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The future procurement function must ready itself to act as a strategic lever to make organizations more resilient and to better respond to rapidly changing market dynamics.
In brief
- Organizations must reimagine how their procurement function operates and assess the new capabilities it will need to better respond to rapidly changing market dynamics.
- Smarter procurement practices and robust due diligence around buying needs can help businesses realize value in both the near and long term.
- Data-driven insights can bring benefits to your organization that are largely self-funded.
Contributors: Utkarsh Verma, and Neha Goel
The world is a different place than it was a year ago. To meet changing consumer demand, manage shifting availability of raw materials and drive operating cost efficiencies, you need to recognize the critical role procurement plays. The procurement function is one lever in today’s extended supply chain ecosystem that can play a pivotal role in the post-COVID-19 recovery and to build resilience to prepare for future disruptions.
We’ve identified three ways organizations can tap into that well of potential:
Make procurement a strategic business partner and central to your organizational goals
The procurement function must evolve beyond its strictly transactional focus on purchasing to become a strategic business partner able to drive efficiencies for the organization. By doing so, procurement can improve your competitive advantage in the market by developing strategic supplier relationships, and improving agility and operational insights. This fundamental shift will require a reimagined operating model based on three key pillars.
First, transform procurement to a category management-focused function, centred around key spend areas and focused on driving business objectives such as better cost efficiencies and improved customer service.
Next, embed redesigned processes and performance measurement to create efficient operations:
- Operational procedures are the detailed process steps that support the category management lifecycle's four essential functions: source to pay process (including strategic sourcing approaches), supplier relationship management, contract management and category performance.
- Performance measures are metrics such as key performance indicators (KPIs) and service-level agreements (SLAs) against all operational procedures that define and measure achievement against business objectives.
And last, implement the necessary technology to enable success of future operations. The procurement function will need to evaluate its technology backbone to assess data accessibility and visibility to enable robust decision-making. Additionally, you should look to use a combination of emerging technologies and e-procurement solutions to achieve efficiencies in your source to pay processes.
A recent EY survey of procurement leaders indicated that more than half view digital as
an immediate priority to enable cost savings, innovation, supply certainty and
service.1 To support this journey, EY and SAP Ariba have come together to help
organizations achieve the benefits of an e-procurement technology.
Identify and prioritize savings opportunities to drive cost efficiencies and accelerate recovery
As organizations look to revamp their procurement functions’ operating model, they can consider various transformational strategies to drive cost efficiencies, accelerate recovery and position themselves for future disruptions.
We typically recommend these six fundamental steps to identify and prioritize savings opportunities:
Accelerate to outcome-focused sourcing
Shifting focus from specifications to business outcomes can deliver forward-looking solutions that meet your current needs while also preparing you for long-term success. Work collaboratively with your suppliers to co-create innovative solutions and commercial models that meet your business goals. Take the time to explain your needs and provide enough lead time for your suppliers to help find ways to save you money.
Used as a true partner, the procurement team can assess the needs of the entire organization and find ways to eliminate fragmentation across the business (because multiple stakeholders are coming to one common team), and bring about efficiencies in the process (because procurement can consolidate everyone’s needs and find better prices).
Leverage non-sourcing value levers
A centralized procurement team can guide you to focus strategically on how your organization is spending money and offer solutions to reprioritize spend where needed. By taking a demand management approach, your organization may be able to reduce or eliminate the need for sourcing.
The three examples below demonstrate the savings possible through this approach:
Leverage the total cost of ownership (TCO) model
Initial purchase price is often just the tip of the iceberg. The TCO model seeks to minimize the cost of an asset over its lifecycle. For example, the lowest-cost fleet vehicle might cost more in the long run once initial delivery, fuel consumption, warranty, service and replacement costs are factored into the equation.
The TCO model can be further evolved to account for critical dependencies in the supply base and potential risks that may require mitigation — for example, the cost of downtime related to delayed deliveries or poor vehicle reliability. By factoring these in at the outset, you can help your organization protect against unforeseen costs should disruption in your supply chain occur.
Accelerate technology adoption
Technology can significantly accelerate your ability to adopt operating model changes, and process automation tools can bring significant savings by automating business processes. Contract cost recovery is one of the levers for savings opportunities; significant contract value is often lost due to lack of tools and processes to monitor compliance with terms and conditions.
EY’s Compliance IQ is a custom-built intelligent automation tool that supports contract
management processes through scalable and automated review of invoice line item
details, leading to cost savings from overpayment.
Enhance spend consolidation
Recurring contracts (e.g., state of good repair) and non-strategic support services (e.g., janitorial services, building maintenance, etc.) can be considered for pooling spend base to improve quality, procurement cost and management overhead.
Leverage current market scenario
Wherever possible, take advantage of low commodity prices to accelerate procurements. For example, by monitoring the cost of oil prices, a construction company could prioritize accelerating the resurfacing of local roads where possible to take advantage of depressed prices of tar.
Build a resilient supply network through supplier risk evaluation and management
Supply chain disruption is a perennial risk to companies, especially in a highly globalized age where businesses commonly have long, complex and opaque supply chains. These supply chain structures are fundamentally ill equipped to cope with increasing numbers of unplanned disruptions.
The COVID-19 pandemic caught many companies off guard and underscored the notion that a rigid supply chain can fail under stress. Organizations globally are looking at their supply chain strategies to be more resilient for the future.
Most supply chain leaders have been complacent to have visibility into tier one supplier risk. However, a true handle of risk requires visibility into the tier two+ supplier network. Assessment of supplier risk requires an astute understanding of category-/supplier-specific risks and possible mitigation measures to be undertaken.
EY’s supplier risk management framework provides customers with visibility into all
aspects of supplier risks and helps evaluate reputational consequences on account of
challenges from supplier continuity, execution, information security, financial,
regulatory and sustainability.
Now is the time to develop a procurement transformation roadmap that will help you accelerate savings and risk reduction in the recovery phase. Investing in a future-ready and technology-enabled procurement function can help you emerge stronger and more resilient to future business disruptions. Failing to begin this journey now leaves your organization exposed to greater geopolitical, environmental and economic risks.
1https://www.ey.com/en_in/consulting/supply-chain-operations
Summary
Smarter, more imaginative procurement practices can free up money to allow you to invest in other projects that will generate revenue and enhance your bottom line. And that can pave the way to enhanced supply chain partnerships and enduring profitability that can make any company more resilient in the face of emerging challenges.