How you can boost your bottom line in a difficult economy by re-engineering your procurement function?

It is already past midnight and procurement is no longer the Cinderella slaving away in the grimy kitchen. Just as surely as the Fairy Godmother recognized Cinderella's true potential. Organisations around the globe are increasingly recognising the strategic role played by the procurement function.

Although it has been considered a necessary but, hardly glamorous process for so long, procurement is increasingly seen as pivotal to business success. According to Hal Sirkin, Senior Partner and Managing Director at The Boston Consulting Group, procurement will assume even greater strategic significance for multinational firms in the future.

For those businesses that had not yet discovered the strategic value of their procurement function, the global uncertainty that we presently live within has been an inevitable eye opener. Clients and customers seeking better value from products and services, impossibility of raising prices, combined with low, declining or disappearing growth prospects are forcing firms to find and focus on areas within their business that can save their eroding bottom lines.

Crisis bring with it opportunities, and in the current business environment, a procurement function ripe for reengineering provides organisations’ with a last frontier in which to find hope and to seek opportunities.

Business process re-engineering

In their 1993 primer on the subject and best-seller, 'Reengineering The Corporation', Michael Hammer and James Champy defined business process re-engineering as a "fundamental rethinking and radical redesign of business process to achieve dramatic improvements in critical measures of performance such as cost, service, and speed”. They recommended systematically starting over and reinventing the way in which work gets done.

Hammer and Champy argued that it was necessary to analyze and redesign workflow within and between enterprises by wiping the slate clean; essentially starting from scratch. This approach was necessary because the design of workflow in most large corporations, they felt, were based on assumptions that may no longer be valid. The assumptions that organisations made long ago about their organisational goals, people and technology may have changed over time. But their business processes may still be stuck in the past. In other words, the business processes required reengineering.

Procurement process re-engineering

Procurement process re-engineering, then, is the analysis and redesign of the procurement function of your business to mine hidden strategic value and to bring about dramatic improvements in performance.

Business process re-engineering is not an incremental approach. Instead it aims at total reinvention. In terms of results, business process re-engineering is not for companies that want a 10 percent improvement; it is for companies that seek a ten-fold increase. If you are merely seeking out ways to squeeze out incremental gains from within the procurement function, procurement process re-engineering is not the way to go.

Who needs procurement process reengineering and why?

The business case for business process re-engineering was answered simply by Hammer and Champy, in the opening paragraphs of 'Re-engineering the Corporation':

Not a company exists whose management doesn't say, at least for public consumption, that it wants an organisation flexible enough to adjust quickly to changing market conditions, lean enough to beat any competitor's price, innovative enough to keep its products and services technologically fresh, and dedicated enough to deliver maximum quality and customer service.

So, if management want companies that are lean, nimble, flexible, responsive, competitive, innovative, efficient, customer focused, and profitable, why are so many businesses bloated, clumsy, rigid, sluggish, noncompetitive, uncreative, inefficient, disdainful of customer needs, and losing money? The answer lies in how these companies do their work and why they do it that way. The results companies achieve are often very different from the results that their managements desire…

In other words, if you feel your procurement function is losing money for you and that it is bloated, clumsy, rigid, sluggish, noncompetitive, uncreative, inefficient and disdainful of customer needs, both internal and external, it may be time to take a fresh look.

Even when a procurement division is fulfilling its role in a reasonable manner, there may still be opportunities to greatly enhance its performance in terms of cost, quality, lead time and level of service.

In 'Business Process Re-engineering: Breakpoint Strategies for Market Dominance', Johansson et al. explain that businesses are driven to change by the customer, by competition, by cost, by technology shifts and even by shareholders. As many businesses world over are finding out, many of these factors are simultaneously and devastatingly at play within the current economic environment. The global recession has given a new meaning to the term market pressure.

Customers are seeking better value for money

Only a rare few consumers have not seen their incomes and savings decline, and the value of their investments plummeting to the abyss. Difficult economic conditions have made clients and customers the world over seek better value for money than ever before. And it looks like they will continue to do so for some time to come.

Even while the US and the global economy looks forward to the upturn, British consumers and businesses are seeing the need to tighten their belts even further. And that is before the true impact of Brexit is felt.

As a result, businesses find it difficult to raise prices even to keep up with increasing costs. This will continue to erode the bottom lines and put further pressure on already stretched businesses.

If your business has not moved to a process orientation, especially in the procurement area, now may be the best time.

Even for super-efficiently managed companies, re-engineering the procurement function may present a last frontier, challenging leadership to evaluate the very purpose, principles and assumptions that are in place and have produced the current levels of performance. They may discover great scope to eliminate waste and become more cost effective.

Limited growth prospects

A study by Booz Allen Hamilton, on the world’s top 1,000 spending companies on research and development found no correlation between the amount spent and the companies’ top or bottom lines. Interestingly, the study was conducted before the global financial crisis manifested itself.

Despite weak, but sure signs of recovery, many businesses are still facing limited growth prospects, and some firms are struggling to maintain their existing business volumes, which are for the most part, likely to be lower than their pre-financial-crisis levels. Other firms are being forced to run faster than ever before to merely slow the decline in business volumes.

Despite signs of the upturn bolstering the sentiments in the industrial firms and in the construction sector, the prospects for the services sector which represents the larger proportion of UK business sector is not yet showing significant signs of recovery.

Other avenues for enhancing profitability have been thoroughly explored; and exhausted.

When there is a lot of pressure from customers and few prospects for price increases coupled with declining sales volumes, and little hope for growth in business, it makes perfect business sense for firms to explore every possible avenue they can to enhance profitability. And for businesses in the UK who are likely to be affected on two fronts, being hit both by higher taxes and by the impact on consumers of drastic cuts in public spending, the procurement process may present a last ray of hope towards enhancing profitability in the short run. The good news is that any dramatic improvements achieved before the upturn will place the business in a more competitive footing for the long run. For some firms that had not yet tried to strategically leverage their procurement function, the potential for cost savings may be significant. Those firms that have realised the strategic value of procurement function, but have not really paid that much attention to it may now give it a second look in their quest to squeeze the maximum profits for their shareholders.

Even firms that have squeezed out all the efficiencies to be had in their procurement function may benefit from taking a fresh look at possibilities, within the context of the drastic changes that have taken place recently in the business climate.

What do all of the above factors taken together mean for your business? It simply means this: When opportunities for top line growth are limited, and organisations have squeezed out all the efficiencies to be had in their other systems, the procurement function could become a de facto profit centre as opposed to a mere cost centre.

How would you find out unless you take a look? And there could be more good news, even before you venture out on a procurement process re-engineering project. This is because changes in business environment may have changed the return on investment ROI and payback of projects.

Procurement re-engineering projects that may have seemed of little value a few years ago when businesses were doing well and flush with money may now offer real value because returns on investment and payback periods may be different when viewed in today’s context.

Can your business benefit from procurement process reengineering?

Obviously, you need to be able to put up a strong and well reasoned case forward if you wish to embark on a procurement process re-engineering in your firm. After all, it may cost money, cause disruptions to the business, and if what you have heard about the history of re-engineering is anything to go by, pave way for human resource issues. So before doing anything else, you need to be convinced yourself about the merits of such a project.

If your business has not moved to a process orientation, especially in procurement, now may be the best time. Even for super-efficiently managed companies, reengineering the procurement function may present a last frontier, challenging leadership to evaluate the very purpose, principles and assumptions that are in place and have produced the current levels of performance. They may discover great scope to eliminate waste and become more cost effective.

Will procurement process reengineering bring value to your business?

You could begin by asking yourself these questions regarding your procurement function; and be honest in how you answer:

1 - How big are procurement costs in your business, and in your industry?

2 - Do procurement costs take up a significant proportion of your costs? The scale of benefit would depend upon how important direct and indirect procurement costs affect your bottom line.

3 - Have you benchmarked your procurement function to businesses operating in your industry at similar levels?

4 - Is your procurement function providing strategic value to your business? Do you even know?

5 - Does the management view the procurement function as a ‘necessary evil’ within the business rather than a value added service?

6 - Does procurement have board level representation within your business? And this is a question we would not even dream of asking about finance, marketing or operations.

7 - Does the procurement function appear disjointed and overly focused on internal efficiencies or getting the best price?

8 - Do you occasionally end up with maverick spends due to poor controls over spending?

9 - From your vantage point and experience, do you feel the procurement function is capable of making a better contribution, especially in terms of improving quality, lead time and a better level of service to both internal and external customers?

10 - Do you believe your procurement function could contribute to achieve the same quality, lead time and service at a lower cost than at present?

11 - How up to date and modern is your procurement function? Is it antiquated and still operating in this 21st century according to a 20th century—or worse, older—design?

12 - Is it bloated, clumsy, rigid, sluggish, noncompetitive, uncreative, inefficient, disdainful of internal customer needs, and losing money?

If any of these words apply to your procurement function, you can be sure you can mine great value within your procurement function.

If you were honest in your evaluation of the status quo, by now, you would be in a position to judge whether your business can benefit from procurement process re-engineering.

If your business has not moved to a process orientation, especially in procurement, now may be the best time. Even for efficiently managed companies, reengineering the procurement function may present a last frontier, challenging leadership to evaluate the very purpose, principles and assumptions that are in place and have produced the current levels of performance. They may discover great scope to eliminate waste and become more cost effective.

Some businesses can benefit more from procurement process re-engineering.

Procurement costs and procurement efficiencies matter more in some sectors than in others. It is also important to consider whether procurement is a core-process or is relatively less important to the business. In evaluating the relative importance of procurement costs, both direct and indirect procurement costs need to be considered.

Here are situations that may lead to greater benefits from a strategic reengineering of the procurement function:

When procurement costs make up a large part of operational costs.

For companies operating in an industry in which procurement costs make up a significant percentage of operational costs, it surely makes sense to seek out avenues that may dramatically reduce costs; and this is what procurement process reengineering promises.

Manufacturing businesses such as Unilever seeking a competitive edge, or even trying the benchmark themselves to their peers will benefit from a radical reorganisation of their procurement function.

Service organizations whose indirect procurement cost component make up a significant part of total costs may also stand to gain from procurement process reengineering.

Where procurement function has evolved focusing inwards.

In some companies, procurement function has evolved focusing on functional excellence— reducing the prices it pays and reducing the cost of the procurement function itself—but looking inwards rather than outwards. Hugh Baker and Fabrice Saporito of Booz Allen Hamilton described the dangers of such a situation in their article, “Avoiding the Procurement Rabbit Hole”.

An internal focus limits the influence procurement has on operational decisions.

When the procurement function focuses on reduced prices and cost reduction, they are limiting themselves to just two levers of value creation. Baker and Saparito point out that the recent innovations such as e-procurement and procurement outsourcing are ways of moving those two value levers. But, an internal focus leaves out "many other potential levers of value when procurement engages the rest of the business and suppliers. These levers of value include funneling all demand into the best supply contracts, setting policies on acceptable demand, and influencing new product design".

An internal focus reduces involvement in strategic decisions because the “more procurement focuses just on improving itself (i.e., on the levers of price and procurement cost), the less engaged it becomes with other functions”. They feel that a singular focus on cost typecasts procurement and reduces the chances of being included in more strategic decisions. All too often “procurement gets invited to participate only after the decisions have been made”, to help with negotiations and drafting of detailed contracts.

An internal focus also runs counter to the increasing complexity of business in the 21st century.

The world of business is increasing in complexity, and finding top-line growth elusive, companies are increasingly turning to complex business models to create revenue and bring down costs. Often these models involve "longer supply chains, multiple languages and legal systems, and bespoke commercial arrangements and ownership models."

In the face of changing traditional supply models are changing, procurement functions need to step up to the table equipping themselves with more sophisticated skills to handle those ever increasing complexities.

Procurement process re-engineering would help your company’s procurement function gain its rightful place within the business, leading to better profits and performance.

Author: Tony Lockwood

Date: December 2016

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