The New Normal for the Procurement Organizations

Spend Matters welcomes a guest post from Teressa Erickson, Director, Alvarez & Marsal Business Consulting

Procurement organizations have evolved over the years from a transactional back-office function to a strategic and competitive value-add function. Today, mature procurement groups are influencing and leveraging 50+% of an organization's sourceable spend. As a result of the 2008 global recession, many companies were forced to abandon collaborative sourcing approaches in order to obtain immediate cost reductions. While there is no doubt that generating immediate savings has a substantial impact to a company and its financial wellbeing -- it is a short-term gain that typically is not sustainable. As the economy recovers, procurement's value proposition is resurfacing with a stronger focus on sustainability and governance.

Procurement's New Role
Product and service customization has become commonplace in the market and requires procurement to be more agile and flexible to meet internal customer demands and expectations. While the products have become more complex, procurement leaders are consistently tasked with taking the complexity out of the supply chain, accelerating speed-to-market, and driving supplier innovation. Additionally, procurement must become the lead facilitator with internal departments such as R&D, marketing, finance, IT, and sales to drive the optimal sourcing strategy based on how the product is engineered, how it differentiates the company, and how it meets the customer's discrete requirements. The ability to understand the client's needs, the criticality of the engineering behind the product, and communicate with suppliers not only enables rapid revenue generation, but provides a means to capture a higher level of profitability.

The Importance of Accurate Spend Data
We often see companies making significant investment in technology, but continue to lack the ability to effectively implement and standardize processes to gain the efficiencies and positive ROIs. One of the biggest issues is the lack of accurate, consolidated data. The common missteps are seen too many times, data standards are not in place, the ERP implementation did not focus on data cleanup, and there is no process to filter and maintain robust data. While companies focus on trying to enhance spend management technology, and add new functionality, many times the problem is as simple as fixing the root cause -- bad data. A defined and rigorous approach to Master Data Management (MDM), Item Masters, and benchmarking Best-In-Class (BIC) companies has become an enabler to success. Recently, a client identified a 25% potential reduction in spare parts inventory. In order to achieve the goal, the 50 US plants needed to develop a common part numbering system and description taxonomy. The first step in the project plan targeted data description cleansing and common part numbering system. The company is now on their way to achieving common inventory management and their working capital improvement goals.

Measuring Procurement's Value
One of the common pitfalls in an organization is the assumption that year-over-year cost savings cannot be achieved and sustained after multiple strategic sourcing efforts. Once an effective sourcing event is executed, the recurring savings will not be as significant over time, however, changes in product requirements and specifications, demand management, right-sizing and the continuous shifts in the economy give procurement an opportunity to provide continuous value. Collaboration with suppliers to a more knowledge-based sourcing approach can allow for true partnerships and is another area of focus for continued cost reduction. True supplier partnerships allow for deeper discussions on ways to avoid costs such as: outsourcing responsibilities normally handled internally, use of supplier tools and knowledge sharing, and acceleration in the development of a more robust product. Capturing and measuring these types of opportunities as cost avoidance is a critical component to procurement's total value.

Procurement organizations have come a long way, and will continue to evolve. But it is clear procurement has the opportunity to reset expectations on how their value is measured, facilitated and how it drives collaboration both internally and externally, and redirects focus back to basics.

One of the critical aspects in the changing role of procurement is accurately tracking and calculating value achieved. These metrics are relatively easy for cost reduction from an agreed upon baseline, but significantly more challenging to create credible measurement criteria for revenue enhancement, cost avoidance or speed to market. Each organization needs to evaluate their position along the maturity continuum, adjust their strategy as required and make sure the value contribution metrics are agreed upon across the organization. There has never been a better time for procurement professionals to swing for the fences and deliver over and above expectations.

- Teressa Erickson, Director, Alvarez & Marsal Business Consulting

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First Voice

  1. Tony Colwell:

    I’m not sure I can agree with the claim that many companies were forced to abandon collaborative sourcing approaches in order to obtain immediate cost reductions. True collaboration has always recognized opportunities to improve the bottom line, whereas many unilateral ‘cost reduction’ initiatives fail in this respect. As I see it, many procurement organisations have yet to engage in systems thinking and real value-adding programmes.

    In many ways, the focus on spend analyis has detracted from pursuit of value. However, the article is, in my view, correct in highlighting the importance of procurement’s value and the switch in focus from cost-down to value-adding strategies.

    For my views, read "The Role of ?Procurement?: Cost Saving or Adding Value?

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