8 ways to create procurement value

Procurement professionals who traditionally measure their effectiveness by means of savings will sooner or later face the following problems: a depletion of supplier resources and a loss in supplier motivation in terms of further co-operation. Suppliers cannot always be the sole source of benefits, patching holes in your company's balance sheet with their funding, says Sergey Dovgalenko (FCIPS), Head of Procurement, Etihad Airways.

Perhaps that is why the concept of strategic sourcing appeared, emphasising an early analysis of requirements so that you can conduct negotiations with internal customers about excessive volumes, pumped-up specifications and overstated expectations.

However, these types of negotiations are much more time-consuming and nerve-wracking than those with suppliers - here the opponent is usually a heavyweight and charismatic, and they can 'blackmail' buyers with operational disruptions, loss of revenue or damage to the brand. Procurement thus needs to persuade and manoeuvre using economics, psychology and internal politics as tools at their disposal.

But let's assume that the opportunities for strategic sourcing in your company have been explored and are effectively utilised. What else can buyers offer their companies in terms of adding value?

Procurement frontrunners will undoubtedly participate in product development, conduct deep supply chain analyses, and audit or optimise business models and strategic suppliers' production processes. (To know just how far the horizon of procurement excellence really stretches read Disruptive procurement: re-inventing and transforming procurement function by AT Kearney's team of authors.)

However, there are some reasonably simple solutions that you can use to start adding value today:

1. Effective use of savings

Where are the millions in annually claimed procurement savings? Usually, nowhere.

Accounting and the classification of savings may be incorrect and savings in future periods are mixed with the results of the current fiscal year. The value of savings can be calculated from a supplier's first offer. Monitoring actual consumption vs. the RFx forecast may be absent. Finally, savings might get spent on unplanned needs as the available budget needs to be utilised fully.

Here are some basic principles of savings management that you can introduce:
• Savings should be measured against a budget
• There should be a distinct 'bucket of savings' applicable to the current fiscal year (i.e. 'cash' savings)
• Reporting must be approved by financial control
• Benefit realisation should be monitored on the basis of actual consumption (not forecasts)
• Approved savings for the current fiscal year must be deducted from the specific business unit's budget

By adhering to the above, real change will reflect on the financial performance of a company and, in turn, procurement efforts become tangible.

2. Supplier innovation

Supplier relationships provide a unique resource: supplier knowledge, experience and creativity and it should be used to the benefit of your company. For example:
• Recommendations on quality improvement and cost reduction in the supply chain and product lifecycle
• Synchronisation of roadmaps between the supplier and your company, so that supplier innovations immediately contribute to your product
• Business consulting, which most suppliers are ready to provide free-of-charge or at a minimum rate, will enable your company to optimise its business model, production process, marketing strategy, etc.

After all, suppliers, like no other, are interested in your success.