Three pillars of procurement strategy
Successful procurement strategy relies on three pillars: sourcing strategy, supplier management, and procurement management.
- Sourcing strategy determines what to buy and from where through effective use of supply and demand power.
- Supplier management ensures what is contracted for is what is delivered and then collaborates with the supplier to bring in more supply-market expertise. Ultimately, the goal is to drive the supplier behavior that you need.
- Procurement management orchestrates technology and processes to provide a frictionless, compliance-based buying experience.
However, all too often, sourcing strategy, supplier management, and procurement management are abandoned because procurement organizations lack the basic insights to harness supply-market power and adequately track supplier performance. These gaps throw the focus on cost savings, arguing over contract terms that never get implemented, and slowing down users who want to buy things in the name of “control.” Administration, rigid processes, and complexity have often reigned supreme at the expense of function, utility, and the ultimate needs of the business.
Now is the time to scrutinize procurement processes. Procurement represents a cross-section of all external demands on a company. In that sense, it is a crucial internal business partner to all other functions, and it fights at the forefront of implementing key efficiencies, such as changing footprint and reducing risk of supplies, finding an accepted way of qualifying new suppliers remotely, and identifying and engaging with nontraditional suppliers.
A history of missed opportunities
In many organizations, this failure to innovate hasn’t been for lack of trying. Businesses have spent millions of dollars on their e-procurement suites, finding them ultimately lacking. Bad user experiences, incomplete functionality, and a lack of advanced features were just a few of their many issues.
Ironically, this steady stream of frustrations came at a time when “digital procurement” was a hot topic. Spurred by the digital revolution of big data, robotic process automation, artificial intelligence (AI), and blockchain, a flood of hype promised to bring procurement plans into the 21st century.
Exploring this contradiction set us on a journey to better understand how companies embrace their legacy systems, what real innovations are emerging in the market, and how procurement organizations can best prepare for the future.
In our examination of market trends, we discovered there had been nearly $500 million of venture capital invested in e-procurement start-ups over the past five years—a staggering sum considering that many people had assumed the market was mature less than a decade ago. But in learning more about these start-ups, we discovered that nearly three-quarters of them are solving problems lingering from the early 2000s: spend visibility, supplier rationalization, and basic sourcing strategy.
How did things go so disappointingly wrong?
The foundation of procurement strategy: people
Digital technologies are on pace to automate most routine procurement processes within three to five years. With automation quickly making today’s skills irrelevant, the days of procurement staff serving as order takers are numbered. CPOs need to be more ambitious, take more risks, and communicate the value they can bring to deliver procurement’s full value—and they need CEOs who encourage and nurture their role.
The potential of e-procurement technology
Many of the exciting advances in procurement technology—from advanced analytics and blockchain to artificial intelligence and the Internet of Things—will disrupt indirect categories such as marketing, maintenance, and facilities, where spending tends to be unstructured and fragmented with myriad people across multiple functions making purchases.
Procurement technology will not have quite the same impact on direct expenditures. Spending on products that are part of the bill of materials tends to be much more structured, with clear specifications, costs captured in the accounting system to enable inventory valuation, and strong controls.
The consumerization of procurement
Unlike the typical online shopping experience, corporate purchasing tends to be slow and cumbersome. Forward-thinking companies find innovative ways in procurement to meet users’ needs without hindering their productivity.
If you could design a new customer experience for corporate purchasing, would you create a buying experience with immediate transparency into prices, shipping options, warranties, and performance reviews so users can make an informed decision? Provide a sleek, fast, and enjoyable experience, with controls that enable transparency and provide feedback to prevent poor behaviors? Or better yet, use artificial intelligence to optimize recommendations and provide visibility into supply and demand?
Embedding procurement strategy into organizational culture
In a market-leading organization, the CPO recruits the best talent from business schools, and working in procurement is seen as a career training ground for other roles in the organization. The CEO, CPO, and wider executive team have collaborated to create a culture that results in a great procurement function and delivers consistent value year after year.
At this organization, procurement is not a defensive mindset but rather an offensive weapon that has created exclusive arrangements with partners to take advantage of new technology. This improves the bottom line and makes the supply chain truly sustainable. It also creates new economic and sustainable uses of by-products rather than simply vendor management that negotiates a low price for disposal.
Procurement strategy has been in the foreground—making things happen and taking value creation to a whole new level.
This should be the norm. After all, in most organizations, procurement is the corporate-wide function with the strongest lean toward creating value. Its reach is both broad and deep while still being tangible, practical, and operational. Procurement done well creates value that no other function can surpass.
A future-proof procurement strategy
Today, detailed procurement operating models (and the scope of the function itself) vary across and within industries based on many factors. Nevertheless, most are center-led and category-focused, with allowances for specific geographies for local categories and enabling user engagement. Often, a back-office processing function takes care of simple tactical sourcing needs and administration of procure-to-pay systems.
The future of procurement will align to product-customer offer teams to shape categories that directly impact the product offer, focusing on high-value commercial input and orchestration of supplier behavior. For other categories of spend, the focus will be on user enablement and automation through e-procurement technology, recognizing that users want to purchase solutions that may cut across classic categories. The categories that directly impact the product offer will vary by business and industry. Typically, all direct categories impact the product and, depending on the situation, a proportion of the indirect ones.
The benefits of a strong procurement strategy are comprehensive and go far beyond deal-making to embrace new approaches to the supply market, support for the company’s sustainability agenda, and radical process automation. By creating an environment that values procurement strategy, business leaders can reap the benefits across the entire organization.
The authors would like to thank John Blascovich, Ana Conde, Simon Horner-Long, Renata Kuchembuck, Shakil Nathoo, and Prasad Poruri for their valuable contributions to this article.
The future of procurement series
We worked with clients and our external network to cocreate a vision for the future of procurement that spurs conversations and breaks complacency with the status quo.