An organisation’s procurement department is a key part of a business owing largely to its impact on the company’s bottom line. The Xchanging 2015 Global Procurement Study of more than 800 procurement decision-makers in Europe and North America found that 47% of respondents consider ‘cost savings realised’ as their number one key performance index (KPI). In fact, the study showed that the top four KPIs for procurement were largely cost-related: cost savings realised, revenue impact, cost savings identified and cost avoidance. However, the reality is that the functions of the procurement department extend far beyond cost-cutting to include other areas such as risk management and sustainability, which are strategic to the success of an organisation. It is therefore obvious that procurement needs to be rebranded as a strategic partner in organisations globally.
Build stronger supplier relationships
When a business requires certain products or services, the procurement department usually liaises with suppliers, communicating the needs of the organisation. Although this seems to be a straightforward process, it lacks the element of value-add. Instead of projecting an organisation’s needs onto the suppliers, an innovative way of going about the procurement process is actually to seek the views and advice of the suppliers themselves. A procurement-mature organisation appreciates the vast store of knowledge that suppliers have when it comes to industry insight, and will look to drive innovation by working closely with its suppliers. Regular communication between key suppliers and management helps to integrate suppliers into the business, further engendering better product development, stronger campaigns and sales activities, and more operational efficiencies. It’s important to understand that your suppliers are as much a source of innovation as other stakeholders in the company – they are essentially, a strategic business partner in the organisation, so drawing from their expertise is good strategic thinking!
Promote internal engagement
Many organisations usually only engage with their procurement departments when they need to purchase something. As a result, the procurement department often works in silo and lacks engagement with other departments in the organisation. Research has revealed that 63% of procurement decision-makers find it hard to cultivate internal stakeholder engagement, with 14% claiming it is as an extreme challenge. This situation has its roots in the fact that the procurement department is not seen as a core function, and because its strategic functions are rarely understood, they are consequently, rarely valued. By not engaging with the procurement department and fully understanding its potential as a strategic partner, companies are not realising their full growth potential. It is, therefore, important for businesses everywhere to raise the profile of their procurement departments by including their monthly achievements in terms of KPI in business reports to management, and making the procurement process a collaborative effort by soliciting input from every department in the organisation when deciding on a purchase. Procurement departments can deliver more than cost savings to the company, and to realise that is to think strategically.
Practice flexibility on company spend
For innovation to flourish, there must be some flexibility to the way company expenditure is managed. Which is to say that overly strict budget controls by the procurement department may lead to the stifling of innovation. In fact, flexibility and innovation go hand-in-hand, and to drive innovation, the business must be flexible and accommodate expenditure where necessary. While the procurement department may feel the need to function as a check-and-balance in the supply chain, it should understand that marketing is a business imperative, and the lack of marketing initiatives usually means tepid sales growth. By realising that flexibility adds value – especially in marketing initiatives – the procurement department would be more willing to allocate a portion of company spend on marketing initiatives. Which is not to say that marketing budgets are expandable beyond reason. A big part of the procurement process involves making cost-effective decisions; so likewise, the marketing department should be expected to convince the procurement department on how their marketing initiatives add value to the organisation. This involves embracing data and analytics to strengthen their business case and contributing their skills across the wider business.
Encourage a cost-conscious culture
Being cost-effective isn’t – and shouldn’t be – the sole responsibility of the procurement department. Although cost-cutting is a key KPI for procurement departments everywhere, the practice of saving and cost-cutting – with good reason – should be inculcated across the organisation for best results. To encourage a cost-conscious culture, companies could educate their employees to think about company money as if it were their own. This causes them to consider the feasibility of their proposals on certain initiatives before applying for funds, thus preventing maverick spending. A cost-conscious culture also forces employees to be accountable for the expenditure on their projects, and ensures that the funds received are used for the intended purposes. Creating a cost-conscious culture within a business is a strategic function, and can be considered part of a procurement department’s KPI.
Engender healthy competition
Studies have shown that the key priority in 2017 for procurement managers everywhere is to reduce costs, a KPI that has been the foundation of every procurement strategy since the beginning. With this in mind, procurement departments everywhere should review the way in which suppliers are selected, instead of using the list of suppliers whose services were engaged in the past. Having a list of preferred suppliers that have provided satisfactory services in the past is helpful, but basing supplier selections on past dealings could potentially put your company at a disadvantage. Essentially, there is no way of knowing whether the services provided by the suppliers are still value for money, or whether there are other options of suppliers that could bring more savings to the company and yet, are reliable. Putting in place a strict, competitive process when selecting suppliers helps to ensure that you get the best value for money on every transaction and forces suppliers to maintain high standards in business. The effectiveness of the procurement department in maintaining a competitive procurement process is yet another strategic business move that can be measured.
Every department in a business plays a vital role in the make or break of it. With that said, it is understandable that they must cooperate and work together to get optimum results. For related articles we invite you to visit our website ThunderQuote
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