10 priorities for procurement
Customer demands are continuing to increase and accelerate. Today, customers expect same or next day delivery of products purchased online and, especially for technology, they expect a constant stream of products that are faster, with more features and longer battery life. This means organizations have had to increase investment in infrastructure, R & D, supply chain, distribution, logistics and, especially, services. So why do so many procurement organizations still have a main focus on driving supplier price? In a My Purchasing Center interview with Chris Sawchuk earlier this year, reduce price and avoid cost was the number 1 procurement objective for 2016 in a Hackett study, but elevate procurement to trusted advisor was close behind. The problem, is that procurement operating budgets were only expected to grow 1.1% this year, leaving little funding for procurement initiatives, even those considered high priority.
Let’s look at headline news about the Samsung Galaxy Note 7’s battery and how procurement’s focus on price and cost could be relevant. Look up make vs. buy and you’ll see most decision trees have 2 main questions (is the capability in-house and is there an intellectual property risk) and a formula for calculating the “cost of make” vs. the “cost of buy.” What might the outcome of inhouse/outsource testing be if procurement’s priorities and focus were more on the attributes of becoming a trusted advisor? In 2013, Deloitte released a perspective Charting the Course – Why procurement must transform by 2020. One paragraph in that report really stuck with me:
“On many levels, “make vs. buy” influence is the ultimate test of procurement’s influence and capability because it relies on being the benchmark and market information clearinghouse, and therefore, the nexus point for all sides of the company in joint decisions. Moreover, it involves looking beyond unit cost, asking questions like “how does a ‘buy’ impact the ultimate end customer?” Further, does this step transfer risk, or actually increase it for the business? Procurement can play a part in generating the right set of questions up-front as well as coming up with creative solutions on the back-end.”
I believe influence and becoming a trusted advisor can be achieved by focusing on value, especially, through strategic relationships with suppliers.
What should procurement be focused on today to gain trust and influence?
- Total value delivery
- Innovation capture
- Improved agility
- Supplier alignment with the company’s business objectives
- Alignment with the customer demand
- Continuous improvement
- Driving supplier performance
- Integrating business systems with suppliers
- Building the short term, medium and long term strategy for the supply chain
- Building key performance metrics and quantifying value capture and delivery
As I continue to assess the current state of procurement departments across the world, I am still astonished at the number of companies that place a high priority on non-value adding transactional activity, have a lack of long term planning and focus most activities on driving price rather than reduction of true cost. There is a need to increase flexibility as product life cycles shorten and customer demands increase. The priorities of increasing productivity, efficiency and eliminating cost and waste sometimes give way to short term thinking and high transactional activity. Management should no longer accept the excuse we are too busy working on price and cost reduction to do anything else. Developing creative options and gaining trust and influence throughout the business require focus on true, value-adding priorities.
Are you wearing blinders that keep you focused solely on price and cost?