Spend Matters welcomes a guest post from Pranav Padgaonkar of GEP.
Most world-class conglomerates eventually establish “group procurement” functions to centralize their strategic sourcing and procurement. The premise is very simple – by combining the spend across BUs, the conglomerate seeks to maximize its buying power to yield savings. However, most functions suffer from one of two fates:
1. Premature Demise: The balance of leadership support vs. organizational resistance primarily determines whether the group function will establish itself in and get buy-in from all the BUs. Factors such as the talent in the group function, the business environment, incentive alignment and market conditions play a support role here.
2. Steady-state stagnation: Group procurement functions which escape premature demise often fall prey to stagnation within the first three years. They manage to consolidate the typical indirect spend categories such as logistics, office supplies, IT hardware etc. Mission accomplished, they settle down into an unexciting category management function.
Unfortunately, the second condition above is often seen as a success, preventing the group procurement function from reaching its full potential and value to the conglomerate. Consolidating top indirect spend categories is just step one in the journey. The function can serve as a much more strategic force for the conglomerate. It has a unique vantage point from which it can readily identify opportunities across the conglomerate’s entire breadth and depth. Here are some additional benefits it can bring:
1. Maximizing internal consumption:
The group procurement function can be equipped with tax, transportation and other cost benchmarks, in order to make quick evaluations to whether internal consumption is more cost-effective than sourcing from an external supplier. This includes many relationships where an indirect spend area (e.g. technology services) for one BU might be the core business for another. Once this evaluation is part of the standard process, it can have a direct positive impact on the conglomerate’s revenues as well as profitability.
2. New business opportunities:
By centralizing the group's spend database and analyzing it top-down, one can gain a completely new perspective on the top goods/services consumed by the conglomerate. Such goods/services have a ready-made “home market” in the organization and hence can be relatively safe new business opportunities for the conglomerate to venture into.
3. Procurement process improvement:
Immense process improvement can be unlocked by moving the entire organization’s procurement practices to best-in-class. This includes common group spend analysis, standard legal templates, standard procurement process, technology tools, etc. But beyond just improving the processes, a group function can also provide immense flexibility and load-balancing, especially if various BUs in the conglomerate have different business cycles of growth and recession. A team of internal “cost-optimization consultants” within the function can take instructions from top management and divert the function's attention and resources to BUs most urgently in need of cost reductions in that year.
4. Long-term supplier development:
The group procurement function can create a mapping of supplier capabilities. Subsequently, suppliers that can address more than one requirement across multiple BUs/geographies can be pursued to progressively reduce supply-base complexity, enhance supplier relationships and achieve better negotiating leverage.
It is important for top management to realize that a group procurement function of a conglomerate can be much more than just a group-buying function for indirect spend. The added values it can bring to the organization from its unique vantage point can be extremely valuable to a conglomerate.