Procurement Learning Centre
Tips and tricks to take your procurement to the next level.
The New Currency for Procurement
The function of procurement as a whole is now more strategic-based than ever before. It is seen that now, it requires more collaborative efforts and it also needs the procurement executives to do more with much less resources. However, this is balanced out with the help of newer and more advanced technology.
According to Accenture’s article, Procurement’s Next Frontier, the value delivered by the ideal procurement organization will assume a much broader meaning. Although the traditional cost savings will continue to be valuable, the next generation of procurement organizations will be measured in broad terms of how procurement aligns to the company’s key performance i.e. EBITDA (earnings before interest, taxes, depreciation and amortization), reduction in functional budget, risk mitigation, supplier innovation, and gross profitability, among others.
The Financial Impact
Further insight retrieved from The Chief Procurement Officer Study by the IBM Institute of Business Value (IBV) 2013, which surveyed 1,128 CPOs (Chief Procurement Officers), from organizations with annual revenue in excess of US$1billion. This study found that top performing procurement organizations report profit margins of 15 per cent higher than the average company, and 22 per cent higher margins than companies with lower performance procurement organizations. With all these compelling factors, many companies have also embarked on their trails to seek the new currency to measure procurement performance.
For many procurement executives, it is important to focus activities that have a positive impact on business variables, such as productivity, profitability, quality, and products and services time to market. These variables capture the essence of group performance year-on-year.
The industry sector leverages on traditional procurement pillars i.e. order management, category contract, strategic sourcing etc, together with new technology on demand shaping, spend management and partnering with finance controlling to enhance business profitability.
With the respective stakeholders, the procurement teams must host dialogue-rich discussions to solve business concerns and guide them through the sourcing process. Only then can organizations operate as smart buyers and provide guidance to the selected strategic suppliers to be a resourceful seller. This has to be a more holistic relationship as it is a mutually beneficial relationship for all parties involved.
The “As Is” metric of today’s procurement performance forms the baseline for the “To Be” future model using six-sigma principles. The cost saving measurement includes both cost optimization and cost avoidance. Cost avoidance is avoided spending, and have minimal impact to profitability. If you ask your finance controller how you fare with cost avoidance, he or she would say that you have not saved anything.
Figure 1. Cost Saving isn’t savings to a finance controller unless the saving methodology is in sync with Finance.
Hence, it is key to focus on cost optimization and partner it with suppliers to improve the value contribution to business. Procurement should never relentlessly pursue cost optimisation at the expense of business value.
Our reputation isn’t measured on cost alone. The sooner we realize the perceived price value of our products or services in the market that we are in, the earlier we can advise businesses to anticipate and sell the products and services to the market acceptance level, and enhance business profitability by not discounting forsake of revenue.
Learning from the Fallen
Eastman Kodak Co. filed for Chapter 11 bankruptcy in January 2012. This is a company that played an important part in the lives of millions of people for more than 130 years through the famous “Kodak moment”. The market changes came very swiftly. In the span of just seven years, from 2005 to 2012, the company lost half its revenue. Although managing cost is critical in above mentioned situation, it is more important for procurement to play the advisory role to be advisory role to business earlier, and shape the demand.
Today, in some top performing procurement organisations, procurement finds itself as a creative agency to drive the right marketing question.
In an article by KPMG, procurement is said to have reinvented itself. Procurement no longer exists in its previous form. It is now structured as an internal agency; it holds a key role in developing new business and finance models for the company, which is also known as the creative agency linking the business to the supply based stakeholders.
A study from procurement leaders and respondents reports that, on average, it takes 2.4 years to complete a restructure, and around one-third (30 percent) of procurement staff’s available time is absorbed by transformation.
Therefore, it is imperative that all procurement leaders take actions now, and embark on the new currency journey. Most importantly, the procurement executives should share their stories and experiences with the industry, and create a new chapter for the procurement industry in due time.
Try ThunderQuote today to bring your procurement to the next level. Sign up now for a quick demo from our team.
About the Author
Michael Koh is the Head of Strategic Sourcing Technology, Asia Pacific, Dimension Data, A Nippon Telegraph and Telephone corporation Group Company. Prior to his role, Michael served as the Head of Procurement, Asia Pacific, T-Systems, Deutsche Telekom Group Company and Schneider Electric ITB. Michael started his procurement career with Hewlett Packard, held supplier quality management and supply chain roles with Motorola and Dell.
From 2016 onwards, he has joined non-profit organizations i.e. Supply Chain Asia, Association for International Procurement Technology and Standards, Nanyang Technology University Trade and Industry Alumni Association, to create awareness and training to the procurement professional by leveraging technology advancement. Michael is a certified Green Belt by Dell. He was awarded the Supply Chain Asia Award for Technology Sector in 2015. Michael holds a Master’s degree in Materials Engineering sponsored by National Science and Technology Board, preceding agency of A*Star, and Nanyang Technological University.