September 20, 2013
More and more, we see the heads of procurement identified as the chief procurement officer (CPO) in recognition of their increasingly strategic role. How are CPOs achieving the organizational change required to deliver greater strategic value?
This is the third installment in a blog series on Procurement Transformation. Prior installments have included Procurement Transformation: Why Now? by Melissa Drew and Change Management: Addressing Issues in Procurement Transformation by Julie Floyd.
During challenging economic times, organizations quickly see that cost containment can be achieved, in part, by more efficient supply chain operations. They’re also recognizing that indirect categories can often add significant savings more quickly than attempts at driving even more efficiency from the acquisition of direct materials and the process of conversion to, and delivery out, as finished goods. Since direct spend is included in the Cost of Goods Sold (COGS), it typically has more visibility and scrutiny and is, therefore, carefully accounted for and managed. However, indirect category spend is often under-identified and under-estimated since it trickles into the various budgets of the consuming departments (e.g., Facilities, Human Resources, IT, Marketing, etc.), leaving it less visible and often unaddressed.
The first transformation step that many CPOs implement is an automated Procure-to-Pay (“P2P”) system, augmented by a more rigorous “stepped” approach to sourcing, which is often accompanied by an electronic auction tool. Unfortunately, some transformation plans stop there without taking it to the next level, which is to “upgrade” procurement’s organizational structure and skill-set.
Automated P2P tools are intended to drive efficiency in the tactical buying processes and to provide detailed, category-specific spend data to form the basis for a sourcing strategy. Sourcing events that are conducted without careful planning and collaboration with those who implement and manage the resulting agreement(s), however, can be the suppliers’ best friend. Such situations inadvertently provide suppliers with the opportunity to fragment the buying organization and subtly erode or re-negotiate deals. In extreme cases, suppliers fail to comply with the agreed pricing and service levels, which often goes unnoticed because the business is focused on its “urgent need” for the goods/services and the administrative and communication challenges it faces in implementing new source(s) of supply.
Organizations that embrace change take transformation to the next level by upgrading and repositioning the sourcing lead to the role of category manager, one who continually collaborates with the business partners that need the category’s goods/services. (Some leading-edge organizations even embed their procurement managers into the respective business teams that are consuming those categories, physically locating them with the decision-makers to foster stronger strategic partnerships.) Rather than focus on sourcing only, today’s category managers develop deep category expertise over time by monitoring internal usage and evolving business requirements. They continually profile the external market, thereby developing their own set of benchmarked pricing, service levels and knowledge of trends in innovation. This type of expertise allows these procurement professionals to develop 3-year and 5-year strategies, for each of their key categories, which align with the organization’s future objectives. Often, the long-term supplier relationships which they manage can also lead to the creation of mutual value. This is especially true in the areas of customized indirect services, such as human resources and marketing, which so often form an integral part of the organization’s overall strategy for success. New and unique ideas conceived by the buying decision-makers and delivered by expert service providers can — when carefully sourced, negotiated and contracted for usage and ownership rights — lead to future benefits in the form of added revenue streams and market differentiation for both parties. Bringing the management of critical direct goods and complex categories and services under the unified direction of the CPO can be truly transformational. This is the point at which cost savings becomes strategic value.
Shelby works closely with its clients to achieve their strategic objectives. We leveraged technology customization to enable competitive advantage for a large nationwide services firm that is highly dependent on service providers for local execution and service delivery to a broad national client base. We’re working with another key client to implement process improvements and organizational changes resulting from an in-depth study and prioritization of opportunities for improving the results of its integrated technology to optimize requisitioning, sourcing, contract management, and price compliance. We also recently helped a regional healthcare provider reduce one of its largest cost components — skilled contract labor — through targeted analysis, sourcing, and negotiation.
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Senior Consultant, Procurement Optimization
The Shelby Group