Taking Procurement Organization To The Next Level
Helping their companies gain cost competitive advantage over their competitors is what is expected of a truly efficient Procurement Organization. For Procurement Organization to truly become strategic arm of their companies, some of the following is expected from them:
- Continuous Cost Reduction: They should be more efficient than their competitors in terms of buying goods and services, their rates should be more efficient than their competitors. And this should improve year on year. Along with cost efficiency the quality should also improve and the evaluation is more on Total Cost of Ownership and not only about price.
- All Tools and Systems in Place: They should have right kinds of tools for procure to pay process, this includes tools like Supplier Relationship Management, Contract Management, Sourcing (eRFX), Auction Event Management Tools, and Spend Tools among others that may be required depending on the size and type of an organization.
- Ensuring Full Utilization of All Tools: Assuming that if all the tools are in place, then it also becomes important to ensure these tools are fully configured and used. Probably some of them have very high license and ongoing cost, so then it is important that these tools are properly utilized. Some of the common examples are Spend tool and Auction tools, as per our research these are the most underutilized systems. In most of the firms it has been noticed that the taxonomy is rarely reviewed, in fact this is an exercise that should be religiously conducted every year. The other example is Auction tool, firms should explore and adopt the concept of online reverse auction as a strategy for negotiation.
- Insights from the Tool should be used to Prepare Implementation Plan: Once these tools are adopted the next step ideally is to interpret the insights provided by these tools, example year on year the management should keep a track of the changes in spend. So as to be prepared with their own response to the changes. It is highly possible that the focus categories have changed or probably there is shift in the product lines or brands.
- Increasing spend under management: As is true with most of the organization and even mature procurement organizations, not all spend is under their management. In-fact during one of the surveys the number was estimated as only 60%. So the question is how is rest of the Spend sourced and how is it managed. Of course the answer is the user departments do it on their own and in most cases the procurement organization are asked to perform the transactional part like PO generation, Invoice payment etc. The obvious disadvantage is inefficient sourcing, in terms of price as well as quality. The only way out is to convince the user departments and to talk to them about the benefits of adopting best sourcing practices. Some of the common categories which are not under management are spend related to R&D, Legal, Advertising among others. One of the important insight the spend tool should provide is to identify what all is not under management and accordingly implementation plan should be prepared to increase spend under management every year.
- Sourcing Roadmap / Implementation Plan: The other insight that should flow from various tools is identification of categories for sourcing, preparation of sourcing roadmap and implementation plan. This plan should list down all the categories that will be sourced for the next year, this can be divided in two half yearly plans. This plan should be detailed enough to justify the reason for including the category and also present insights about the category with information like cost drivers, index that can be linked, major players etc. In addition the plan should also give projected savings that can be achieved and the sourcing strategy that should be adopted to achieve the desire results.
- Exploring Low Cost Country Sourcing Opportunities: When the sourcing plan is being prepared, the focus is to identify categories, irrespective of their supplier base. As part of preparing LCCS (Low Cost Country Sourcing) strategy, deliberate effort is aimed at identifying categories for which huge savings can be achieved if low cost countries like India, China, Eastern European countries are explored. Identifying categories for LCCS strategy is an important step towards achieving efficiency.
- Tracking and Improving on CSR Goals – Supplier Diversity & Sustainable Procurement: The core function of Procurement Organization is to achieve Total Cost of Ownership (TCO) reduction on an ongoing basis. In addition to this they also have CSR goals to achieve, as these goals help with increasing respect for their brands. Supplier Diversity and Sustainable Procurement goals should be pursued and improvement in this area can be achieved.
- Identifying Areas that can be outsourced: To achieve the goals of a lean and efficient organization the most obvious area is the transactional activity involved in pay to procure process. In addition the cutting edge organization should also focus on identifying newer areas like Spend Analysis, Strategic Sourcing and Procurement Intelligence. The advantage of outsourced procurement services is not limited to cost advantage, the key impact is because of the resources availability. High skill resources are easily available in countries like India.
- Being Proactive and Forecasting Changes with Strong Focus on Category Management: For Procurement Organizations to succeed it is very important for them to keep track of changes happening and planned at the company level and product level. This will allow them to accordingly recalibrate and focus their efforts. Category Managers can play a very crucial role as they can act as eyes and ears to listen to the changes happening on the ground at the category level. They can also focus on understanding the ever changing needs of the client group. This is critical as client group buy in is required to succeed in achieving all the other objectives.
- Preparing SMART Goals: This last point is all about preparing SMART goals for the procurement organization.
S – Specific
M – Measurable
A – Attainable
R – Realistic
T – Timely
The key is to focus on quantifying the “As is State” and setting the “Target”. Some of the KPI’s of an ideal procurement organizations are:
- Savings, this can be in form of % of the total spend under management or can be in terms of absolute $ numbers.
- CSR goals (% of spend through supplier diversity vendors and sustainable procurement initiatives).
- Increase in spend under management, this can be form of % of the overall spend or can be in form of absolute $ numbers.
- Improvement in Quality of goods and services procured, the user departments can be asked to rate on an annual basis.
- Improvement in Delivery Time, the user department can be asked to rate on an annual basis.
- Overall performance of Procurement Organization as rated by user departments, measured on parameters like value addition, proactive and innovative insights, quality of deliverables etc.
Leverage Our Procurement Services & Procurement KPI Dashboard
We at EmpoweringCPO with vast pool of experience, we have plenty of case studies to elaborate on how we were able to transform procurement organization of our clients. In addition to our services we have been leveraging cutting edge technologies to develop various procurement dashboards and tools for our clients. Our focus on procurement intelligence and procurement analytics have been our two key ingredients to achieve successful results.
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