Procurement professionals are experiencing a time of change. As more purchasing processes become automated, many are shifting from transactional buying to a more strategic approach to procurement. This includes tightening up indirect spend and looking beyond simple cost-cutting to achieve true value from their supply chain.
Few would question that procurement has a strong role in controlling a company’s costs. Buying well has a direct impact on the bottom line – influencing a company’s entire financial performance. Yet, at every turn, leading procurement figures say this essential function is currently undergoing a massive shift:
The changes they refer to are equipping procurement teams to have an even greater influence on the company’s bottom line. Here are three trends already underway that are shaping the future of procurement:
Traditionally, procurement has focused on direct supplies, i.e. those linked to saleable goods and chargeable services. For example, sourcing parts to manufacture products or purchasing goods to resell to customers. By driving down the costs of these purchases, companies can boost the margin on their profit-making goods and services.
Now the procurement spotlight is widening to include indirect purchasing too, i.e. essential supplies required for the day-to-day running of a company’s operations. For example, lines such as office supplies, cleaning materials and printer consumables. Although these items do not generate profit, they add to a company’s cost base. So, effective procurement of these items can lead to greater overall profit. However, these transactions have often been overlooked in many organisations.
Individual teams may require specialist goods to carry out their day-to-day tasks. As a result, indirect purchasing is frequently carried out by individual functions and departments, rather than a central procurement team. This siloed approach to purchasing makes it difficult to control. However, organisations overlook it at their peril. Although indirect spend for each department may be small, across an organisation it can account for 20% of the company’s spend (the greater part being direct spend). Yet, due to the vast range of supplies different departments require, indirect spend can equate to 80% of a company’s supplier base. Placing numerous low-value orders with a long tail of suppliers in this way often results in duplicate handling and carriage costs, as well as making it difficult to monitor compliance.
In the past, companies have deemed it too labour-intensive to gain control of this complex indirect supplier base. However, developments in technology are making it easier to gain visibility of these transactions and bring this important 20% under control through a centralised approach to procurement.
More and more business processes are becoming digitised due to innovations in technology. Procurement is no exception. Many purchasing activities that were previously time-consuming can be automated. As a result, it is now more straightforward to manage, track and report on procurement transactions. This equips procurement teams with the tools to more effectively manage both direct and indirect spend. Luigi Ganazzoli, CPO of Italian food company Barilla comments:
“We are seeing a rapid evolution of cloud-based systems from our providers not just in terms of capabilities, but also in user friendliness. More specifically, we are very excited about APIs and portals that helps [sic] us exchange information with suppliers.”
These systems provide a unified means of placing orders with suppliers. This drives compliance across the supply chain, whilst also reducing petty cash purchases or ‘dark purchasing’, i.e. staff making purchases outside of the approved vendors. This can promote rationalisation, as staff will find it easier to use preferred suppliers – in turn, eliminating duplicated costs and ensuring all orders accrue any agreed discounts.
Many systems incorporate powerful data capturing and reporting functions. This gives procurement teams greater visibility, which can be used to further optimise purchasing strategies. Meanwhile, the advantages of these systems go far beyond the efficiencies of automation. They actually improve relationships between procurement and its suppliers – driving greater collaboration.
Processing transactions manually is time-consuming and prone to errors. For instance, delayed invoices, late payments or incorrect charges – along with the disputes that can follow. This can lead to strained relationships between companies and their suppliers. However, automation has eased some of these frustrations. Meanwhile, visibility of shared data means everyone is on the same page.
As a result, the relationship between procurement and the supply chain is shifting from a viewpoint of ‘us’ and ‘them’ to one of partnership. This shift has fostered a change in buying behaviours. Procurement teams are looking beyond the short-term wins of buying cheap, towards the long-term goal of achieving value-added partnerships. Alberto Méndez, CPO of European renewable energy provider Vattenfall predicts:
“Modern procurement is still focused on TCO (total cost of ownership), but in the future it will go to Total Value of Sharing.”
The trends of centralisation, digitisation and collaboration are interwoven. As more procurement processes become digitised and automated, procurement teams have the opportunity to gain greater visibility and control of their purchasing spend – giving them the tools to embark on a truly strategic approach to procurement.