Time To Rebalance Procurement’s ‘Cost over Value’ Philosophy

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Daniel Ball, Founder and  Director at Wax Digital considers the cost over value equation that shapes our purchasing decisions.

According to a survey by retail analyst Conlumino, a consumer’s consideration time around a purchase has risen significantly in ten years. On average we used to take half a day to move from initially considering a product to buying it, but now we ponder for around three and a half days. It’s likely that the economic downturn has made us extra savvy and that we spend longer weighing up whether something is good value for money.

These results made me reflect on whether procurement too takes longer to consider the ‘cost vs. value’ of new resources, and which of the two they tend to consider more. In a survey by Oxford Economics 60% of procurement professionals said that they are increasingly taking a strategic direction within their organisation. It’s positive if procurement is focusing on how to add value to the organisation, but other statistics suggest that tactical activity and the ‘cost factor’ can still override strategy in some instances.

Our recent CPO Viewpoint survey for example, showed that many procurement professionals are still putting cost over value. Indeed, around a third of procurement departments agreed that they saw cost-cutting as more important. Considering other findings, procurement’s imbalance between value and cost-cutting could have major ramifications on its influence across the organisation. Only 12% of the finance department and just 4% of the sales and marketing department sees procurement as highly effective. The lack of understanding of procurement’s full potential could hinder its ability to forge positive relationships with other business units and prevent it from expanding its presence at a strategic level. Consequently, this could hold it back from helping the organisation succeed and grow. More alarmingly, only one in four of procurement professionals view themselves as highly effective, suggesting that procurement’s full value must still be realised within the department itself.

Negotiating on price is obviously something inherent to procurement best practice but ensuring value should be a key priority too. For example, it’s important to consider the longevity of products through processes such as calculating the total cost of ownership. It’s easy to be more attracted to the product that only costs half as much as the other, but the more expensive product may last four times longer than the cheaper one, doubling its value and saving money in the long-term. Cheaper products may raise the risk of accident, death or shutdown of business too, meaning that procuring products of a higher value can help reduce any liability that causes a hindrance to the business functioning.

Although it’s not obvious, procurement is in fact at the heart of customer satisfaction. There are certain areas of the business in particular which, if low-quality, are likely to hinder a good customer experience. For example, if a business procures a cheap offshore call centre over one based in the UK for example, the experience that this delivers to the customer could make them feel less inclined to use your service again. Consequently, your cheap purchase will have lost you a customer. And it’s important to think about staff retention through procured products too. What you offer to employees, such as a benefits package, will only help retain staff if it meets their demands. Ensure that you understand the quality required for the product to perform its purpose of attracting employees and keeping hold of current ones.

Keeping sight of how you can innovate could help other business functions appreciate your full potential and as a result bolster your relationships with them. Our survey found that only 28% of sales and marketing and 36% of IT sees procurement as ‘value adding’ or ‘critical’, while the majority of them merely view it as a necessity or administrative function. There seems to be a lack of understanding of the full capability of procurement, making several employees in other departments merely view it as a tactical function that delivers cost-savings.

It’s time for procurement to demonstrate how it can spearhead innovation to help the organisation achieve its objectives. As 52% of procurement professionals only see themselves as ‘necessary’, some may not understand the full value it can add to the business. The department as a whole needs to work together to break out of its traditional mould and perception within the organisation.

It’s been eight years since a poor business landscape deepened a cost saving culture within organisations due to the economic downturn. So, it’s easy to see why many departments and often procurement itself views its role as mainly serving a cost-cutting purpose. But as conditions pick up, it’s time for procurement to move away from this and ensure that innovation doesn’t escape its focus. It starts with establishing your strategy to innovate and then collaborating with key stakeholders, such as supply chain partners and suppliers, to deliver it. This will put the right team and resources in place to support you in your pursuit to help the organisation progress.

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