Effective procurement, like many other supply chain functions, requires a strategy for success.
Procurement strategies are often completely misaligned with what the business is trying to achieve and/or have poorly defined measures of success. Frequently, procurement is simply measured by the savings it delivers rather than the value it can create.
Aligning procurement strategy to business goals
Creating supply advantage is about aligning your procurement strategy to the business's aims and objectives to make sure you're working toward a common goal. Sounds easy, right? Time and again, we see this as a difficult challenge for the following reasons:
Challenge #1: Business misalignment
Oftentimes, the business is not aligned with procurement, which may pursue goals that don't support the overall business aims and objectives, or may even be detrimental to them. This is likely because procurement is usually focused on cost savings, whereas the business may be focused on growing revenue through innovation or service. Instead, procurement needs a business relationship with suppliers to incentivize the right behaviors — not just one where suppliers are constantly asked for cost cuts.
Challenge #2: Inappropriate metrics
Even when the procurement strategy and business strategy are aligned, if procurement is measured on delivering cost savings, then that is exactly what you will get. However, delivering on a strategy to collaborate and innovate with suppliers, for example, could mean cost savings, but it could also end up helping to create new products and services. A recent client exclusively tracked ongoing opex savings, which meant that the procurement team put minimal effort into thinking about new ways to help the business innovate.
Challenge #3: Absence of C-suite influence
In businesses where procurement is not present at the C-suite level (such as a chief procurement officer), the function does not have a seat at the table and is not seen as strategically important. This makes it difficult for procurement to align, support and influence business strategies. For example, input on supplier capabilities and costs by a chief procurement officer should influence key decisions on new product development.
Challenge #4: Limited spend influence
When procurement does not have an input on all the third-party spend within the business, this limits its ability to influence the supply base, marginalizes the function, and prevents it from delivering real value to the business. Professional services are a frequent area where executives make independent decisions to retain providers and miss the opportunity to leverage scale, expertise and knowledge of their own business to achieve better outcomes.
Challenge #5: Lack of capability
Sometimes the procurement function lacks the capabilities to operate at a strategic level and provide real market insight and intelligence. There are myriad reasons for this, including a lack of skills for data analysis, inexperience of personnel, or overuse of contract workers. Strong leadership is required to build out the right talent and capabilities for a mature procurement function.
To create supply-side advantage, you need to tackle each of these challenges, starting with business alignment. Consider whether your procurement function actively supports the following:
- Innovation – are you collaborating with business partners and suppliers to support product and service development? Procurement can be the facilitator between parties to produce commercial agreements that foster collaboration through continuous improvement or innovation funds.
- Supply certainty – are you creating a stronger and more stable supplier base to maintain surety and prevent supply disruption? Procurement can help implement effective risk scoring, monitoring and mitigation processes to enable proactive decision-making.
- Cost leadership – are you optimizing the value delivered for the goods and services procured? Procurement should have overall focus on the total cost of ownership in its commercial agreements with suppliers.
- Agility and service – are you fulfilling business and customer expectations by procuring goods and services that can flex to unanticipated needs and tailor services to varying requirements? For example, can you support omni-channel distribution, and are you responsive to evolving environments?
Once you've decided on a strategy, it is important to align your metrics and measure them appropriately to demonstrate whether you are delivering to that strategy. It's a snowball effect that can lead to more C-suite influence as procurement starts to bring greater value to the organization.