How is Procurement Your Company’s Most Strategic Function?

Part 1:

Try to visualise this scene. Your R&D department has just finalised your new product design. You’re excited! The development from prototype took months. Jeff from procurement happens to walk by.

“Hey, that looks cool.” He picks up your new GPS integrated, smart phone compatible, Spotify connected, ultra slim, fully waterproof fitness watch, and rubs its smooth, sleek finish. “It’s such a shame we’re going to lose the waterproof functionality.”

“What!” You exclaim. “But that’s our core functionality!”

“Really? No-one told us that. Yeah, the supplier of the small silicone O-rings, protecting the watch from the water, has ceased production. We highlighted his company as a risk, but R&D wanted to push on with the spec he designed. We suggested an alternate supplier who was developing a new type of thermoplastic rubber, but we were told we couldn’t wait that long. I think they’re now in partnership with Fast Fitness.”

“How could this have happened! Everything’s ready to go. Our marketing campaign is centred on the waterproof functionality!”

“Hey man don’t ask me; I only work in procurement.”

The evolution of procurement

Sound familiar?

The modern business landscape is dynamic and ever changing. In order to keep the pace, procurement has had to constantly evolve and adapt to these shifting trends. Globalisation, technology, consumer demands, outsourcing, and sustainability, constantly drive change in the business environment. In parallel, procurement has shifted from a function of tactical support to one of a key strategic player.

Modern industries focus more on developing their core capabilities, with 82 % choosing to outsource activities not part of their ‘sweet spot’. The reliance on suppliers has therefore increased exponentially. As the manager of suppliers, procurement has been pivoted into a core strategic role, responsible for sourcing, maintaining, and driving quality suppliers who are innovative, trustworthy, and add value to the company.

The ‘new frontier’ of procurement is the effective management of suppliers, building meaningful, long-lasting relationships that are win-win for both parties. As the critical link between company and supplier, procurement’s strategic role cannot be underestimated.

Strategic procurement is company strategy

In ‘What is the Future of Procurement?’, KPMG (2019) outline that CEOs are looking to the procurement function to adopt a wider set of strategic responsibilities than ever before.

Strategic procurement is built around the needs of the company and supports corporate planning and value systems. In order the company to achieve its long-term goals, corporate, business, and functional levels must have their strategies aligned. This ensures that the vision is united, as everyone is on the same page.

To use a simple example: The Apple brand’s quality design is a core element of the company’s overall strategic plan and unique value proposition. However, if procurement was not aligned with this strategic vision, cheap components could be sourced to achieve cost-savings (which many companies would applaud). However, this is not part of Apple’s long-term goals and would ultimately damage their brand image.

For procurement to be strategic it should:

  1. Be focused on potential risks and opportunities that impact strategic goals.
  2. Be involved in the strategic planning process and be measured in line with these goals.
  3. Be visible, supported, and viewed as an important function in the decision-making process.

Deloitte’s (2018) ‘Global Chief Procurement Officer Survey’ finds that procurement leaders are expanding the role of procurement in the wider supply chain by improving alignment between procurement and business strategies and priorities. Yet, only one in four procurement leaders consider themselves excellent business partners contributing significant strategic value.

The journal of Strategic Change (2016) finds that strategic misalignment results in reduced market share, missed opportunities (often seized by competitors), and lower profit margins.

By including the bargaining power of suppliers as one of his five forces, Porter (1979) laid the foundations for procurement’s strategic role as the key function responsible for conducting market research, identifying supplier opportunities, leveraging negotiations, and correctly managing suppliers.

For long-term strategic goals to be achieved, the procurement function must be included in companies strategic planning processes.

Procurement skills support strategy

Changing perceptions can be a slow and difficult task. The advent of Covid-19 has awakened the world to vulnerabilities inherent within global supply chains, displaying the key strategic role procurement plays in combatting such risks. However, some companies still adhere to the traditional view of procurement as a passive, administrative, cost savings function.

Top management support is vital in driving procurement’s ability to enhance overall company strategy. As procurement operates in a dynamic business environment, management must accommodate for upskilling to allow procurement teams adapt to this rapidly changing landscape.

Yet, Deloitte (2018) finds that 51 % of procurement leaders believe that their current teams do not have sufficient levels of skills and capabilities to deliver on their procurement strategy, with an alarming 72 % of leaders spending less than 2 % of their budgets on training and development.

Companies must change their structures and perceptions to facilitate strategic procurement, otherwise its ability to achieve competitive advantage will never be realised.

 

Written by; Marie Muckley

 

 

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *