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Strategic Procurement Threatens to Fundamenta

August 2004, by Mike Antich - Also by this author

Corporate procurement departments are becoming the engines of change in fleet management at Fortune 500 companies. The emergence of strategic sourcing in the 1990s is rapidly altering corporate purchasing and increasingly forcing change in fleet purchasing and the supplier selection process.

In a recent study, Archstone Consulting documented the growing influence of procurement departments in vendor selection, contract negotiations, service level agreements, and ongoing supplier management. The research by Archstone Consulting reveals that procurement is now often the major driver in close to 90 percent of all outsourcing initiatives. According to the company’s white paper, “procurement clearly has the skills and knowledge to manage complex supplier selections and negotiations. In addition, procurement is most often made responsible for managing the ongoing relationship and will have an increasing role going forward.”

Chilling words for fleet managers, who increasingly are finding themselves reassigned to corporate procurement departments.

Reverse Auctions Turn Fleet into a Commodity

One technology promoted by purchasing departments to reduce procurement costs is a reverse auction, which allows bidders to watch in real-time as competing suppliers make bids. Participating suppliers submit lower bids against one another until the buyer accepts a bid. Initially, commodities were purchased in reverse auctions. However, for the past four years, reverse auctions have been used to negotiate pricing for fleet management services and new-vehicle acquisitions.

The potential problem with reverse auctions is that low-cost bidding runs the risk of ultimately lowering the overall quality of fleet management services. A common refrain I hear from fleet managers is that purchasing departments seek to make themselves look good to management by demanding the lowest cost from suppliers, but then it is up to the fleet department to pick up the pieces when the inevitable service problems develop.

In terms of using a reverse auction for vehicle pricing negotiations, the biggest problem is that vehicles are not like commodities since they do not share common option packages or configurations. Vehicles are highly configurable and different models do not match up identically among different manufacturers. In the case of traditional full-size vans, where there are currently only two manufacturers, some question the need for reverse auctions.

The Growing Dominance of Strategic Sourcing

Today, strategic sourcing is one of the hottest trends in corporate procurement. Strategic sourcing initiatives re-examine the way a corporation conducts its business and are tasked to identify opportunities to consolidate purchasing volume to obtain reduced pricing from key supplier partners. The migration of large corporations to strategic sourcing is becoming a powerful change agent at large fleets.

A strategic sourcing fleet group typically includes a cross-functional team, which brings the fleet manager together with representatives from other departments in the company. The presumed benefit of a cross-functional team is a more thorough examination of the fleet purchasing and supplier selection process from a wider range of interests and perspectives. Although these cross-functional teams may bring a fresh perspective to fleet management, they also tend to lack real-world expertise of fleet requirements, sometimes leading to wrong, and perhaps very costly, decisions. Unfortunately, at some companies, the fleet manager doesn’t have as powerful a voice as other members of the strategic sourcing committee, despite the fact that decisions are made that impact fleet operations.

Strategic sourcing groups are often single-focused in their goal. Frequently, the single focus is cost cutting. The assembled sourcing group may be very good at buying, but the non-fleet members often do not understand the subtleties involved in the service relationships between the corporate fleet department and its partner fleet suppliers. In addition, procurement groups often work on several projects simultaneously, limiting the amount of time they can devote to understanding the complexities of fleet management. A competent fleet manager can easily save a company millions of dollars by implementing the right fleet policies and selecting the right fleet suppliers. However, this ability may be inhibited in the future unless fleet managers exert their expertise and influence within strategic sourcing groups and retain an important say in the RFP and supplier selection process.

Let me know what you think.

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