Procurement can cost money

Roger OakdenProcurement

Obtain value.

Its difficult to be pure when under pressure. In the best of situations the role of procurement is obtaining value for your organisation when acquiring externally supplied goods and services.

This sounds reasonable, except when procurement professionals are under pressure to meet time deadlines or price objectives, then objectives can become hazy. I read about this type of situation when visiting New Zealand recently, which shows things can go wrong in all countries and organisations.

The story I read was about procurement at KiwiRail, the State owned railway company (privatised in 1993, but had to be re-nationalised in 2008). The business is expected to make itself viable within ten years.To correct the balance sheet, the business received a capital injection from the government. The Turn-Around Plan requires cuts in the operating budget (including maintenance by 40 per cent) and the business is required to fund its own capital expenditure.

A financial picture such as this will put pricing pressures on procurement, with the potential for things to go wrong – and they did. Capital equipment purchases can go wrong because they are often ‘one-off’ experiences for procurement professionals and the items are sourced internationally.

Place the order

Write the tender document, receive responses from suppliers, select the cheapest price can too often be the process. The actual process was not described, but in succession 20 diesel locomotives, 300 flat top wagons and 100,000 wooden sleepers, all purchased from outside the country, were declared on receipt to be unfit for purpose.

The cost to rectify the problems, including international legal processes, were not disclosed, except that fixing the sleeper problem was expected to cost more than $NZ7m. People time costs in procurement, engineering and legal would be substantial and take them away from working on future purchases, thereby exposing the business to more potential problems.

Buying on price seems like a good solution when budgets are tight, but the total cost far outweighs obtaining good value from suppliers the first time around.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...