Procurement. Considered by many to be the Cinderella of business processes; the Enfant Terrible of Broken Promises. Fact is, at 10% cash flow optimization, every $10,000 savings realized by procurement would require a net new revenue increase of $100,000 to achieve the same net benefit to the bottom line. I am asking you – what is easier to achieve?
As procurement practitioners, we haven’t necessarily done a stellar job advertising our value. Case in point: at a CPO conference I recently attended, even the CPOs agreed that the function must re-invent itself or it will not survive. So… what’s broken?
It is in this context that we examine the future of the procurement function. There are no doubts for the need to buy goods and services; we simply wonder if there will continue to be a need for “a profession” to oversee the process. Given that many other functional groups within the enterprise are probably busy redefining their future role, there is the potential of a lot of competition – and herein lies the opportunity.
Procurement organizations are at an inflection point – new approaches are needed to sustain value delivery. Past growth in procurement’s ROI does not guarantee that the value creation trend will continue into the future. The next test for procurement will be how to increase its impact in previously covered categories, and here, the path is less clear going forward. Successive rounds of cost cutting initiatives yield diminishing returns. Procurement must look beyond traditional project work to create and sustain value
There are at least four major challenges. One, of course, is the nature of skills and knowledge that business partners expect. The second one is the openness of others in the business community to the expanded or altered role that is anticipated. The third challenge would be the continued adoption of IT-enabled tools and processes to drive automation, and the fourth is the ever-increasing role of outsourcing the function.
We discuss a roadmap for procurement to maintain and increase their importance as a driver of value.
In summary, the future of procurement will put a lot more stress on outcomes and end customer value. In this environment, basic skills, risk management, supplier relationship management, technology adoption and talent management will be keys areas for procurement.
The Roadmap to Value within Procurement:
The Procurement function is the organization’s gateway to the supply base. This means procurement is responsible for establishing and managing relationships with suppliers and spending the organization’s funds by procuring goods and services. Procurement decisions have a significant impact on performance, not only in terms of costs, but also on quality, innovation, responsiveness and revenue generation. The role of procurement must become more strategic and its scope broadened. In the future, procurement will not just focus on its traditional area of cutting cost, but put priority on enhancing value to the final customer and protecting the organization from external risks.
The CPOs and CEOs that participated in the conference mentioned earlier, predict a different, challenging, but auspicious future for procurement as a function, and as a profession. In view of this, procurement professionals need to take action in the following critical areas:
Align with the business: Our vision for the future shows a loose network – versus a tight-functioning – of supplier-facing professionals embedded into strategic business lines, communities and processes wherever needed, constantly moving and reinventing their roles as needs shift. The final “model” thus is that the functional “procurement” label fades from the corporate lexicon over the next decade. The central idea being that spend management professionals get involved only where they are needed and move on once the right supplier relationships, processes, information flows, performance metrics, technology tools and so forth are in place and functioning, smoothly and predictably.
A more strategic role for procurement: It’s no longer about seven step methodologies. As production was pushed overseas in the 1990s and 2000s, years of consolidating spend resulted in a narrow band of suppliers, exposed firms to supplier risk, inflexible contracts and higher switching costs. Technology tools, strategies and information sources that make procurement organizations incredibly nimble are going to be important in the future. Regardless of production location, leading supply chains and procurement functions will enable this less extended, but more dependent, business model by changing the nature of spend optimization projects they invest in. Why? The very reasons supply chains are adapting—condensing product life cycles, new service level expectations from customer proximity, greater visibility—will render the consolidation and standardization projects of the past less effective.
Procurement managers should seek greater responsibilities in more strategic areas such as supplier relationship management, global sourcing, outsourcing, and mergers and acquisitions.
Talent management: While valued highly in today’s marketplace, procurement practitioners who excel at sourcing processes, or at being power users of procurement and sourcing automation technologies, will find themselves working for third-party services firms – or not at all. You’ll be expected to expand the traditional sourcing role with excellence at managing supply and supplier risk, using technology tools, conduct sophisticated analytics, collaborating and managing supplier relationships, hedging against commodity volatility, using best practice project management tools, and so much more. What will it take to survive and shine in procurement? From a skillset perspective, procurement professionals will require a blend of effective internal and external focus – plus a combination of relationship and technical / analytical skills.
The necessity of quick response: Volatility in supply and demand has become the norm, and managing uncertainty remains a major challenge for procurement. Accordingly, on top of advance planning, businesses need to be resilient to unpredictable changes in the market. Consistent with the idea of agile procurement, re-shoring or near-shoring are key for future procurement plans.
Supply risk management: Everybody will have to wake up to the pervasive problem of supply risk. Supply and supplier risk management is often the number one reason cited by CPO’s as the reason for their insomnia. We expect to see big increase in awareness around supply risk and also a much better awareness on where those risks reside. No successful company will be without a supplier risk or a supplier relationship management framework. We expect Supply Risk Management and Vendor Relationship Management to drive up to 40% of procurement’s value-add. We’re not just talking about focus on reducing total cost of ownership (TCO) – we mean bigger and broader activities such as increasing resource utilization and maintaining flexibility in the supply chain.
Supplier Relationship Management: Converging trends will make supply relationships even riskier than they are today. Today, typically, procurement looks at suppliers’ financial stability, which is only one element (and not a very significant one), compared to continuity of supply. Many companies treat all suppliers on equal footing, which is unacceptable from a risk point of view. Some suppliers are truly critical to the continuity of your business, while most are not. Critical / strategic suppliers need to be treated very differently. We anticipate that there will be a big expansion in the kind of risks companies address in their supply chains. For Vendor Relationship Management structures to truly work, you will need to consider, for example, such things as sustainability, brand and reputation impact, social responsibility, geo-political impact potential, natural disaster impact, physical and information risk and security aspects, and indeed, who in the organization should link with your supplier executive team.
A continued role for outsourcing: A lot of clients are starting to ask themselves if it really makes good sense to develop a best-in-class competency to buy goods and services that do not contribute to the organizations’ competitive differentiation, market share growth or margin optimization. They are starting to segment their supply base, choosing to focus solely to actively manage the relationships with those suppliers that are strategic, critical to the company. Everything else is considered for outsourcing. We feel that outsourcing some of the tail spend may be a critical strategy for some organizations whiles others need to look at internal opportunities. Regardless, outsourcing providers are gearing up for the next step in their cycle. Regardless of our view of outsourcing, we expect even more trending towards outsourcing procurement, perhaps even roles that are considered strategic today.
Collaboration Reigns: Collaboration will be the new normal. Increasingly, the profession will focus on networks. While organizations are now charting their own course in innovation, a transition from “buyers and suppliers” to “integrated supplier networks” will enable greater co-ordination and innovation across connected business and industries.
Now, procurement tends to get involved in mid-to-end cycle in a sourcing process. Early involvement will become mandatory as the timing of supplier and customer collaboration shifts. Today, suppliers may be asked to contribute ideas to existing designs, or to help fix an existing process. Buyer / seller lines will blur as procurement will want to extract more value from suppliers by leveraging supplier resources and integrating supplier functions with internal processes.Procurement Business Intelligence: If you want to be relevant, you need to come to the table with internal and external business intelligence. Understanding pricing and process benchmarks and baselines, options and possibilities of supply and supplier base, understanding internal spend data – these will be the key elements that procurement professionals need to engage with the business on a business / economic level
There are many spend management and sourcing techniques procurement can deploy to deliver longer term packages of value back to the business: e.g. centralizing spend under a category umbrella or embedding more deeply into a business line. In either case, the key challenge for procurement will not be selecting spend analysis methods, but convincing multiple levels of the organization to buy the long term vision. In other words, supply chain and procurement professionals must be able to create sound, quantitative business cases to evaluate and recommend new spend models at all levels and across functions.
Engaging internal stakeholders will not only empower procurement to build a long term pipeline of opportunity, but achieve a faster project speed to value.
In the era of the geographically agnostic supply chain, leading supply chain and procurement functions must also source innovation ideas from external suppliers. The key differentiator between transformative and lagging logistics procurement functions will be the ability to engage providers, and then convince internal stakeholders to change, thus allowing procurement greater leverage over their business.