Associate Principal Patrick Chan talks with Associate Principal James McDonald discuss how companies can transform and optimize their buying channel strategy by considering the best mix of requirements, controls, approvals, and procedures for each major category of corporate purchases.
Today’s episode of the Business Excelleration Podcast is hosted by Pat Chan, Principal in the Hackett Group’s sourcing procurement practice. Pat welcomes his colleague James McDonald, who is also a Principal within the practice. Today’s episode will focus on buying channel strategies. As procurement organizations continue to evolve and strive to add value, one of their main focuses will always be efficiency in their processes. The Hackett Group helps many procurement organizations on their journey to world class. Their channel strategy serves as a blueprint for the source to pay process.
To begin, James defines a buying channel as a path taken throughout the complete procure to pay process. In the world of procure to pay, it’s important to understand that not all commodity purchases are created equally. He explains the various degrees of control and risk management which apply to different categories. When thinking of a buying channel strategy, understand that an optimized channel strategy looks at all the different categories of spend and allocates them to the least controlled process, which still mitigates the risks. Common risk factors include how much detail is needed about a purchase, the likelihood of fraud or abuse, size of the purchase and likelihood of maverick spending.
Surprisingly, most procurement organizations don’t actually have a strategy in place. This can often result in a lack of direction in policy, high level of variability for purchase orders, inconsistent user experiences and more. The key driver in building a strategy comes down to standardization. At Hackett, drivers typically include things like reduced entry points and channels to buy, increasing the use of purchase orders and contracts and increasing use of electronic invoicing.
Then, James clarifies how buying channel strategies fit into procurement transformation work. Commodity and category-driven standardization allows us to understand not only the impacts for category managers and sourcing, but also the impacts to the broader organization. This then influences the change management strategy. Lastly, putting in place a buying channel strategy in our technology implementations is a way to streamline design and configuration.
When implementing a technology, buying channel strategy should be a part of that methodology to ensure the design is based on an agreeable standard. Hackett engages in many optimization projects in which reviews are conducted to understand how technology which has already been implemented can be further optimized. There is a transition which has to occur in order to align with a new taxonomy aligned with a new channel strategy, but James believes it is well worth the effort. As channel strategies are reexamined, you should communicate the strategy with updated technology and a simplified, more standardized policy.
Finally, James shares some examples of the best practice strategies, though he says is not a one size fits all. When using purchase orders, he recommends not to force it. Rather, think about it from the perspective of approving the commitment of funds and determine where it makes sense. Hackett sees that top performers manage 72% of their spend on a purchase order. Additionally, many companies are beginning to do invoices directly against contracts. This makes sense in consulting and professional services.
- 0:40 – Pat introduces today’s guest, James McDonald.
- 1:37 – What is a buying channel strategy?
- 3:45 – What are some of the risk factors?
- 5:05 – What are the consequences of not having a procurement policy in place?
- 8:02 – The most common key drivers in building a procurement strategy.
- 12:40 – How buying channel strategy fits into procurement transformation work.
- 15:55 – Is it too late to develop a strategy if you have already implemented a tool?
- 18:30 – Examples of best practice strategies.