First Generation Procurement Transformation

Taking procurement to the next level, part 1

Procurement Transformation is a concentrated effort to transform the focus and performance of a Procurement organization, and many firms have done this successfully at least once. However, once maturity has been reached in savings delivery, the next step for Procurement organizations to truly align themselves as strategic business partners within their enterprises is a challenge that many struggle to make. In this blog series we will first introduce and explore the difference between First and Second Generation Procurement Transformation (part 1 and 2). Later on in part 3 we will introduce an approach on how to embark on a Second Generation Procurement Transformation.

First Generation Procurement Transformation

Traditionally many organizations have treated their Procurement department as a tactical and administrative function. Amongst others, this means that the Procurement department is creating and maintaining:

  • Tools and processes to ensure your people can buy the goods and services they need in a timely manner
  • An approved supplier list (including PO exempt suppliers)
  • A supplier engagement strategy
  • True PO compliance is constantly measured and improved
  • Policy violations are identified and followed up

Procurement organizations often find that they are caught in a never-ending loop of saving goals, work/time pressure, stagnating procurement teams and all this eventually may lead to not the best service being offered towards the business partners.

Eventually the question becomes: What’s next?

Many Procurement organizations in market-leading enterprises across the world already have embarked on different types of Procurement Transformation projects in order to become a key enabler in achieving corporate objectives.

Procurement Transformation is a tried and tested method to develop a professional and high-performing Procurement organization. Companies typically get external consultants or other specialists to benchmark their starting position and develop a strategy, organizational model, policies and processes, as well as systems and capabilities to transform their Procurement organization into a proactive, value-adding business partner.

Continuous improvement, of course, is part of the answer — delivering somewhat more with somewhat less each year — but is Procurement really just a one-trick pony and is there only one path forward possible? Savings delivery (using a Sourcing strategy), unquestionably, is the foundation of any Procurement organization.

It is often said, that Procurement can deliver strategic advantage to an organization, but how many Procurement organizations today define their value proposition as anything other than supply assurance and value for money?

A good indication comes from the KPI’s used. The term “what gets measured gets managed” is valid here. While many Procurement professionals preach “value, not just cost” and focus on stakeholder management and business collaboration. They continue to measure themselves only on the traditional KPIs such as savings and a number of efficiency metrics.
While they could also consider measuring themselves in other ways, such as:

  • Innovation
  • Speed to market
  • Risk management
  • Sustainability

However, Procurement seems unwilling to measure its impact in these areas. Some organizations attempt to deal with this challenge by adding to the responsibilities of sourcing teams, others prefer to create specialist teams focused just on SRM, or sustainability, or risk. In both cases, this usually is a case of layering something new onto an organization and processes designed for sourcing, rather than thinking about if and how the overall value proposition has changed, and how everything needs to align with the new value propositions. However, to truly refocus the Procurement organization on some of the value metrics other than savings and efficiency. Procurement also needs to learn how to measure some of the other value contributions it is making. And this is a situation where one size definitely does not fit all due to the different challenges per company/region/business unit/category etc.

Some examples of different ways in which value can be quantified

Innovation: Most companies are depending for their own product innovations on the innovations/releases from their supply chain. A manufacturer for computer games may delay a new game until the relevant hardware has been released onto the market. Or the other way around where you know that your suppliers will release a certain new product which in turn encourages you to release a new product quicker than originally planned. Also here, Procurement is in a unique position to partner with key suppliers to join forces and thereby conquering market share which neither party could have achieved on their own given the resources and timeframe.

Speed to market: Procurement can make a huge impact on a company’s success by making new product launches quicker and smoother, as well as cheaper. Imagine the positive impact for a major technology company if it could bring a new cell phone model worth 1 billion euros in annual revenue into the market six months earlier. Why should the profits from that half year of additional sales not be considered a Procurement value contribution? For sure, Procurement can’t accomplish this on its own, but by leveraging its core skills of producing clear specifications, creating commercial agreements to incentivize suppliers for speed, even just by bringing alternative sources of supply into the mix, procurement can have a concrete impact on speed to market and should not be afraid to take credit for it.

Risk management: is a board-level concern for all organizations and, in a situation of multi-layered and inter-connected supply chains; third-party risk is a major challenge. Procurement, given their unique positioning, should play a vital role in mitigating this. Procurement organizations are typically very good at mitigating certain types of risk, using techniques such as establishing multiple sources of supply and inventory management. However, Procurement does not always have the knowledge or expertise to understand how the cost of risk is actually calculated and how to apply this to third party risk management. By working even closer to other departments such as Finance, Procurement must provide a very concrete and well-established way to quantify its value contribution.

Sustainability: may very well be the best example where value cannot be fully measured by a financial metric. In many cases, sustainable practices also can be financially beneficial (think of creating goodwill by replacing plastic bags with (recycled) paper bags). Unsustainable practices can damage an organization’s reputation, but more to the point the value of doing the right thing and behaving in a responsible way is that it is the right thing to do. There are several (non-financial) metrics that can help drive Procurement’s performance in the right direction. For example, suppliers’ compliance to child labor regulations, CO2 footprint of the supply chain, and so on.

In short, there are a range of value measures — some of which have been highlighted here — that procurement can use over and above the almost traditional savings, coverage and efficiency metrics. However, the challenge is not just what to measure and how to measure it, but also how to fundamentally refocus a Procurement organization on a broader set of value drivers.

But CPOs in mature Procurement organizations should also focus on the next leap forward, a second-generation Procurement organization in order to consistently meet the corporate objectives and link better to overall organization value drivers. I will discuss this more in the next part of this blog. Stay tuned!

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