Procurement activity has peaked in developed economies (part 1)

I'm hoping this topic will stir up a bit of comment and maybe controversy, so don't disappoint me, esteemed readers..

We made a slightly throw-away comment the other day that the peak of procurement activity in the developed world may have passed. That would be the reversing of a long-term trend - we've seen procurement employment steadily growing over the last 30 years at least, which is a strong indicator of more activity. CIPS membership growth demonstrates this perfectly.  So why does it now seem likely that we're at the peak of employment - or at least somewhere close to that? ( We may even be on the down slope already).

Greater automation of repetitive and generally low value procurement tasks is one fairly obvious reason. There are fewer procurement people processing requisitions or administering multiple physical tender documents than when I started in the profession. But we have a even more fundamental hypothesis to support our argument.

In the olden days, for most businesses,  their own staff would have represented the greatest part of their cost base.  Vertical integration was popular - Henry Ford famously owned his own coal mines and steelworks. A factory may well have made most of the sub-components for their final product themselves, employing craftsmen even to make the machines that were used for production.

But gradually, organisations started specialising, and supply chains and networks developed. So instead of making a car from scratch, the modern auto manufacturer buys in complex sub-assemblies, and production equipment, as well as a whole range of outsourced services ranging from legal to catering.

So the end result is that we see the situation analysed by Proxima recently, where the UK’s top 350 firms spend over 60% of their revenues with suppliers of goods and services, far more than they spend on their own staff (estimated at around 13% of revenues in the Proxima report).

That clearly explains much of the growth in procurement – simply, firms buying more from third parties creates procurement work. Yes, but that causes even more dramatic consequences for workload and employment than you might at first think. Because of the tiers within the supply chain, the same principle applies at each level in the supply chain. So the automotive supplier to Ford has outsourced much of its own work, and so on and so on through the various supply chains.

If we start with a first tier firm spending 60% of their revenues with third parties, we actually have an arithmetic series to consider. Of that 60% that goes to second tier suppliers, 60% of that will be spent with third tier.. and so on.  So the total amount of spend that is there to be handled by procurement people is the sum of that series.

The formula for that is 1/(1-r) where r is 0.6. That equals 2.5. Therefore, if the procurement spend at the first tier is 1 unit, the total consequent “procurement spend” flowing from that through the supply chain would be 2.5 units.

This demonstrates the significant multiplier effect that we’ve seen in procurement from the move towards outsourcing and the “vertical dis-integration” of the old Henry Ford supply chain. That in turn, we would suggest, has led to the explosive growth in procurement activities and employment over the last 30-40 years.

So why should this not continue? Stay tuned for part 2 to find out.

 

See our new Spend Matters search4 procurement website with great procurement job opportunities here!

 

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