Executive Briefings

The Procurement Dilemma: What's the Best Approach for Controlling Costs

Controlling costs is, without a doubt, the top priority for procurement professionals this year, according to a survey of executives at the 2011 Institute for Supply Management conference.  While strategies for managing the global supply chain have evolved significantly over the years, the criticality of finding new areas of organizational savings still transcends the times, regardless of the state of the economy.

With today's economy still in turmoil - and the possibility of a double-dip recession - procurement is becoming a boardroom discussion.  There has never been a better time for procurement teams to demonstrate how their actions can have a lasting impact on the financial stability and valuation of a business.  All of corporate management knows that they need to control costs to stay competitive - but with so many different approaches being recommended, where's the best place to start saving?

Perhaps surprisingly, despite historical agreement on where a procurement department's focus should be, there seems to be a growing lack of consensus around how to best control costs today.  Procurement professionals surveyed at ISM earlier this year were largely divided on the issue, creating a dilemma for organizations seeking clarity and best practices on how to more cost-effectively procure goods and services.  Of those executives surveyed, 32 percent said bringing more spend under procurement's control is the best way to control costs, 28 percent said increasing enterprise-wide spend visibility, and 23 percent said putting an end to off-contract purchasing.

Seeing the Big Picture: Procurement Life Cycle Management

All three areas - controlling more spend, improving enterprise-wide spend visibility and ending off-contract purchasing - are critical to a company's long-term fiscal success.  Smaller, resource-constrained organizations with less mature sourcing processes will likely have to focus on improving just one area at a time, but for most organizations, taking a single-focused approach could be a big mistake.

The most effective strategy is a holistic approach to the entire life cycle of a product. Spend analysis is a critical first step, because procurement teams can't control costs they can't see.  Once an organization's spending pitfalls are uncovered, it becomes significantly easier to transform a company's procurement culture.

In many organizations, there are areas of the business, such as marketing, human resourcing and operations, where employees likely have less rigor in how they spend and less of an understanding on the benefits from applying best-practices of vendor management. Collaborating with those departments in applying these processes, as well as demonstrating how actions by individual employees can combine to have a substantial impact on the financial success of an organization, are important elements to driving internal adoption of new procurement processes.

Once non-compliant spending has been uncovered and addressed, organizations need to work hard to prevent it from continuing, which usually requires a sourcing platform that can effectively support the entire procure-to-pay process - and as many relevant categories and suppliers as possible.  Regardless of the number of suppliers, categories or features a sourcing platform has, if it's not easy to use, or if the information is not relevant enough to what's being procured, users will intentionally go around the system and purchase on their own, increasing off-contract spending and costs.

When it Comes to Supplier Management, Relevance Matters Most

The need for more effective supplier management is one area where many procurement executives are in agreement. In fact, 60 percent of executives surveyed at ISM said that consolidating the supply base is a critical step toward controlling costs. However, while reducing the number of suppliers may decrease the burden placed on management, it could actually cost a company more in the long run.  If users feel that the supplier options they have aren't vast enough to meet their sourcing needs, they're more likely to find their own suppliers outside of procurements view and control.  Additionally, consolidating the supply base could substantially increase a company's risk. Having fewer suppliers means your organization is more susceptible to a disruption if there's a natural disaster like the Japan tragedy, or if one or two of your suppliers fail due to financial struggles or performance.

Procurement chiefs need to understand that the number of suppliers a company has isn't nearly as important as how relevant those suppliers are to the sourcing projects.  Smart commerce means connecting buyers and sellers through their preferences.  It's a much more collaborative approach to supplier management that helps both parties get exactly what they need when they need it, without wasting time - and money - trying to find it.

Controlling costs will undoubtedly remain a top priority for procurement pros for years to come.  Regardless of where procurement teams choose to focus - controlling more spend, improving enterprise-wide spend visibility, reducing off-contract purchasing, consolidating their supply base or all of the above - one thing is critical, and that's having a base of relevant suppliers to improve compliance and effectively meet your company's sourcing needs.

Source: Rearden Commerce

Controlling costs is, without a doubt, the top priority for procurement professionals this year, according to a survey of executives at the 2011 Institute for Supply Management conference.  While strategies for managing the global supply chain have evolved significantly over the years, the criticality of finding new areas of organizational savings still transcends the times, regardless of the state of the economy.

With today's economy still in turmoil - and the possibility of a double-dip recession - procurement is becoming a boardroom discussion.  There has never been a better time for procurement teams to demonstrate how their actions can have a lasting impact on the financial stability and valuation of a business.  All of corporate management knows that they need to control costs to stay competitive - but with so many different approaches being recommended, where's the best place to start saving?

Perhaps surprisingly, despite historical agreement on where a procurement department's focus should be, there seems to be a growing lack of consensus around how to best control costs today.  Procurement professionals surveyed at ISM earlier this year were largely divided on the issue, creating a dilemma for organizations seeking clarity and best practices on how to more cost-effectively procure goods and services.  Of those executives surveyed, 32 percent said bringing more spend under procurement's control is the best way to control costs, 28 percent said increasing enterprise-wide spend visibility, and 23 percent said putting an end to off-contract purchasing.

Seeing the Big Picture: Procurement Life Cycle Management

All three areas - controlling more spend, improving enterprise-wide spend visibility and ending off-contract purchasing - are critical to a company's long-term fiscal success.  Smaller, resource-constrained organizations with less mature sourcing processes will likely have to focus on improving just one area at a time, but for most organizations, taking a single-focused approach could be a big mistake.

The most effective strategy is a holistic approach to the entire life cycle of a product. Spend analysis is a critical first step, because procurement teams can't control costs they can't see.  Once an organization's spending pitfalls are uncovered, it becomes significantly easier to transform a company's procurement culture.

In many organizations, there are areas of the business, such as marketing, human resourcing and operations, where employees likely have less rigor in how they spend and less of an understanding on the benefits from applying best-practices of vendor management. Collaborating with those departments in applying these processes, as well as demonstrating how actions by individual employees can combine to have a substantial impact on the financial success of an organization, are important elements to driving internal adoption of new procurement processes.

Once non-compliant spending has been uncovered and addressed, organizations need to work hard to prevent it from continuing, which usually requires a sourcing platform that can effectively support the entire procure-to-pay process - and as many relevant categories and suppliers as possible.  Regardless of the number of suppliers, categories or features a sourcing platform has, if it's not easy to use, or if the information is not relevant enough to what's being procured, users will intentionally go around the system and purchase on their own, increasing off-contract spending and costs.

When it Comes to Supplier Management, Relevance Matters Most

The need for more effective supplier management is one area where many procurement executives are in agreement. In fact, 60 percent of executives surveyed at ISM said that consolidating the supply base is a critical step toward controlling costs. However, while reducing the number of suppliers may decrease the burden placed on management, it could actually cost a company more in the long run.  If users feel that the supplier options they have aren't vast enough to meet their sourcing needs, they're more likely to find their own suppliers outside of procurements view and control.  Additionally, consolidating the supply base could substantially increase a company's risk. Having fewer suppliers means your organization is more susceptible to a disruption if there's a natural disaster like the Japan tragedy, or if one or two of your suppliers fail due to financial struggles or performance.

Procurement chiefs need to understand that the number of suppliers a company has isn't nearly as important as how relevant those suppliers are to the sourcing projects.  Smart commerce means connecting buyers and sellers through their preferences.  It's a much more collaborative approach to supplier management that helps both parties get exactly what they need when they need it, without wasting time - and money - trying to find it.

Controlling costs will undoubtedly remain a top priority for procurement pros for years to come.  Regardless of where procurement teams choose to focus - controlling more spend, improving enterprise-wide spend visibility, reducing off-contract purchasing, consolidating their supply base or all of the above - one thing is critical, and that's having a base of relevant suppliers to improve compliance and effectively meet your company's sourcing needs.

Source: Rearden Commerce