Omid Ghamami, is the CEO of the Procurement and Supply Chain Management (PSCM) Institute, which performs procurement and negotiation consulting, training, and certification services. He was a procurement executive for 18 years at Intel Corp and has 3 decades procurement and negotiation experience working with clients in 29 countries. His institute has innovated the CPSCM™ (Certified Purchasing and Supply Chain Manager) certification program, which has been invested in by nearly half of the Fortune 100. He is also an accomplished procurement and negotiations author (2 books and many articles in prominent journals), speaker, professor, and thought leader.
We took advantage of a small window in Omid’s schedule to put three questions to Omid. Resulting in eloquent and considered responses, as you will see below.
Omid, procurement wants the proverbial seat at the table. What does it need to do to earn that seat? What can procurement achieve with this seat?
This has been a problem since the advent of the profession. Today, most companies treat procurement as a back-office support function. Worse yet, they fund it that way too. It’s mostly our fault. We report cost savings that, from the CXO perspective, don’t exist. We tell them we’ve saved, say, $13.2 million dollars, but that money doesn’t exist. That money went back to the business unit, and they spent it! This is a reality that nobody is talking about. The C-Suite doesn’t take us seriously because our number 1 metric is viewed as “PowerPoint results”.
So, we need to change our metrics. We should be reporting ROI on the procurement department total savings divided by total cost of department (salary, overhead, etc). This paints a picture of the return that executive staff is getting on their investment. Secondarily, we need to be reporting our savings as “Contributions to EBIT”. That money was saved and given back to the company and is procurement’s contribution to EBIT.
The next thing is we need to stop defining our role as just delivering cost savings, however you report it. The number 1 problem in procurement today is that we are buying goods and services – instead of performance results. Almost every problem we have in procurement today is because of this issue. Nobody’s talking about that either. If we take measures to transform the procurement process for the top 90% of spends to be singularly focused on the solicitation, negotiation, contracting, and receiving of performance results, THEN we will be viewed as a source of enterprise advantage. And when that happens, business units will engage procurement because they want to, and because they see the benefit, and not because they have to. This will organically result in the proverbial seat at the table for procurement, at the behest of the business unit executive leadership.
The pandemic appears to have raised people’s awareness of procurement. There is a significant opportunity for procurement to move away from the back-office support function label and move towards the role of commercial facilitator. Does procurement need to rebrand or reinvigorate its processes and culture to make the most of this opportunity?
I’ve been in this for 30 years now. We have an incredible opportunity that is in front of us for the first time in my career. In the past, procurement was pushing business units to try and make cost and total cost minded decisions, while the business unit viewed this as short sighted and wanted to use their vendor, with which they may have already come to tacit agreement on the purchase.
Now, clients are telling me that the post-pandemic era has brought about significant cost pressures. With that, business units are coming to them for the first time, asking for help to devise strategies to bring costs down. This opportunity may not come again in most people’s careers. Take advantage of it!
The most important thing is to engage the business unit in the process. When procurement receives a purchase request and just takes the baton and runs with it, the business unit feels like they’ve given their 6-month-old baby to a babysitter who is just too independent. The key is to make them feel like they have part ownership and active involvement in the procurement process – while still maintaining the overall lead.
The other aspect of this opportunity is to stop trying to achieve savings just at-the-table with suppliers, which is the antiquated traditional model that our profession is still clinging to. Savings opportunities start with streamlining the architecture of the demand itself. There’s usually a lot of fat there that is unnecessary for the performance outcomes the end user is trying to achieve – I could talk for days about that. We call this “Upstream Design for TCO”, and it essentially entails driving strategies of reuse, standardisation, simplification, and supplier innovation to surgically remove unnecessary costs from the purchase – and therefore the supply chain. We’re finding 18% savings here on average, and that’s before negotiating at-the-table with suppliers. Procurement needs to capitalise on these post-pandemic opportunities. They’re golden.
Procurement vs Sales. In general terms it appears that these two functions do not always seem to work hand in hand. Why? What is the solution?
First off, the question itself highlights the biggest problem of all: who said procurement should be working with sales? Not to state the obvious, but sales’ only objective is to sell. They deeply understand price and price breaks, but they don’t understand anything about cost and cost drivers. They also see the transaction as limited to trading money for goods and services. All of this is problematic.
The first thing procurement needs to do is to stop inviting just salespeople to negotiations. Sales should be included, but more importantly, players from operations, engineering, design, logistics, manufacturing, etc should be involved where appropriate. Everyone who is involved in cost creation inside the supplier’s company should be represented. That way, you are no longer just parasitically negotiating price and profit margin, and you can now start negotiating costs and cost drivers – which can and usually does have outcomes that benefits both parties.
For instance, one of our clients is a potato chip manufacturer. They took this advice and expanded negotiations to include operations people from the potato farmer’s side. Once they found out that potato cold storage was a pain point for the supplier and costing them 20%, they moved the cold storage function to their own facility and the supplier happily dropped the price by 20%. This could never happen in negotiations with salespeople. So, this entire procurement-sales paradigm needs to be put to rest and replaced with a newer model focused on involving everyone who influences cost and cost drivers.