have been spent somewhere between five and seven times in OPEX (in updated currency). This ratio is quite similar in any other industrial or infrastructural sector. It is therefore clear that procurement at the cheapest price induces a harmful evolution of OPEX throughout the life cycle. However, intellectual honesty demands that we also point out that the injection of a CAPEX supplement in the procurement phase does not suffice to ensure the correct management of OPEX over the rest of the life cycle. As we know, it is the best-practice conduct of the procurement project (considering both what is integrated in capital expenditures and the anticipated expectations of OPEX performance) that will indeed generate desirable results.
• The contemporary regulations inducing “cheapest bid” deals for public markets are inherently unable to avoid the pitfalls for which they’ve been designed; if they could, we would know it by now. Indeed, their enforcement is not (or not anymore) an obstacle to the occurrence of conflicts of interest, or even of events of corruption; once again, we would know it by now.
One can only rejoice in the fact that some countries have really seized the opportunity to tackle this problem, and have succeeded in developing functioning models of public markets aligned with the fundamental principles of Asset Management, but not solely—they are especially very supportive of states that act as financial investment backers using public funds. New Zealand, in particular, has for the last decade led a successful campaign aiming at the redefinition of these public market regulations, taking a clear stand in favor of the consideration of the life cycle as early as in the procurement phase. Furthermore, it has operated this transition in great simplicity: the public market regulations in New Zealand state that the replacement of assets reaching the end of their life cycle must be priced by the assets which will replace them at the time of dismantlement—and that this must occur as early as in the purchase offer stage. This implies that the offer should integrate a global life cycle cost attractive enough for the renewal to be profitable for the buyer; hence, the system encourages a long-term sight by making bidders project a vision on the end of the life cycle and help their clients in the efforts they will have to deploy to renew the asset.
In practice, this implies that the stated requirements should include a tender amount that will integrate the initial CAPEX as well as the CAPEX provisioned for the identical renewal during the end of life.
Other countries are nowadays trying to draw inspiration from this model, not only in Australia but in various other parts of the industrialized world. This trend is all the more laudable if we consider that, historically, other attempts to include the notion of “life cycle” in public tenders had systematically failed. As an example, we could state the case observed in the United States in the 1980s. The Department of Transportation at that time, encouraged by the wave of liberalization and privatization of public infrastructure implemented by the Reagan government, had developed public market specifications whose only admissible tenders in the urban transportation field were those in which the life cycle cost of the equipment was eligible; in other words, instead of favoring the lowest procurement CAPEX, this initiative offered to award the markets to the lowest LCC. These clauses were successfully imposed for a few years in the United States, but they were abandoned as soon as the state agencies became aware that the bidders were in a situation of such ignorance regarding their LCC projections that the purpose of the initiative was fundamentally discredited.
To conclude on a positive note, we could assert that despite market regulations remaining well under the standard set by Asset Management principles in most countries, undeniable progress is being made in the present era. The emergence of a dosage between price, technical quality, performance, and HSE criteria will potentially bring into question the habit of buying at the cheapest price, even if this may not suffice to induce a true taking into account of CAPEX and OPEX throughout the life cycle.
2.2 Outsourcing and Accountability
Over the course of the last decades, a new trend has become the standard in the context of industrial contracts. In addition to material purchases, organizations now purchase an increasing quantity of services. Hence, entire sectors of industrial and infrastructural management are currently being delegated to outsourced companies—the most visible part of these transfers has probably applied to IT services, but they are also happening in the industrial maintenance sector.
The market share of outsourced industrial maintenance is in constant augmentation. This means that organizations have become aware that they could delegate those specific tasks that external agents could realize more efficiently and at a lesser cost. This practice has encountered such success that industries have gone a step further, transferring ever more of their activities to outsourced companies in order to attempt to simultaneously transfer the responsibilities inherently tied with the risks. However, the standards that apply at the moment state that only the corporate director may be deemed accountable for risk; hence, we can see through the illusion embodied by the “performance contracts” whose results are made up of parameters that may by no means be tied with a subcontractor’s responsibility, in terms of social or legal accountability. This approach is therefore practically limited in terms of performance, due to the fact that organizations lack a normative frame suited to their wishes.
The ISO set of standards (in our case the ISO 5500X) have emerged in this complex context. They have acted as a true game changer by integrating within their management systems the notion of outsourcing. The ISO standards’ approach consists of defining a frame in which a free but aligned practice of outsourcing may be exercised. In short, one can consider that organizations who seek to obtain the ISO certification are entitled to purchase and outsource any service or product, so long as they ensure that their management systems are totally aligned with their subcontractor’s (and vice-versa). Thus, these standards regard outsourcing as an integrated extension of the organizations’ management system within which the alignment of operating modes is the foremost priority. It is therefore required that the subcontractor take part in the virtuous circle realized by the organization in its process of continuous improvement. These ISO standards mark a first external effort to implant more systemic and sustainable conceptions in the procurement sector.
It is also necessary to discuss the inherent subjectivity, which is tied to the procurement function and which comes with a heavy consequence: that of divergent appraisals. I recently overheard an old friend, himself a purchasing manager and a specialist of the supply chain, assert that the industrial world is faced “with a real problem when it comes to assessing purchases because there are no buyers’ schools,” or at least, not in the sense that there are “engineer schools” or “manager schools.” There are, in fact, a few specialized degrees and MBAs—but we must admit that this role is all too rarely regarded as a fully legitimate segment on its own in the sociological representation of organizations. Furthermore, the buyer is characterized by his role as an “interface” between the operator (who employs him) and the suppliers with whom he is asked to negotiate. However, it must be understood that these two tribes do not necessarily speak the same language. The operator knows that he needs a performance but he does not necessarily master the expertise required to evaluate the quality of the product or the service that was provided; on the other hand, the manufacturer may not exactly understand his customer’s requirements, or worse yet, he may understand them but be unable to come up with a satisfactory solution.
Hence, it is not necessarily easy to give long-term guarantees to the purchases made, which is a real problem. All of these notions reinforce the idea that a departitioning of the procurement sphere is in line with the empirical reality.
