The Role of Procurement: Cost Saving or Adding Value?

Where does cost saving sit in your Procurement’s scheme of things?

In a recent series of articles I have been examining the reasons why procurement cost-saving initiatives frequently fail to meet expectations, particularly in term of delivering measurable improvements in business profitability. There is undoubtedly a bigger question: where does cost saving sit in Procurement’s scheme of things?

3 Business Imperatives

To remain successful a business has to do three things:

  1. Exploit opportunities
  2. Manage risks
  3. Control costs… and that means delivery to the bottom line!

No business ever became successful by managing its risks and controlling its costs. I would also argue that any business focused solely on controlling costs is soon to be going out of business. So why the Procurement obsession with cutting costs?

The Answer to Procurement’s Whinge

We often hear procurement professionals whingeing about not being given the recognition they deserve, not having representation at Board level, not being paid as well as comparable marketing, sales or finance managers, etc, etc.

If Procurement is to be taken seriously, and represented at Board level, then it has to make a significant contribution to exploiting opportunities and managing business risk. It has to add value.

The Role of Procurement in Adding Value

Most organisations with a professional procurement function recognize its role in the management of supply risks. Nevertheless, recent disruptions to supply chains caused by natural phenomena – earthquakes, floods, etc. – suggest, even in companies with relatively mature procurement practices, the balance has been in favour of easily accessible cost reduction rather than risk mitigation. Post-disruption cost evaluations probably reveal very different cost outcomes to those anticipated. Perhaps the value and focus on risk mitigation is changing as a result.

But what about Procurement’s role in exploiting opportunities?

I recall a discussion with the Board of a strategic business unit (SBU) which had withdrawn from supplying pharmaceutical  businesses – a relatively high-margin sector of their served markets – over difficulties with product quality. The frustration at Board level was that they didn’t have the technical know-how to solve the problem. When I suggested that this was a deficiency in their procurement, one of the Directors was adamant that this had nothing to do with procurement. To me it was simple: the expertise did not exist within the business; it clearly existed outside (as competitors were supplying satisfactory product); therefore the business had to look outside to source a solution. That is procurement!

In this case, the difficulties came down to maintaining the integrity of seals in packaging – on closer examination,  a problem exacerbated by a fragmented and cost-driven approach to procuring materials and sealing equipment. By saving a few cents in revenue costs, the business was foregoing many thousands of dollars in gross margin. What I found particularly interesting was that another SBU in the same group (a European Division of a global company) was producing products successfully, under more demanding conditions, by taking a systems approach.

I could give more impressive game-changing examples of Procurement taking the lead in product innovation: seeing the connection between customer requirements and supplier capability; reverse marketing of product development opportunities to potential strategic partners; leading the development of commercial relationships to enable the allocation of sufficient technical resource (in both organisations) to exploit emerging opportunities. To do so would detract from my key message.

The point of highlighting the simple opportunity (the packaging problem) is that it exemplifies what I see in many businesses. Procurement just doesn’t have its eye on the ball… it just doesn’t get that the big game has little to do with short-term cost reduction… it’s all about adding value.

 

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