Archive: August, 2014

What’s the agenda?

Introduction

Research from the Hackett Group published early this year shows that procurement’s priorities continue to shift from focusing on cost to expanding the scope of spend influenced. The law of diminishing returns means that procurement is finding it more difficult to deliver savings from traditional categories. Consequently, procurement professionals are pushing into new categories to maintain past successes. This requires new skills and a re-prioritisation of existing skills. In particular Hackett’s research suggests that procurement should focus on supply risk, better utilisation of technology and broadening procurement’s measures.

Supply risk

Deciding the appropriate level of resource for supply risk mitigation activity has always been challenging. In the past many other strategic areas such as category management and SRM have had a higher profile. For most organisations supply risk mitigation has involved scanning supplier market intelligence for signs of financial distress and evaluating alternative sourcing arrangements. Unfortunately, this approach often felt time consuming and only appeared useful in the rare event that a supplier’s failure could be linked to its deteriorating financial health.

Increasingly, however, the scope of procurement’s role in risk management is expanding. Hackett considers a range of risks including demand side volatility, threat of competition, supply volatility, talent risk, regulatory risk, global economic crisis, financial volatility, supply chain risk and geopolitical risk.

From a more operational perspective, we see that safe-guarding sensitive and personal data private is a burning issue. There is no doubt that the amount of data stored and used by suppliers is growing exponentially. This gives rise to some critical questions, for example, what role does procurement play during the supplier pre-qualification process if suppliers will be handling sensitive data; and how should procurement work with IT to understand and track data-security compliance? For these and other risk-related topics, the key to success will be finding the right balance of governance, people, processes and technology to actively mitigate and manage supply risks. Easier said than done!

In my post on 28 September 2013 called Big Data I highlighted research from Gartner and Aberdeen that forecast the rise of big data. This presents both an opportunity and a threat for procurement. If we fail to develop the skills to manage big data then we will be left behind. If, on the other hand, we can prove to customers and suppliers that we understand the importance of big data and have the skills to keep it safe and analyse it appropriately, then we can get a much better grasp of the world around us.

Procurement technology and tools

Hackett believes that new procurement-related IT spending will be limited in this year. Unfortunately this means that Procurement and IT teams will not have lots of shiny new toys to play with. Instead, we will have to reconfigure or extend existing applications in order to obtain additional value from them. One way to do this is to improve the quality of the inputs. To that end, Hackett says that master data management (MDM) remains a priority in 2014. This was also the case in 2013 suggesting that procurement still haven’t got to grips with it.

Reinventing procurement’s value proposition

Savings have long been the key measure of procurement’s success. This is partly because that’s what our customers wanted to hear and partly because that’s what we thought we could measure. I am critical of procurement reporting on savings because it’s akin to someone marking their own homework. Like Aberdeen, Hackett say that procurement is becoming more sophisticated. While Aberdeen (see Big Data) focus on spend under management, procurement contract compliance and savings that are actually realised and implemented, Hackett believe improved performance in spend reduction, internal/supplier compliance and customer satisfaction are the key areas.

Conclusion

So what does the research from Hackett tell us? Procurement must broaden its agenda beyond savings. It must be better aligned to its customers and the overall business strategy. Perhaps it’s the legacy of the financial crisis but understanding risk is more important now. Central to these areas is a flexible approach that has good quality data as its foundation.