Mastering Value Creation
Traditionally, the procurement function has been a transactional one, with professionals measuring their value to the organisation in terms of successful negotiations conducted, cost savings, process improvements, and efficiency gains.
But times have changed, placing greater emphasis on the role of procurement in value creation at a wider and often more strategic level. In this sense, the modern procurement function has become transformational.
The Rise Of Strategic Sourcing
The modern procurement function with its focus on delivering tangible value is driven by the need to foster increases in revenue, strengthen relationships with suppliers, minimise risk to the enterprise, drive innovation, and improve internal effectiveness. In this atmosphere, procurement professionals can no longer rely on suppliers to be the sole source of benefits, patching holes in the company balance sheet with their funding.
A more strategic approach to sourcing is required, and practitioners must call on a new set of skills that transcend the dollars and cents mind-set of traditional dealings with supply chain partners and stakeholders. Procurement professionals must now persuade and act strategically, using the tools of economics, psychology, and internal politics.
Procurement organisations must understand and define value, while creating strategic impact. It’s critical for practitioners to connect supplier capabilities to customer requirements, and develop value propositions which are unique and compelling. Achieving process discipline is key to creating competitive advantage in integrated supply chains, by making sure that standard processes are in place, such as supplier analysis, supplier qualification, and financial and commercial controls.
(Image source: apics.org)
Use Savings To The Best Advantage
A distinct proportion of savings measured against the budget should be set aside as applicable to the current fiscal year, in the form of “cash” savings. Approved savings in the current fiscal year should be deducted from each respective business unit’s budget. And benefit realisation should be monitored on the basis of actual consumption, rather than forecasting.
Supplier Innovation
Consult experienced and knowledgeable suppliers for their recommendations on quality improvement and cost reductions in the supply chain and product life cycle. Some suppliers may offer consulting services free of charge or at a minimum rate, to help your company optimise business models, production processes, marketing strategies, etc. Others may be willing to coordinate activities with your organisation so that any innovations they pioneer can integrate immediately with your production processes or service delivery.
Offload The Balance Sheet
Redundant inventory, obsolete or faulty equipment, and other unwanted surplus should be offloaded. This, in addition to optimising warehouse space and selling off potentially useful assets can raise additional revenue that may even exceed traditional procurement savings.
Bartering As Cash Alternative
To eliminate sales, distribution or marketing overheads, and save money, it may be possible to barter your company’s products, or some of the services it consumes. For this purpose, you can also engage specialist companies offering perks like hotel accommodation or advertising assets, in exchange for barter currency.
Marketing Cooperation Agreements
You can offer marketing assets to suppliers for advertising, brand promotion, and targeted campaigns, in exchange for revenue, discounts, or similar assets to promote your own brand. Such assets might include your company website and social networks, regional offices, or points of sale.
Strategic Use Of Technology
Electronic procurement systems (e-procurement) can standardise work-flows, and simplify the processes involved with getting correct levels of approval, accessing existing supplier information, pulling up existing tasks, and preventing out-of-contract purchases.
Automated procurement solutions often include spend analytics capabilities, which may be customised to help in making data-driven decisions and improving business processes.
E-procurement tools with automated features can also help organisations to mitigate the effects of the existing skills shortage in the procurement industry.
Ethics And Social Responsibility
In an era of greater accountability, transparency, and sustainable practices, organisations that actively display a sense of ethics and social responsibility are more likely to attract and retain the patronage of loyal consumers.
Programmes supporting small entrepreneurs, veterans, charities, or other worthy causes may be factored preferentially into tender evaluations, setting aside a fixed percentage of the commercial rating to help fund these efforts. Preferential practices may also extend to long-term strategic partners.
Reducing Risk
A major value contribution for procurement lies in minimising the risks associated with the most critical products and services that your organisation purchases. Having earmarked these assets, practitioners should identify all of the reasons that can disrupt their supply, with actions to take in preventing supply disruptions or recovering from them, if they do occur.
Speeding Time To Market
To reduce the time to market, procurement practitioners should also identify any time-sensitive products or services whose delivery or completion is particularly important to consumers. Supply base delivery of all products and services supporting this fulfilment can then be optimised, so that your organisation can serve its customers more quickly.
Final Thoughts
It’s not only through traditional price negotiations that procurement can add value. From an enabler of cost reduction to a creator of sustainable competitive advantage, procurement professionals can add value to their organisation. As revenue increases, the image of the company improves, relationships with suppliers are strengthened, and the brand image is elevated and promoted.
With this in mind, how is your procurement team geared up to deliver?