By: Sakthi Prasad -- Content Director
19 September, 2021
(Pic Courtesy: Bernardo Nicoletti)
The “Agile” concept has its genesis in software project management methodology called “Scrum.” This is an agile method of iterative and incremental product delivery that uses frequent feedback and collaborative decision-making. It consists of small-scale cross-functional teamwork toward a series of agreed goals through several intermediate steps known as “Sprints,” which are meant to eventually lead to an optimal outcome.
Agile procurement is an offshoot of this agile framework. Several case examples highlight the advantages of agile procurement -- the main theme is the ability to anticipate change and act quickly to mitigate the fallout as opposed to reacting to a situation once it has happened.
According to McKinsey, a global aircraft builder embarked on risk monitoring of all its suppliers -- even as far downstream as tier three and tier four. The company had dual sourcing for all key components -- even though this reduced leveraging opportunities in contracting. Moreover, it knew where its suppliers were located. In contrast, many automotive OEMs were surprised to learn that they were affected by the Fukushima disaster because of exposure to lower-tier suppliers that they did not know about.
In another example, the agile method was tested on two projects conducted by the Telia Company, a Swedish multinational telecommunications firm. The test results demonstrated that using agile procurement would have saved 21 percent of the total cost of the project -- and the time it took to generate the project outcome would have been reduced by 40 percent. This research concludes that agile procurement can facilitate the agile execution of a project (1).
The concept sounds good; however, the big question is how agile procurement principles can be effectively deployed in real-life scenarios.
Beroe spoke to Bernardo Nicoletti, Professor of Operations Management at Temple University, Rome, Italy, to get a sense of the applicability of agile principles in procurement operations.
Professor Nicoletti has considerable experience in the corporate world -- he was the CIO at GE Oil & Gas and AIG -- before moving on to academics. He has published several books on supply chain including a couple of them on agile procurement.
It was noon in Rome when Beroe spoke to him with the aim of decoding the agile procurement concept. Professor Nicoletti provided the below chart to help readers visualize the agile procurement framework.
Agile Procurement Framework (Copyright Bernardo Nicoletti, 2021)
Q: The procurement function is growing in importance, and the COVID-19 pandemic is a watershed moment, where we can say that the function has truly arrived. Do you concur?
Yes, the COVID-19 pandemic has shown how important the procurement function is for a company. There are several reasons. The first reason is that more and more is bought -- rather than manufactured internally. Second, procurement is done online -- it has become much easier to buy products or services for companies in this way. The third one is that when certain materials, inputs, or components become scarce, it is even more important to source them in the right way. Consequently, procurement has become more important in this situation.
Q. What is agile procurement, and how can procurement teams make use of it? What is your definition?
Agile procurement is essentially a different way to conduct procurement -- a sort of break from the past. To put it simply: agile methodology would entail smaller purchases as opposed to buying in bulk or signing long-term contracts. It is designed in such a way that the procurement team can react to market conditions and adjust purchases according to the prevailing market situation. In agile terminology, this is called “Scrum.” Scrum entails doing procurement in small chunks at a time and is carried out as a team effort: successful procurement does not occur in isolation but in close relationship with business.
Q. Can you elaborate on this point of procurement having to work in collaboration with business?
Procurement will have to work with business in small teams to make purchases as and when required -- in “Sprints.” When you spot an opportunity or sense a threat, you “sprint” into the marketplace to secure the necessary materials required for your supply chain in that specific moment. The world has become more uncertain and turbulent, and its volatility has increased in many categories. In such cases, “just-in-time” may not work. On the contrary, procurement has to plan for purchases in a “just-in-case” approach.
This is not possible without collaboration with business teams. The benefits of this close collaboration are that -- as a category manager -- you have a two-sided relationship with the businesses, who use the product or service. Over a period of time, you will become a good judge as to whether to build a buffer stock of inventory or just stay the course.
You should consider that when the environment is more turbulent, smaller-quantity procurement is the appropriate approach. This would prevent you from getting into standard contracts with suppliers. On the contrary, the contract should be designed in such a way that it offers flexibility about the quantum of purchases, which would allow you to buy in relatively small quantities. This would free up working capital as you do not end up storing the entire inventory in the warehouses.
Q. Is there any formula to determine the optimal purchase size because you said companies will have to buy a smaller quantity?
Well, the formula in this case is not about the order size but it has to do with the “time taken between orders” you see. In other words, I would say that in an ideal situation, you will have to order on a weekly basis -- revising the order quantity based on the market situation.
However, I think it is very difficult to do every week because as you can imagine the workload will skyrocket. It depends on the supplier -- I would suggest 15 days, but again it depends on the specific market situation.
Q. So based on what you are saying, contracting, especially when it brings in flexibility, is a very important aspect in agile procurement?
Yes, that is correct. However, there is also a drawback -- I mean, beyond a level of flexibility, the vendor will try to charge more because they would want to get compensated for the flexibility.
Hence, vendor negotiations become much more important. Thus, in this situation, it is important to negotiate the end goal and tell the vendors that they must also be a partner in terms of flexibility because if the strategy of the company requires agility -- and if they are successful -- then the vendors should also succeed.
What you are trying through agile methodology is not just procuring materials or services, but working toward the fulfillment of an end goal that is set in collaboration with the business and vendors. For example, you are not buying sensors for sensors’ sake -- but buying them to help your business stakeholders produce a winning product. You need contract flexibility and a trustworthy relationship with your suppliers to achieve that end goal without incurring higher costs or stockpiling material that might become obsolete.
Q. A big company with deep pockets may be able to obtain the level of contract flexibility that you advocate. Will a mid-sized or small company be able to do that? In other words, will agile methodology work for small and medium-sized Procurement Organizations?
Yes, it is difficult if you are a small company as your volumes are not higher -- hence, you may not have negotiating power. Certainly, this may not be possible with a big vendor, especially if you are a small company. However, there could be similarly positioned small- and medium-sized vendors (or distributors) who may be willing to walk the extra mile to provide the flexibility you are looking for. In such cases, procurement will have to scour the marketplace for a suitable partner.
Q. Can agile procurement be deployed only for a select number of categories as opposed to all the categories in a company? This is because some categories could have a high value as opposed to others.
Absolutely. Pareto Law would apply in most circumstances where 20 percent of your categories will incur 80 percent of your spend. Sure, one can deploy agile methodology in one or select categories as a proof of concept, and if it works, it can be extended -- or it can be restricted to the ones that you believe would provide good returns.
Q. Does agile methodology result in cost savings?
Yes, in terms of total cost. The companies that have adopted -- not many have adopted this methodology until now by the way -- have seen a 20–30 percent reduction in costs. This is in terms of the total operating costs -- individually, the prices of some materials may increase due to added flexibility, but one needs to measure savings in terms of total cost and reduced waste.
Q. What are the critical success factors of agile procurement?
First, sponsorship from top management, at least one member of the top management -- the CEO or COO -- should sponsor this.
Second, robust ICT infrastructure is a critical success factor because you are increasing the number of orders that you will place during the year -- as you can imagine, doing things manually will become much more complex. ICT and automation go hand-in-hand—which is why people talk about digital procurement.
Third, risk management. The main idea of flexibility is to reduce the risk because if you reduce the size of the order-- and if you process more orders -- you are reducing your risk over time. Of course, there is a risk of stockout and loss of orders -- this is the reason the supplier relationship management is very important because you do not want to end up in a difficult position.
Again, I cannot emphasize enough the importance of stakeholder management and vendor relationships. If any of the two goes wrong, then the operation is bound to fail. You need to run a disciplined and water-tight ship to achieve success.
Q. From what you are saying, it appears that agile procurement may be more suited for the heavy manufacturing sector as opposed to firms operating in the services sector?
Yes and no. In indirect spend, agile procurement works very well -- for instance -- in ICT sourcing. Companies in all sectors make ICT investments and agile methodology will work well in this category. ICT was considered to be indirect spend. Due to digital transformation it is increasingly becoming a direct spend. Take the example of a financial institution: would you even consider current ICT spend to be indirect?
Q. What are the tell-tale signs that agile procurement is in play? How will it manifest itself in day-to-day operations?
The first sign is that the average size of the orders decreases, which is a prerequisite for agile procurement.
The second sign is when the relationship between procurement and business deepens to such an extent that procurement is somewhat embedded within business, which will pave the way for great teamwork.
Third, it is also important to ask the rest of the organization -- the business stakeholders, the operations people, top management, marketing, sales, etc -- if they perceive a change in the way procurement is working. If they answer that they are witnessing an increased level of service such that they believe they are now much more in tune with procurement in terms of flexibility and quicker responses -- then we know that agile is in play.
Finally, it is necessary to check with vendors if they are happy with the flexibility that is demanded of them; and in addition, whether they are also experiencing business success due to procurement’s agile methodology.
If all the above four boxes are ticked, then one can say that procurement is on its way to tasting success through agile principles.
(1) Source: Bernardo Nicoletti
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