In the first instalment of this special two-part article, Senior Operations Performance Consultant, James Bousher, discussed the role of procurement savings and whether or not they should even exist at all. In this article, James explores how these savings are actually achieved.
As previously discussed, procurement savings are an important tool that can be used to ensure a company’s financial longevity and stability. Whilst I may have questioned whether or not procurement should be given these targets, I’m fully behind the concept. However, following on from my previous article, the logical next question is, when do these savings actually occur?
In most instances, procurement savings are ‘signed off’ after a sourcing exercise. At this stage though, the savings are purely on paper (and often the paper has some assumptions built in). This article seeks to review if this is really the case or if the savings targets that were discussed in part one are part of the fuel of this disconnect.
The problem with strategic sourcing
A lengthy request for proposal process can deliver savings, ranging from anywhere between a couple of per cent to 30+ per cent, or more. But equally, a compliance rate to any agreed contract of 30 per cent will erode most of those savings away. This begs the question, is the saving delivered through strategic sourcing or the on-going management of the contract?
The answer is probably a bit of both, but the problem comes when strategic sourcing is seen as the answer to savings targets that are set for procurement functions. If an individual can hit the hallowed savings targets discussed in my previous article after a sourcing exercise, what incentivises them to actively manage compliance? In fact, a shrewd operator could even argue it’s not in their interest to manage compliance – it makes sourcing the same category in three to five years’ time easier.
There are undoubtedly positives to be gained from strategic sourcing which, if executed well, can generate savings. Effective sourcing can also enable businesses to approach their problems holistically and improve service quality and performance.
However, no matter which sourcing methodology you find yourself using, whether it’s five, seven or nine steps, the likelihood is that the final step is, implement and manage. The fact that on-going compliance of a contract only attracts one, out of a number of steps of a process, highlights how misbalanced current procurement methodologies are.
The importance of managing and tracking compliance
In a lot of instances, compliance is seen as a bit part of the job, with savings targets being set without a clear definition of what savings are and who gets to claim them. However, in my opinion, compliance is key when it comes to procurement savings.
As an individual, you do your best to negotiate your phone bill so that you get the most minutes and data possible for the phone you want at the lowest price. You’re unlikely then to go and use payphones for all of your calls or not complain if your phone operator charges you double. This is because you’re being compliant: you’re using your phone (being supplier compliant) and checking your bills (ensuring the supplier is being compliant). As soon as it becomes company money, this focus seems to dilute.
For me, the technology that companies seem to be investing in highlights this quite well. Often an e-sourcing system is implemented before a Purchase-To-Pay (P2P) system. The implementation cycle shows the bias towards savings delivery over compliance to purchase orders or preferred supplier lists. Part of this might be due to the increased complexities of integrating with accounts payable, but often this can be attributed to the value with which sourcing holds as the main method of savings delivery. ‘The savings that the e-sourcing system delivers helps pay for itself’ and the like.
Arguably though, the best piece of strategic sourcing could potentially have no value if compliance isn’t managed or tracked. Procurement savings do really matter as businesses can benefit from true procurement savings that reduce their cost base. But they’re delivered through proper, holistic procurement, not strategic sourcing.
Value generation = procurement performance
Procurement departments need to start looking beyond savings and focus on value generation. This value could stem from savings delivery, but equally it could also arise from providing strategic advice on new product development by improving service levels through strategic collaboration with suppliers. This redefinition of procurement needs to be led by finance departments who do away with savings targets for procurement teams. In turn, procurement teams need to be more proactive in their pursuit of compliance and true value delivery for the business.
The belief that savings are the only way to deliver value and that they’re achieved through strategic sourcing should be challenged. If not, procurement functions could quickly find themselves chasing their tails in search of savings through long sourcing processes and missing out on the true value that they can add to their business.