Dive Brief:
- The pressure to reduce costs often hamper procurement's ability to deliver innovation, digitize and improve the department's value to the company.
- So, what would happen if the pressure on savings was taken out of the picture altogether? Based on her experience with several projects in Singapore, Madeleine Tewes writes procurement can focus on other value opportunities like driving compliance, innovation and social responsibility.
- Rather than bouncing from one cost-savings project to another, the department can own up to improvements within the supply chain and become more influential. Having clear KPIs and strong communication is essential, however.
Dive Insight:
Here’s a little secret: It’s not always about the cost savings in procurement. It is, however, about aligning sourcing and supplier performance with the strategic needs of your business.
Thinking about three types of business strategy — operational excellence, customer intimacy, and time to market — may help better align procurement's efforts:
- Operational Excellence (OE): Both in materials management and operations there is a strong focus to reduce costs in order to meet marketing in financial goals. Operational excellence, then, requires a strong dependence on an integrated supply chain and lean strategies to reduce costs. An example of an OE company would be a big box retailer.
- Customer Intimacy (CI): Sometimes a customer is willing to pay more for a better experience. Companies working in this environment may have less need to manage costs. Their customers are happy to pay a higher price for a closer relationship and companies can pass on higher costs, while often enjoying a healthy margin themselves. Consider a boutique in a tony downtown neighborhood as an example of a CI firm.
- Time to Market (TM): Costs be damned, albeit temporarily, as a company tries to get a new product to market to capture initial share or take advantage of a competitor’s misstep. Cost management will come later in the product lifecycle. Think about an internal research and development department as one with TM pressures.
Note that some companies may employ all three strategies, often concurrently. The savvy purchasing pro needs to really understand the business to manage the supply base effectively. That’s the fun part of the job.
