Top procurement organisations generate significantly higher savings than the average, but are they reaching the limits of what savings can be made?
World-class procurement organisations now operate at nearly 20 per cent lower cost as a percentage of spend than typical companies, according to The Hackett Group. However, it warns that these world- class organisations have reached the limit of their ability to reduce costs.
Hackett’s research found that world-class procurement organisations generate purchased cost savings equal to more than nine times the cost of procurement – more than double the ROI generated by typical companies.
But the ability of world-class companies to generate savings declined dramatically in 2014, dropping by more than 17 per cent, it said, warning that it expects ROI at these organisations to further decline next year. At the same time, ROI at typical procurement organisation is expected to show a slight upward trend, improving by 4-7 per cent in 2015.
“The value proposition of procurement is clearly evolving,” says principal and global procurement advisory practice leader Chris Sawchuk. “Top procurement organisation are running
extremely lean. Our forecasts show that world-class procurement organisation are unlikely to be able to generate significant additional cost savings or ROI improvements next year. But they are expanding their value proposition in other areas, to better differentiate themselves.
“A key element of this is the focus on becoming a trusted advisor to the business. This is a role that procurement organisation have aspired to for some time. But getting there is challenging, because it’s a position that is defined by the stakeholders. Procurement needs to create an environment where the business appreciates and respects the value of the insights they can offer, and reaches out to them proactively for guidance before making key decisions. This is a much more complex relationship than one where procurement’s primary value is generated by delivering savings.”
The research identified five areas where world-class organisations are adopting procurement strategies to differentiate themselves: being a trusted advisor to the business; driving suppliers to innovate; providing analytics-backed insights; protecting the business from risk; and employing an agile approach to staffing.
World-class organisations have a high level of involvement in planning and budgeting half the time, nearly four times more often than at typical companies.
Hackett also found that these organisations are effective at building strong business relationships with key suppliers, enabling them to work collaboratively to reduce costs and sometimes even create customised and unique breakthrough solutions.
Providing insights requires having the tools and expertise to turn data into actionable knowledge. The ability to view spend data by suppliers on a global basis is a building block of more predictive analytics. World-class organisation have a significant level of information available nearly 90 per cent of the time, more than twice as often as typical companies, the research found. They have also mastered this competency to the point that analytics, market intelligence and benchmarking are offered on demand as a service to key stakeholders.
Hackett also found that organisation with a formal and broadly-applied strategy for assessing risk have nearly 25 per cent greater procurement ROI than those without them. This includes completing supplier risk assessments and working with finance and other stakeholders to determine the best mitigation strategy when risk exposure is identified. The research also found that world-class organisations are distinguished by the way they attract, develop, and retain talent. Their efforts are not limited by geographical borders, as they hire globally and from other parts of the business, opening the door to new sources of skills and fresh thinking.
The importance of collaboration is also highlighted in a report by Noosh, a provider of web-based integrated project and procurement management technology. Its 2014 Project & Procurement Management Benchmark Report says that teams that collaborate and employ collaborative sourcing strategies see significant cost savings per project and manage projects more efficiently.
“We found that while an average worker manages 250 line items per year, the top Noosh users manage more than three times as many, allowing for a high level of efficiency in collaboration and, in turn, providing the opportunity for growth,” says Ofer Ben- Shachar, CEO of Noosh.
The report said that the act of collaborative sourcing (multiple bidding on one central platform) results in 20.7 per cent average savings, when comparing the lowest estimate versus the average of all estimates.
Another option for companies is to outsource some or all of their procurement activity. Dairy Crest, for example, recently outsource some £250m of spend to Proxima, a procurement services provider which now manages over £6 billion of operational spend from clients across a broad range of industries including consumer products, financial services, healthcare and media and entertainment.
Dairy Crest brands include Cathedral City Cheddar cheese, Clover, Country Life and FRijj. It also delivers milk to around 750,000 households. It has enlisted Proxima to assist with all indirect costs, in areas such as fleet and logistics, corporate services and supply chain.
Dairy Crest procurement director Simon King says: “Proxima demonstrated expertise across all categories of indirect spend at Dairy Crest. Coupled with the ability to deploy specialists in a quick and flexible way and a pure focus on procurement, we are looking forward to working together to deliver significant results.”
Proxima is tasked with identifying and implementing initiatives to enhance the commercial value of Dairy Crest’s supplier relationships as well as the management of indirect categories in support of the company’s wider long term strategy. At the heart of this approach is the objective of improving performance and aligning the benefits of success across the entire organisation and supply chain.
Procurement salaries outpace marketing, IT and finance
Pay awards for purchasing professionals averaged 2.0 per cent in 2013 and 26 per cent had a pay freeze or pause, according the latest salary survey from the Chartered Institute of Purchasing and Supply. Senior and middle ranking purchasing managers are now more highly paid than marketing, sales, HR, IT and finance, the survey found.
The average award excluding pay freezes was 2.3 per cent. In the private sector, 14 per cent of respondents received a pay freeze, but this figure was 32 per cent in the public sector. Forecasts for pay awards for the coming year are 2.5 per cent. 20 per cent of respondents forecast a pay freeze although 51 per cent are forecast an increase of 3 per cent or more.
The year-on-year increase for purchasing and supply middle managers was 3.8 per cent. Median basic pay for head of
function and senior managers dropped slightly this year, while pay for middle managers and below either rose or stayed the same.
CIPS also found that buyers and
purchasing managers who are members or associate members of the institute could expect to earn up to £2,200 pa more than non-members in similar roles. Female purchasing professionals earn more than their male counterparts at middle manager level and above. 35 per cent of the heads of function who responded to the survey were female and their pay was 5.6 per cent above that of their male counterparts. Pay for the 42 per cent of female middle managers who responded to the survey was 2.3 per cent above their male counterparts.
Some 49 per cent of purchasing professionals reported that they had good or excellent job satisfaction. 57 per cent said their job security was good or excellent and a further 31 per cent said it was fair. Some 73 per cent felt their total pay was equal to the market.
Innovative procurement boosts sustainable development, says UN
Innovation and procurement are viable, tested and proven policy options to achieve sustainable growth‚ according to United Nations secretary-general Ban Ki- moon.
In the foreword to a UN report, Ban Ki- moon says innovative procurement offers tremendous opportunities to use government buying power to shape the world around us for a better tomorrow.
The Supplement to the 2013 Annual Statistical Report on United Nations Procurement provides an overview of the benefits and challenges of implementing innovative procurement.
Through investment in new technology and research, the promotion of domestic manufacturing, increased transparency and accountability in public fund management, and support for small and medium-sized enterprises, procurement systems can help develop national capacity and attain sustainable development goals, he says.
According to Raj Kumar, lead author of the report, innovative procurement is viable, particularly if the development community works together to change the mind-set around innovation from novel ideas to better results achieved faster and cheaper‚ Kumar, who is president and editor-in-chief of Devex, a social enterprise that connects and informs 500,000 aid workers and development professionals, highlights tangible steps to foster innovation through procurement, including buying solutions‚ rather than specific products, focusing on process improvements such as building more modern and effective government systems, fostering a market for the commercial introduction of new products and technologies and incentivising innovators through social financing.
Originally appeared in Supply Chain Standard, September 2014