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Dan Hillier | 01 Oct 2021 | 5 min read
Private Sector Procurement: Balancing KPIs and Finding Wins
While procurement professionals in the public sector work with a fairly consistent set of pressures (e.g. transparency, fairness, and accountability), things aren’t so simple in the private sector. Instead, procurement priorities are driven by business strategies that can shift at any time.
For example, by late 2019 there was a near-universal agreement among private sector professionals that sustainability was one of the top areas of focus for every business. The topic dominated procurement research reports, training courses, and conference agendas.
But when Covid-19 emerged, sustainability sank to the bottom of the priority list, and there was a return to more traditional areas of focus. Far from an exceptional circumstance, a change in business priorities is common.
Why This Makes Things Challenging
Ideally, it would be fantastic to consistently score top marks in key KPIs such as quality, service, and cost reduction. However, purchasing professionals know this is more difficult than it seems.
When an organisation wants to drive performance in one area, it often comes at the expense of another. Slashing costs can lead to lower service and poorer quality, while driving quality improvements may mean higher prices.
The results of these trade-offs can also be difficult to track in terms of ROI. For example, a focus on sustainable procurement may lead to increased costs and lower (short term) margin. However, it can be a boon in terms of brand perception and marketing success, and can benefit the business long-term.
The Role of Leadership
One of the key tasks of CPOs and other procurement leaders is to ensure the procurement strategy stays aligned with the enterprise strategy. By doing this, it ensures procurement doesn’t end up barking up the wrong tree; for example, by focusing on cost-cutting while the leadership team is more interested in controlling risk.
As a general rule, procurement’s reporting lines provide a clue as to the pressures the function will face. If the function reports to the CEO, the focus is likely to be on protecting the brand reputation. Reporting to the CFO will mean a focus on cost savings, while a COO usually cares most about efficiency and business continuity.
How To Find Balanced Procurement Wins For The Business
A balanced win is one that improves one area without impacting another. Below, we summarise six places you can find these sorts of wins for your business and the pressures they help address.
1. Embrace Automation and Reduce Manual Processes
Helps with: Cost reduction, speed and risk (reducing human error).
Unless you believe robots are coming to take our jobs, there are very few downsides to pursuing automation in procurement.
Start by identifying bottlenecks in your purchasing process or highly manual areas, make a list of priorities, and tackle the most difficult first. Don’t guess – survey your procurement team and stakeholders, or (if you want to get really technical) consider process mining to truly understand where you are going wrong.
Procurement automation solutions can range in complexity. Areas ripe for automation include purchase requisitions, invoicing and payments, vendor management, contract management, spend analytics and much more. Not only will automation boost speed and efficiency, it will also reduce human error.
2. Strengthen Supplier Relationships
Helps with: Cost reduction/value creation over time, innovation, risk mitigation, quality and service levels.
Supplier relationship management (also known as vendor relationship management) is about building long-term, win-win relationships that benefit both parties. Having a strong relationship can lead to better service, higher quality, long-term value creation, and lower the risk of a sudden break in the relationship.
When supplies run short (as experienced during the pandemic), it pays to be a customer of choice.
To learn how to effectively manage these relationships, read our article: “Vendor Relationship Management in FY22: Best Practice Software, Tools and Methods”
3. Tackle Tail Spend
Helps with: Cost reduction, risk mitigation.
Tail spend or sub-threshold purchasing can account for 40 – 60% of total spend and cover 90% of the volume of sourcing events, yet it is often overlooked due to being considered low value and low risk.
Tail spend is typically decentralised, which can lead to challenges such as maverick spend, policy compliance, and invisible/inaccessible spend data scattered across spreadsheets and emails. Procurement software can help manage these challenges by bringing all spend onto a single platform, providing full visibility, and making buyer compliance easy.
Spend visibility enables spend analytics, which in turn unlocks several benefits including cost reduction through supplier consolidation and flagging risky buyer behaviour.
To learn how to get control of your tail spend, read our article: “Taming the Long Tail”
4. Get strategic in procurement
Helps with: Continuous improvement in all areas.
Focusing on day-to-day, tactical purchasing means procurement as a function will never have an opportunity to drive continuous improvement. A procurement strategy enables you to identify long-term goals to address major pressures such as cost, risk, efficiency, or relationships, then find ways to work towards them over time.
A procurement strategy can be broken down into sub-strategies such as a data/technology strategy, a recruitment strategy, a risk strategy, and more. Importantly, any procurement strategy should be married to the overall enterprise strategy, and should be reviewed regularly as business priorities shift and evolve.
To learn how to get more strategic with your procurement, read our article: “Six Procurement Strategy Recommendations for FY22”
5. Improve Contract Management
Helps with: Cost reduction, risk mitigation, supplier relationships.
Poor contract management can lead to scope creep, opportunity costs, breaches of contract, missed renewals and underperformance; all of which increase cost and risk.
By using proper contract management techniques and tools (there are dozens of software options available), procurement can track KPIs, stay on top of renewal dates and avoid unexpected cost increases.
To learn everything you need to know about these software options, read our article: “The Ultimate Guide to Contract Management Software”
6. Broaden Procurement’s Definition of Value to Embrace CSR
Helps with: Corporate Social Responsibility
Considering other definitions of value beyond cost, quality, and service can broaden the value procurement brings to an organisation.
Corporate Social Responsibility includes sustainable procurement, social procurement, and purchasing from diverse, minority-owned, or Indigenous suppliers.
Socially-responsible procurement is not just the right thing to do; it makes business sense. Major rating agencies such as Moody’s and S&P are now taking organisations’ CSR performance into account. CSR initiatives such as supplier diversity can reduce risk and build supply-chain resilience, while sustainable procurement can help future-proof an organisation against the financial impacts of forces such as climate change. Finally, socially-conscious consumers will pay more for sustainable products and services and may avoid brands that neglect CSR.
To learn more about these new trends in procurement, read our article: “Social Procurement and Our Evolving Understanding of Value”
Balance can be achieved between procurement pressures by avoiding focusing on just one area. Ensure the pendulum doesn’t swing too far in any one direction by taking a multi-pronged approach to your procurement strategy.
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