The commodity wave process

So you just got your advanced Diploma in Procurement and Supply management and can’t wait to implement all those good strategic procurement ideas at your company. But no one wants to listen, and to be honest, even when they do, you just can’t seem to get across all the knowledge you have acquired in a structured way. So how do you go about implementing strategic procurement into an organisation that has only ever viewed procurement as an operational department?

For starters, you will need to sell the outcome, and get everyone excited about the prospects and improvements that can be achieved by implementing what is known as a value team process.

For example, if you were a travel agent, you would be selling the “great destination”, and hopefully not the boarding procedure to catch the flight to Mauritius. The flight is just the vehicle to get you to your destination.

The implementation of a value team (which has also referred to sometimes as a money team) is in many respects also just a vehicle to get to your destination. For each strategic commodity or service that you believe needs to be fully evaluated, a vehicle or value team needs to be customised to get to your objective. The need to customise each value team is due to the varying nature and complexity of the different types of commodities and different environments companies operates in.

But before running off and just starting a value team on your favourite commodity, a higher level process needs to be completed. This preparation part of the process is unstructured, and does not have a “Dummies Guide for Beginners” that can be just followed. This is simply because all companies have different structures, cultures and operating environments.

For the preparation to be successful, the following needs to be addressed:
• An executive sponsor is required to support the initiative.
• A mandate from the board to proceed needs to be obtained.
• The scope of the strategic procurement initiative must be defined.
• A rough estimate of the costs and potential savings.
• High level project plan including estimated timeline and potential resources is required to achieve the objectives.
• A communication plan of this new initiative, and how it will be communicated to the rest of the company.
• A guideline of how results will be measured so that everyone can agree on “the rules of the game”.
• Roles and responsibilities, to define the roles in the Value Team as well as other internal departments that will need to support the process, such as IT and Finance.

In preparation for the above process, a rough spend analysis of the company’s strategic commodities and services needs to be completed. The Pareto analysis technique can be used to identify the top 20 strategic commodities and services that make up 80% of the company’s spend. At this point it is not critical to get the numbers perfect.

By presenting this spend analysis to the executive team, it also gives them an opportunity to change the priority of some of the commodities or remove any commodities that are strategic in nature. An example of this could be to remove the service “property and facilities rentals” spend as the company has their own property company. Any reduction in rental “saved” would just result in an offset loss to the property company, and be of little value.

The project plan that needs to be approved is referred to as the commodity wave process. This is simply the prioritisation of each value team against a timeline, which is implemented in waves. The first wave normally has just one value team known as the pilot wave.

This pilot wave is used to make any final adjustments to the process. It is also used to train the core team members that can then be used in subsequent value teams as value team leaders.

The subsequent waves normally have between two and four value teams running in parallel per wave. The number of value teams that a company selects to implement in parallel is often a judgement call. The more value teams completed in parallel, the faster you can implement strategic procurement across your spend. However, this requires additional resources, and it is often not possible to get operational departments to support multiple value teams implemented at the same time.

The value team is also a change management process, and often requires senior management intervention to keep the process on track when challenges need to be resolved. This additional requirement on the senior manager’s time is often under estimated, and is another good reason to implement fewer value teams per wave.

Implementing the commodity wave process requires significant effort to get started, and this is one of the main reasons that outside consulting companies are often contracted in to assist procurement departments implement this process.

Anyone that has been on this journey knows that when implemented correctly, significant bottom line results are always achieved, and is well worth the effort.

Contributed by: Dion de Gruchy, Director of SCM Advisory at Bespoke

Article first appeared in Bespoke Procurement Bulletin: BESPOKE.png