Proxima — See the change

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Value, values and the return to growth

Ian Ingram
Apr 22, 2014 11:42:00 AM

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Ian-New

New research shows that a growing number of corporates are refocusing their procurement functions away from cost and towards strategic innovation. A sure sign that corporate management's attitudes towards procurement are shifting. (We discuss this further in our webinar). But are the smart ones just copying the companies that have always understood that this is a key source of value?

The increasing prevalence of mainstream news stories related to procurement and supply chain issues tells us three things. First, how you buy is important. Gone are the days when companies would take raw materials in through one door and push finished goods out of the other. If you want to understand a company, understand its supply chain. It’s where a lot of the financial and operational risk is – so it’s important.

Second, who you buy from (and sell to) is also very important. Stories about high street retailers selling clothes made in sweatshops have always been with us (although, sadly, they find new life again and again). But every industry – from food retail to technology – can now boast its fair share of exposés on its supply chain. The supply chain now defines company values: it doesn’t matter how insanely great your employee or customer proposition is – if you’re reliant on third parties with questionable approaches, the lowest common denominator applies.

And third? There’s a growing appreciation for just how strategic that procurement has got. That’s partly about a maturing of the industry, which has got a lot more creative; partly it’s the fact that simply trying to source the cheapest of any given product or service is, frankly, boring.

But it’s also about growth. A recent Hackett Group study showed two-thirds of global corporates prioritising revenue increases as a financial priority; 61% also cited improved margins. Of the top four business priorities, two were related to innovation of their offering or their business model.

Companies with a conventional procurement function, then, can pretty much dispense with sending them any strategy memos. Unless procurement can find ways to support innovation and help develop new markets or new lines of business, they're not only not part of the conversation – they might actually be hindering the rest of the business. (Even the UK government thinks procurement needs to be thinking strategically and driving innovation.)

Of course, most procurement functions don’t see themselves in that mould. In the Hackett study, 69% said they were keen to support innovation (nearly half of those said that was a “critical” priority for 2014). Falling down the list was “reduce and avoid purchased costs”.

Interestingly, there are still plenty of “traditional” procurement roles present in the list of more prevalent externalities affecting enterprise strategy. But they’re all based around risk – such as regulation and geopolitics – and volatility. In a globalised, specialised business ecosystem, even the core parts of the job are pretty strategic.

There’s a lot of work to be done on the ground to make this value-driven, growth oriented vision a reality. “Most notably, plans for supplier networks are moving beyond the basics of managing accounts payable, scheduling and PO processing,” explains the Hackett report. “Organisations will start using [procurement systems] in new ways, like networking with peers to share supplier risk and performance data; as a collaboration platform for sharing information, such as demand forecasts; and to identify new suppliers and market opportunities.”

Strategic sourcing is now a high or critical investment priority for 96% of corporates; programmes to drive more value from existing suppliers, meanwhile, is the only investment category in the top five to fall down the charts in 2014.

This is, above all, about mind-set. Procurement leaders who have spotted this need to deliver on value. Values and growth driven by innovation are well-placed to implement not just better systems, but the right culture – a procurement culture that creates a platform for the rest of the business to build on.

But even if you get that in place, you have to deliver. As Hackett’s report concludes: “It is through expanding its sphere of influence and better execution that procurement’s value contribution to the business will improve.” That’s the thing about sitting at the top table: there’s nowhere to hide.

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Ian Ingram

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