Targeting Value: The First Step Towards Procurement Transformation
“A new era is changing the procurement function, creating broader and deeper roles where buyers also need to be value brokers, and capture, retain, and manage talent (Supply Management).”
What, exactly, is procurement transformation? It involves changing more than just a few processes; it’s an overhaul of the entire function with the emphasis on people, processes, technology, and compliance.
Like many major business initiatives, procurement transformation typically begins when a company identifies a need to rapidly improve its financial results. Triggers can vary: a merger or acquisition, market downturn, or failure to meet earnings or profitability goals are among the most common. In any case, the business must cut costs, and one way to do so is to focus on the value driven by its procurement group in controlling and reducing both direct and indirect spending.
Gathering & Analyzing Data
The first step towards procurement transformation is an evaluation to target value, or identify opportunities both for savings and for improvement of the procurement function itself so it can best serve the organization. It includes three activities: analyzing spending, evaluating the procurement function to determine deficits in internal capabilities, and creating a procurement roadmap.
A spend assessment involves collecting and analyzing data from all relevant systems to create a procurement-focused spend database. This provides visibility into what an organization is purchasing, how much, and from which vendors. A series of interviews and contract reviews delves into the procurement practices of the organization, builds a fact base for each spend category, and helps those involved decide which categories are good candidates for strategic sourcing.
Interviews provide information about the maturity of the procurement function and aid in identifying critical gaps in the organization that are or could be roadblocks. In addition, interviewing category stakeholders begins building the relationships and alignment necessary to a successful procurement transformation.
This detailed analysis ends in the creation of a procurement roadmap, which prioritizes categories for sourcing, includes recommendations for procurement organization design and enhancement, and synthesizes findings into an execution plan.
What Can Go Wrong
A deep dive into an organization’s procurement spend also means a deep dive into data. Unfortunately, many companies start procurement projects with inaccurate or murky information, a shaky foundation for a successful transformation.
Bad data has many causes, but three dominate:
- Poor data discipline. ERP and P2P systems work perfectly if you use them perfectly. However, most organizations suffer from data input errors, miscoding, lack of controls, poor guesses, and other issues that compound to create untrustworthy or unusable data.
- General ledger codes that are designed for accountants. GL systems are designed and implemented for the people who write the checks. While they may be effective for accounting or finance, procurement category data doesn’t fit into such software and spending is hard to identify.
- Too many systems. Whether due to acquisitions, decentralized divisions, or purchasing card strategies, many companies have data scattered across multiple systems. Even if data can be consolidated, vendor naming conventions and GL codes usually aren’t harmonized.
Whatever the reason for inaccuracies, cleaning up data is like flipping on a light. When data is organized and analyzed to reflect procurement, organizations finally have a clear picture of what they’re spending and where.
How to Make It Right
Artificial intelligence-driven analytic processes can turn financial data into procurement data and organize it the way the supply market works.
For example, most organizations use shipping services – some, constantly and at great cost. Those charges often are found in separate departmental budgets under variations of the shipper’s name – sometimes dozens of them. AI analytics will root out shipping charges and rationalize vendor names, combining variations into one and cutting down the overall number significantly.
Effective Assessment Leads to Millions in Savings
Here’s how a Phase 1 spend assessment worked for one of our clients, a 30-year-old furniture retailer that was backed by private equity funding and was in growth mode.
The company found itself with contracts and price structures that were more appropriate for a much smaller organization. In addition, the retailer had limited procurement capabilities, mainly performing tactical purchasing work with a staff of three. The executive team was eager to begin sourcing work to arrive at significant savings.
The assessment included:
- A robust spend analysis to define spend by category, subcategory, and vendor
- 20+ stakeholder interviews to build a fact base for each category and begin the necessary change management process
- Identification of 17 immediate sourcing opportunities with a $14 million savings target
In addition to implementing a sourcing initiative to deliver the identified savings, the company established a strong and capable procurement team to sustain savings, continue additional sourcing waves, and enhance procurement’s value to the organization – the desired end state for any procurement transformation.
This is part two of a series of posts on procurement transformation. Up next: more on spend assessments, the collection and analysis of data to provide all-important visibility into an organization’s purchasing. If you missed part one—Banish the Skeptics: Creating Credibility through Realized Savings—click here.