Time to Look into the Future of Procurement!

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Guest blog post provided by Milan Vyas

There has been transformation in the Procurement function over the past decade. From the starting point of the traditional buy-sell, transaction-based purchasing, the practice has moved through stages of change that redefines most aspect of the business.

A typical Purchasing Function is limited to the transactional job of collecting information about the requirements of user departments and carrying out commercial checks and balances to finally procure the product & service based on cost reduction only and focused on supply continuity.

The strategy is to shift the company’s focus from the current “transaction” oriented independent buying of goods and services to a “product” oriented strategic approach.

A Paradigm Shift in the Procurement Function

As companies seek to discover ways to increase overall excellence and competitiveness, a new source of value has emerged – Strategic Sourcing. Strategic Sourcing is a proven approach to understanding and delivering significant cost reduction based on Total Cost of Ownership (TCO), building a sustained value – creating relationship with the suppliers and category spend reduction in order to create and sustain a competitive advantage.

What is Strategic Sourcing?

The fundamental objective of any organisation is lowering the cost of goods manufactured. This can be achieved through reduction in prices of purchased products & services and reduction in their specific consumption. Strategic Sourcing does exactly the same by addressing the total cost.

Strategic Sourcing is a comprehensive process aimed at obtaining maximum advantage on cost, technology, process and quality, by leveraging the company’s buying power with select suppliers, conducting best price evaluations, sourcing globally and conducting company/supplier joint process improvements.

It is defined as: “A disciplined, systematic process for reducing the total costs of externally purchased materials, products and services while maintaining or improving levels of quality, service and technology”.

The Strategic Sourcing approach is designed to:

  • Drive reduction in total cost of acquisition of goods and services
  • Drive a thorough understanding of both the supply market and internal company requirements
  • Developing in-depth understanding for knowledge based buying
  • Building sustained value creating relationships with suppliers
  • Deliver significant earnings to bottom line

The process of strategic sourcing starts with spends analysis and category management, which identifies, consolidates and standardises information from a wide range of data sources.

The Evolution of Procurement’s Value Proposition

Are we witnessing the dawn of a big shift in the way strategic procurement is done? Category management has been the only credible procurement strategy since the late 1990s, and that may be about to change. The techniques devised in strategic sourcing and category management strategies to choose suppliers and build strategic partnerships are due for an overhaul.

Today’s uncertain and volatile markets make agility and change inevitable as well as essential.

Many business leaders have ambitions to improve profitability by reducing costs. But to do so, they must also reshape their supplier relationships, aligning their supply chain with a more progressive strategy and securing a competitive advantage. So what are the new realities?

Procurement professionals need to get savvy. Their professional credentials will be measured by their ability to influence, persuade, and provide vision. Their mindset must be strategic, global, collaborative, and, above all, commercial.

Today reducing cost is no longer enough. Successful companies must seek high-impact performance improvements. According to A.T. Kearney’s latest Assessment of Excellence in Procurement (AEP) study, more senior executives are asking their procurement functions, and specifically their Chief Procurement Officers (CPOs), to deliver value well beyond cost reductions. Indeed, the AEP finds that the importance of value creation in procurement is growing twice as fast as the importance of cost reduction.

Today procurement professionals are under considerable pressure to deliver value-adding business performance, and it is no longer enough to build a supply management capability that is efficient, demand-driven, or even transparent. Procurement must offer the organisation something that is value adding: a new supply management where the strategic scope of procurement’s value is delivered via innovation, a networked function, and focus.

This demands full alignment with the corporate strategy, and integration internally with stakeholders and externally with the supply base. Procurement must be the function that is continually challenging ways of working. It must look to ensure that it helps its internal business stakeholders to achieve their goals and targets while, at the same time, taking the opportunity to challenge total cost and facilitate “customer of choice” benefits, such as access to innovation and, of course, the management of risk. Most critical of all is that procurement must be aligned to the corporate focus, addressing the key question for any business: “What is value to the customer?”

The customer never buys a product. By definition the customer buys the satisfaction of a want, which in economics is defined as value. In essence, value is utility; that is, the total satisfaction derived from a good or service.

Value management relies on multiple streams of information from inside and outside the organisation — both internal and external perspectives are necessary. Today procurement holds information regarding customers, competitors, demand, offers, costs, and production constraints. These data are all used in value management, and this places procurement in a strong position to make this aspect of business their own.

Procurement was once a transactional function focused on supply continuity. Strategic sourcing transformed CPOs into credible business contributors. Now, CPOs have the chance to transform again – to use strategic supplier relationship management (SSRM) to deliver something more than cost reduction, something that drives competitive advantage – strategic value. Yet delivering strategic value across the supply chain will require a change in mindset: from confrontational, one-on-one negotiations on cost reduction to collaboration – both internal and external.

What and Where Is Strategic Value?

Many CPOs have rightly concluded that the key to unlocking the next level of value is to complement their category-focused strategic sourcing efforts with a supplier-focused approach.

The above figure illustrates models of supplier interaction that form a pyramid because they rely on a solid base in category-driven transactions. With some suppliers, it’s also possible to use strategic sourcing projects to optimize total cost of ownership. An even smaller subset of suppliers deserves SSRM value projects that use more intense supplier cooperation to gain more substantial advantages for a specific business unit or product. Lastly, the top of the pyramid represents those few cross-enterprise relationships that interact across many business units or products and multiple dimensions – you may buy from, sell to, innovate with, and sometimes even compete with these suppliers.

Turning Supplier Collaboration into a Core Competency

To drive strategic value creation systematically, your procurement organisation needs to develop a key competency in supplier collaboration.

Indeed, the first step for CPOs is to lead the function through an understanding of how a collaborative approach compares and contrasts with traditional sourcing (see figure). What happens when you move from transaction to relationship-based philosophies? Which traditional strategic sourcing success principles can help you in the move? Many CPOs, for example, enforce the use of deep analytics to inform the process before engaging a supplier. Good. The analytics are important in developing a structured approach to identify value creation opportunities.

Turning supplier collaboration into a core competency will not be easy. But when properly structured as an initiative to develop a key capability, it will not be insurmountable (no more so than developing strategic sourcing capabilities was 20 years ago).

Now Is the Time…

Now is the time to push your CPO to become a strategic contributor to your team, accountable for tapping the supply base’s energy to help achieve your company’s strategic objectives. Obviously, these objectives go well beyond cost reductions. As key industries continue to consolidate, the first-mover advantage of learning to collaborate with winning suppliers will be crucial to success. The CEO’s job here is to understand and articulate the vision—and task the CPO with specific strategic objectives over the next two to three years. These objectives may include:

  • Growth: Create incremental revenue growth.
  • Risk: Demonstrate a significant reduction in enterprise risk, covering all potential relevant risk categories such as brand, catastrophes and commodity pricing
  • Value chain: Optimise the value chain around the corporation’s core, differentiating capabilities, using supplier relationships to maximise benefits for all involved
  • Structural capabilities: Demonstrate advances in select areas, such as a sustainable competitive cost advantage, improved agility or responsiveness, gains in corporate social responsibility, or other structural capabilities essential to the future strategy.

Clearly, the objectives will vary depending on your strategy, position, and industry. The suppliers you collaborate with, and the results you achieve, will also be unique. What must not vary, however, is the philosophy of collaboration. In the past few decades, the procurement function has grown from a function of lesser importance to one important enough to a have a chief officer. The next step in the quest for value creation is collaboration.

And the time to take that step is now…

 

Check out Procurement Report Card: Most Executives Think Procurement Isn’t Strategic Enough!

#Procurement #SupplyChain

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Procurement Report Card: Most Executives Think Procurement Isn’t Strategic Enough!

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Blog post provided by http://argentus.com.  Argentus is a boutique recruitment firm focused on Supply Chain and Procurement

 

As we’ve chronicled on the Argentus Blog, it’s no secret that the world of Procurement is changing and fast. With automation, big data and burgeoning AI systems removing more and more of the profession’s “tactical” or “clerical” tasks, companies are calling on their Procurement teams to be more strategic, more nimble, and more innovative.

They’re expecting their Procurement functions to deliver not just bottom-line cost-savings, but other sorts of value, adding to organizations’ overall competitiveness.

Procurement, you’ve come a long way, baby!

But a new survey of 200 C-Suite executives from a variety of industries and functions presents a rather dispiriting picture of the Procurement function today – or at least how it’s perceived.

Continue reading “Procurement Report Card: Most Executives Think Procurement Isn’t Strategic Enough!”

Commodity Management – What is your Buying Strategy?

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In any company or industry that sells products the cost of the raw materials and components is often the single largest expense.  Despite the magnitude of this cost however there is a wide range of focus put on managing this expenditure from proactive and strategic to reactive and tactical.  In some cases there is a great level of  planning applied before a single purchase order is placed.  In other cases buying decisions are made subjectively and with very little focus.  Further the experience in those buying these goods can vary significantly as well.

Supply Chain is about much more than just negotiating lower materials costs.  A well constructed Procurement Strategy will raise the value of the Supply Chain to your company.

How do you manage your materials spend?  Are you executing a Buying Strategy or are you just blindly placing purchase orders ?

Continue reading “Commodity Management – What is your Buying Strategy?”

Supplier Relationships – Don’t go over to the Dark Side!

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Early in my career I worked in a department that was responsible for the design,testing, sourcing and procurement of packaging materials.  It was a great experience and introduction to so many aspects of the Supply Chain.

But one day one of my peers was fired.  He was responsible for negotiating with the packaging suppliers.  As it turns out he was taking kickbacks.  When that was discovered and verified he was summarily dismissed.

I never got the precise details but I don’t believe he could have got more than a few thousand dollars for his illicit efforts.  More importantly he got a black mark on his resume, and in his life, that he could never erase.

That was my first lesson on the do’s and don’t of Supplier Relationships.

Continue reading “Supplier Relationships – Don’t go over to the Dark Side!”

What’s the Difference between Procurement and Purchasing? (Infographic)

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Blog post provided by http://argentus.com.  Argentus is a boutique recruitment firm focused on Supply Chain and Procurement.

 

It’s a good question. We often see these terms used interchangeably, but there are some concrete differences between Procurement and Purchasing such that we think they are two different practices, each with their own set of concerns and skills.

We thought we’d take it upon ourselves to do a summary-style Infographic that highlights some of the core differences between what’s considered “Purchasing” and what’s considered “Procurement.” In short: Purchasing is an activity that’s a subset of the overall Procurement process. But there’s more to it than that.

We should give a caveat: in some professionals’ opinion, arguing about the difference between “Purchasing” and “Procurement” is a matter of semantics. The terms are often interchangeable. But at the very least, the discussion helps give some perspective on two different approaches to how organizations buy the goods and services they need to run. Some organizations are – sadly – still concerned only with “Purchasing” instead of the more nimble and strategic approach of “Procurement.”

Check out the Infographic below!

 

We hope you enjoyed the Infographic.  There are many different opinions about the definitions of Procurement and Purchasing.  There can be differences of opinion between Industries, across Geographies, and from various levels and parts of your organization.  Most importantly individuals may have different views of Procurement and Purchasing even if they work beside each other.

Please share your thoughts on this comparison!

Blog post provided by http://argentus.com.  Argentus is a boutique recruitment firm focused on Supply Chain and Procurement.

 

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#Procurement #SupplyChain #Purchasing

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Procurement Outsourcing – Keep your Integrity!

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Like so many professionals Procurement people are very proud.  They are proud of the job that they do and the contributions that they make.  And they are most always proud of their ability to negotiate and get the best deal!

But at some point in their careers, especially in the age of Outsourcing, they are likely to have to deal with potential suppliers who provide Procurement services.  Procurement typically negotiates deals for other functions like I/T, HR, Manufacturing and every other area in the company.

Now they are faced with dealing with companies who basically state that they can do a better job at negotiating and Procurement than they do.

In the face of such a perceived, direct challenge to your abilities how do you and your Procurement team deal with this professionally and with integrity?

Continue reading “Procurement Outsourcing – Keep your Integrity!”

Tail Spend: The Hidden Procurement That’s Hurting Your Company’s Bottom Line!

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Blog post provided by http://argentus.com.  Argentus is a boutique recruitment firm focused on Supply Chain and Procurement.

 

In the fast-changing world of strategic Procurement, certain categories of spend get all the thunder: IT Procurement gets to help drive a company’s innovation. Business Services Procurement gets to restructure a company’s operations and drive competitiveness. Travel Procurement gets to look at pictures of exotic destinations all day (just kidding).

And most large companies are well aware – by now – of the cost savings and strategic advantages of being more strategic about the way you buy things in an organization. For the most part. For most of the stuff a company buys.

But there’s another sort of spend that never gets any love, a sleeping giant that’s actually costing companies millions of dollars and opening them up to risk: Tail Spend.

Continue reading “Tail Spend: The Hidden Procurement That’s Hurting Your Company’s Bottom Line!”