Procurement Needs to Engage in a Wider Value Conversation

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Ask procurement leaders about the business value that their organizations deliver and chances are the first thing they will mention is cost savings.

In my experience, some don’t get much further than this. Not convincingly, anyway. The truth is that cost savings has become both a mantra and a self-fulfilling prophecy in procurement circles. The more the function talks, promises and delivers savings, the more it is seen as the “savings function.”

This defines its primary role and, in many cases, sets the boundaries in which it operates. Almost regardless of the business requirement, procurement’s answer is savings. Quantifiable, year-on-year savings is the preference, not the fuzzy cost avoidance kind (which can be hard to measure, validate and pay out bonuses on).

This savings-first preoccupation may have worked while the procurement discipline was professionalizing and there was plenty of low-hanging fruit (i.e., savings) to pick. But as the function matures and excess costs are squeezed out across a wide array of spend categories, the value conversation should naturally evolve.

A Broader Value Agenda

Supply chain executives certainly seem to agree. Asked in our latest Future of Supply Chain survey about the value procurement should be delivering over the next year or so, their top two answers both involve collaboration: first with suppliers, and second with internal planning colleagues (see chart below).

 

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Total cost optimization comes a close third, which makes perfectly good sense. After all, planning, manufacturing and logistics folk care about this too (although not quite as much as sourcing professionals, who rank it No. 1).

However, consolidating spend to increase negotiating power (and hence deliver lower pricing) — a tried-and-tested procurement practice over many years — has slipped from first place, when we last asked the question in 2015, to fifth place this time.

Does this mean that cost leverage is no longer a powerful instrument? Not exactly. In fact, wielding it remains procurement’s most important role today, according to our respondents.

Project forward to 2025, though, and we see that cost leverage and maximizing the amount of spend that procurement specialists control both dip quite noticeably in the minds of our sample. At the same time, as I noted in my previous blog, ensuring customer satisfaction — through both supply availability and speedier sourcing processes — edges up in importance.

More dramatically still, we see a significant jump in the perceived importance of capturing supplier innovation. So much so that it actually overtakes cost leverage in the ranking.

Championing sustainability and corporate responsibility also shows a healthy increase, albeit from a lower base.

 

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Neither finding should come as a surprise. After all, innovation is becoming ever more critical for competitive advantage in many industries, and few companies can afford to rely solely on internal resources to fill their product development pipelines.

Meanwhile, social and environmental pressures continue to intensify and much of the focus is on companies’ upstream supply chains, not just their own operations.

So the message is clear: procurement’s value agenda and role are getting broader.

Getting in Shape for the Future

How can CPOs ensure their organizations are in good shape to take advantage of these opportunities in the 2020s? Three initial suggestions are:

  • Take the conversation beyond savings. Cost management will always be procurement’s job. But limiting the function’s scope and ambition to cost savings is a recipe for extinction. Risk mitigation, innovation, sustainability and customer satisfaction need to be actively promoted as a core part of procurement’s value proposition.
  • Be prepared to make trade-offs. If the business needs to move quickly, is the procurement process going to be seen as an enabler or a blocker? Hard as it may be to accept, the requirement for speed and agility might require leaving some money on the table during supplier selection and negotiations.
  • Invest in broader skills and competencies. Whether it’s collaborating with strategic suppliers, engaging internal stakeholders or using data analytics to drive better decisions, procurement skillsets need to evolve and expand. Order takers and one-dimensional negotiators belong in the past. Future success — and survival — demands a total business outlook and having the competencies to deliver value on multiple fronts.

 

 

Geraint John is research vice president at SCM World, A Gartner Community.

 

Author Geraint John

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