Thursday 24th Aug 2017 - Logistics & Supply Chain

Procurement under pressure

Procurement has faced a number of heavy pressures over the past few years. Alexandra Leonards explores how the profession is responding to these new challenges, and the future for the sector.

This article first appeared in Logistics & Supply Chain, October 2016.

Procurement is becoming more tactical, inclusive and technology driven than ever before – but it has suffered significantly in recent years. Multi-faceted challenges are being pushed to the forefront by new trends, stimulated by the changing nature of the societies we live in today.

These pressures are in part, at least, the result of market trends, and vice versa. Handling both sides, and identifying where the problems stem, can be a challenge in itself.

Paul Smith, executive director at procurement specialist YPO, says that there are five major pressures currently faced by the profession. The first is the need to manage risk in increasingly complex globalised supply chains. Another is ensuring that technology strategies are delivering value and flexibility.

An additional challenge is the pressure for procurement professionals to drive competitive advantage from strategic suppliers. As well as this, procurement must attempt to manage these key strategic suppliers, who have more power as business processes become increasingly outsourced. The final challenge is attracting and retaining talented staff in such a competitive marketplace.

Oxford Economics, the forecasting and analysis company, describes the future of procurement as a ‘work in process’. In its recent report and survey ‘The Future of Procurement: One survey, Two perspectives’, it says that the profession has witnessed some big changes in the last few years. Despite these changes, the company says that procurement remains ‘quite recognisable to anyone who worked in the field a decade ago’.

But there is definitely a palpable shift towards a new technology culture in the business. This is one change that all those working in procurement, and those that know it well, will have certainly come across. Smith describes the developments in technology as ‘unprecedented’ – and they show no signs of stopping.

“Technology continues to accelerate such that it has become a challenge just to keep abreast of new products and software which will have an impact on your business,” he says.

After e-procurement and e-sourcing company Wax Digital commissioned a survey of 100 procurement professionals, it concluded that the sector is ‘embracing new technologies’ and that its professionals are ‘redefining their skills sets to become a more strategic business function’.

70 per cent of those surveyed for the research see procurement technology as a vital innovation, and at the same time, a ’traditional process efficiency’. 47 per cent feel that introducing technology or processes to improve collaboration in procurement is an ‘innovation priority’.

The company says that many procurement professionals are seeking innovation in contract lifecycle management and purchase-to-pay software – around half of all the respondents said they are planning to implement one of these technologies.

However, according to Smith, technology is moving beyond purchase-to-pay software.

“From a technology perspective everything is moving to the cloud,” he says. “This is a more significant step than just being a change in the location of a few servers, as business systems and processes move to the cloud it will become easier for companies to collaborate successfully and quickly.”

At YPO, it is seeing traditional procurement systems like e-sourcing and P2P systems being replaced by cloud-based solutions.

“These cloud based solutions tend to be easier to deploy, easier to upgrade and have a number of collaboration features built in,” says Smith. “However, we see real opportunities for supplier collaboration to be enabled in new and innovative ways in systems designed for the purpose.”

Daniel Ball, director at Wax Digital, says that procurement is beginning to recognise that innovation can spearhead the use of new technology and in turn transform traditional buying practices.

“To become real innovators, procurement professionals must nurture the correct set of new skills and seek to break ground in their approach to technology. That’s the challenge ahead,” he says.

Data

Like the many other arms of the logistics and supply chain industry, procurement is trying to seize the benefits of data driven strategies.

However, it is no different to the hundreds of other industries currently struggling to harness the data practically and efficiently.

“Data is hugely important to every part of a business and procurement and supply chain is no different,” says Smith. “In the past, it may have been that getting the data was the problem.

“Increasingly the problem is handling and interpreting the data.”

Smith says that while we live in an era of unprecedented generation of data, it is gathered across the supply chain and becoming more and more available and accessible to buyers.

“ However, this does not mean that better decisions are being made,” he says. “We generally don’t need more data we just need to think about what the data means and what we should be doing about it.”

Global supply chains are becoming more and more intricate, competitive and often tenuous. This, according to Smith, is prompting more focus on risk management as well as strategic sourcing to alleviate risks.

“Similarly, we are seeing a continuation of the trend for businesses to choose strategic suppliers to deliver core business functions and therefore procurement departments challenged to manage fewer larger suppliers with increasing strategic impact,” he says.

Procurement is certainly becoming more strategic and collaborative. According to the Oxford Economics report, practitioners and executives are beginning to find that data is being use for strategic decision-making across a business.

So, it seems that more technology and collaboration is on the horizon for procurement. But what is the wider landscape going to look like, in say, ten years?

According to the Oxford Economics survey, the larger question of where procurement is headed on an organisational level prompts a split answer between executives and practitioners. The research demonstrates that half of all practitioners believe the procurement function will shrink in head count and responsibilities over the next decade.

However, this perspective was not shared by procurement executives. Only 37 per cent felt that procurement would dwindle over the next ten years. They were more positive about the prospect of procurement having an ‘independent function of strategic importance’ in the coming years. Executives predict a more important role, and at worst stability, over the next decade.

Oxford Economics say that there is room for more than one correct prediction when it comes to looking ahead, because procurement is ‘unlikely to become a monoculture any time soon.’

“It’s going to continue to bifurcate,” says Mike Merlin, vice president, procurement at casino-industry heavyweight Las Vegas Sands Corp, in the survey. “You’re going to have some companies that are going to continue to evolve and other companies that frankly will just keep cutting the purchase orders.”

According to the report, for those sectors that put a big pressure on procured costs, including industries like manufacturing, there will be an even bigger role available for procurement. It says that companies that ‘ skimp on training and development for the procurement team’ because of an apparent lack of need or resources, will come a cropper when they ‘end up with lower-profile and less capable procurement shops’.

The report also says that the future may depend on whether or not corporate leadership and the business units ‘perceive value in making the function more strategic’. In other words, executives becoming more political in their strategy to ‘make sure they get their due’.

Brexit

The UK’s referendum decision to leave the European Union will clearly have implications for sourcing and procurement sector.

For procurement, the decision came as a shock. And a disappointment. A poll by 4C Associates, the management consultancy specialising in procurement, surveyed 500 global procurement professionals.

It found that 79.5 per cent said they would rather stay a part of the EU, while 78.6 per cent said they think the procurement industry would be a harder to work in outside of the EU. And 98 per cent said that leaving the EU would have a negative impact on procurement career opportunities.

“What was clear both from our poll and from conversations we have been having on a daily basis with clients and other procurement professionals is that leaving the EU presents new and very unknown changes to business matters and it is likely that procurement functions within business will certainly see differences,” says Milan Panchmatia, managing partner at 4C Associates.

“Brexit will be the beginning of a long and unclear process and certainly not the end. It provides the possibility for the UK to run its own economy more closely in line with its own national interest. But it does not guarantee success.”

Alejandro Alvarez, director at consulting group Ayming, says that following the decision, organisations and the EU need to plan ahead.

“Over the next two years, as the terms of Brexit are negotiated and clarified, organisations really need to conduct a “Brexit health check” with a clearly defined road map of action to mitigate potential risks and capitalise on any opportunities that may emerge,” he says.

He says that a Brexit health check across procurement and supply chain should include a number of things. These include: assessing the implications of Brexit across key criteria (eg supply chain risk/opportunities, commercial risks/opportunities, etc.) identifying potential opportunities across key categories and supplier agreements (eg due to de-regulation), developing and rolling out strategies to mitigate potential risks (eg identify alternative supply sources, put in place SRM strategies to manoeuvre around Brexit), supporting the organisation to ensure the right skills and capabilities are in place and providing specific subject matter expertise.

“It is a challenging period, but this is the time for procurement and supply chain functions to demonstrate why they’ve earned a seat at the table and continue to deliver value to their organisations,” says Alvarez. “The best procurement leaders will grasp the opportunity to make a difference.”

Procurement strategies to boost the bottom line

The parent company of truck-makers Scania and Man, Volkswagen Truck & Bus, says it has been saving €200 million annually in procurement synergies since it reorganised its operation on a cross-divisional basis.

“The commercial vehicle brands have already increased their collaboration significantly. Volkswagen Truck & Bus’s matrix organisation is paying off as planned: areas such as development, finance, HR, or procurement are now organise as cross-divisional functions,” says the company. “Synergies in procurement in particular have by now saved around €200 million per annum. But this is not the only area where we can see progress: in June, employees of the holding relocated to the new company headquarters in Braunschweig.”

The Tungsten Network has said that smarter procurement could save the UK’s small and medium sized businesses £106 billion.

Research from the company found that of 1,000 business decision makers asked, 28 per cent felt they could save between £5,000 and £20,000, while 15 per cent said they could save up to £50,000.

The figures show that, on average, each UK SME could save around £20,000 annually, which when multiplied across the whole of the UK’s 5.4 million SMEs, would save around £106 billion.

“If British SMEs could realise even a small percentage of the estimated savings identified in the report, profitability would soar and working capital as well as cash flow would be significantly improved, allowing businesses to be more agile and flexible,” says Richard Hurwitz, CEO, Tungsten Network. “With a clear procurement strategy, the potential savings are considerable and this research just highlights the value of having good market intelligence.”

He says that smarter procurement could lead to small and medium sized businesses investing more money back into the business.

“So they are prepared for whatever opportunities or risks may come their way,” he says. “In an age where finance can be hard to come by, bringing efficiencies to the procure-to-pay work stream can be a value enhancing initiative. As SMEs make up 99.9 per cent of all private sector businesses in the UK, the impact on the economy would be considerable.”

Putting the focus on total cost of ownership

According to research by Fleet Operations, the fleet management company, only 11 per cent of businesses take total cost of ownership (TCO) into consideration when procuring their vehicles.

“Given the number of businesses that we talk to about the importance of using TCO, these findings were very surprising and suggest many companies may be incurring unnecessary fleet costs,” says CEO Ross Jackson.

“Although headline prices must be taken into account, TCO offers the most complete and meaningful evaluation for selecting fleet vehicles.

“This calculation includes not only leasing and purchasing costs but all real-life costs over the period vehicles are retained – from depreciation, fuel, insurance and maintenance to interest, tax and employers NI.”

The research found that 46 per cent of those surveyed were unaware of the correct formula to calculate the TCO of a vehicle. At the same time, 26 per cent of have seen lease costs increase over the last year. Even still, 38 per cent of those surveyed that do lease their vehicles do so via a solitary supplier.

“Lease costs can have a considerable influence on TCO but rising prices can be mitigated through competitive, multi-supplier, procurement practices,” says Jackson. “Eye-catching deals on specific makes and models can lure companies, but a preferred sole supplier is unlikely to offer the best deals for all vehicles.

“Significant savings can be realised by searching the market for the best price on every vehicle. Although this can prove labour-intensive, it can be cost-effectively outsourced to a fleet management specialist.”

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