How procurement can add value and reduces costs

How much value evaporates as the ink dries on a contract?

All too often, getting to a 'deal' with a vendor is the primary function of the Procurement team. Even then, in too many organisations, the Procurement team is often involved at a late stage in the buying cycle (when vendors and product or service specifications have already been decided) and then have to negotiate around price and contract terms.

Where procurement teams have targets they are nearly always focused on cost savings and in unsophisticated organisations that means price!Once the often intense activity of an RFP process is over it is time for the vendor to actually deliver and that is when the potential to lose value really starts!

Most lost value goes unnoticed, so long as the vendor does a 'reasonable' job. Whether perceptible or not lost value manifests itself in a number of ways. Three typical ones are:

  1. Steady increase in spend over time with no change to the original scope
  2. A failure by the vendor to meet expectations
  3. A generally adversarial relationship with a mutual lack of trust.

Progressive orgainsations are realising that this situation has a three step remedy:

1. Give procurement an appropriate remit:

Procurement can add much more value if treated as an internal business partner. Often, involving procurement much earlier in a decision process pays dividends. Good procurement functions can take business needs and match them to market capability in order to secure effective supply that represents best value in terms of cost and quality.

2. Right people in the right roles:

Traditionally procurement was about hard-nosed negotiation and tactical problem solving. However, procurement will deliver more if a broader range of skills are employed. The ability to manage relationships inside the organisation and with vendors is key. There is also a need to understand that different supply markets need different tactics and skills to extract the most value. In some areas, fierce competition and keen market prices mean that a traditional 'trader' approach is right, while in other areas the ability to develop and nurture partnering approaches is more appropriate.

3. Effective technology and good management information:

Many organisations don't actually know who spends what with whom. Still more organisations have little objective evidence about how well, or poorly, vendors are performing. Strong procurement functions have the ability to analyse spend and act appropriately to manage cost and increase profitability. Effective vendor management ensures that quality, delivery and cost are controlled as well as forming a basis for vendor management, future selection and to underpin continuous improvement activity.All of this adds up to the ability to manage spend, contract and vendor relationship through and beyond the any contract term.

In summary:

An investment in procurement has a very clear return. Most organisations invest in other activities that are critical to customer satisfaction, increasing market share, making sales or improving profitability. However, many of them don't realise the potential they have to impact all of these by investing in Procurement. Every £,$,Euro saved on third party spend goes straight to the bottom line.

If any of the issues above seem a little too familiar to you, maybe you should speak to us at Change Associates - we can help!