P@31 – Defining the Procurement Value Contribution for the company and selecting the appropriate future Procurement direction

In previous posts, in order to become more relevant and successful, we saw that we should aim for a more Scientific Procurement function. The first step is to analyze the macrophoto: industry environment, business impacts, risks and opportunities, and corresponding company strategic imperatives. With this clear picture, we can then, as the second step, define the right Procurement outputs for our firm.

To be honest, how good and courageous are we in Procurement at defining, communicating, and delivering our Value proposition? 

A self-assessment could start with a quick look at our Procurement mission statement.  Do we have a well-established, known and communicated Procurement mission? Is it motivational and accurate enough? Is it directly linked with Business issues and priorities? Is it driving our daily activities?

I have quite often read mission statements referring to ‘best-in-class’ Procurement by ‘delivering value’ or ‘business solutions’ through improved ‘business partnering’ and other worthy general objectives. This is a great aspiration. Nevertheless, we can easily ask ourselves:

- does the procurement team clearly get the right direction and priorities?

- do our stakeholders and vendors understand what it means? I guess they don’t.

- does it make sense for Procurement to focus on becoming “World-class”?

Big and very diverse corporations may not have the choice and need to be generic.  In any case, we should do our best to avoid too general procurement mission statements.

We definitely need to be more precise by accurately describing the Procurement unique value proposition. How should we do it?

In the past years, in different companies and jobs, I applied the RAQCSI that proved to be a good tool.

R: regulatory, reglementary, being responsible for corporate and social points of view, legal, cyber security

A: assurance of supply and risk mgmt.

Q: quality

C: TCO, cash flow, financing mechanisms, spend mgmt.

S: additional services like efficiency of the invoicing process, reporting, vendor’s KAM performance

I: innovation, time & speed to market, Procurement early involvement

Could you recommend any other acronym?

In each organization, at Procurement department level and at category level, we will have different priorities among those 6 chapters that will also change over the time depending on the business imperatives, the structure of the company and the maturity of the Procurement organization. Those priorities will be the foundations of the Procurement team objectives.

Several big companies like Bayer, Mars, Valeo openly publish their Procurement focus and value contribution in a clear and understandable way for their business, vendors and procurement teams. In addition, those ambitious mission statements seem to be aligned with the company strategy and their respective functional maturity level.

I am often cautious when I see pillars like Innovation, TCO, Risk mgmt. or CSR mentioned by an historically administrative purchasing function and/or on the contrary by a ‘young’ procurement organization. Do they have the right level of supply market knowledge? Did they get credibility in front of the vendors to lead productive relationships? Do they have the right level of business understanding and partnering?

As a necessary and basic step, Heads of Procurement and Category Managers should spend enough time in precisely defining their unique value proposition. Is it properly reflected in their mission statement, vision and/or objectives?

Only then, the Procurement key leaders should think about the appropriate future for Procurement, and their long term journey. Based on existing trends, we could envision a beyond traditional procurement approach with 4 potential different future models:

Global business services: this cross-domain unit is composed of several support functions (Procurement, Travel mgmt., Congress & events mgmt., Fleet mgmt., Real estate and facility mgmt. and why not any other support function like IT, HR operations, Accountancy, Legal, etc…). The main goal of this unit is to provide a wide range of high quality services to the business units aiming at standardization, simplification, efficiencies, compliance and lower costs. This model is especially relevant in sectors with a low-to-medium total 3rd party spend (representing between 10 - 50% of sales), with a rather higher percentage of indirect + capex spend vs direct purchasing (with rather short/limited supply chains). It could be appropriate for companies with different business units and a worldwide complex (often redundant) organizational set up. E.g. Big Pharma.

Spend efficiency: the function focuses on getting the best outputs while optimizing the spend base, different cost centers or company budget. Key elements are: constant usage of sourcing process, some category mgmt. approach for key categories, strong focus on demand mgmt. and forecasting, productivity mgmt., (internal) process optimization, accurate budgeting & spend approval process. This model could be relevant in sectors with a rather low total 3rd party spend (representing between 10 - 30% of sales), with a high percentage of indirect and Capex spend (limited direct purchasing, and/or limited/short supply chains). E.g. Banking.

Total cost-base mgmt.: this organization works not only on optimizing the TCO of the key goods and services procured from outside the company but also on the Total Cost of Production & Distribution of final products and services. Key elements are: category mgmt., demand mgmt., (internal and external) lean six sigma, value analysis & engineering, risk mgmt., insourcing/outsourcing-offshoring complex strategies. This model is relevant in sectors with a medium total 3rd party spend (representing between 40 - 60% of sales), with a high percentage of capex spend and technical (direct or indirect) proc. categories. E.g. Utilities.

Value chain integration: the focus is on innovation, speed and time to market, production process excellence, supply chain optimization, productivity mgmt. requiring a deep integration of many key vendors. In such environment, Procurement often applies SRM or Joint Account Mgmt. programs, co-design, design-to-cost, relationship and investment based business models with the key suppliers. This model is relevant in sectors with a high total third party spend (>60% of sales), with a high percentage of direct purchasing, technical (direct or indirect) categories, and/or complex supply chains. E.g. Automotive.

There is still a lot to think about those 4 possible models. Once again, it seems that business context and priorities, corresponding Procurement value contribution and functional maturity level are the key criteria to select the appropriate model. 

If we want our function to become more valuable for our company and more recognized, we should more precisely and courageously define our unique Value proposition and, at the same time, look for the long term destination of the function.

Does this make sense? In your company, what are the 3 most important pillars of the RAQCSI? Are the Procurement team objectives aligned? What might be the most meaningful future model for your Procurement organization? Why?