At its core, procurement is designed to obtain the right goods and services at the right price and on time—but still can get pigeonholed as such.
Procurement value goes way beyond process compliance and cost savings. The success of procurement should be measured in improved business KPIs and efficiency of strategy execution.
So, why do organizational stakeholders tend to see procurement as a 'savings only' department?
In this blog, we'll go over 8 ways you can prove the procurement value proposition and potential that exceeds cost savings.
8 ways procurement adds value
In this chapter, we present 8 methods of demonstrating the value of procurement. Cost reduction is commonly recognized as the primary source of added value, but we offer 7 additional arguments to support your case.
1. Cost savings and reduction
With the best visibility into spend data, procurement knows more than anyone about savings opportunities.
Procurement is a key driver of cost savings and improved financial performance through techniques such as spend consolidation, contract negotiation, and the pursuit of volume discounts.
In addition to these tangible benefits, procurement also delivers "soft savings" through cost avoidance by mitigating the impact of price increases and the risk of purchasing substandard products. By effectively managing supplier relationships and providing data-driven insights into market trends, procurement professionals can deliver real value to their organizations through improved financial outcomes.
2. Strategic sourcing
Sourcing high-quality products for the right price is a learned skill. It takes compromise, communication, and a lot of research.
Strategic sourcing involves analyzing the organization's spending patterns, identifying opportunities for cost savings, and developing a sourcing strategy that leverages purchasing power.
In addition, strategic sourcing helps organizations identify and manage risk in the supply chain, improve the quality of goods and services, and create sustainable supplier relationships. By taking a strategic approach to sourcing, organizations can create long-term value for their business.
3. Process improvement
Process improvements identify and eliminate inefficiencies in an organization's processes. Procurement’s global view gives them a unique perspective on potential improvements across multiple business functions.
Internally, procurement has a significant impact on the areas of disposal, inventory management, and waste reduction. By optimizing these processes, procurement can drive efficiency and savings for the organization.
Improvements usually come from implementing best practices, automating processes, and using technology to improve visibility and control. Technologies brought on board by procurement, such as spend analytics and e-sourcing solutions, bring substantial speed to daily processes.
In other ways, procurement can identify and address bottlenecks in the supply chain, reducing cycle times and improving delivery schedules.
4. Risk management
Procurement professionals should always be one step ahead when it comes to risk mitigation. Teams should evaluate business risks by severity and likelihood and take preventive actions where the benefit supersedes the effort.
Procurement carefully monitors and addresses sub-par supplier performance, service delivery issues, and stock-outs that can indicate wider issues in the supply chain. Also, procurement manages potential financial risks by controlling exposure to interest, inflation, and currency rates.
More advanced procurement organizations may even be running simulations of global events and creating contingency plans for critical material categories.
Procurement is a key touchpoint for ensuring compliance with laws, regulations, and policies. It involves ensuring that procurement procedures are followed and in line with any applicable federal, state, or local laws. Effective compliance helps organizations reduce the risk of fraud, waste, and abuse, and also protects them from legal and reputational risks.
Procurement compliance is a critical component of good governance, sustainability, and risk management. Organizations should implement robust compliance programs to ensure their procurement activities are carried out with integrity and accountability.
6. Innovation and supplier development
Innovation and supplier development are key components of effective supplier relationship management (SRM) in procurement. Organizations should focus on building strong and collaborative partnerships with their suppliers that foster win-win mentality.
Innovation in procurement refers to the integration of new and innovative techniques, technologies, and approaches into procurement processes to improve efficiency and effectiveness. Effective collaboration can be achieved by implementing technologies such as supplier portals and performance management tools to enhance communication and transparency.
Furthermore, gainsharing programs and supplier diversity initiatives are beneficial for the longevity of supplier relationships. Organizations should also encourage innovation from their suppliers by providing them with opportunities to suggest new and creative solutions.
By incorporating SRM and innovation in procurement, organizations can drive cost savings, improve performance, and foster a culture of continuous improvement.
Procurement has a crucial role in mitigating the effects of climate change, as a large portion of emissions, approximately 80%, originate from the supply chain. To combat greenhouse gas emissions, procurement must take a proactive approach by making environmentally responsible decisions. This can be achieved in several ways, such as selecting suppliers with a proven track record of sustainability or partnering with current suppliers to develop more sustainable solutions.
Get started on your sustainable procurement action plan with this guide
To effectively track the progress of sustainability initiatives, procurement can leverage spend data and external information. These reports provide valuable insights into the performance of suppliers and the impact of procurement decisions on the environment. By utilizing this information, procurement can make data-driven decisions that further drive sustainability and reduce emissions.
8. Contribution to growth
For the reasons listed above, procurement value ultimately contributes to business growth. Whether through process efficiencies, sustainable practices, savings, or everything in between, better procurement is better business.
It’s the one function involved in the entire supply chain, from market research to demand management and end-user satisfaction.
By sharing its market knowledge and facilitating the exchange of value between suppliers and the business, procurement contributes to business growth and success.
Selling procurement value
Here we summarize how to communicate the procurement value to your organization.
Making procurement count - the art of effective communication. To effectively communicate procurement's value to stakeholders, building strong relationships and understanding their challenges is key. By positioning procurement's value in a way that addresses their needs, you'll be able to effectively get your message across.
Keep the value coming - highlighting consistent wins. By frequently communicating procurement's value, small wins can have a big impact. They reinforce the importance of procurement and demonstrate its ongoing contributions to the organization.
Take a cue from sales - presenting procurement's value proposition. Procurement professionals can learn from their sales colleagues how to effectively present their value proposition. By adapting the skills and strategies used by sales professionals, procurement can effectively communicate its value and drive business success.
Ready to start demonstrating value through procurement data? Read our latest book Procurement Loves Data, and our most popular guide Spend Analysis 101.