Transforming Procurement

Posted by: Amy Julian

Transformation is a buzz word in the business world today. It seems like almost every business wants to transform something; an internal process, employee engagement, how they reach consumers, or their product mix. But what differentiates real business change from a more generic step change?

A 2016 article in HBR, “What do you really mean by Business ‘Transformation’”, made a good case for a company needing to do both core operational transformational activity, as well as strategic changes to shift the core business model. Neither type of effort is easy to identify or to implement without a team that is also willing to engage.

This is where a solutions based procurement team can step in. Traditionally, procurement has been seen as order takers, masters of compliance, and hard-nosed negotiators. With this mindset, procurement should be primed to start using data and analytics to identify gaps in core processes that could drive savings or improve service levels. Today and in the future, many procurement organizations are shifting to a sourcing organization – they are focused on identifying the best suppliers to partner with. That mentality, when combined with strong relationships with their internal clients, sets the function up to bring solutions instead of process roadblocks. When the two approaches are combined - a data driven lean organization and a creative sourcing team - the results have the potential to help any business transform.

A best in class procurement department stays on top of industry knowledge. Since they are also actively involved with strategic decisions on spend, they can bring new suppliers or new technology from existing suppliers to the table, effectively leading innovation. On the core operational side, a tightly run procurement department has access to spend and usage data that can identify anomalies in the day to day operations of the business, and quickly act to bring costs back in line. And cost doesn’t have to be the only driver, contracts that take into account total cost of ownership are gaining importance. For example, in a just in time manufacturing environment, on time delivery of goods may be the single greatest indicator of a successful supplier. A strong procurement function understands the business drivers, and negotiates these points into the contract.

What does transformational procurement look like in practice? Below are 6 things to look for in a converted procurement structure:

  1. Data Transparency – A procurement department knows its spend data inside and out. This includes supplier spend, site spend, and cost modeling.
  2. Presence at Business Meetings – A sourcing manager is present and even leading meetings between the business unit and the suppliers
  3. Understand Total Cost of Ownership – Targets and annual bonuses are not solely dependent on savings, but include other organizational priorities such as cash flow, return on investment, delivery on time, or other relevant KPI’s
  4. Leading Innovation Process – Proactively partners with business units to bring new suppliers to the table that can address brand or business needs
  5. Process Improvement Ownership – As the hub for the business, procurement often sees process breakdown first. They should be able to identify and act on organization level inefficiencies around contracting, payments to suppliers, ensuring delivery of goods or services, and budgeting
  6. Budgeting & Forecasting Knowledge – with deep insight into spend data, Procurement is primed to understand how changes in the business will impact the P&L.

Citations:

https://hbr.org/2016/02/what-do-you-really-mean-by-business-transformation