Making Procurement a Revenue-Generator For Your Organization
Too often organizations view their procurement departments as compliance people who only slow down the process of buying essential goods and services. So we are going to start with a little assignment.
I would like you to assess where your organizations fits on the chart below. Give yourself a score from 1-10 on how much power your procurement department has within your organization. A lot of power would mean that procurement can stop anyone from buying something, has a strategic seat at the executive table, and can influence the margins of your organizations. A little amount of power means that procurement is not taken seriously, bypassed during the buying process, and buying is owned by each individual department.
Now give yourself another score of 1-10 on the value that your procurement department provides. A high value department would formally manage key supplier relationships, act a business partner to the other departments in the organization, leverage current purchased assets, and focus on getting the best return for the organization's purchasing dollars. A low value department would focus on lowest price, frustrate suppliers and employees, and default to policies and procedures over good judgment.
You should now have two scores and you can plot yourself in one of the four quadrants. Which of the quadrants did you fall into?
Most organizations find themselves on the left side of the chart, where the value that the procurement department is providing is low (or at least perceived as low by the rest of the organization).
If you found yourself in the bottom left quadrant, your procurement department is actually eroding margins because they have no power and they are adding no value. They are merely additional salaries and labour costs.
If you are in the top left quadrant, your procurement departments acts as compliance officers. They slow down the buying process, they can say "no" but not "yes," and they default to rules and regulations over common sense.
If you are in the bottom right quadrant, you fumble opportunities to increase revenue because your procurement department is adding value, but no one listens to them. They have no influence in decision-making.
If you are in the top left quadrant, then your procurement department is generating revenue (and increasing margins) for your organization because they act as a strategic partner for other departments, their advice is listened to, and they are able to provide tremendous additional value.
Here are some strategies you can implement to help your procurement department get out of the basement and become a revenue generating function of your organization:
Formally manage relationships with key suppliers - Most organizations don't effectively manage the contracts and service levels they have in place with key suppliers. This just saps value (and margins) out of the organization. Regular performance reviews and discussions on achieving mutual objectives will go a long way in building stronger relationships with key business partners.
Provide strategic advice - Procurement people should be experts on how to buy things and how to get the best return on investment on purchasing dollars. Too often, procurement acts as a gatekeeper and compliance officer, focusing on policies and procedures and not critical thinking and common sense. Work with internal departments and act as a strategic partner to help them get what they want, not a police officer scrutinizing their every move.
Use different metrics - Procurement departments should not only be measured based on the amount of savings achieved. That promotes the wrong behaviour (cost-cutting). When you look at more strategic metrics - % of purchasing dollars spent on new innovations, average profit margin per procurement employee, % of key suppliers being formally managed - it encourages different behaviour from your procurement department.
Anticipate needs - The most valuable procurement departments anticipate what their customers (the other internal departments) need and help figure out the quickest and most effective ways to meet those needs. They don't wait for departments to come to them, they proactively reach out.
Which of these strategies can you implement immediately to help achieve your corporate objectives?