INDUSTRY INSIGHT

Playing the Procurement Game: Back to Basics

Due to growing market disruptions and greater level of digitization, businesses are operating in a very different environment today. Without a major overhaul, procurement will soon become obsolete.

In today’s high-speed digital world, where online platforms such as Amazon and Alibaba have made purchasing fast and easy, corporate procurement organizations are struggling with customer satisfaction. We’ve all grown accustomed to purchasing products with full transparency into prices, and we expect rapid delivery. And yet, corporate purchasing remains stuck in the past with highly complex, opaque processes. The result? Many chief financial officers are left wondering about the value of procurement.

So why does procurement exist, and what value does it add? In the simplest terms, procurement selects vendors, establishes payment terms, and purchases goods and services with an eye on both quality and costs. Although there is nothing wrong with these tasks, they have come to define the discipline instead of being tools to achieve a larger goal. It’s time for procurement to go back to the basics—setting aside the busy work and embracing high-value initiatives that impact the bottom line.

Enter disruptive procurement

High-tech original equipment manufacturers have gotten a head start in the telecom, automotive, and aerospace industries, where procurement organizations are designing, procuring, and outsourcing manufacturing. These organizations have gained preferential access to innovative technology in the external market, and they are orchestrating supply and demand power to drive the right supplier behavior.

“As markets get disrupted, the fundamental purpose of procurement—harnessing the power of the supplier market—is more crucial than ever.”

This kind of disruptive procurement relies on three pillars:

  • Effective strategic sourcing determines what to buy and from where through effective use of supply and demand power.
  • Supplier management ensures that what is contracted for is what is delivered and then collaborates with the supplier to bring in more supply-market expertise.
  • Orchestrating technology and processes provides a frictionless, compliance-based buying experience.

Unfortunately, many procurement organizations have abandoned these pillars, failing to track supplier performance and lacking the talent to design effective systems. Ask most users today, and they’ll say procurement’s job is to cut costs and debate about contracts while slowing down the process in the name of control. Too often, administration, rigid procedures, and complexity reign supreme at the expense of function, utility, and the ultimate needs of the business.

Trends and transformations

Political forces around the globe are influencing the business environment, including a focus on sustainability and risk mitigation along with political changes such as populism, tariffs, and trade agreements. The result is greater instability for many established businesses, competitive threats from unexpected sources, and disrupted sources of competitive advantage.

And as markets get disrupted, the fundamental purpose of procurement—harnessing the power of the supplier market—is more crucial than ever. Embracing technology and online platforms will be essential. But so far, technology’s impact on procurement has been disappointing. One global chief procurement officer (CPO) recently told us that much of this technology is still trying to solve the same spend-transparency challenges that were top-of-mind two decades ago.

Procurement functions that continue to focus on backward-looking data about regular purchases will soon become irrelevant. However, this situation will change dramatically as companies embrace innovative technology. When used properly, technology can ensure that money is being spent with the right suppliers—tied to supplier performance and according to most beneficial terms. We believe it will come about in three stages. First, there will be a disruption to the procurement process. Next, there will be a sea change in internal expectations of what good procurement looks like. Third, companies will reorient themselves to the fundamentals of procurement.

Rediscovering the fundamentals

So how can procurement respond to demands for more user-friendly approaches to buying while at the same time balancing control and transparency to protect the business from risk? Forward-thinking procurement begins by getting back to the basics: translating supply-market value into actual product value.

This will require a new operating model and more advanced capabilities. For example, shape categories that directly impact the product offer, with a focus on high-value commercial input and orchestrating supplier behaviors. For other categories, focus on user enablement and automation, recognizing that users want to purchase solutions that cut across classic categories. The categories that directly impact the product offer will vary by business and industry. Typically, all direct categories impact the product and, depending on the situation, a proportion of the indirect ones. The traditional accounting-driven direct–indirect split is not necessarily helpful.

“Forward-thinking procurement begins by getting back to the basics: translating supply-market value into actual product value.”

Forward-thinking companies are shifting the focus away from process administration, procedures, and haggling skills and instead honing three powerful capabilities:

  • Analytical skills to draw insights from data and then use those insights to fuel decisions by addressing supply and demand power
  • Emotional intelligence to influence supplier behaviors and win what the business wants by managing internal and external parties
  • Orchestration of the overall procurement engine for seamless realization of all of the above

Several moves can help forward-thinking CPOs shape the future instead of waiting to get dragged into it. Begin by embracing technology, not simply by replacing old systems with slightly better ones, but by adopting a future-proof architecture that can be extended as needed. Then, take a close look at your organization’s capabilities. Are your people analytically driven, trained in design thinking, and able to think creatively? If not, retrain them, arming them with new skills. Finally, is there a culture of experimentation and intellectual drive at your organization? Foster an environment that values working faster, smarter, and independently, according to agreed-upon principles.

About the authors:

By Stephen Easton, Partner, A.T. Kearney; Hugo Evans, Vice President, A.T. Kearney; Thomas Rings, Partner, A.T. Kearney; and Marcos Mayo, Vice President, A.T. Kearney