Executive Briefings

Procurement Puts the Squeeze on Rising Costs

Virtually all companies will face economic headwinds and other challenges in 2016. Finding new sources of revenue growth remains difficult, resulting in pressure to protect margins through cost control. How can the procurement professional provide that?

Procurement Puts the Squeeze on Rising Costs

Enterprise cost takeout is the most prevalent initiative on the business agenda for many companies, according to the 2016 Key Issues Study from The Hackett Group, but all the priorities identified can be viewed as defensively-oriented. To support the enterprise agenda, procurement functions must continue to increase their own efficiency, upgrade their talent, become more agile, and ensure that their strategy is in line with that of the company as a whole.

Procurement’s Top Priorities in 2016

The ultimate measure of procurement’s performance is its ability to support the company’s overall business strategy. This will require some procurement organizations to make far more than incremental improvements. As procurement’s operating budget is expected to grow by just 1.1 percent this year, it can afford to fund only a select few of its highest-priority initiatives.

Against this backdrop, our study findings reveal a change in procurement’s priorities from last year, when elevating its role to a trusted advisor was top-ranked. In 2016, reducing purchase costs placed slightly higher on the list. Balancing these sometimes conflicting goals will be difficult this year.

Fortunately, many procurement teams are well-equipped to reduce and avoid purchase cost today, as measured by the minimal gap between this capability’s importance and ability to address.

Unfortunately, a number of more strategic areas fall into the “critical development” zone, that is, issues rated as highly important, which most procurement groups are poorly prepared to address. The greatest capability gaps (the same ones that procurement is most focused on in 2016) are to elevate the role of procurement to a trusted advisor, increase spend influence, improve agility and tap supplier innovation.

Elevate procurement to trusted advisor role

Attaining this position is dependent on a new type of talent: one comfortable with technology, able to speak the language of the business, and politically adept enough to navigate complex organizations in order to drive change. Exceptionally-trusted advisors are not always the ones bringing the most innovative or transformational solutions to the table. In fact, when asked to name the most important characteristic of a trusted advisor, 77 percent of respondents chose “consistently delivering on the basics”. The message is that in 2016, while procurement is building out its strategy to upgrade its role, it must not lose focus on its day-to-day responsibilities.

Improve agility

A confluence of high volatility, technology-led innovation, and hyper-competitive market conditions has accelerated the rate of change in business to unprecedented levels. Agility is the key to success in this environment. In a procurement context, agility refers to streamlining the buying experience and creating an organizational model that permits quick reaction to changing requirements. Agile procurement organizations have four distinct attributes:

• Information-driven, proactive decision-making, leveraging information and predictive analytics to improve the quality and timeliness of decisions

• Industry leadership in digitizing their value chain, including supply and demand chains as well as internal operations

• Customer-centric planning processes and day-to-day business decisions

• Operational responsiveness permitting swift response to changes in the supply chain, customer preferences, the competitive landscape and business strategy

Becoming information-driven should be a primary focus area for procurement; it must develop the tools and skills that will allow staff to apply market data and intelligence to decisions on spending and sourcing strategies. Creating deep, consultative working relationships with business leaders demands that procurement brings this valuable expertise to the table.

This level of insight requires high-quality, real-time market intelligence. However, over half of the Key Issues Study respondents lack a formal market intelligence program or are in the very earliest stages of adoption. Access to market intelligence and ensuring that sourcing and supplier relationship management teams are using high-quality category and supplier intelligence are prerequisites for agility.

Increase spend influence

Leading procurement organizations have streamlined their internal processes, capitalized on existing savings opportunities, developed advanced strategic sourcing programs, and consolidated at least 80 percent of spend down to 20 percent (or less) of their suppliers. Despite these successes, chief procurement officers remain under pressure to continually unearth new sources of savings. To do so, procurement must expand the scope of its influence and take a hard look at the 20 percent of spend spread thinly across the remaining 80 percent of suppliers (called tail spend).

Our study data show that 7.1 percent savings on average can be achieved by better managing tail spend. This average is significantly higher than our past research has shown, and was magnified by the 30 percent of the respondents who estimated savings of more than 10 percent. Follow-up interviews found that many suspected a significant part of their current tail spend includes high-dollar maverick buying that should have been strategically sourced. If visibility to tail spend were increased, these types of opportunities could be identified and properly sourced in the future.

Previous research by The Hackett Group has shown that once these opportunities are routed to proper sourcing channels, a more realistic tail-spend savings range is 3 percent to 5 percent for less mature sourcing organizations and 1 percent to 3 percent for more advanced ones. However, when it comes to tail spend, savings are only one piece of the value proposition. The cycle time gains and ability to free up higher-paid category managers from dealing with one-off requests is where the most significant benefits are found.

Tap supplier innovation

Supporting the enterprise innovation agenda is a critical priority for procurement. But the capabilities required to do so are lagging, even among world-class organizations. One of the main hurdles is a lack of innovation-specific KPIs and processes designed to support the generation of creative, game-changing ideas. Another is procurement organizations’ limited involvement early enough in the development of products and services to make an impact. Still, there are areas where organizations are notching successes, such as hosting supplier innovation days to showcase new ideas and holding working sessions to prioritize future release schedules. To ensure success, procurement needs to begin tracking and measuring the results of supplier proposals, become more embedded in R&D groups, and facilitate collaboration between new-product/services teams and suppliers.

World-class procurement groups are very effective at channeling the intellectual capital of their suppliers to bring new and original solutions to light, helping to influence (not just support) the business strategy. This is enabled by maintaining strong business relationships with key suppliers and working collaboratively to create unique, customized solutions. Even if breakthrough solutions are not identified, better collaboration often leads to cost savings, product substitutions, and cost-sharing programs. Procurement organizations that have invested in formalizing the innovation lifecycle (spanning idea formation, evaluation, development, productization, and continuous improvement) have seen positive results.

Looking Ahead

When asked to identify the trend with the greatest potential impact on the way procurement does it job over the next decade, the majority of study participants chose predictive analytics or forecasting. As procurement’s role matures from transactional facilitator to trusted business advisor, proficiency with the next generation of analytics – a.k.a. “big data” – will be a key enabler. Big data has been a game changer when it comes to customer analytics, offering an unprecedented ability to quickly model massive volumes of structured and unstructured data from multiple sources.

Taking advantage of the value of advanced analytics requires creating new technology roles, aligning agendas, and elevating the overall level of institutionalized technology knowledge. Procurement leaders who have not already started down this path should use the high-stakes competitive environment of 2016 as a burning platform.

Sophisticated analytical tools and methods can only live up to their full potential when put in the hands of staff who have the appropriate skills to use them. The importance of training and hiring for these skills cannot be overstated. The specific capabilities required can be understood only through careful definition of the objectives and governance structure of an analytics program.

How well the newest generation of workers is integrated into analytics and other procurement initiatives will be one of the biggest determinants of whether procurement is able to exploit social, mobile, analytics, and cloud technology to advance its mission.

Patrick Connaughton is senior research director at The Hackett Group, and Christopher S. Sawchuk is principal and Global Procurement Advisory Practice leader, also at The Hackett Group.

Resource Link:
The Hackett Group

Enterprise cost takeout is the most prevalent initiative on the business agenda for many companies, according to the 2016 Key Issues Study from The Hackett Group, but all the priorities identified can be viewed as defensively-oriented. To support the enterprise agenda, procurement functions must continue to increase their own efficiency, upgrade their talent, become more agile, and ensure that their strategy is in line with that of the company as a whole.

Procurement’s Top Priorities in 2016

The ultimate measure of procurement’s performance is its ability to support the company’s overall business strategy. This will require some procurement organizations to make far more than incremental improvements. As procurement’s operating budget is expected to grow by just 1.1 percent this year, it can afford to fund only a select few of its highest-priority initiatives.

Against this backdrop, our study findings reveal a change in procurement’s priorities from last year, when elevating its role to a trusted advisor was top-ranked. In 2016, reducing purchase costs placed slightly higher on the list. Balancing these sometimes conflicting goals will be difficult this year.

Fortunately, many procurement teams are well-equipped to reduce and avoid purchase cost today, as measured by the minimal gap between this capability’s importance and ability to address.

Unfortunately, a number of more strategic areas fall into the “critical development” zone, that is, issues rated as highly important, which most procurement groups are poorly prepared to address. The greatest capability gaps (the same ones that procurement is most focused on in 2016) are to elevate the role of procurement to a trusted advisor, increase spend influence, improve agility and tap supplier innovation.

Elevate procurement to trusted advisor role

Attaining this position is dependent on a new type of talent: one comfortable with technology, able to speak the language of the business, and politically adept enough to navigate complex organizations in order to drive change. Exceptionally-trusted advisors are not always the ones bringing the most innovative or transformational solutions to the table. In fact, when asked to name the most important characteristic of a trusted advisor, 77 percent of respondents chose “consistently delivering on the basics”. The message is that in 2016, while procurement is building out its strategy to upgrade its role, it must not lose focus on its day-to-day responsibilities.

Improve agility

A confluence of high volatility, technology-led innovation, and hyper-competitive market conditions has accelerated the rate of change in business to unprecedented levels. Agility is the key to success in this environment. In a procurement context, agility refers to streamlining the buying experience and creating an organizational model that permits quick reaction to changing requirements. Agile procurement organizations have four distinct attributes:

• Information-driven, proactive decision-making, leveraging information and predictive analytics to improve the quality and timeliness of decisions

• Industry leadership in digitizing their value chain, including supply and demand chains as well as internal operations

• Customer-centric planning processes and day-to-day business decisions

• Operational responsiveness permitting swift response to changes in the supply chain, customer preferences, the competitive landscape and business strategy

Becoming information-driven should be a primary focus area for procurement; it must develop the tools and skills that will allow staff to apply market data and intelligence to decisions on spending and sourcing strategies. Creating deep, consultative working relationships with business leaders demands that procurement brings this valuable expertise to the table.

This level of insight requires high-quality, real-time market intelligence. However, over half of the Key Issues Study respondents lack a formal market intelligence program or are in the very earliest stages of adoption. Access to market intelligence and ensuring that sourcing and supplier relationship management teams are using high-quality category and supplier intelligence are prerequisites for agility.

Increase spend influence

Leading procurement organizations have streamlined their internal processes, capitalized on existing savings opportunities, developed advanced strategic sourcing programs, and consolidated at least 80 percent of spend down to 20 percent (or less) of their suppliers. Despite these successes, chief procurement officers remain under pressure to continually unearth new sources of savings. To do so, procurement must expand the scope of its influence and take a hard look at the 20 percent of spend spread thinly across the remaining 80 percent of suppliers (called tail spend).

Our study data show that 7.1 percent savings on average can be achieved by better managing tail spend. This average is significantly higher than our past research has shown, and was magnified by the 30 percent of the respondents who estimated savings of more than 10 percent. Follow-up interviews found that many suspected a significant part of their current tail spend includes high-dollar maverick buying that should have been strategically sourced. If visibility to tail spend were increased, these types of opportunities could be identified and properly sourced in the future.

Previous research by The Hackett Group has shown that once these opportunities are routed to proper sourcing channels, a more realistic tail-spend savings range is 3 percent to 5 percent for less mature sourcing organizations and 1 percent to 3 percent for more advanced ones. However, when it comes to tail spend, savings are only one piece of the value proposition. The cycle time gains and ability to free up higher-paid category managers from dealing with one-off requests is where the most significant benefits are found.

Tap supplier innovation

Supporting the enterprise innovation agenda is a critical priority for procurement. But the capabilities required to do so are lagging, even among world-class organizations. One of the main hurdles is a lack of innovation-specific KPIs and processes designed to support the generation of creative, game-changing ideas. Another is procurement organizations’ limited involvement early enough in the development of products and services to make an impact. Still, there are areas where organizations are notching successes, such as hosting supplier innovation days to showcase new ideas and holding working sessions to prioritize future release schedules. To ensure success, procurement needs to begin tracking and measuring the results of supplier proposals, become more embedded in R&D groups, and facilitate collaboration between new-product/services teams and suppliers.

World-class procurement groups are very effective at channeling the intellectual capital of their suppliers to bring new and original solutions to light, helping to influence (not just support) the business strategy. This is enabled by maintaining strong business relationships with key suppliers and working collaboratively to create unique, customized solutions. Even if breakthrough solutions are not identified, better collaboration often leads to cost savings, product substitutions, and cost-sharing programs. Procurement organizations that have invested in formalizing the innovation lifecycle (spanning idea formation, evaluation, development, productization, and continuous improvement) have seen positive results.

Looking Ahead

When asked to identify the trend with the greatest potential impact on the way procurement does it job over the next decade, the majority of study participants chose predictive analytics or forecasting. As procurement’s role matures from transactional facilitator to trusted business advisor, proficiency with the next generation of analytics – a.k.a. “big data” – will be a key enabler. Big data has been a game changer when it comes to customer analytics, offering an unprecedented ability to quickly model massive volumes of structured and unstructured data from multiple sources.

Taking advantage of the value of advanced analytics requires creating new technology roles, aligning agendas, and elevating the overall level of institutionalized technology knowledge. Procurement leaders who have not already started down this path should use the high-stakes competitive environment of 2016 as a burning platform.

Sophisticated analytical tools and methods can only live up to their full potential when put in the hands of staff who have the appropriate skills to use them. The importance of training and hiring for these skills cannot be overstated. The specific capabilities required can be understood only through careful definition of the objectives and governance structure of an analytics program.

How well the newest generation of workers is integrated into analytics and other procurement initiatives will be one of the biggest determinants of whether procurement is able to exploit social, mobile, analytics, and cloud technology to advance its mission.

Patrick Connaughton is senior research director at The Hackett Group, and Christopher S. Sawchuk is principal and Global Procurement Advisory Practice leader, also at The Hackett Group.

Resource Link:
The Hackett Group

Procurement Puts the Squeeze on Rising Costs