Spend Matters welcomes this guest article by Mike Robertson, managing director at POD Procurement.
What is the function of procurement? It's an emotive question that generates a plethora of answers. Fundamentally, let us assume, “Procurement is responsible for spending the profits of the organization in procuring goods and services to address the business requirements.”
What is the value of procurement? Again, it's hard to quantify depending on who is answering the question, but let us assume it is to “maximize the value of what the business procures,” or to it simply “to spend wisely and save as much as possible.”
Procurement savings directly impact bottom-line profits and are one of the most beneficial models for driving a company’s profitability and increasing shareholder value. Procurement savings are a pre- and post-contract award activity. Pre-contract award savings are achieved through the well-trodden path of supplier selection, contract and price negotiation. Post-contract generated savings still remain under utilized and are achieved through supplier innovation. Supplier Innovation is the term used when the contract has been structured in a manner that encourages the supplier to apply its knowledge and experience post-contract award and to deliver the requirement for less than the contract value. When suppliers achieve supplier innovation, it can provide additional profits to the supplier and increases the buyer’s savings.
If you look across the media you see a focus on aspects such as supplier consolidation, ethical procurement, reducing risk and exposure, which are all valid business issues, but when a CPO approaches the board to ask for investment to enable “consolidation of the supply chain to reduce risk and exposure,” the question has to be, “Is this really adding value or is it good housekeeping?”
Most organizations agree that suppliers hold the key to their future business success, yet how many organizations are actively using a model to encourage and reward supplier innovation? The challenge for many is that the current commercial models make it difficult to achieve supplier innovation. Gain shares have been used to some degree but are typically a point-based solution rather than a scalable and practical model.
Consider this potential outcome: A supplier is provided with the opportunity to increase its profits by delivering the contract under budget, yet without incurring any additional risks or costs and at the same time generating additional procurement savings for the buyer. Now, role that model across all procurement contracts with all suppliers, offering suppliers a chance to increase their profits while creating additional savings for the buyer, on top of the pre-contract negotiated savings.
If procurement is required because it adds value to shareholders, increasing procurements value requires increased procurement savings. Higher savings might be achieved through lower supplier pricing but is a tactical approach that might be strategically damaging to the sustainability to the supply base. An alternative model for increasing savings in a sustainable manner that benefits both buyer and supplier might be to consider accessing the post-contract savings available through supplier innovation.