Four ways procurement must improve in 2018
The Hackett Group’s recent CPO Agenda report detailed four areas procurement must be improved. They are as follows:
1. Align procurement skills and talent with changing business needs
In 2018, 77% of respondents consider alignment of procurement skills and talent with changing business needs to be of “high” or “critical” importance compared to 73% in 2017.While the total increase is of minor significance, it is notable that the percentage that consider this area to be of critical importance jumped from 10% to 17%, a rise of 70%. To meet this challenge, leading procurement organisations are looking at new talent/skill areas, with 28% of respondents evaluating the addition of non-traditional, insight-related roles and skills (e.g., physicists, data scientists) to the organisation.
2. Measure and manage procurement performance and business value
In 2018, 76% of organisations ranked measuring and managing procurement performance and business value as high/critical in importance, but only a little more than half (56%) believe they have the ability to address the challenge. As procurement organizations mature, they start looking beyond traditional areas of tactical supply assurance and price. In parallel, procurement spends more time on strategic business enablement, an area that requires more coordination and collaboration with internal stakeholders and suppliers based on criteria outside of negotiated cost alone. Increasingly, service delivery requires advanced business skills such as negotiation, relationship management, problem-solving and strategic thinking. Moving into these areas, procurement serves as more than a buyer/negotiator; it becomes a consultant and change agent.
According to the study, 81% of procurement organisations still get most of their hard dollar recognition for purchase-price reduction success. However, none of the survey respondents obtain hard-dollar recognition for avoiding profit impacts (e.g., from avoided regulatory costs, re-sourcing costs, etc.); only 34% get soft-dollar recognition. To incorporate digital transformation into procurement’s value elevation, the function must continually look for business value-contribution opportunities beyond price reduction. These include protecting revenue and brand integrity, and supply risk management.
3. Obtain more value from existing suppliers through supplier relationship management
Strategic partnership with the business requires taking on more responsibility for supplier relationship management (SRM) initiatives. Today 74% of respondents acknowledge the importance of obtaining more value from existing suppliers through SRM, but 51% have only a low or moderate ability to meet this objective.
SRM is not a new investment area for procurement. The Key Issues Study results document a high level of interest in moving SRM activities (along with supplier onboarding, performance management and more) to a Center of Excellence (COE) or similar leveraged model, possibly to make better use of these relatively scare skills. The implication is increased interest in linking supplier-centric processes to wider source-to-pay efforts and strengthening the acuity of supply market intelligence.
Organisations are also planning or piloting collaborative customer/supplier activities through their supplier innovation efforts. Increased competition has made today’s suppliers more willing to invest in technologies and share ideas with customers with whom they have positive, collaborative relationships. Supporting supplier innovation promotes increased coordination between buyers and suppliers, strengthening partnerships and increasing motivation on both sides to invest further in the relationship. Thirty-five percent of respondents are evaluating the use of a supplier network in 2018 as a means of improving communication, collaboration, supplier profile maintenance, transaction processing and supplier catalog management.
4. Obtain more value from existing categories through category management
By understanding spend categories better, procurement can pursue sourcing initiatives in ways that go beyond one-time events. Improving category management helps them manage the entire lifecycle in the value chain of goods and services. Eighty-three percent of Key Issues Study respondents consider obtaining more value from existing categories through category management to be of high/critical importance, but only 56% currently have the ability to meet this objective. Moreover, 25% also consider as critically important the deepening of procurement’s influence on complex indirect spend categories, to drive value beyond sourcing. And, 44% are evaluating or piloting migration of analytics to a Center of Excellence for category management. Doing so will help procurement organizations centralize the evaluation of contract and supplier lifecycles and holistically manage specific groupings of materials or services that have similar supply and usage characteristics.
Even if major spend categories are properly sourced and the supplier base is rationalized, procurement must still find further ways to help the enterprise tap suppliers for more value. Using a category strategy execution framework can help organizations apply the appropriate value drivers, techniques and tools to meet the value objectives in other areas including strategic sourcing, SRM, value engineering, process reengineering, demand management, and compliance management.