Procurement has evolved: once considered purely administrative, the function now possesses a more strategic focus. Insights made possible by new technology have accelerated this shift, elevating procurement to the boardroom. Here, the function’s input towards business decisions has been welcomed – along with its potential to drive business performance.
We explore below the increasingly important role of procurement in strategic decision-making.
Changing face of procurement
Traditionally, procurement’s role was clerical. The department oversaw order placement and the payment of purchase orders. Far from strategic, purchasing was considered solely transactional.
At this stage in procurement’s evolution, purchasing was split by department or function. However, this siloed approach to purchasing diluted organisations’ buying power. As a result, best value was seldom achieved. In an effort to drive down unit costs, procurement teams began to join the dots between departments. This socalled ‘coordinated purchasing’ evolved as a means of focusing spend to achieve better value.
In many organisations, procurement has control over the lion’s share of the entire annual budget. So, savings achieved through better buying can have enormous influence over profit margins. Naturally, coordinated purchasing revealed these opportunities by rationalising requirements or consolidating purchases, allowing savings to be released. However, these savings were still transactional – based on driving down unit costs.
Once procurement had established interdepartmental inroads, cross-functional purchasing emerged. Under this approach, a central procurement department uses insights into business-wide needs to solve key purchasing requirements. This method is more solution-based, allowing purchasing to drive greater value from the supplier relationship beyond simply buying well. With this shift, procurement became a dynamic department whose remit spanned the entire enterprise: touching on all departments and interwoven with business processes.
The emergence of cross-functional purchasing has given procurement much greater scope to influence business performance. Whilst a traditional approach to cost-cutting typically achieves savings of around 5%, strategic collaboration can reduce costs by up to 38%. So compared to the pennies negotiations may squeeze out of suppliers’ margins, the efficiencies which can be harnessed through innovation are unprecedented – yielding far bigger returns for the business. With this in mind, the results of a survey by business consultancy Ayming are hardly surprising: 73% of respondees recognised the need for procurement to lead cross-functional supply chain integration. Given procurement controls half the annual budget in many industries – and up to 80% in some sectors – procurement has considerable influence over an organisation’s cost base, and therefore its profitability. No wonder 87% of executives expect procurement to be more involved in steering and delivering business strategy.
The role of technology
The shift in gear from traditional cost-cutting to strategic savings has been accelerated by technology. Today’s procurement tools make capturing, sharing and interrogating purchasing data easier than ever before. Indeed, 79% view e-procurement tools and systems as crucial to boosting value creation within procurement departments. This rises to 90% amongst Chief Procurement Officers (CPOs). Paul Alexander, Director of Indirect Procurement at BP, explains:
An agile supply chain is greatly enabled by technology. You can be more responsive and take informed risks because you have better visibility.”
In addition to having better tools, today’s connected world gives procurement teams access to increased volumes of data – complete with richer insights. Alongside their own records, online systems give procurement visibility of additional data captured by third party suppliers. This can span simple spend and usage data, through to inventory levels and demand forecasting – all the way up to savings automatically calculated based on switching products to better value alternatives.
Equipped with these insights, procurement teams are no longer restricted to small scale, reactive cost cuts. Instead, they can use predictive analytics to forecast, model and target future savings. This shift is best summed up by Andrew Coulcher, director of membership and knowledge at the Chartered Institute of Purchasing and Supply:
Historically, procurement has looked in the rear-view mirror and out of the back window; now we can look out through the windscreen at the road ahead.”
Armed with data-driven insights and fostering valuable supplier relationships, procurement’s profile in the organisation has been elevated to the level of strategic decision-making. As a result, procurement is now taking a seat in the boardroom.
The rising profile of procurement
Procurement’s ability to influence the financial performance of a business is becoming ever more apparent.
As a result, the function is now being drawn into business planning. Now, purchasing strategy is increasingly
expected to align with the company’s long-term goals in a bid to boost profit margins and drive growth.
The elevated importance of procurement is visible in today’s employment market. In terms of seniority, CPOs
are increasingly present in the boardroom. Meanwhile, in the last decade the average wage of strategic
level procurement professionals has risen dramatically. Clearly businesses are taking the function’s strategic
potential seriously – and are willing to invest in it.
Procurement has come a long way from its clerical roots. Since the function’s early forays into reducing unit costs, its influence has become interwoven with all aspects of business buying.
Armed with Big Data, procurement is now taking its seat at the boardroom table. Here, its data-driven insights and appetite for innovation are being matched to the organisation’s overall strategic objectives and goals. The result: a supply chain fine-tuned to support the organisation’s ambitions.