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Collaborative procurement and the impact on finance

Optimising procurement increases profitability, says Lance Younger, managing director of supply chain and procurement consultancy INVERTO, a Boston Consulting Group company.

Procurement is a key area where companies can deliver tangible financial improvements and increase resilience, which is particularly important during this period of economic and political uncertainty.

Leaders in this space need to deploy comprehensive programmes of sustainable and integrated change to capture and, most importantly, deliver an impact. This procurement transformation is far reaching with enterprise wide value also being achieved across cost, quality, risk, speed, innovation and ESG (Environmental, Social and Governance) levers.

Improving procurement leadership, operating models, core capabilities and performance to enable business growth

In practice, optimising procurement operations and performance is a complex process, which involves a holistic approach for maximum results. Successful companies manage to address a number key dimensions:

  1. Implementing agile, collaborative sourcing programmes to deliver P&L impact
  2. Securing new sources of supply to improve supply chain innovation, sustainability and risk
  3. Enhancing supplier performance and create new supplier ecosystems to manage uncertainty and access new sources of value
  4. Integrating Zero-Based Budgeting, demand management and procurement initiatives to improve enterprise cost management
  5. Improving procurement leadership, operating models, core capabilities and performance to enable business growth
  6. Embedding digitization and intelligence in procurement processes, operating models and categories to increase efficiency, effectiveness and experience

Firstly, procurement need to define its purpose which will be integrated within its vision, strategy, objectives and priorities. This will be aligned to the organisational goals to deliver total shareholder value and is typically focused on either operational excellence, product leadership or customer intimacy.

To fully deliver this and exploit the existing potential, leadership and a professional collaboration and governance model between procurement, suppliers and key functions is needed.

Current state assessment, benchmarking and opportunity assessment form an initial baseline which should be reviewed and challenged regularly. From this, companies create a dynamic initiative portfolio across all key dimensions, which feeds into the programme or annual plan for improvements to the procurement organisation, as well as category and sourcing programmes.

Agile, collaborative sourcing programmes to deliver P&L impact

Through category management and strategic sourcing programmes procurement operationalize their overall strategy and capabilities.

The type of opportunities that procurement deliver now are more complex and enterprise wide.  These extend far beyond the typical commercial approaches and the additional establishment of strategic product group management. Examples include zero-based budgeting, target cost management and design-to-cost approaches.

As well as price and specification focused procurement optimisation, a reduction in working capital is one of the most promising measures. Reducing stock and receivables while increasing liabilities results in increased liquidity and decreased capital requirements.

The way these opportunities are delivered is now more agile and collaborative, and more active programme management techniques are used, for example:

  • Programme performance management including a programme audit, initiative acceleration, and opportunity portfolio management;
  • Value enablement and delivery including a category delivery review, flexible on demand delivery support, continuous structured idea generation and fast track programmes;
  • Stakeholder management and engagement including an expert and experienced project team, stakeholder leadership and business as well as geographical coordination.

The CFO imperative

For the CFO to achieve a procurement impact in the short and long term, it is important to anchor all changes in the organisation. This ensures that savings and performance improvements can be achieved sustainably.

  1. Business leadership

Act as a role model, business champion and involve procurement early, especially in strategic initiatives and supplier facing programs.

  1. Invest in procurement

The return of investment for every pound invested in procurement is frequently higher than investment in other areas. Savings generated from procurement can fund growth, investments and manage uncertainty.

  1. Enterprise cost management

Help procurement and the business deliver benefits beyond price changes.  Specifications changes, policy and demand profiles, as well as ZBB all involve business and finance.

  1. Get started

Pick one procurement capability and one sourcing category with alignment to the organisational purpose, then accelerate activities to achieve short-term successes in these ‘lighthouse’ projects. These help to mobilise partners and pave the way for far-reaching changes.

Optimising procurement increases a company’s profitability. Sustainable procurement transformation links procurement’s purpose to the impact it delivers beyond just financial benefits.  Intelligent business, procurement and supplier leadership, combined with creativity, collaboration, agility and digitalization delivers real impact. Finance and procurement collaboration is key to delivering this.

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