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Not just a ship for stormy seas: Realizing the value of procurement beyond the pandemic

07/22/2021 By

Spend Matters welcomes this guest post on procurement beyond the pandemic from Alex Klein, COO and Co-Founder at Efficio Consulting.

When the pandemic slammed the brakes on supply chains across the globe last year, it was clear to see which businesses had their operations in order and which, unfortunately, did not. Against a challenging economic backdrop of tighter budgets, supply restrictions and a shrinking global network, those with robust supply chains were able to leverage a competitive advantage over their ill-prepared competitors, leaving them behind in the dust.

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Amid this chaos, and previously overlooked in favor of the sexier aspects of supply chain management, the procurement function at long-last rose from the shadows — forced into the limelight to tackle the supply chain challenges at hand. Existing supply chain norms were called into question as the turmoil surrounding the events of early 2020 exposed oversights and vulnerabilities, and procurement was on the front line to overcome this.

The point of no return

As we, hopefully, emerge on the other side of many of these events, businesses can’t go back to how things were. If procurement and the CPO are needed for the worst of times, then imagine how they could thrive in the best of times. The most successful organizations today know this, and it shows.

That’s why the CPO must be given broader influence. To the wider organization, procurement — for too long — has been seen and treated as a back-office function. Without getting too technical, this is largely because, at face value, it is just not an exciting or seductive part of the business. It’s seen as the culmination of administrative effort and has subsequently suffered from being part of a vicious cycle in which it doesn’t have the platform to prove its worth, and therefore can’t flex its muscles enough to earn a more prominent pedestal.

It took an external influence to highlight existing inefficiencies or risks that had been overlooked in favor of aforementioned benefits, such as globalization or cost-effective one-vendor models. On cue, 2020-2021 has served up more than just the one outside influence. Alongside Covid, the UK has also been contending with a new international makeup off the back of Brexit. In addition, the recent Suez Canal blockage also confirmed a need to optimize supply chains in preparation for more black swan events that may lie ahead. And for manufacturers in particular, the ongoing global chip shortage has made a further case for diversified or nearshored sourcing. The Covid vaccination effort amid the rise of the variantS is another tick in that final box too.

Driving value

This difficult time has proved that procurement is more than a background staple, and certainly more than a ship for stormy seas. It is an enormous profitability lever, whatever the weather. After all, procurement represents between 50% and 80% of a company’s costs, depending on the industry. And most of the savings extracted from those expenditures flow straight to the bottom line in terms of overall value. In fact, procurement has been shown to have the potential to increase an organization’s EBITDA (earnings before interest, tax, depreciation and amortization) by 30% or more.

This significance makes sense if you think about it. External spend isn’t just one line. It’s a network. Procurement pertains to everything from office supplies to raw materials, maintenance, equipment, energy, haulage and transport, marketing, IT and more. As a function, procurement spans business units, geographies and budget lines. And yet, it has been seen as an administrative given. An unchangeable necessity.

In reality, and what organizations are hopefully now realizing, is that true optimization of the procurement channel means potential refinements across 40 or more categories, avenues and channels.

The lifeblood of the business

For too long, procurement has sat at the heart of the company without any acknowledgement that it is in fact the lifeblood. As organizations look to establish more control, insight, variability and robustness in its numerous expenditure channels, it’s time to get that heart beating more visibly and loudly.

For most, this re-evaluation of the CPO’s role and influence will require a mindset and cultural shift. For so many years, procurement sat passive, achieving what it needed to achieve and blocking out the idea of needing to improve upon an already functioning discipline. Organizations had, they thought, achieved best practice. Yet, allowing these opportunities for improvement to pass by, in a marketplace crying out for heightened agility, resilience and efficiency, can only be described as “bad best practice.”

It is for this reason that positioning and leveraging procurement as a core competence and as a driver of value is more than just a technical tweak or a shifting of the CPO’s prominence. Procurement needs support across the whole organization to ensure a successful transition — support in the form of people and skills, tools and technology. Only with this mindset change, and requisite investment into a new procurement culture, will the true influence and impact of the CPO be realized.

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