At a time when many companies are facing tough times, procurement is becoming recognised as an essential component of corporate strategy for leading organisations. It is well understood by CEOs and CFOs that buying more efficiently can bring big cash savings and more revenue through improved quality of goods and services as well as more reliable supply chains, but its strategic impact is now starting to elevate CPOs up the corporate agenda.
So where should you start? We’ve identified four steps for maturing procurement organisations to consider.
Put a compass in place – Start with spend analysis
Detailed and granular level visibility of spend is a sensible starting point for any organisation. Without spend visibility, businesses do not have the insights needed to develop procurement strategies, or demonstrate the results of improvement initiatives such as contract compliance or savings tracking due to sourcing initiatives.
Organisation-wide spend visibility appears to be a simple goal, so what are the difficulties? For one, spend information is frequently spread across diverse data systems and the capability to extract and aggregate this vast amount of information is not common. And despite the best efforts at enforcing standard terminology or classification at entry, all too often “miscellaneous” is the default entry; even diligent information entry results in inconsistent terminology. Also, financial reporting systems are often too rigid to support procurement analytics.
By implementing fast, intelligent and repeatable spend analysis solutions, organisations can identify and evaluate opportunities for making cost savings and measuring contract and purchasing compliance.
However, the real value of spend analysis is in maintaining this visibility as the procurement lifecycle progresses, ensuring the delivery of best practice throughout the process, including contract compliance, supplier reporting and opportunity analysis.
Strategic sourcing through eSourcing
Strategic sourcing sets the content for subsequent contractual terms – technical capability, quality and commercial price perspective. It’s a critical element of the procurement lifecycle when specifications are developed, suppliers are identified and tender responses are received, evaluated and negotiated.
By definition, procurement professionals are required to achieve the best value for money without compromising quality or innovation. All of this must be conducted within the boundaries of the company’s wider business strategy.
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Determining best ‘value for money’ awards across multiple suppliers and complex supplier bidding scenarios (such as volume discounts, price tiers, rebate structures, contract award share ratios and alternate combination bids) is difficult, time consuming and resource intensive in an offline environment. Applying the correct sourcing approach and using the right eSourcing tools in these environments can dramatically reduce an organisation’s time to value, along with minimising risk in their supply chain.
Best-in-class eSourcing practices enable procurement professionals to gather requirements and specifications from internal and external collaborators; openly advertise tendering opportunities; develop standardised processes and category templates, then enforce organisation-wide adoption and standardised sourcing processes, deliver low risk, compliant sourcing support procedures; support sophisticated and auditable evaluation of qualitative and quantitative criteria; conduct price evaluations and negotiations through sophisticated price trade-off analyses and best value eAuction models – eAuctions that award not only on best price, but also take non-price factors such as quality, service, risk and technical specifications into account; and track complete audit trails and reporting from both an organisation to individual project level
Contract governance – Monitor and control your existing contracts to mitigate supplier risk
With typical business critical contracts requiring at least three months of resource-intensive and complex sourcing activities to achieve, it is an obvious characteristic of any best-in-class procurement organisation to tightly contract-manage these hard-won agreements.
Unfortunately, an all too common contract management mentality of ‘let and forget’ allows excellent sourcing results to pass unrecognised, service levels to lapse and potential savings to go unrealised.
Aside from ensuring that a business has visibility of spend and appropriate tools in place to secure the initial, optimal contracts for the organisation, it is critical to conduct ongoing contract governance to ensure that suppliers are actually fulfilling their promises.
It is impossible to claim to have any spend under management without the most simple of contract management characteristics, such as storing all relevant sourcing and contract information in a single, standardised format. Proactive contract management can come next, with service level agreements, performance indicators, contract amendments and timely review alerting.
By combining contractual information with the actual activity picture through spend analysis, it soon becomes possible to accurately measure the actual contract performance from a supplier and procurement organisation perspective, such as overall contract exposure, on/off contract spend, supplier price compliance and service level achievements.
Best-in-class contract management solutions allow procurement professionals to develop standard contract types by category and then enforce organisation-wide adoption; convert existing sourcing activities into contracts; provide a central, single source of all contractual information accessible to all stakeholders; generate automated alerting reminders and reports; collation and tracking of key performance indicators; full audit trail of contract amendments, such as price variations; and enable multi-tier contract compliance reporting with spend analysis.
Identify and continually enhance the skills of your team
It is a continuing challenge to recruit, train and retain the best talent. As the strategic importance of procurement becomes ever more widely recognised, it is imperative that businesses become more efficient at growing and maintaining knowledge within their organisations.
Professional resource and skills management methodologies must be adopted to ensure the success of any staff talent initiative. Lifelong learning, through a core approach of measuring existing skills, refreshing and renewing skills followed by an impact assessment, must be coupled with ongoing sustainability of the process.
Staff should be motivated to participate through skills recognition and rewards such as certification or alignment to personnel development plans (PDPs). To be successful, learning must be made accessible and available in multiple formats to support the fact that individuals perceive and process information in different ways. Learning is continual and takes time. It is not instantaneous and frequently requires existing knowledge to build on through repeated exposure and thought. The learning environment itself must be continually assessed for relevance and absolute effectiveness in line with the evolving roles of procurement.
Clearly technology alone does not provide the panacea to procurement pressures and challenges. However, equally clear, best-in-class procurement organisations find the correct balance between skilled resources and strong processes, leveraging technology as a key enabler.
Whilst identifying cost savings and improving efficiency is a challenge to be met across many businesses, best-in-class procurement functions ultimately help their organisations to improve profitability, drive bottom line value and offer a distinct competitive advantage to their organisation.