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Effective & efficient procurement: can you have both?

In any complex system, there are natural trade offs – and that’s certainly true of the supply chain. The ability to move goods on time and on budget is balanced against external forces such as product quality and customer satisfaction  – and thus you have the finely poised relationship between efficiency and effectiveness.

That relationship underpins so much of what procurement in particular does. It encompasses the steps taken when buying goods, negotiating contracts and sourcing suppliers. It’s the balancing act between quality, quantity and cost, and the ability to get the right items to the right place at the right time. In fact, it more or less dictates what procurement does.

Yet, therein lies the problem. It’s been a long-held idea that getting the best of both is idealistic. That if you want efficiency you have to trade down on effectiveness, and vice versa. But is that really the case? Let’s take a look.

What’s the difference?

Efficiency is a gauge of how well resources are being used by the company and by its departments. Those resources cover a broad interrelated spectrum that takes in the physical, technological and human resources at a company’s disposal. These are usually expressed in financial terms i.e. cost, profit and loss, and value. What is efficient however is not always what is effective, especially from a procurement perspective.

Procurement efficiency – going by the above definition – is how the function behaves. It’s how you execute the strategy and processes, and how they manifest in the business. But just because you carry out the strategy and the processes efficiently, it doesn’t necessarily mean that either are effective overall – or that the overall outcome is one you want.

For example, you could have a slick operation that sourced goods for the lowest price, delivered them ahead of time and secured volume discounts for future orders. But if the goods are of substandard quality and aren’t fit for use by the client then it’s not at all effective. A relevant case in point is the PPE crisis that saw the UK Government spend money on poor quality kit that couldn’t be used in hospitals.

So what is effective? To quote Peter Drucker, effective is doing the right thing – whereas efficient is doing the thing right. It’s a subtle difference, but one that effects the overall quality of performance. Effectiveness is certainly a little more nuanced. It’s dependent on the procurement strategy, the evolution of the department and the evolution of the business. In practise it’s attaining the end result that the organisation requires, whether that is saving money, improving the quality of products produced or speeding up delivery time.

Can you have both?

The overlap between efficiency and effectiveness should be obvious. Can a procurement department effectively deliver its goals with inefficient processes? While not impossible, it would certainly be much harder. Therefore, to be more effective, procurement has to identify its goals clearly and deliver them as efficiently as possible. So can you have both?

The answer is yes. In fact, one begets the other.  Here’s a hypothetical scenario.

Company A and B both want to reduce the cost of their office supplies (i.e. be more effective). They both start by reverse engineering the supply chain and looking at how much they’ve spent over the year and with whom in order to identify where savings can be made. However company A does this manually, checking invoices and spreadsheets, and manually collating the data they find. This is both time consuming and open to error.

Meanwhile company B uses analytics software to automatically find and collate its spend data for office supplies. The software can do this in a matter of hours (?) and present the findings in a report. It can show how much money was spent in and out of contract, with which suppliers and how often. This is highly efficient and accurate.

While the net result for companies A and B is likely the same –  reduced cost on supplies – the process for B was far more efficient. It was able to achieve in a single day what company A achieved in a number of weeks. The net result is that company B is able to be far more effective in the long term. By using data and software it makes it processes more efficient. It can be more proactive to future demand and changes – the overall result is being more effective.

Of course in real life, the situations are far more nuanced. But the take home should be that in order to optimise procurement, you need both efficiency and effectiveness to work in tandem. Fortunately for modern businesses, that is being made possible by the use of data and software – both of which are delivering rapid and efficient process and highly effective procurement departments.

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