Procurement functions needs to evolve to match changing needs

30 August 2017 Consultancy.uk

The majority of procurement models are failing to add significant value to businesses, according to research by Ayming among C-level executives across Europe reveals. Fewer than half of executives interviewed consider their company’s procurement models effective meanwhile – suggesting that procurement needs to evolve to cope with the demands of today’s businesses. Yet, while two-thirds also think that reorganising the procurement function would deliver additional business value, fewer than half have recently reorganised or plan to in the next two years.

Procurement and supply management involves buying the goods and services that enable an organisation to operate. Procurement in the future facing massive change, due in part to the non-stop period of digital innovation and technological advancement that has seen every market segment effected by new, agile competitors. Businesses in all areas will also have to deal with new challenges arising from broader trends and global issues, including disruptions from climate change, resource scarcity, an ageing population and skills shortages. Meanwhile, the current political landscape around the world is in a state of flux. On top of that, both consumers and the workforce are changing.

“Ever since the financial crisis, procurement continues to climb higher up the corporate agenda. But it’s not enough for firms to focus on merely cutting costs” said Alejandro Alvarez, Director of Operations Performance at Ayming, who led the study.

Partnering with Raconteur, Ayming canvassed the opinions of 200 key C-suite executives, evenly split between CEOs, CFOs, COOs and CPOs, from businesses around the world. The company sizes, ranging from an annual turnover of £250 million to in excess of £5 billion were spread evenly across global sectors, including financial services, healthcare, manufacturing, retail, technology and transport & logistics.

Opportunities to drive greater value from procurement

Ayming’s research into procurement found that the functions in question are not generating as much value as they should be, despite a trend of major reorganisations within procurement in recent years to improve results, with as many as 28% of organisations reshuffling their procurement methods over the past 2 years. Ayming’s survey meanwhile reveals that 51% of respondents still do not think their current organisational structure is effective, suggesting that procurement needs to evolve to cope with the demands of today’s businesses.

Looking ahead, 64% of respondents think that reorganising the procurement function would deliver additional value to the business, in the hope they might reduce costs and provide better value.

Reorganised or are planning to reorganise their procurement function

Interestingly, across the board, confidence in procurement varies notably across depending on the size of a company, and respondents' roles. Unsurprisingly perhaps, the very largest companies are most likely to report high or very high value from procurement, with 36% still believing their procedures deliver significant worth. These respondents were also more likely to make procurement a strategic priority, perhaps due to their size meaning significantly more planning is required for procurement than a smaller, more agile firm which might be better able to call things on the fly. This agility is not necessarily a blessing in this case however, and the higher confidence of the larger businesses that they are more likely to get the best from procurement suggests that the best results may be achieved when treating procurement as an integral part of business, as opposed to a logistical after-thought. 70% of large corporate respondents include creating value through procurement as a core part of their strategy for the coming two to three years, while just 35% of small to mid-level enterprises said the same.

Consistent with the responsibilities of different executive roles meanwhile, respondents with direct link to procurement management – CPOs and COOs – are the most likely to say value creation through procurement is a core part of business strategy, at 48%. Meanwhile, just over a quarter of CEOs (28%) and CFOs (26%) said the same, which as they have broader portfolios generally with a view to running a company as a whole, managementally or financially, is not a drastic surprise. However, this does point to a gap in alignment between procurement and the rest of a business – which could be the root of why so many businesses feel their procurement methods do not deliver the value that they should.

How effective do you consider the current procurement organisation-operating model

There are also differences in perception between industries, which in large part seem connected to the manner of business done in that sector. Unsurprisingly perhaps, 43% of respondents from the retail sector, heavily dependent on procurement in order to fulfil the tertiary nature of consumption-end business, feel their procurement methods are highly effective, with a further 18% saying they were somewhat effective. Financial services meanwhile had the lowest rates of respondents who believed their methods were highly effective – with financial services perhaps being less directly related to the physical act of procurement, leaving it again as a lower priority, which subsequently delivers lower value when performed as an optional add-on.

Surprisingly though, overall dissatisfaction with procurement was highest in the technology sector. While 27% of respondents in that sector said their procurement was average, the second lowest answer available, 37% said it was ineffective – which, considering the reliance of technological businesses on effective procurement to supply technological solutions, suggests the industry may be missing out on major value creation subsequently. An added level of irony suggests that despite the innovative new techniques of procurement made available through new technologies, the tech sector itself is not making as effective use of them as other industries.

Evolution

According to James Bousher, senior consultant at Ayming, “Procurement operating models need to evolve, because procurement faces new challenges. One of these is the rapid development of new technologies. These include procurement-specific technologies that will affect the function directly, but also more general technological developments that may be even more disruptive. For example, professionals will have to procure solutions that simply did not exist before, such as blockchain-based applications, services and EDIs (electronic data interchanges). We know these things will make the supply chain a lot more transparent, but many people do not know what they do.”

Top 3 opportunities arising from greater use of procurement technology

One key way that companies could evolve their procurement is to take a more strategic approach. A mere 17% of respondents currently believe that their procurement function is entirely strategically-focused. The opportunity for better alignment between procurement and the wider business was a recurring theme throughout the study meanwhile.

A disconnect between the objectives of procurement departments and their wider businesses was also revealed, with 58% of CPOs believing that delivering savings is a key concern for their teams over the next two-to-three years, but only 42% cent of CEOs agree. There is also disagreement on the best way to achieve those goals. While two-thirds of CPOs feel they need increased budgets to deliver more value in the long-term, fewer than half of CEOs agree with the need to invest. On the other hand, 58% of CEOs and 64% believed that reorganising the procurement function is crucial, compared to just one quarter of CPOs.

These misalignments present not just a problem, but an opportunity for businesses, with a reorganisation presenting the chance for companies to not only improve the efficiency of procurement process, but the lines of communication and strategy that move through the entire business. The cohesion of the respective c-suite threads could mean the difference between stagnating value and boosts to productivity and profit.

Another improvement point is earlier involvement in process. 68% of respondents believe that earlier involvement from procurement professionals would increase value creation. Two-thirds of respondents believe that earlier involvement in projects from procurement professionals would increase value creation. A major driver for improved operations is people and skills, particularly digital skills which have become increasingly important due to the disruptive forces currently affecting multiple markets. 84% of executives believe training and upskilling existing talent could make procurement functions more effective meanwhile, with CEOs, CPOs, COOs and CFOs in agreement. Areas of investment such as this could create serious problems for the cohesion for an organisation if neglected, so the solidarity between the c-suite on this issue at least indicates an understanding and willingness to evolve in this area.

People and skills development is considered most important to driving additional value across industries

As a result of these new developments, the organisational structure and the way procurement departments interact with the rest of the business is also crucial. According to James Bousher, “You may have a great team in place. But if the way they operate and the communications between internal functions – and between the company and external suppliers – are not good, then it doesn’t work.”

Meanwhile, Alejandro Alvarez concluded, “As the business environment changes, procurement models need to adapt to focus on delivering the best possible service and supporting firms in meeting their objectives. This means making sure communications between internal and external stakeholders are as seamless as possible and that there is enough flexibility built into the system to accommodate new technologies, such as blockchain.”

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