Introduction to procurement
[straight from a procurement consultancy]
Back in 2017, Forbes magazine was predicting that procurement would be one of the hottest jobs of the decade. Were they right? Well today, despite advances in AI and automation which were meant to reduce dependency on humans, over one million people work in procurement across the UK, US, and EU. And the number of procurement consultancy businesses is growing every day.
So why is procurement so important? Most businesses depend upon suppliers. In fact, the work that an average business does with its suppliers accounts for 70% of the total revenue. That’s right, our research found that for every pound or dollar you make, 70% of it is invested back in the supply chain. This is because in a specialized and global economy someone else is often better placed than you to do something, or provide something. What was once a paycheck is now an invoice.
And so the procurement role is born to get the maximum value from all that money spent. Conventionally that means sourcing and supplier management – ensuring that the right suppliers are chosen to do the right things and that the cost/process of finding them, contracting with them, buying from them, and managing the relationship is as efficient, low cost, value-adding and pain-free as possible.
How can procurement add value?
There are lots of ways that procurement can and should add value to that 70% of revenue. A few of the more obvious answers might be:
- Cost optimization – ensuring best value for the money you spend
- Spend visibility – creating transparency of supplier spend and data
- Risk Management – effective contracts and contract management
- Process optimization – using tech and tools to make it easy to buy
- Innovation – bringing in (to a business) new ideas from suppliers
The reality is that every customer of procurement may have a distinct slant on what “value” means.
For a full list of benefits, browse through our service offerings here.
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Read on to explore:
- What does procurement mean?
- What are the benefits of good procurement?
- Our ten tips for an effective procurement process?
- Why do you need a procurement strategy?
- Consequences of poor procurement practices
- What are procurement categories?
- Can procurement be outsourced?
- How can Proxima help?
What does procurement mean?
noun: the action of obtaining something
Procurement is often referred to as the process of buying something, but it’s actually bigger than just buying things. The term commonly encapsulates a number of activities within the “source to pay process”.
Across the world, the scope of a procurement function might vary, according to the organization, and its internal terminology. Sometimes it’s just the buying, sometimes it includes payments, sometimes it excludes supplier management, but sometimes it is end-to-end.
The reality is that the end-to-end process happens to some degree in every company. Just not always in the same department. And so when talking about procurement you may also hear a variety of nomenclature such as purchasing, P2P (procure to pay), S2C (Source to contract), S2P (Source to Pay), Vendor Management, Supplier Management, SRM (Supplier Relationship Management, Sourcing, Category Management, Commercial.
These are all terms that are commonly used to describe all or parts of a procurement function, and there are plenty more. If it involves the commercial aspects of working with a third party, and it’s not sales, there’s a good chance it is procurement.
If you’re unsure of how to improve your procurement function, reach out to one of our specialists who will help guide you on your procurement journey.
What are the benefits of good procurement?
The benefits of good procurement are fairly obvious because you can equate it to how you spend your own money. Every year you have a finite amount of money to spend, and a number of things that you need to spend it on, as well as things that you want to spend it on. Across the year there will be bargains, missed opportunities, and bad purchases. But if you have got a strong procurement process in place, your money should go further; you’ll get what you need, and more of what you want (and maybe even save a bit).
Now, look at that in the corporate context. Corporates have lots of basic needs in order to operate successfully, but they are also constantly investing to evolve and grow. A good procurement strategy helps them to spend their money wisely and well. That might mean things like:
- Cost optimization – Getting more for less or more for the same
- Supplier management – Changing specifications when suppliers can offer better/ different
- Risk management – Striking the right balance between risk, cost, quality, speed
- Supply innovation – Bringing innovation from supply markets
- Budget management -Being able to advise on how to spend budgets and creating commercial plans
And of course doing it in a way that suits customers and suppliers, both in terms of the tech experience (mostly for buying and managing) and the human touch. Whether it is an increase in dollars saved, happier internal customers, a technology solution that fits your business needs, or a major business transformation – when done right, a good procurement process and strategy can be the key to unlocking unrealized value in an organization and play a huge role in value creation.
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Why do you need a procurement strategy?
Who do you spend your money with today? Why? And how are you going to spend it next?
Which suppliers are you overpaying with? Which markets are competitive and disruptive? Where are there emerging technology solutions? Where can suppliers improve business and customer outcomes?
If you are asking yourself any of these questions, then maybe you need to update your procurement strategy.
We recently published a report with unique insights on the challenges CPOs predict for 2021. Four procurement leaders spoke about looking forward to 2021 and what is in store as they seek to rebuild and grow their businesses and department over the next 12 months… Download your free copy.
What is a procurement strategy?
A procurement strategy starts with your business goals, and how suppliers (the things that you buy) can best be used to achieve them, and finally how the procurement function can best be staffed, tooled, and skilled to make that happen.
But when you hear the words procurement, and strategy, it can sound frightening. It is important to understand that the overarching strategy will create the pathway for the other, more focussed strategies that make it a reality. If you need assistance in defining your strategy, reach out to a procurement consultant for expert advice.
Some procurement strategy examples include:
Focuses on the function and the people, process, and technology that make it. Today’s operating models are built back from business objectives and corresponding (internal/ external) customer needs. They will usually focus on the required people, process, technology, and knowledge, but also be geared to design principles important to the business and its customers like sustainability, cost reduction, diversity, innovation, etc.
Is a strategy geared towards a product or services grouping, or category. This could be something like MRO, Plastics, Cloud Computing, Temporary staff, etc. A category strategy seeks to produce a spending plan that maps market dynamics and supplier capabilities to business objectives and design principles.
Is usually reserved for specific strategic suppliers to the business and may be geared towards rolling out a specific service or improving the performance of a supplier.
Is focused on an approach to buying something. IT takes a business need and documents a way to procure, taking into account the business use case, market capability, dynamics, and current commercial practices, for example.
There are other types of strategies that may be in play across the operating model such as a people strategy or a digital strategy as key programs seek to make their mark.
Do you have the right skills in-house to deliver your procurement strategy or do you need a procurement consultancy? Read our article here to find out.
Consequences of poor procurement practices
If you have a poor procurement framework, process, or strategy you will waste money. That may manifest itself in a few ways:
- You don’t know/ test market pricing
- You lose ground in a negotiation vs the better skilled/ tooled sales professional
- The cost of buying things is too high (the process is inefficient)
- You under leverage your buying power
- You fail to challenge specifications when markets change
- You buy more functionality than you need and don’t use it
- You accept inappropriate levels of contract risk
- You miss out on innovation from suppliers
- You introduce the complexity of terms (to manage)
Do you know that nagging feeling you get when you’ve wasted money on something? Wrong quality? Perhaps it didn’t arrive on time? Perhaps you overpaid? Perhaps you should have bought the other version? Perhaps something went wrong and there was no recourse?
Now imagine that on an industrial scale…
As a world-leading procurement consultancy, we have helped customers avoid all of the above for over 25 years. That’s a lot of money saved. If you are experiencing procurement or supply chain challenges, we’d be happy to share our learnings – simply get in touch with one of our procurement consultants here.
What are procurement categories?
A procurement category is a logical grouping of goods or services. Categories often relate to indirect procurement or direct procurement, although more recently there is also a third type where the distinctions may be blurred around a particular product, trend, or theme. For example; digital marketing for example which may meet in the middle of technology and marketing...
Procurement categories are normally organized by a hierarchy, often referred to as a category tree. The trees contain levels that define how deep the organization wants to define its expenditure.
The number of levels is based upon how deep or specific the organization wants to define its expenditure. These are sometimes based upon UNSPSC codes, or sometimes are a more bespoke version specific to a business. These are less descriptive but easier to manage manually. A three-level example of a Category Tree could look like:
|Level 1||Construction||Property and Facilities Management||Information Technology|
|Level 2||Construction Consultants||Catering Services||Software|
|Level 3||Architects||Contract Catering||Virtualisation|
These definitions are applied to expenditure reporting so that your procurement people and category managers can understand expenditure by type or supplier, and then build compelling strategies and plans.
Other business functions sometimes insist that procurement categories are different from business/ finance definitions and are written in “procurement speak”. This is often true, but the classifications may be deeply embedded in systems and reporting, so changing may not be an easy fix. This is why it is important to collaborate between procurement and finance (and other areas of the business) to build a clear understanding of spend and strategy and implement this company-wide.
The category manager’s role is to own and execute the commercial plan for that category, something that requires close cooperation with stakeholders. Categories are also a way of organizing the skill sets. A category manager is usually focused on one category of goods or services. For example meat, plastic packaging, IT, marketing, insurance, company travel.
A procurement specialist usually gathers experience in one category. In most companies, procurement categories are assigned usually based on the annual spend per category. Hence, it is possible to have a category manager for chicken and in the same company a category manager for all other food products. Categorization can as well be done by region and end-use. For example, in Airlines there is a category manager for aircraft appearance, which includes linen, blankets, pillows, newspapers, and magazines.
Can procurement be outsourced?
YES! Finding procurement talent is tough, finding good procurement talent is near impossible. That’s why we, a procurement consultancy, exist. We find that even the world’s leading organizations need help from experts. Whether it be business process outsourcing (BPO), or an on-demand approach, our consultants are trained procurement practitioners and we work seamlessly to fit your business needs.
New report: ‘The State of Spend’
We recently published a report exploring how Fortune 500 and FTSE 300 companies spend their money. Most crucially, the report reveals where companies should be focusing their efforts to optimize their spending in the current global climate.
Among other findings, our report found that reducing supplier costs would improve EBITDA of FTSE 350 companies by over twice as much as cutting jobs.
- Significant variations in spending between sectors
- The breakdown of internal vs. external spend
- How to achieve a 35% increase in EBITDA
- Why taking a strategic approach to supplier management is key to avoiding unnecessary job losses
Click here to download your free copy of our new report, ‘The State of Spend’, and find out how your business can reduce supplier spend and improve profitability.