Better procurement used to mean just cutting costs, but today businesses find innovation and collaboration are the key to improved efficiency
According to the latest global procurement survey from Deloitte, while cost reduction remained the top priority for procurement professionals, many are now placing a premium on better innovation and collaboration to create sustainable supply chains, particularly through greater use of technology. It is here that CFOs and FDs need to be able to make a persuasive case to fellow executives of the benefits of modernising procurement and investing in the people and technologies needed to make it a reality.
“I don’t think the focus on cost reduction will ever change,” says Mark Ellis, partner at procurement consultancy 4C Associates. “[But] how we drive that change through technology will alter things. Setting the criteria by which you are evaluating a service, product, brand or relationship – that matters.”
One of the first steps to creating a more efficient procurement process, and one often overlooked, is developing a clearer understanding of where money is spent through analysing spend data and evaluating contract delivery. Using digital systems and statistics to provide cost insight and market intelligence should set the basis for any improvement project.
“Procurement is most effective when it goes beyond this focus on cost reduction. Not focusing purely on securing the lowest price and squeezing suppliers. Businesses that ditch this traditional approach in favour of a procurement strategy centred around business intelligence are seeing more substantial, longer-term returns,” says Rob Peck of procurement consultancy Inprova.
It should be no surprise that the other top priorities for procurement chiefs, according to the Deloitte study, were stronger ties between specialist procurement teams and the CEO/CFO and increased levels of supplier collaboration. Although the principles of efficient procurement are the same for small and medium-sized businesses as they are for large multinationals, the obvious difference between the two is resource. For smaller businesses finding ways to enable greater efficiency and speed up processes by utilising new technology could arguably be of most benefit. This is especially the case where a company’s procurement “team” consists of just one person operating within the finance function.
Working together
Richard Turnock, who became executive director of corporate services at River Clyde Homes in Scotland in December last year, has restructured his organisation since joining so that procurement sits in the finance team and “finance gets involved in procurement from the start to see that the procurement strategy is aligned to the corporate strategy”. Although not affected by the housing association rent caps introduced in the 2015 Budget in England, Turnock’s changes could help River Clyde Homes adapt and innovate around procurement and the supply chain, saving money in the event of similar rent caps being introduced north of the border.
Turnock, who is a Scottish CA, says he is challenging the approach from both a finance point of view and that of procurement to ensure a clearer end-to-end process that matches corporate goals.
40% of procurement professionals are enhancing the function with tech such as cognitive analytics and digital reporting
Emerging technologies
Although Deloitte’s survey of 324 procurement professionals found 60% do not have a clear digital strategy, the 40% utilising it are turning to the likes of cognitive analytics, crowdsourcing and digital reporting. The report identified a clear uptick in the use of these technologies. And most (70%) businesses reported investing in the use of self-serve portals. Mobile technology was being used by 42% (up from 23% last year). The same was true of cloud services (45% up from 26%) and social media (16%, up from 6% in a year).
Stuart Hough, managing director of Travis Perkins Managed Services, which works with public and private sector organisations, says his business is using new technologies to transform its procurement services and foster greater collaboration. It is saving its clients as much as 20-30% of labour costs through a “rapid response” service in areas such as local housing associations by delivering goods and services to the sites where repair and maintenance teams are working.
It is also taking this “just in time” principle one step further using unmanned facilities based on near-field communication technology. Clients use hand-held PDAs to swipe items they need, which then update stock registers at Travis Perkins’ headquarters, allowing them to remotely restock. Hough estimates using this technology allows clients to save between 20-25% on headcount.
“We can do these things if it’s a real partnership, but it doesn’t work if there is a traditional supplier relationship,” Hough says.
And as the Deloitte survey concluded, it is that relationship that remains key. Over the coming year another major focus for most procurement professionals will be to restructure supplier relationships to continue to deliver value. And delivering value is at the very heart of this issue. Procurement must evolve into a value driver rather than merely a buying service within a business. This is the model established within the most effective and progressive procurement functions.
In the construction sector, businesses are finding huge benefits from better collaboration with suppliers. Paul Chesworth, director of building at property consultants Bilfinger GVA, explains: “Over the past year there’s been a culture change in the supply chain. People want to work collaboratively. We need to be more selective and foster longerterm relationships rather than one-off projects.”
Greater collaboration is taking root in the housing sector, too. Housing trusts are seeing more collaboration in the form of longer contracts, pooled resources with other housing associations and more investment in technology by suppliers. Sharon Brookes, property service director at housing association Pickering & Ferens Homes, says: “Because suppliers know they are in it for the long-term we get a better relationship with them and they can invest more in technology.
“There’s also a better understanding of our business and stronger performance from suppliers. I can see increased use of technology and collaboration because we need things more cheaply and efficiently.”
War for talent
42% now use mobile technology to enable better procurement
Risk factors
“Brand image in all markets is paramount,” says Ellis. He points to various corporate scandals from the BP oil spill, to the UK horsemeat scandal and Bangladeshi clothing sweatshops. All of these impacted on household brands from BP to Tesco and Marks & Spencer. And they pushed down profits, which is where the procurement brief comes in. “As procurement becomes more engaged in the wider business, it should help to mitigate risks. This is a different way of thinking for procurement,” Ellis adds.
Until recently, most supply chain risk was considered reactively and on a case-by-case basis by senior management. If a supplier went insolvent, steps would be taken to bring in a new supplier or extend financial support to the existing one to help keep it afloat. But in recent years the fall-out from high-profile supply-chain disasters, notably in sectors such as food manufacturing and the car industry, have increased senior management interest in the risks inherent in the supply chain. And gradually, assisted by the added pressure of a global financial crisis and new requirements for greater transparency on board thinking on strategic risks, this has led to stronger focus on procurement and supply chain risk.
As Turnock says: “Procurement is a standing agenda item in our audit and finance committee. We also use internal audit to review our procurement processes.”
When things go wrong it is likely to have a negative impact on a business’s reputation, customers and credit rating. At worse it could put the entire company out of business and harm a raft of other suppliers reliant on that business.
It’s one area where the manufacturing sector as a whole – and in particular car and aeroplane manufacturers, where key suppliers are critical to the production process – is more advanced. Many manufacturers have had to learn painful lessons on procurement risk the hard way.
When supply chain and procurement together can account for 60-70% of business costs, it is clear that team has a robust argument to present to management when it comes to investing more in the procurement function.
Another trend identified in the Deloitte research is the continuing desire to outsource procurement activities, although there is less of a focus on outsourcing strategic activities for the first time since 2011. This reflects a caution that hasn’t previously existed or perhaps a tipping point in the perceived value of external support. This may be the proof that procurement teams are getting through to management in the struggle to make sure procurement and supply chain management are viewed as a strategic function.
The digital revolution has changed a lot for procurement professionals, whether working in large or small businesses. Those in smaller businesses looking to improve procurement are arguably more agile in terms of adapting and absorbing new technology.
And while technology alone won’t be the complete solution to improving procurement and overcoming the challenges the function faces, it presents an opportunity for procurement leaders to embrace during a tough economic time. Better still they may possibly create an environment for more sustainable procurement for the future.
62% - number of procurement leaders who feel their team lacks the right skills for the job
Taking a temperature: How confidence could affect procurement
The quarterly ICAEW/Grant Thornton
Business Confidence Monitor looks at
five key areas as well as overall
confidence which, while still relatively
positive, was found to be at its lowest
level for three years. What effect could
this have on procurement?
Profit growth
Despite the weakest outturn growth
since Q3 2013, businesses “predict
turnover and sales to continue
growing”. A decline, particularly in
manufacturing, was put down to the
strength of sterling, making it harder
for companies to compete at home
and abroad – in procurement this
could lead to more expensive raw
materials, with those in the supply
chain able to command higher prices
in their respective territories.
Export growth
Subsequent falls in sterling resulting
from a belief interest rates would not
rise before later in 2016 may have
fuelled some recovery in exports.
Could the ability of businesses to
output goods for export turn on the
strength of relationships in the supply chain that were affected by the earlier
high value of sterling?
Capital investment growth
Capital investment growth continues to
fall and R&D remains subdued
according to the monitor, with muted
sales and profits resulting in weaker
investment plans. Could this mean vital
investment in modern technological
systems – capable of transforming
stock monitoring, replenishing and
automation etc – is delayed?
Spare capacity
More firms are operating below
capacity, especially in manufacturing,
IT and communications. In retail, a
move away from bricks and mortar
towards online has weakened demand
for floorspace. Is this increasing the
cost of warehouse space for
components and goods?
Employment growth
While employment growth has eased
off, an earlier concern about skills
shortages seems to have plateaued.
This could mean teams, including in
procurement, are feeling the benefit of
earlier recruitment strategies
Visit our Economic Insight hub for the latest Business Confidence Monitor updates.
Download pdf article
- Buying into change
Finance & Management Magazine, Issue 243, May 2016
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Update History
- 11 May 2016 (12: 00 AM BST)
- First published
- 07 Nov 2022 (12: 00 AM GMT)
- Page updated with Further reading section, adding further resources on cost reduction and efficiency in procurement. These new articles provide fresh insights, case studies and perspectives on this topic. Please note that the original article from 2016 has not undergone any review or updates.