A world-renowned management consulting group recently published research that showed that best-in-class procurement organizations operate far much more efficiently than most other companies. The report by Hackett Group found that on average, they have 18% lower operating costs and up to 28% fewer employees. Still, they manage twice the Return on Investment as compared to other companies. Their research concluded that there are at least 5 defining characteristics of world-class procurement organizations.
Procurement Gives Strategic Advice
The place of the procurement department must not be limited to gatekeeping when something is being acquired. Instead, the department must be involved in high-level planning and budgeting. This allows the procurement department to contribute to solving supply chain risks proactively. Examples of such risks are price fluctuations, quality concerns, and supply shocks. The company can research and pick the right suppliers. They can plan for strategic acquisitions months and even years in advance. The procurement department becomes an important part of building resilience, minimizing costs, and achieving medium-term and long-term goals. When the procurement department is involved in strategic planning, they will own and execute tactical and operations plans better.
World-Class Procurement Organizations Drive Suppliers to Innovate
Best-in-class procurement organizations strive for deep visibility into their upstream supply chain. They make genuine attempts to make suppliers more efficient and resilient, including by influencing their business strategy. For instance, if the supplier relies on hiring third-party logistics providers to deliver goods, the company might give them a longer and guaranteed contract that enables them to acquire their own delivery trucks. The supplier can then pass on the benefit to the company through lower prices on delivered goods.
Another example of collaboration is in holding training to instill best practices or to familiarize suppliers with emerging trends. This is often the case when a procurement organization is working with many small-scale suppliers. The procurement organization gains when such suppliers move towards professionalizing their work and standardizing quality.
Realizing the Value of Analytics-Based Insights
The most efficient way of finding value opportunities is through analytics in the procure-to-pay process. For instance, analytics can be used to decide when the best time is to request proposals and which suppliers to use. This might be based on current prices and predictions on price trends in the future. Analytics can also be used to send alerts when contracts need to be renegotiated because certain conditions have changed. Analytics tools can also minimize the risk of fraud by highlighting suspicious activity and high-risk suppliers based on transaction history with them. Spend analysis also reveals the categories where a business is spending too much money and a review might be due. World-class procurement organizations make use of every chance to draw actionable insights from data collected in their procurement processes, including using the data to power AI models.
Great procurement organizations take exceptional care in assessing and managing supply chain risk. This is a continuous process involving searching for vulnerabilities and applying correct fixes. Changes in laws in other countries, global events, emerging suppliers, and changing consumer preferences are all examples of things procurement organizations must continually respond to. Resilience can be built by dual sourcing or putting in redundancy measures, should need to arise. Internally, the procurement organization has to get better at contract management including by moving to automated systems that manage the procure-to-pay process. This minimizes the procurement risk by sending alerts when there is a breach of contract terms. For instance, a certain supplier’s license may have expired or certain deadlines may have elapsed.
According to the Hackett Group report, world-class procurement organizations have a talent management system that sets them apart. They have institutionalized learning and knowledge management instead of just assigning people to tasks they seem best suited for. They allocate resources for training, with employees receiving 28.7 hours of external training annually in these organizations. This is nearly twice what their peers in other organizations receive.
World-class procurement organizations also have well-defined retention plans for senior management and employees with critical skills. Naturally, this leads to more internal promotions. The training received explains why the company needs fewer employees, on average, to manage their workflow efficiently. In fact, the report found that these organizations have two to three times fewer errors in order quantities, quality, and pricing of their invoices. Discrepancies that lead to reviews increase the average handling costs per order.
The Hackett Group also found that these organizations outsource certain functions to shared services companies. The primary reason for this is to tap into service providers who have greater expertise in areas such as market intelligence. Doing so also frees up procurement teams to focus on more critical business needs.
Adopting World Class Procurement Best Practices
There are numerous benefits to adopting best practices in procurement. First, it leads to valuable supplier relationships that often lead to resilience in the supply chain. Suppliers will be willing to share useful information that can help in contingency planning. Relying on analytics for insights leads to more objective decision-making, which yields better procurement prices and better cost management. This can be passed on to your organization’s customers, leading to greater competitiveness. The overarching characteristic is that the best-performing organizations make procurement a part of their strategic planning. They use it to build strong supplier partnerships, resilient supply networks, and a tool for achieving efficiency.
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