is in stark contradiction with the policies encouraged by the adepts of industrial Asset Management. We will thus try to go over the issues and the perspectives that derive from the modus operandi of procurement managers in order to bring forth an innovative and rational perception of what the procurement phase should become in order to comply with the requirements of a true “Asset Management” line of sight.
What is it that we find so reprehensible in the historical posture of procurement agents? And why do we oppose their practice so stubbornly? The answer is truly quite simple, but it shines a light on some of the cultural and internal rationales that have a lasting impact on corporate decision-making.
It is crucial to consider the very specific situation of the procurement phase in the overall life cycle of industrial assets. Indeed, this segment is regarded as being neither under the responsibility of engineers, nor under that of operators. It is a function whose limits are very well defined and almost partitioned—which comes with a fair share of problems. De facto, procurement has always operated in an isolated manner relative to the rest of the life cycle. Yet, the theory of constraints demonstrates that the optimum of the sum is not equal to the sum of the optimums; this means, in this context, that it does not suffice to adequately administer the procurement segment in an isolated manner in order to improve the global performance of the organization. For the enthusiasts of Asset Management, this is a systematic problem whenever one seeks to realize a function’s optimum without laying a simultaneous view on the entire life cycle.
No one is exempt from such pitfalls: in my own experience as a manager, I’ve conducted procurement deals without giving preliminary thought to their long-term impacts. I’ve done so without a hint of embarrassment, as it seemed at the time that I was doing what I was meant to do. Indeed, what is it that is expected from a buyer? Based on undeniably variable technical criteria, his role is to identify and select the correct service or the right product, in compliance with current specifications, and always at the lesser cost. Regardless, it seems obvious that the role of the buyer should be broader and more proactive: his function should come close to that of an internal consultant, or in other words to that of an agent capable of assessing the needs and wishes of every segment of the organization in order to establish a coherent line of action and to keep expenses under control. And de facto, there have been many procurement managers who have exercised their job in this fashion; however, over time, the increasing weight of economic pressures has reduced the role of buyers to a mere speculation on prices.
This rationale has reached a climax with the contemporary trend of public-private (or private-private) granting or Internet auctioning of infrastructural equipment or even complete infrastructural installations. This approach turns the notion of value extraction from the assets (dear to Asset Management thinking) into a mere calculation on instantaneous cost (contrary to the notion of life cycle) on a deal settled for the lowest bidder. We should even point out that some agents in the business seem to be very pleased with this trend, despite all its inherent flaws.
It is undeniable that firm control over procurement costs constitutes a crucial advantage for maintaining the financial health of an organization endowed with a heavy capital-intensive assets fleet, both in the industrial and infrastructural sectors. Indeed, purchases represent the equivalent of up to 80% of the organizational turnover in sectors such as the automobile or the distribution industries. It is no wonder, thus, that the price of the assets in which they invest appears as such an essential factor for industrial leaders worldwide. However, all too often this prevalence of the economic aspect tends to overshadow other trends that should also be considered—most notably, that of reliability. We are faced here with a certain organizational culture, very widespread nowadays, which has shunned all strategic and systemic vision in favor of a restrictive short-termism.
As we’ve already suggested, an exemplary purchase should respond to a definite need at the lowest possible overall cost, rather than at the lowest possible price. It should be noted that according to this definition, the procurement price is a secondary factor. However, it is the most prevalent in real-life procurement decisions, whatever else one would be inclined to believe. This rationale has led countries in which production costs were the lowest to gain situations as the “factories of the world,” for the simple reason that these states spoke the language of industrial leaders: that of the lesser cost. This geographical displacement of global production has generated a remarkable and generalized qualitative degradation of assets. Indeed, one should consider that the production realized from the assets depends on three modulable parameters: namely cost, timeframe, and quality. However, it is an often neglected fact that it is only possible to modulate simultaneously two of these distinct parameters. When buyers prioritize assets produced at the lesser price, it is only logical that the machines’ quality should decrease accordingly. Caught in a twisted game of which “minimal investment” is the golden rule, managers—the internal clients of the buyers—are bound to go from disappointment to disappointment as they are increasingly resigned to do without efficient machines (in the Asset Management understanding of the notion).
By solely focusing on prices, the buyer favors his own interests; he strives towards the optimum of the “procurement” function to the detriment of the needs of other segments of the organization (and all too often, he does so in good faith). Yet it is obvious that these segments, which themselves heavily depend on the buyers’ decisions to reach their own realization, must be taken into account at the time of the procurement-related decision-making. Too little consideration is given to the well-informed opinions of engineers and operators—in fact, buyers and organizations often reenact purchases previously denounced by these agents. Hence the input of life cycle costing, and of a quickly-developing array of methodological tools. By monetizing the financial impact of an asset across its entire life cycle, one obtains an increasingly precise notion of the purchase’s profitability, as long as one considers its entire existence within the organization. However, design-to-cost remains the predominant method for assessing costs, whereas life cycle costing is still a marginal trend, or at the very least applied in a timid fashion—this will be developed in coming chapters.
Agents of the “procurement” function cannot take the entire blame for this situation. From the perspective of enterprise sociology, the so-called “buyer’s mindset” is in fact determined by exterior factors such as corporate pressure or the lasting influence of a culture that rewards quick successes. Nonetheless, if this explains why the buyer cannot be an internal consultant (since he is not required to heed the needs of other segments), he should at least learn from his mistakes—which rarely seems to be the case. De facto, mediocre assets are becoming the norm within the industrial sphere, and operational expenses (OPEX) are on a rapid rise. The OPEX we are discussing are not those that are originally budgeted, but those that are eventually spent throughout the budgetary year, not to mention the shortfalls tied with unplanned production stoppages; these are such tremendous wastes of funds!
Buyers are buying irrationally—and quite stubbornly so. One cannot help but to think of Albert Einstein, who defined insanity as the act of “doing the same thing over and over again and expecting different results.”
When one engages a reflection of procurement processes, it is essential to discuss the question of the regulations imposed on the public markets. Indeed, we could synthetically assert that the public market regulations in most countries dictate that procurement be realized at the lesser price, following the cheapest bid. Disregarding the reasons supporting this present condition of the public market, it is quite clear that if the economic world embraces Asset Management in the near future, these regulations will quickly become totally obsolete.
To support this assertion, one could enumerate a number of points:
• What is known as the “negative elasticity” between low CAPEX and the consequently very high OPEX in the remainder of the asset’s life cycle. In other words, when equipment is bought
