Procurement: How to Optimize Value in a Mature Environment

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You’ve successfully captured all the value there was to capture in Phase 1 of your sourcing initiative. You look like the enterprise hero because the successes you create are disproportionate to what anyone else in the business achieved. Look forward to Year 3 and 4, and the contracts you negotiated in Year one matured. While you’ve created the expectation of 15 to 20% or more value capture… you’ll be lucky that it’s 5% thereafter. Now what and how can you save the day?

Procurement – The Cinderella of business processes. The Enfant Terrible of Broken Promises. It would not be unrealistic to say that in most organizations, procurement has not had as much focus as, or realized the status of sales or marketing functions. Yet, when one considers that at 10% cash flow optimization, every $10,000 savings realized by procurement would require a net revenue increase of $100,000 to achieve the same net benefit to the bottom line, it would stand to reason that procurement gets treated with more respect. The function must re-invent itself or it will not survive. There appears to be consensus within the procurement community. One could make the analogy with the Pony express, put out of existence almost overnight, by the final link being made in new technology, the telegraph.

It is in this context that we examine the future of the procurement function. There is no doubts for the need to buy goods and services; we simply wonder if there will continue to be a need for “a profession” to oversee the process.

While it is certainly possible to redefine and extend the role that today’s procurement practitioners could play, there are at least four major challenges. One, of course, is the nature of skills and knowledge that business partners expect. The second one is the openness of others in the business community to the expanded or altered role that is anticipated. The third challenge would be the continued adoption of IT-enabled tools and processes to drive automation, and the fourth is the ever-increasing role of outsourcing (portions of) the function. Given that many other functional groups within the enterprise are probably busy redefining their future role, there is the potential of a lot of competition – and herein lies the opportunity.

Procurement organizations are at an inflection point – new approaches are needed to sustain value delivery. Past growth in procurement’s ROI does not guarantee that the value creation trend will continue into the future. The next test for procurement will be how to increase its impact in previously covered categories, and here, the path is less clear going forward. Successive rounds of cost-cutting initiatives yield diminishing returns. Procurement must look beyond traditional project work to create and sustain value

The objective is to chart a roadmap for procurement to maintain and increase its importance as a driver of value.

Volatility, uncertainty, dynamism, globalism, risk, and hyper-competition. Procurement professionals have to cope with significant change. Supply Chain and Procurement professionals need to gear up to face these changes in order to cope with the rapidly changing business climate.  It is not unrealistic to state that, in order to be prepared for the future, organizations are likely to need to reshape their internal operations and external relationships.

After all, the Procurement function is the gateway of an organisation to the supply base.  This means it is responsible for establishing and managing relationships with suppliers and spending the organisation’s funds in sourcing goods and services.  Hence, procurement decisions have a significant impact on performance, not only in terms of costs, but also on quality, innovation, responsiveness and revenue generation. Increasingly, procurement professionals are involved in business process improvement efforts across the supply base, with a greater contribution to measured objectives, and their performance frequently reported to the organisation’s top management. At the same time, the role of procurement is changing in response to environmental changes. Procurement has more to gain in driving revenue than cost. It also has a great capacity to influence business, and change the perception of business life. After all, Procurement can have more outcomes for the end customer.”

Procurement and supply management are powerful driving forces behind organizational performance. The role of procurement must become more strategic and its scope broadened. In the future, procurement will not just focus on its traditional area of cutting cost, but put priority on enhancing value to the final customer and protecting the organisation from external risks.

The following linking major trends which will impact on the shape and structure of procurement:

  • Corporate values and strategy will contain a significant contribution from procurement;
  • Strategic business decisions will be made around sourcing and supply;
  • Relationship management will come to the fore;
  • Skills development of procurement will be essential;
  • Data management and web applications will become major features;
  • Global sourcing will be an ever-present activity;
  • Risk management will become a significant issue;
  • Complexity management will be high on the agenda;
  • Material scarcity will become an ever-present issue.

Action to meet future needs

Procurement experts predict a different, challenging, but auspicious future for procurement as a function and as a profession. In view of this, procurement professionals need to take action in the following critical areas:

A more strategic role for procurement: Moving away from a transactional-focused role, procurement should contribute more to profitability, and value-adding. Thus, procurement managers should seek greater responsibilities in more strategic areas such as supplier relationship management, global sourcing, outsourcing, and mergers and acquisitions. Consistent with that, CPOs should take the opportunity of trying economic times to gain greater involvement in strategic decisions and a stronger presence at the board level.

Talent management: Procurement talent availability is a challenge for the future of the profession. Skills shortage will be exacerbated, creating costs and risks for organisations without a developed pipeline of well-qualified procurement professionals. A broadening and increasingly strategic role for procurement demands a new deeper talent pool. Finding the right talent to oversee the pivotal procurement responsibilities requires a thorough understanding of the capabilities necessary to lead a best-in-class procurement operation.

The necessity of quick response: Volatility in supply and demand has become the norm, and managing uncertainty remains a major challenge for procurement. Accordingly, on top of advance planning, businesses need to be resilient to unpredictable changes in the market. Consistent with idea of agile procurement, re-shoring or near-shoring are key for future procurement plans.

Supply risk management: New expanding global supply bases bring new risks, such as different life cycles, quality issues, length and variability of lead-times, poor visibility, natural disasters, terrorism and regulatory changes. New types and levels of risks need new contingency plans. Procurement professionals should see this as an opportunity to assert their presence, influence strategy and drive performance.

A continued role for outsourcing: A lot of clients are starting to ask themselves if it really makes business sense to develop a best-in-class competency to buy goods and services that do not contribute to the organizations’ competitive differentiation, market share growth or margin optimization. They are starting to segment their supply base, choosing to focus solely to actively manage the relationships with those suppliers that are strategic, critical to the company. Everything else is considered for outsourcing.

Tackle the difficult categories: while nothing is easy in the supply chain/sourcing and procurement world, some things are relatively easier than others. Perhaps now it’s time to tackle the vaunted sides of business that traditionally have been off-limits to sourcing: marketing, strategic consulting, audit, facilities come to mind.

In summary, the future of procurement will put a lot more stress on outcomes and end-customer value. In this environment, skills and talents will be keys for procurement.

 

 

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