Procurement- understanding the process.
Ideally, what should be the metrics used at your company to measure the success/contribution of the procurement organization?
57% of chief procurement officers surveyed recently reported that short-term cost containment is a higher priority for their organizations than long-term growth. Professional buyers are focused on gaining the best price for goods and services received while shifting appropriate risk to suppliers. Since 2008, more than half of the 300 companies surveyed in a recent McKinsey survey cut their costs by more than 10%. As companies look to extend cost containment, purchasing professionals must increase their efforts to work with suppliers to create more cost-effective methods of supply, lower delivery costs, and generate greater utilization of products.
Single Source Suppliers
Single source negotiations can be divided into two types of negotiations.
- Multiple source - There is more than one option available, but buyers choose to contract just one supplier.
- Sole source -There is only one source for the product, material or service that the buyer needs to purchase.
With more than one option, buyers must choose the option that offers overall value or lowest total cost of ownership (TCO) for their organization. When dealing with truly single sources, buyers must build a more effective negotiation strategy, one that builds their power by
- Assessing the needs of both parties.
- Estimating the consequences of no agreement to the supplier.
- Leveraging long-term contract options and the possibility of company-wide spend.
Most importantly, procurement must be involved in the early stages of product development and specification preparation.
A supply chain professional can deliver value that goes well beyond cost, quality, and efficiency. What if traditional behaviors were replaced with a new vision of supply chain? According to Dr. Shohelia Lunney of the Lunney Advisiory Group, procurement leaders must see their organizations as engines for growth, innovation, and differentiation.
Dramatic changes to business models through supply chain innovation can be seen in several industries:
- Same-day/next-day delivery in the parcel industry.
- Mass customization in the consumer PC market.
- A rapid cycle of new product introductions in the retail clothing space.
Purchasers should ask themselves how the supply chain can be a catalyst for innovation. Having an open mind when examining a supply chain can turn an entire buying strategy on its head, finding creative solutions to long-term problems, creating higher levels of value, and forging stronger relationships in the process.
The Association of National Advertisers (ANA) recently embarked on a qualitative and quantitative analysis. It explored how procurement can operate to better understand and meet the metrics used to measure procurement organizations’ contributions, as well as the importance of each metric. It’s no surprise that procurement professionals rated cost reduction and cost avoidance as the most important metrics used to measure the contribution of procurement today.
However, when asked, "Ideally, what should be the metrics used at your company to measure the success/contribution of the procurement organization?" they ranked supplier performance improvements and process improvements, in addition to cost reduction and cost avoidance, at the top. The way procurement professionals buy, and the collaborative ways they work with suppliers to develop and implement cost-effective solutions to improve bottom line ROI, has changed dramatically since 2008. The need for collaborative partnerships and innovative problem solving has changed the way buyers select partners, meet critical needs, and negotiate more profitable long-term agreements.