One of the most significant procurement trends we’ve seen so far in 2020 is delivering value beyond savings. So what exactly does this mean in the context of the function’s traditional goals?
Savings, as we all know, have long formed the foundation of procurement’s ROI to the organization. It’s been our primary charter over the years and is quite literally how the function has “paid its bills.”
In fact, take a look at any organization and a substantial element of cost improvement year-over-year comes from procurement - not least organizations that are going through M&A, where a material chunk of the expected merger synergies will come from procurement. So dollar savings are important, and always will be.
But there’s also a growing understanding of the value procurement can deliver beyond cost savings, cost containment and cost avoidance – driven by a multitude of factors. The function is far more sophisticated today than ever before and is supported by a deeper talent pool than ever before. At the same time, the function is a victim of its success. It has delivered material value over the years and so, in many organizations, the lens continues to zero in on it even more as a source of continued benefits.
Add to this the fact that much of the low hanging fruit (such as price improvement and consolidated spend) has already been picked. With companies seeking greater growth, faster innovation and increased competitiveness, procurement is being asked to step up its game and show how it can contribute to the broader cause.
So, progressive procurement in 2020 and beyond means not only working toward traditional cost savings goals but also upping the ante and showing how it can deliver real, tangible, material value above and beyond. And this can happen in at least four ways. Let’s take a look:
1. Enhancing Revenue Through Supplier-Enabled Initiatives
Procurement sits at a unique position in the corporation where, in many ways, it acts as the gateway to an entire world of innovation and development potential. It has the ability to build upon the valuable knowledge and capabilities of the company’s suppliers, who have a deep, cutting-edge understanding of the market in their areas of expertise and, at the same time, are familiar with their customers’ business and strengths. And that means not only you as the customer but also the supplier’s other customers both within your sector and outside of it.
Practically, this means procurement has many opportunities to drive tangible benefits, including:
- Looking at alternative delivery models that suppliers are deploying with other customers
- Identifying new product ingredients that drive material customer satisfaction
- Exploring innovative packaging types that check off customer convenience needs in new and unique ways
All of this feeds into broader, more overarching corporate goals, such as:
- Creating new and better products
- Getting products to market in a shorter time
- Lowering internal product development costs
- Accelerating product innovation and hence market momentum
Finding these suppliers or collaboration partners is key, but it’s only part of the battle. Other best practices that companies need to adopt include:
- Embedding a culture that supports innovation in general and supplier collaboration in particular
- Developing supplier-friendly processes – looking at how we can make it easier to share, partner and work together
- Articulating clearly the tangible benefits to suppliers participating in pilot and innovation activities
- Agreeing upon fair risks and rewards for suppliers who are involved
- Establishing practical training resources for procurement as they embark on this journey
2. Accelerating the “Path to Delivery”
This can be done in two ways – (i) external or market speed and (ii) internal cycle times. From an external, speed-to-market point of view, supplier-enabled partnerships play a pivotal role. Initiatives here can be supplier-led, based on specific innovations that they bring to the table, or internally driven by procurement, based on specific corporate goals or themes.
For example, suppliers can help to rethink how delivery (to the customer, DCs, etc.) is currently managed and suggest alternative approaches that reduce timelines and cost. This can be all-encompassing, ranging from the mode of delivery to distribution points to how and where customers can access the product.
It's worth noting this can’t be done in isolation. Other functions will need to be involved, but there’s no doubt that procurement can play a prime role in bringing these opportunities to the forefront: from assessing the feasibility of new ideas to working with external partners and internal stakeholders to enable the opportunities.
Procurement can also reduce cycle times by increasing sourcing speed, in particular through rethinking its own operating model and re-assessing how and where work is done, to drive greater efficiency and effectiveness. The most fundamental step in realizing this value is going through a radical rethink of its operating model.
Grounded in this discussion is the assessment of what is truly strategic, what is decision-support related and what is (at the risk of oversimplifying) transactional. The strategic stuff is what we should be spending most of our time on, while the decision-support and transactional stuff is what we want to rethink. For example, automate and digitize, or outsource to third-party specialists, so the time of in-house resources can be dedicated to efforts that move the needle.
The use of digital technologies can greatly accelerate the procurement process—whether it’s S2P or P2P, or various subsets thereof. According to BCG, new digital solutions can reduce end-to-end cycle time by as much as 80% for simple items like office supplies and 40% for complex items like capital projects. These improvements can, in turn, boost savings on spend by 1-3% and save time for procurement professionals to focus elsewhere.
It isn’t only about the technology, however. In order to reduce cycle times, procurement must:
- Ground optimization efforts in overall business objectives
- Better understand and define processes
- Assess the level and nature of their employees
- Embed flexible and appropriate training programs
- Define roles clearly
- Provide the right tools and capabilities that are fit for purpose
3. Bringing Sustainability to the Forefront
Sustainability has become a vital part of the progressive procurement organization’s agenda, as concerns about the environment, climate change and corporate footprint have put the issue front and center. And given that so much of what a corporation delivers is in conjunction with its broader ecosystem, it makes perfect sense for procurement not only to be involved but to play a role in driving the issue forward.
It’s clear that procurement needs to fully understand the sustainability goals of the corporation, and factor in how it can tangibly support delivering those goals alongside its own traditional savings objectives. Practically speaking, procurement needs to embed sustainability as a key supplier contribution area. This means looking at a host of options at its disposal, everything from global to local sourcing options, new packaging formulations, managing demand in critical categories to reduce carbon footprint, improving recyclability and working with suppliers to reduce waste throughout the value chain.
This, of course, has material implications for the work of the CPO, as it calls for specific, practical changes in how they work with suppliers. This means rigorous and thoughtful sourcing processes, contracts designed with the right metrics and performance requirements, regular supplier risk assessments, structured supplier performance management, and the clear delineation of and compliance with procurement policies and codes of conduct.
4. Boosting the Innovation Agenda
Finally, procurement must directly participate in the enterprise's innovation agenda. While not an area procurement has materially played a substantial role in over the years, that’s been changing of late. There is so much the function can contribute to – from identifying product formulation impacts to new packaging implications to value chain delivery implications and more. Procurement can tap into deep intelligence, patent insights and analytics about the supplier ecosystem to better understand what is possible, as well as implications for the enterprise and specific aspects of the value chain.
The trick is developing strong enough relationships and trust so that procurement can get a seat at the table early on – early enough to be able to make a real and material impact at the right time and with the right stakeholders. And note, this isn’t just an internal seat at the table (essentially, ensuring procurement has the credibility to be invited to the strategic conversations where innovation is discussed). It’s also ensuring your suppliers offer you a seat at their table – that you’re getting visibility into their pipelines and their innovations, so you can be sure they’re bringing their best ideas to you. That will only happen if you have strong relationships, are a customer of choice, and have fostered an environment of collaboration and mutual respect.