In most organizations, procurement is recognized as a fundamental part of business and the most effective way to maintain long-term cost control.
The procurement department is usually thought of “the ones who purchase goods and services”, but really, their function is much more important than that. They are a window into understanding what’s really going on in your every day business operations.
Ernst & Young, a business consultant and knowledge provider, maintains that there are 5 basic things that you should expect from your procurement team. If you don’t have these basics, they argue, there is a good chance that money is being left on the table, strategic business decisions may be made in isolation, or you may not be utilizing the full potential of your procurement team.
So what are these basics that your team needs to be doing? Here’s exactly what they suggest.
- Create a spend map for your entire organization (and update it quarterly).
- Balance both short and long term saving initiatives.
- Find alternative ways to gain value from suppliers (rather than always trying to simply get lower prices).
- Manage your ongoing relationships with your suppliers to make sure that you’re getting all that you can from them.
- Have a clearly defined procurement operations model and work to continually improve it.
Create a Spend Map
Most organizations do not have a spend map and rely on poor quality information including summaries of general ledger categories or spend totals by supplier.
A spend map can provide you with the basis for identifying opportunities and risks, providing the foundation for cost reduction initiatives and improve the value you receive from your suppliers.
Mapping your organization’s spending (and regularly updating that map) will give you invaluable insights which include:
- Knowing what your total spend is
- Who is spending and on what
- Which vendors supply multiple business units
- Which business units buy the same or similar goods and services
- What portion of your spend is with the core suppliers, and the total number of one–off and small value transactions suppliers
- How many transactions your organization processes and the associated administrative cost
Creating the first version of your spend map can be challenging, but in Ernst & Young’s experience, they find that the results are often shocking and can quickly help a business re-direct and re-organize spend patterns.
After you do this spend analysis, the goal is to move on to a number of secondary analyses using this information. Using the information that you’ve compiled in the spend map, ask yourself the following questions:
Balance Short & Long Term Savings
Another important challenge for the procurement team is to get the right balance between short term savings and long-term transformations.
The typical responsibility of a procurement team is to produce savings (which often occur primarily in the short term). That earns them “buy in” and support from stake holders. As a result, the short term opportunities are often pursued more actively because they’re both easier to achieve and more readily recognized by bosses and owners.
As a result, long term initiatives that focus on strategic core services and large-scale improvements often get ignored.
In Ernst & Young’s experience, they’ve found that the most successful procurement departments equally split their efforts between short term (quick win) opportunities as well as long-term initiatives that focus on strategic change. By maintaining this balance, the short term initiatives buy your department traction, while the long term initiatives show more substantial benefits and transformational changes.
Find Alternative Ways To Get Value From Suppliers
Getting your suppliers to lower their costs (and often their own margins) is always good in theory, but it’s not necessarily the best way to run a long term procurement strategy. Ernst & Young claim that too many procurement managers focus on the final dollar amount, which greatly reduces their chances of finding other ways to create value with suppliers in the long run.
Instead of looking at price as the number one target, they suggest that savings opportunities often exist by looking at sourcing in an alternate, creative way or by looking internally at your companies wants vs. needs.
To look at sourcing in an alternative way, as yourself these questions:
- Do you really need what you’re sourcing, or do you just want it?
- Is there a more appropriate type of supplier that you could source this item from (like buying through a bulk supplier instead of a distributor)?
- Are you asking your suppliers what could save them (and therefore you) money?
- Is there any way to reduce or eliminate the original need for this item?
- Is there a different way to have this delivered (like consolidating orders or using different packaging) that would reduce costs?
Ongoing Contract And Supplier Management
Too often organizations struggle with short term “transactional” issues with suppliers and forget to focus on long term patterns, goals and improvements.
Your suppliers are not just there for buy/sell transactions. Your suppliers can be utilized to help you create goals and put your long term strategic plans into place. But vendors are not psychic. They require information to be effective. If you can offer the important information, their integration into the long term demand planning process will help you realize a lot of additional value.
They can provide valuable information on the market (in the bulk oil world, they would offer insight on the recent commodity market trends) and help you plan accordingly.
Suppliers are increasingly looking for long-term commitments and win-win partnerships, so it can be beneficial for you to use your suppliers knowledge and industry insight to your advantage.
You’ll also need to manage your suppliers over time to make sure that contracts are being met and that agreed upon expectations are being lived out. That way, you’ll get as much value from them as possible.
Have A Clearly Defined Procurement Operations Model
Understanding who does what and why in your procurement department can be key to maintaining long term success.
A procurement team that knows what they’re responsible for, what the mission is, and what to do in times of crisis will function much more smoothly than a segmented team that requires hands-on direction at all times.
Building a team that is skilled and experienced will help everything run optimally. If you are stuck with an inexperienced team, figure out where their skill gaps are and work to slowly fill them in.
To make sure that you’ve covered all the basics when creating a structure for your team, think about the following topics and make sure that you’re clear on all fronts.
Editors Note: To learn more, download the eBook from Ernst & Young and check out their website.
Topics: Purchasing & Procurement
