Top procurement trends for 2017
We’ve had a sustained period of growth, and people are starting to worry the economy will soften, or that growth will get even choppier. Coupled with uncertainty following the Brexit vote and the US election, this may drive companies to try to get out ahead and curtail spending plans or look at cutting costs. Attention will likely turn to indirect procurement, which is a good thing, but only if they’re ready with analysis of the right areas to target.
That means procurement’s secret weapon in 2017 will be spend insight. Even before the inevitable cost-cutting demands happen, those at the top of their game will have sliced and diced their company spend data and be poised to take action where it will have the most impact. Prices have been squeezed hard over the last 8 or so years, so the biggest impact will come from challenging demand and scope, rather than boring old price.
To do this, sourcing will need to incorporate more PMO functionality, as future projects will encompass demand management activities such controlling waste, reducing overall demand, and eliminating excess quality. Another area to look at is cost structure transformation. Projects in this area will focus on things like process re-engineering, consortium-based purchasing and supplier continuous improvement programs. Sourcing organisations will need modern tools, and they’ll either need to develop or attract sourcing professionals with more project management skills.
Organizations that are unprepared will be chasing the same low value targets as always - cutting travel and Post-it notes, and freezing laptop upgrades.
A renewed interest in developing local and ethical sources
The Brexit vote and the US President-elect’s promise to revisit international trade agreements has introduced new exchange rates fluctuations and uncertainty from overseas partners and suppliers over future trade agreements. The only certain outcome of all this uncertainty is that overall spending will be down.
The growth of home-grown supply may lead to a small reduction in overseas dependency. And as governments’ sign up to more environmental commitments and consumers continue to show preference for socially responsible brands, procurement needs to be ready to roll up its sleeves to deliver step changes in this space. For too long, most of us have done little more than muck about in the shallow water. It’s time to dive in head first.
Greater supplier collaboration
As more companies deploy spend management platforms that automate or enable employee self-service for tactical procurement activities, procurement departments will find mundane supplier activities waning. That will give professionals across the source-to-pay process more time to focus on higher value add from suppliers, including suppliers of services.
Working collaboratively with suppliers to develop innovative solutions is second nature to much of the retail and manufacturing sectors, but its high time the services sector stopped talking and started acting. This is a team objective, not just a leadership one. Procurement should reposition itself as a business enabler by proactively analysing spend data patterns and supply markets. We must deliver insights and recommendations that let business leaders make key decisions on how to meet their financial goals.
Suppliers are likely to welcome this shift; they would rather focus on value too. Both sides have always held collaborative supplier relationship management as a goal, but we just never had time to do it. Now it should become more widespread.
Time for indirect procurement to finally get some respect
Many indirect procurement groups finally have complete spend management data--including integrated travel spend data--and tools allowing them to present analytics to help their company save money. Executives will welcome this type of support for data-based decision making on where to cut indirect costs.
Procurement could improve its positioning internally by handing over the tools, analysis and responsibility to the business. We have to lose our “policing” persona and progress toward empowering the business with analytics that allow them to make local decisions. Functions within firms that have earned the respect of the businesses and executive stakeholders will find that proverbial seat at the table is there . . . with the chair pulled back and ready.
Reverse auctions for SaaS
Certain SaaS software has become commoditised enough to make the prospect of “rip and replace” a lot less daunting, and in some areas there is very little hesitation to switch out. This means that sourcing groups in some cases can get away with quick and easy reverse auctions on solutions that just a year or two ago would have required complex RFPs. That means those SaaS vendors are under more pressure to compete, and there are better deals to be made.
Continued technology evolution
Integrating sourcing, purchasing and procurement technology, and its interface, into wider business applications, has been single-handedly transformational for every organisation that has had the acumen to implement it to date. If you haven’t done it yet… start today! In 2017 those CPOs who have already implemented enabling systems are fit to position Procurement at the centre of their company, armed with arguably the best business data available.
Technology will continue to evolve over the medium to longer term to a mode with a core “container” with a myriad of transactional apps. Companies will see the impact as they start to control a much larger percentage of indirect spend.
By Alex Kleiner, GM & VP Customer Success, EMEA at Coupa Software
Follow @SupplyChainD on Twitter.
Procurement Outsourcing: Partnering with Outside Experts
In coming years, supply and demand will fluctuate, new technology will change the way procurement teams operate, and skilled workers will be in short supply. Outsourcing procurement is now a priority. Explained John Piatek, GEP Vice President and Thought Leadership Council Chairman: “In the face of wild swings in consumer demand, trade wars, tariffs, and lockdowns...supply chains bent and frequently broke.” Therefore, companies need to know how to recover.
The Rise of Strategic Procurement
The pandemic placed procurement on a higher level within business operations. Executive boards that previously overlooked or undersold the value of procurement started to sit procurement managers around the table with strategic advisors to mitigate risks, optimise costs, and drive growth. ‘‘This year has demonstrated the importance of bringing CPOs into C-suite conversations”, explained Jennifer Brown, Principal, Deloitte Consulting. “They bring significant value to the table.”
Procurement teams now race to find skilled, third-party vendors to provide services they can neither afford nor prioritise. “Outsourcing of S2C can give companies access to expertise, capabilities, and scale they may not have in-house,” said Iliana Filyanova, Partner for McKinsey’s Manufacturing & Supply Chain. For example, expert outside firms can analyse market conditions, supply specialised goods such as semiconductors or uniquely designed parts, and help develop a strong IT infrastructure.
To be clear, if your team can skillfully outsource, a whole new world opens up: you can rapidly adjust to market conditions, scale up when demand spikes, and scale down when dips hit.
First, you can cut costs. Suppliers in Southeast Asia and other low-cost countries can provide large amounts of materials and products at excellent prices without the political backlash that often accompanies offshoring. But outsourcing has several advantages. When you get specialists on board, you can shorten development times, hire additional staff without having to train them, and digitise your procurement systems thanks to IT experts.
- Increases focus on core tasks
- Provides staff more time to fulfil their priorities
- Supplies next-gen technology expertise
- Reduces operational costs
- Helps prevent duplicate payments
These benefits only accrue, however, if your team carefully defines the scope of the operation. When you try to hit the bull’s-eye on a dartboard, you aim directly at the centre. It takes a certain angle, force, and skill. Likewise, procurement teams must figure out what and how much to outsource. Outsourcing still requires spending, and teams will want to get good data before they sign a final contract. In addition, staff members should be on board with the rationale and objectives of the outsourcing project—otherwise, your darts will miss their target.
How To Successfully Outsource Procurement
According to McKinsey, teams should focus on three main steps.
- Determine which categories to outsource. Focus on non-core business areas. These are any services that support your core product, such as freight and shipping, facilities, and IT infrastructure.
- Select the right metrics. Build supplier scorecards, in which your team decides upon two to three key criteria such as low unit prices, supply chain resilience, and quality of product.
- Partner with the appropriate people. Ask potential firms questions to assess their domain expertise; diversify your search to take in a variety of global organisations, and consider their technical skills—even if you’re not hiring the vendor for IT.
If these focus areas seem too broad, Deloitte recommends a phase-by-phase process.
Deloitte: The Seven Stages of Outsourcing
Starting the Search
First, companies should Assess and Prepare. These steps include defining vendor requirements and starting to engage. In these phases, you may do some background research but not engage with them directly. Web searches can yield initial results, and consultants can also help—especially those who know the strengths and weaknesses of your industry. After you have your list narrowed down, you can produce a strong, detailed RFP.
Naturally, your RFP will attract the relevant suppliers, and you’ll be able to move to Evaluate. If you’ve chosen strong metrics, two to three top vendor proposals should stand out. Be forewarned, Deloitte said: the next part is tricky. Committing, or negotiating your final contracts, will lock you into a potentially multi-year collaboration with a vendor. Take your time: you can deliberate over competing offers, as well as request that additional support be built into the contract.
Negotiating the Best Deal
Advocate for your best interests! “I moved forward to negotiate with a current contract manufacturer with whom we had an important volume commitment with high prices,” said Elodie Cramer, Associate Director of Biogen. “We were in a single-source situation, with no active alternatives.” She opted to pursue dual sourcing, as well as insist on open vendor discussions. At the conclusion of the talks, she had bartered better terms: 29% lower costs, 75% less volume commitment, and improved vendor quality and service.
Additionally, teams should discuss details such as how to optimise taxes, meet regulatory compliance, and protect ESG standards. Safety-catch measures like these may seem to extend the outsourcing process, but they’ll ensure that you don’t end up spending more over the long term. Compliance, after all, can drive 30% to 50% of savings, and talking about it upfront is for the best for all concerned.
Closing the Case
Once you’ve reached acceptable terms, you can Transition, handing the project work and resources over to your vendor, and Optimise, following up to manage and improve the relationship. Don’t forget to dot your i’s and cross your t’s—Deloitte even recommends an end checklist. Sign the contract; create a people transition plan; complete consultations with any oversight committees. After signing the paper with a flourish, you can then rest easily, confident that you’ve followed a strategic outsourcing system.
Companies To Emulate
Procter & Gamble, Unilever, Slack, Alibaba, Acer: even major multinational companies seek to outsource specific systems, technical skills, or materials. When Unilever integrated its ERP platforms into a single system, outsourcing saved the company an annual €700 million. Slack outsourced its universally-known colourful design label to MetaLab. Alibaba outsourced to US firms to compete with eBay. Acer outsourced manufacturing to maintain a small, agile team. As a result, these companies improved their international reputations, offset their internal weaknesses, and built strong vendor partnerships.
As executives increasingly turn to procurement to make their global operations less costly and more resilient, teams that strategically outsource work will stand a better chance of bringing good news to the next management meeting. Said Ryan Flynn, Principal, Deloitte Consulting: “CPOs are uniquely positioned to help their organizations navigate a historically disruptive time and build the agility required to thrive.”
Yet to do so, they must act with intent. “Successful outsourcing—outsourcing that drives transformation and helps achieve broad strategic goals—requires companies to follow a disciplined process,” wrote Deloitte. In short: Outsourcing initiatives succeed not by luck, but by design.