The drive for competitive advantage has never been greater. And the role that an effective procurement strategy can play in delivering that competitive advantage is increasingly understood by the Boards of organisations, small or large.
A shift from cost reduction to improving value
Historically, some procurement strategies have been focused simply on minimising cost at the expense of suppliers. However, as many contracts and relationships built on this strategy have since soured (with significant negative impacts both operationally and financially), the importance of developing long-term procurement strategies based on value and positive supplier relations has become paramount for company directors of all business sizes seeking to gain an edge.
It’s an approach we all understand in our own lives. When considering domestic purchases, for instance, we often justify spending more money up front. On clothes for example, because of its ‘price per wear’ or electronics because if you ‘buy cheap, you buy twice’. The same approach is often overlooked in business and pressure to reduce expenditure in the short term often leads to increased long-term costs and poor supplier performance.
A focus on whole-life costs
Take, for example, the purchase of a new injection moulding machine. With the rise of quality Chinese innovation, there is a realistic argument for buying from China and making an upfront saving compared to a European equivalent. However, factor in the cost of doing business in China (travel as well as translation), the availability of maintenance packages and spares, the lack of long-term quality assurance, lead times and delivery charges, and any initial cost savings can quickly pale into insignificance.
It’s why evaluating alternative options requires an assessment of cost and value over the whole life, not the Day One cost. However, a whole-life cost approach is difficult to model; many costs are ‘soft’, and they can be hard to quantify.
Procurement as enabler of change
The role of procurement is shifting rapidly. Instead of being focused purely on Day One cost reduction, procurement teams are increasingly being seen as agents of change, working across the organisation to enable real change and deliver improved value. Successful procurement teams now engage with technical teams to challenge specifications, engage the supplier market to identify innovation, work with sales to shape demand and plan delivery through working with production. So, how do procurement teams deliver on this new requirement?
Engaging early with stakeholders
Procurement teams today will work with, and bring together, all the relevant parties – from the technical and design teams, to end-users and finance. Procurement’s new role is to act as the enabler to bring these groups together, create the right specification and develop long-term thinking right at the outset.
Shaping the market
Smart procurement teams use external support or in-house category knowledge to shape the market and engage early. They use supplier input to help form the specification, including the latest innovations or value engineering opportunities. Holding supplier days, for example, is a great way to excite suppliers, to create some competitive tension and to start building early relationships.
Factoring in demand planning
Demand planning is an essential process to predict and manage whole-life costs and to deliver the optimal procurement decisions. Understanding the required volumes, peaks and troughs – and any factors that could dramatically increase or decrease demand for the service or product – is an essential component of understanding the requirement today.
Planning for on-going management
The most effective procurement teams understand that procurement is only half the battle. For the anticipated value to be realised, any contracts procured must also be flexible enough to respond to downline change. They must also be rigorously managed, using agreed performance metrics, to drive the required outcomes.
Focussing on continuous improvement
The best contracts are those that evolve. A key part of effective contract management today is the continuous search for improvement. Developing an effective, two-way relationship between supplier and buyer creates the foundation. Focussing not only on price, but on value, suppliers should have clear incentives to innovate. This approach of seeking additional value, not simply cost management, ensures more value is added (and erosion avoided) than could have been achieved by focusing on cost cutting as the main driver.
For further information on how Lifecycle can help your organisation meet the new procurement challenges, deliver reduced costs and improve value, call James Drury on 01865 340800.