Every crisis accentuates the nuances of various industries, and Covid-19 is no exception. IT, packaging, furnishings and logistics are in a sweet spot as demand for them have surged despite the pandemic. Furthermore, the fall in oil prices reduced cost base. The local construction industry is facing pressure as the demand for housing and infrastructure is soft, and cement prices have increased due to M&A movements in the supply market. The alignment of upstream-downstream velocities is critical to sustain the growth trajectory of a company.
Companies should endeavor to harmonize the velocities of both streams, while harboring reserves to ride out uncertainties. For SMEs, it is the responsibility of the CEO or owner to have a finger on the pulse of both streams. In bigger corporations, procurement aligns the demand-supply chain of the companies. To create a thriving procurement ecosystem, six elements must be balanced in symbiosis.
The first element is to align procurement with the strategic objectives of the company. As companies grow, their strategic focus shifts from being a cost leader, to a quality leader, to a brand leader. Procurement needs to be in sync with the company’s growth. It cannot remain static as just an order-taker and cost-cutter. Cost-based ROI should remain at the forefront of procurement’s agenda, as they focus on harvesting the budgets of other functions for cost reductions.
For seamless alignment, procurement needs to form business partnerships with the other functions, and embrace their metrics as well. This is the second. The business partner role is a management-oriented and value-add internal role, not immersed in the day to day. It coordinates between top management and strategic suppliers, capable of teambuilding, negotiation and bridging polar views. To be a valued business partner, procurement should move beyond classical cost control, and be the source of rich, forward-thinking information for strategic decisions.
Procurement fulfils this role through early involvement in planning and budgeting process with stakeholders, influencing planning decisions with insights on supply market dynamics. In product design and development phase, procurement ropes in strategic suppliers’ collaboration early on, with MOU that hinges on the success of the end-product. For procurement to flourish as business partner, separation between strategic and transactional roles is necessary. This is the domain of procurement operating model, the third element of the ecosystem.
With a rapidly shifting business landscape, and frequent technology disruptions in supply chain, companies need to adapt their procurement operating model to endure the ebbs and flows of economic cycles. Having an operating model that’s a right fit for the company’s DNA, business life-cycle and business environment dictates the value that procurement is able to provide to the company, from cost-saving and risk management to broader organization goals, such as innovation or time to-market for new products.
Operating models ranges from autonomous, hybrid, centralized to center-led. Whilst the first three models are ubiquitous in business literature, the center-led model is unique to the procurement sphere. In the center-led model, strategic procurement decisions are centralized, while transactional procurement execution is distributed. The center-led model adopts the category management approach, with the level of management for key spend category determined by supply market dynamics, to leverage on scale without sacrificing speed of fulfilment.
Supply market dynamics is the fourth element of the ecosystem. It drives the design of a company’s procurement operating model, enabling companies to adapt to suppliers’ evolving manufacturing footprint, and leverage on disruptive supplier innovations. Supply market dynamics encompasses the complexity, geography and relativity of the supply market. Complexity increases with market distortions in the form of monopoly, exclusivity or regulatory. Geography relates to the suppliers’ footprint in the global, regional or national markets. Relativity relates to the size of the company’s spend relative to the suppliers’ revenue.
Technology enablement is the fifth element. Cloud technology has brought a greater level of connectivity between companies and their suppliers, and we see a whole new generation of automation and digitalization really coming alive with AI technology. Chatbots interact with end-users and suppliers in guided buying, freeing procurement to focus on strategic priorities. AI tools propose negotiation approach based on behavior pattern of the vendors. AI technology not only drives efficiencies into processes, it also enhances the strategic capabilities of procurement for better informed, deeper insights and data-driven business decisions. This enables procurement to be strong internal partner, creating value for the company.
Value proposition is the sixth and final element of the ecosystem. As procurement’s value proposition expands from cost reduction to value creation, it needs to demonstrate this and adopt new metrics that reflects this. Metrics such as increase in turnover, margin improvement, contribution to product innovation speaks the business language, and integrates procurement with the business. Value proposition ensures alignment by procurement with strategic goals of the company (the first element) and this completes the full circle of a robust procurement ecosystem.
The author of this article, Joe Lee, an Executive Director of Tricor Axcelasia, has 24 years of experience in internal & financial audit, transformation and cost savings delivery services. He is currently the Procurement Consultancy Service Leader and has managed numerous procurement transformation initiatives, business process improvement review and business process analysis engagements in manufacturing and logistic sectors.