Procurement is a core operational function of any business. Without the ability to obtain the necessary materials, a business cannot manufacture its products.
Traditionally, procurement’s most important goal was to lower costs. However, the pace of modern business has accelerated dramatically. Today’s businesses also operate on a global landscape sourcing materials and selling products across the world. That’s forced procurement to become a digital, measurable function aligned with overall corporate priorities.
The resulting strategic elevation of the procurement function has drastically broadened its priorities. Modern procurement managers must concern themselves with far more than mere cost control.
In a nutshell, procurement is an umbrella term for the series of processes, policies and steps that an organization performs to acquire the goods and/or services it needs to operate.
The individual steps will vary, of course, from one organization to another. Managing vendors may be of great importance to a large manufacturer but of no consequence to a small SaaS product company.
Cost Control – a declining priority
Traditionally, procurement’s highest priority has been cost control and it’s still the top priority. However, its importance appears to be waning. According to a recent survey of procurement managers, the number of respondents who claimed that cost control was their top priority fell by 10 percentage points from 82% to 72%.
Obviously, procurement managers are focusing on other more strategic objectives.
Olivier Joseph, Senior Procurement Engagement Manager at Microsoft, confirms the trend: “Although cost control is still the main priority at Microsoft, it is now one of seven top metrics that are all equally important.“
Here are 5 areas with increased priority for procurement managers.
1. Corporate Social Responsibility (CSR)
Today, customers champion businesses they perceive to be ethical. Companies that commit to CSR with meaningful, consistent programs enjoy commensurate financial rewards.
Conversely, procurement scandals e.g. Nike sourcing from sweatshops spread rapidly and quickly erode trust.
Today, companies commonly accept that they are fully responsible for the products they sell from sourcing to manufacture to distribution to support. Procurement has a real opportunity to impact CSR by vetting suppliers and contractors. It must ensure they uphold the company’s values and are themselves responsible corporate citizens.
An essential first step towards impacting CSR through procurement is to align the leadership of both. It’s also important to share standards with suppliers, perhaps via a formal supplier code of conduct. That way, they understand the moral, ethical, environmental and labor standards that the company expects.
2. Supplier Relationships – real partnerships
Reliable suppliers who deliver quality goods on time are crucial. Otherwise, projects stall, product rollouts are delayed and customers are left disappointed. Missed timelines often result in investors punishing the stock price for public companies.
As a result, according to the above survey, 59% of respondents have taken measures to strengthen the quality of their supplier relationships.
According to a Zurich Insurance study, major corporations have an 85 percent chance of at least one supply disruption in the next 12 months. Supply chain issues can hinder growth even at technologically advanced companies like Adidas.
As globalization spreads out supply chains across continents, managing supplier relationships has indeed become a top procurement priority.
3. Automated transactional processes – digital data
Purchase requisitions, purchase orders, invoice approvals are all simple, transactional processes under the procurement umbrella. Far too often, these processes are manual and are based on emailing Excel documents around.
Email has many issues and hampers your operational efficiency. Yet, the most pernicious, long-term damage is that it locks up your proprietary business data.
That data sits in SharePoint repositories, document management systems, or folders. You cannot analyze it – certainly not in real-time – or build models that can learn from it and optimize operations.
Without digital data, technologies like artificial intelligence and machine learning are but a distant dream. According to Gartner, underutilization of analytics technologies and the inability to visualize data rapidly is the #1 challenge facing procurement teams at midsize organizations and a significant challenge even for the largest ones.
As a result, organizations are rapidly becoming digital and data-driven and procurement is no exception. Automating these processes and digitizing their data has quickly become one of the highest priorities.
4. Risk Mitigation
To increase profit, every business wants to buy goods and services at the lowest possible cost in the least possible time under the most favorable payment terms possible.
Apple’s Chinese suppliers outnumber US ones even though they’re riskier because the iPhone maker is able to derive enhanced value in spite of the potential for disruptions due to distance, trade wars etc.
Given these inherent risks, it’s crucial for procurement to have a comprehensive and proactive approach to risk management. Effective risk management is a planned and systematic process consisting of:
- Identifying the risks
- Assessing their likelihood and impact
- Addressing and controlling risks
- Continuously monitoring to identify new risks
In addition, as procurement processes increasingly go digital, cybersecurity risks increase commensurately. This isn’t a procurement-specific risk since automation is pervading every aspect of business. Nevertheless,
5. Talent Management
A recent DHL Research Brief entitled The Supply Chain Talent Shortage: From Gap to Crisis warns of severe talent shortages and estimates that demand for supply chain professionals exceeds supply by a ratio of 6:1 and could be as high as 9:1. The U.S. Bureau of Labor Statistics reports that jobs in logistics are estimated to grow by 26% through 2020.
DHL’s brief also explains that the most important factor is changing job requirements. The ideal employee has both tactical/operational expertise, analytical skills, strategic thinking, leadership and innovation. Of course, 58% of companies find it hard to find people with these skills.
Yet, one third of companies have taken no steps to create or feed their future talent pipeline.
Talent acquisition and retention will continue to be a major challenge and priority for procurement departments in the foreseeable future.
Changing priorities for a changing world
Procurement’s goals used to be simple – a laser focus on cost control. But, business complexity has rapidly increased thanks to globalization, social responsibility, digitization and talent shortages. Goals have changed in response.
When considering procurement’s priorities, organizations need to think beyond the bottom line. They need to take a step back and consider how these new factors interact with each other to affect priorities.
Global supply chains are too advantageous to ignore yet inherently carry greater risk. As a result, procurement departments must prioritize harmonious supplier relationships to minimize disruptions in production.
Customers increasingly scrutinize labor practices, sustainability, and environmental impact. They expect companies to take responsibility for all aspects of a product including the business practices of their suppliers. Procurement leads the way.
Transactional procurement processes are among the most common everyday activities in a typical organization. Automating these is a must both for efficiency but also to set the stage for future technologies that rely on digital data.
Finally, none of this is possible without prioritizing talent. The talent wars are real and shortages are likely to continue for the foreseeable future. Acquiring and retaining the best employees is an organizational priority and procurement is no exception.