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Why savings in procurement is being replaced by value

March 11, 2024

Delivering savings inprocurement has been the justification of our increased headcount over the past 20 or so years. The business case for having a strong, central procurement team has typically been vindicated by the delivered cost savings.

Each Full Time Equivalent (FTE) position in Procurement should, as a rule of thumb, have the potential to deliver savings which are 10x the base salary of the employee. Analysis of our system back this up, showing that on average, each user of our tool that owns projects delivers $1.3m of savings per year.

Let’s ignore for a moment the debate between Procurement and Finance of “what is a cost saving?”

It’s still seen as a no-brainer to have an experienced procurement team who can bundle any spend under management. Being able to leverage commercial relationships through central account management can bring substantial gains.

However, as we move into an era of more holistic supply chain management, is it time for a change in logic?

Sustainability topics are increasing in prominence. Once a peripheral discussion, this is now firmly grabbing the attention of the boardroom. We also find ourselves battling against an inflationary environment and a lot of geopolitical and financial shocks and risks out there in the supply chain.

Against this backdrop, how should we be measuring the total value managed and delivered by Procurement? If hard, piece cost savings are becoming beyond reach in some commodities and categories, how will Procurement deliver wider added value to the business?


Savings in Procurement vs.Total Value: Changing the attitude

This must start with the organisational mindset within the business.

Procurement, if seen as a transactional or compliance-driven function, will always struggle to make its case as a strategic partner to the organisation.

What we are starting to see in a more volatile supply chain and economic climate is that Procurement is needed for tasks which go way beyond traditional negotiation, sourcing and delivering savings.

While it can’t be denied that these will always form a solid foundation of what we as a team deliver, our role must be viewed with a wider lens.

A Chief Procurement Officer is increasingly becoming a Chief Value Officer in more progressive, entrepreneurial-minded organisations.


Which are the most common ways to reduce procurement costs?

Before we explore this concept in more detail, let’s first briefly revisit the ways which Procurement has traditionally contributed to business goals.

They are through hard savings, soft savings, and cost mitigation.

Hard Savings

Classic procurement activity based on visible, measurable price reduction. Easily measured and recognised by Finance as a positive impact on the bottom line.


Soft Savings 

These are the less tangible procurement cost savings which will typically require more alignment with Finance around how these are measured and tracked. Provalido’s software makes this activity more visible and structured to all business stakeholders.

Cost Mitigation

Reducing or eliminating the potential impact of an adverse price movement or a possible deterioration of commercial terms. These are the same as soft savings, in the sense that they’re more difficult to measure against the bottom line. However, they are easy to track through supplier communication, material price index data or foreign currency movements.


Procurement cost optimisation isn’t the same as procurement value

Cost savings in procurement - or even cost optimisation - is usually directly or indirectly attributed to the bottom line. On the other hand, added value contributed by procurement can often hit the top line.

We must therefore differentiate the two.

Procurement value is highly strategic. Through our strategic relationship with a supplier and our knowledge of the categories of spend we are managing, we can drive increased revenue to the business as well as cost savings.

Cost optimisation and cost savings can be both tactical or strategic, depending on the activity.

A negotiation for a one-off, non-complex purchase is tactical.

Undertaking a detailed sourcing exercise when a critical contract comes up for renewal is a much more strategic process.

The result is usually the same: a reduction or avoidance in overall cost to the business, regardless of whether it’s a repeat purchase or a one-time spend.


Ensuring procurement cost savings and value are cross-functional

There are a couple of key success factors to ensure that Procurement and the wider business collaborates on strategic value delivery.


1.      Open collaboration

Using a platform like Provalido, where initiatives can be viewed, updated, assigned and project-managed in real time, can contribute to cross-departmental collaboration.

Ensuring that different departments and business units don’t work in silos is vital. Attributing the success of an initiative to a team fosters this spirit.

But spending time arguing whether it’s a procurement saving or an operational or logistical saving definitely doesn’t. It creates a culture of competition, rather than collaboration. I’m sure many of you have been there. I certainly have.


2.      Alignedbusiness objectives

The second piece of the jigsaw is ensuring that objectives and targets are set as fully aligned business objectives. If Procurement is being measured on something that the wider business doesn’t really align with, then we’re already fighting a losing battle.

Regardless of how good the initiatives may be or the software that’s being used to track and measure the outcomes, measuring Procurement on wider business value, rather than just cost savings and avoidance, is a vital move in the right direction.


Beyond savings inprocurement: the importance of value

Why is value more important than cost savings in procurement? We touched on it a little bit already, but for me it’s all about having more alignment with the wider business. By delivering value rather than just focusing on cost, we stand a better chance of achieving this.

When the goals of Procurement and of the wider business are in harmony, it fosters a more collaborative work environment. The outcomes are then almost self-fulfilling. Strategic partnerships with suppliers on initiatives such as joint R&D projects, and a joined-up approach to topics such as sustainability and material consumption between Procurement and Operations, will flourish.

As we transition from the era of “great moderation”, where inflation was low and supply chain shocks were rare, there has to be a paradigm shift. The way that Procurement thinks, operates and communicates must be in sync with the business as a whole. A business is not run with a single focus on cost saving as the only performance metric.


How do you measure total procurementvalue?

How can we track this total procurement value gained through a more strategic approach to supplier relationship and cost management?

We already touched on the battle of getting Finance to recognise Procurement cost savings. It’s always been relatively straightforward to get hard savings recognised against purchase price variance (PPV) or a standard budget cost. The tricky part comes when Procurement is involved in something that is not directly price related. We already covered this in detail in a previous article.

This same challenge would also apply when Procurement delivers added value.

It’s a little bit like measuring the success of marketing campaigns. It’s often difficult to attribute a clear ROI to a specific marketing campaign.

Think of it a bit like this:

Running Facebook ads for a direct to consumer (DTC) brand is very easy to measure success. You calculate the cost of acquiring each new customer against the total lifetime value of that customer. For example, let’s imagine you’re a cosmetics brand. You estimate that it costs $30 in ad spend to acquire each new customer. They will then spend $150 with you over their lifetime as a customer. Easily measurable and a clear, solid ROI if you execute this successfully.

That’s kind of like measuring savings against last price paid (LPP) and PPV in procurement.

Now let’s consider a supermarket chain who wants to increase revenue and profit in the run-up toChristmas. Your marketing team runs TV ads, magazine ads, online banner ads, and advertises in metro stations. Revenue and profits are up, but how do you know which campaign can be attributed to the success? Maybe it’s all four?

That’s a little bit like added value coming from Procurement. You know there’s a contribution to the topline and to the brand value, but it’s difficult to put an exact number on it.


How can procurement performance management track total value?

To conclude, let’s share how procurement performance management tools can help you track total value.

Firstly, collaboration can be performed online, and in real time. No need for emails or monthly project review meetings to track progress against initiatives. Projects will get implemented faster, thanks to a more fluid management platform. Also, on the flipside, projects that aren’t going to fly will also be ditched sooner. This in turn enables more focus on the initiatives which are given the green light.

Secondly, any project ideas being initiated by Procurement or suggested through supplier reviews can easily and quickly be shared with business stakeholders and with Finance.

Thirdly, by collaborating in an open platform rather than in spreadsheets squirreled away on a shared drive somewhere, it encourages more discussion around how the value of a project will be determined. What does success look like? How will it be measured? And can any benefit, tangible or intangible, be accredited to the initiative and to the whole team working on it.

When all of this happens in a more open, visible and streamlined manner, the chances increase that success will be celebrated jointly and initiatives will be executed more effectively.

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