7 minute read 29 Aug 2018
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How to evolve procurement into a souce of comptetive advantage

By

EY Global

Multidisciplinary professional services organization

7 minute read 29 Aug 2018
Related topics Supply chain Advisory

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The procurement function of the future could provide a competitive advantage by facilitiating between internal customers and suppliers.

With today’s extended supply chains and the dependence on supplier capabilities within larger ecosystems, the procurement function is in the right place to act as a conduit and facilitator between internal customers (such as research, engineering and operations) and suppliers — and to do it in a way that is commercially advantageous.

However, in most enterprises, today’s procurement function is not ready to fulfill this bigger role to drive a competitive advantage. With the emergence of the need to “go digital” to effectively compete against disruptive forces and new competitors, the procurement function of the future has an opportunity to provide a competitive advantage to companies instead of being viewed in a traditional cost-management role.

Procurement has evolved substantially over the past 20-plus years. In the past, the procurement function was responsible for purchasing a subset of the business requirements for goods and services (Procurement 1.0), and then also proactively managing the largest spend categories — often with a “seat at the table” with their stakeholders (Procurement 2.0).

The evolution of procurement (to 3.0) includes becoming a critical business partner in delivering on enterprise strategies and providing a competitive advantage. This includes the function expanding its remit so that the focus shifts from cost leadership to alignment with stakeholders. This evolution enables enterprise strategies in innovation, agility and supply certainty.

Enterprise business strategies
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Chapter 1

Disruptive forces impacting the role of procurement

Procurement is having to change and adapt its role in response to disruptive forces.

The forces include:

  • Global business environment. Global and domestic political turmoil is unsettling traditionally stable markets and cascading into new tariffs and trade agreements. Immigration policy changes are impacting the availability of skilled resources, and this is causing uncertain financial and commodity markets.
  • Organization and talent. The growth of the gig economy and the contingent workforce is expected to continue and fundamentally change the concept of employees. This is accompanied by evolving expectations from millennials, who value purpose-driven missions.
  • Sustainability and risk management. Enterprises must continually adapt to a volatile regulatory environment. Lean supply chains are also leading to dependencies on subtier suppliers that are often not well understood. In addition, there is increasing consumer sensitivity to sustainable products.
  • Innovation and growth. The continuing convergence of business models, and the global growth by well-funded competitors, results in shorter product life cycles. This requires companies to drive their own growth and innovation by collaborating effectively with their ecosystem of suppliers.
  • Digital technology enablers. Companies are testing how to solve issues by deploying emerging technologies such as artificial intelligence, robotic process automation, blockchain, the Internet of Things (IoT), advanced analytics, chatbots and 3D printing. Leaders are shifting from a mindset of “going digital” to “being fully digital.”
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Chapter 2

Is today’s procurement function ready for its challenges?

Now that procurement is in a position to deliver on its potential and enable the enterprise strategy, is it ready? In many cases, no.

Today, the function is typically hampered in several areas:

  • Metrics focused on cost reduction. This behavior is problematic, especially when the distinction between cost savings and cost avoidance is not clear. Cost leadership should remain a key metric, but it must be balanced with other objectives — including innovation, agility and supply certainty.
  • System functionality gaps. Even as legacy solutions migrate to the cloud, these platforms are inevitably built to satisfy standard requirements. Complementary applications are inevitable as each company has discrete needs that cannot be configured into commercial off-the-shelf software.
  • Talent. Finding, hiring, developing and retaining top talent remains an issue, especially as millennials are looking for flexibility and work-life balance. There is also the need to bring strategic thinkers into the procurement function to work as influencers in changing how internal customers should work with suppliers.
  • Change management. Repositioning the role of procurement in the minds of stakeholders allows the function to focus on value-add activities and shifts transactional activities to the lowest-cost technology-enabled solutions.
  • Analytics. This involves utilizing available data not just to understand spend and influence pricing but also to extract insights in demand patterns that can impact inbound deliveries and inventory, working capital improvements and standardization opportunities.

Within this context, the function needs to evolve to Procurement 3.0 — increasing the value delivered by expanding its critical role to the enterprise.

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Chapter 3

Procurement 3.0 – Supply Side Optimization

Supply Side Optimization is the next evolutionary step for procurement.

Supply Side Optimization entails explicitly linking to the enterprise business strategy and ensuring that the supply base is aligned and contributing, with the goal of having the right suppliers, under the right commercial agreements, delivering the right goods and services. There are clear building blocks required to accomplish this evolution.

The EY Supply Side Optimization framework

EY Supply Side Optimization framework

First, start with setting the purpose for procurement. This means understanding the opportunities to enable and support business strategies, and articulating them in a way that can be internalized by your teams by cascading metrics and individual objectives. The purpose of procurement is likely a combination of cost leadership, innovation, agility and certainty/risk minimization, but it should also reflect commitments to corporate social responsibility goals, such as sustainability. For example, a large health care provider has committed to support the development of small businesses in the communities it serves by including metrics on suppliers — by ZIP code — to monitor how well it is doing.

Second, the procurement function must determine how to have the right work in the right place, which is known as the operating model. For example, a procurement function that wants to enable continuous innovation should co-locate its team with internal customers to facilitate communications and common objectives. A procurement function focused on cost leadership, however, will group activities into a global hub, or regional hubs, to benefit from scale. The chosen operating model will define work responsibilities, where to execute these activities, and the organizational structure and governance to best manage processes.

Within the operating model is the source-to-pay process, which splits into three key subprocesses:

  • Supply portfolio optimization. Through rigorous evaluation, this process selects the optimal portfolio of suppliers to achieve the purpose and identifies contractual terms that align suppliers with the enterprise.
  • Commercial excellence. This confirms that the portfolio of suppliers is fulfilling the spirit and intent of tailored contracts to help deliver on the purpose. It also actively monitors and helps to manage performance.
  • Touchless procurement. This utilizes leading-edge digital assets to improve P2P processes and assists requisitioners to order and receive, in compliance, without procurement involvement.

Within the framework, the execution of these processes is supported by three enablers: utilizing data-driven insights; building a workforce of the future; and performing effective change management with team members and stakeholders, internal business partners and external suppliers.

To date, commercial and legacy systems to manage procurement have fallen short of the end-to-end functionality that allows for ongoing improvement. That is because the systems are often not well-integrated and support transactional execution, while not assisting dynamic optimal decision-making. For example, while category management is well understood conceptually, the tools to gather, synthesize, normalize and present data from multiple sources are lacking, which makes effective decision-making difficult. Worse, category managers and analysts spend too much time gathering data rather than assessing scenarios and making decisions.

There is a sea change happening. Emerging digital tools are complementing existing systems to add to the functionality map and are now developed and deployed at an increasing rate. Intelligent automation is eliminating many basic clerical tasks, freeing up resources for higher-value activities. However, one critical area still to resolve is data quality to allow ever-improving analytics.

Summary

The next evolutionary step for procurement involves linking to the enterprise business strategy for the right suppliers, commercial agreements, and goods and services.

About this article

By

EY Global

Multidisciplinary professional services organization

Related topics Supply chain Advisory