Procurement – Why Beat a Dead Horse – A radical overhaul is needed, or risk being swept away.

Procurement – Why Beat a Dead Horse?
A radical overhaul is needed, or risk being swept away

Georg Christopher Schweiger

CFO | Jun 22, 2024

In tougher economic climates and with rising pressure on cost savings, the corporate bargaining power has shifted once again back to procurement departments. Please do not get me wrong; the procurement function has historically created value for various reasons and even rebranded itself as “value engineering” to obtain its own standing. However, this justification has been short-lived. Efforts to streamline and automate corporate buying have created yet another organizational silo. This new silo now encompasses many functions from within the murky world of matrix organization, including purchasing, warehousing and logistics, quality control, information technology, risk management, legal, and compliance, each adding their own wish list to an increasingly toxic process. Even worse, this unholy alliance has developed into a corporate serpent which kills any transformation efforts from the outset.

We are now left with a business function so bogged down with bureaucracy and inefficiencies that it hardly serves any purpose. Lack of expertise, capabilities, and empowerment exacerbate the plight of this function. It unleashes complex, multi-headed requests for information (RFI) and requests for proposals (RFPs) on unsuspecting suppliers, potentially undermining well intended sustainability efforts with a single blow.

With corporate governance here to stay, particularly for large and listed companies, the question arises: “What efforts can be introduced to bring procurement back to its value-adding roots?

1. Leverage Technology

This is almost a no-brainer. The rapid advancement of technology and the availability of data, analytics, and insights can help set up, launch, and monitor procurement efforts with ease. Technology can also assist in realigning the entire process to focus more on identifying potential risks and suggesting related mitigation efforts. As highlighted by The Hackett Group (Source: The Hackett Group 2024 Procurement Agenda and Key Issues Study) digital transformation and modernization are among the top priorities for procurement in 2024, which can significantly enhance efficiency and effectiveness within a short period of time.

2. Business-Driven Process

Ownership of procurement efforts should start and end with business departments that carry key performance indicators, ideally profit and loss account responsibility. Revenue generation is the final step of any value generation process, making every other organizational unit, including senior management, subservient to this effort. Only with expertise from key product/ service operations can a procurement effort truly fulfill business needs.

Business-Driven Process

Addressing these needs and solving precise problems will almost automatically shift procurement assessment away from focusing solely on the lowest price. Exceptions, such as commodity products, confirming the rule.

3. Return on Procurement

The typical cost of a procurement effort can vary considerably between organizations. Whilst precise numbers are difficult to obtain and compare, it can be safely assumed that the cost for preparing a complex RFP can easily reach $25,000, and by the time the procurement is completed, the entire RFP costs will have easily doubled or even tripled.

This means that with a price span of, say 10%, the procurement volume must amount to at least $0.5M before the effort can generate any Return on Procurement, i.e., achieving a cost saving higher than $50,000 in total RFP efforts. Therefore, why not limit RFP/ tender efforts to purchases exceeding $250,000? For a lower band down to $50,000, you may create a highly simplified format, granting empowerment for low volume efforts to one or two senior executives.

4. Corporate Culture

Improvement efforts start with senior management. Clear roles and responsibilities, coupled with transparency and accountability, are the hallmarks of good governance, decision-making, overcoming resistance to change, and driving innovation. Operating in a highly regulated environment cannot serve as an excuse; it just raises the bar for knowledge and expertise, as the same competitive forces are at play. Procurement, again, can be no exception.

Corporate Culture

5. The Hackett Group’s 2024 Procurement Priorities

The Hackett Group has identified several key priorities for procurement in 2024, emphasizing the need to improve spend cost reduction, ensure supply continuity, and combat inflationary price increases. Acting as a strategic business advisor and transforming the operating model are also critical. Additionally, there is a focus on digital transformation and modernization, strengthening third-party risk management, improving analytics and insights, embedding sustainability, and enhancing procurement agility.

Procurement’s workload is predicted to increase by 8% in 2024, with only modest increases in headcount and operating budget. Vast productivity and efficiency gaps highlight the need for significant improvements across the entire organization. The time for radical change has come and with procurement sweeping in front of their own door first.

6. Generative AI in Procurement

Generative AI is still in the exploratory stage for many organizations but with related funding expected to increase throughout 2024. Procurement teams should continue to assess and invest in early AI stages of development to realize true and lasting improvements.

The time has come to replace outdated buying processes with smart decision-making and to work with handpicked vendors chosen on merit rather than size or price. Stop wasting time on a toxic and convoluted modi operandi with highly questionable added value. Last but not least, what is the point of choosing the cheapest vendor when the execution of the project ultimately fails and blame starts to fly?

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