Cooking lunch as a CPO
Businesses often take CPOs and procurement for granted. But why? Maybe it’s because procurement is hard to explain, or because they consider it a legacy function that does not lead to any incremental changes in process execution or delivery. Indeed, even business-savvy people, but who are not directly involved with procurement, usually only regard it as a cost center used to source materials, items, and other goods or services.
Finally though procurement is beginning to evolve and mature, and as newer and more modern technologies are now being adopted, it is even more critical to understand how the procurement function can add value to an organization and to realize what roles CPOs should play in terms of the distribution of resources and time to attain the best outcomes.
In Cooking lunch as a CPO, I use a relatable, everyday situation to explain sourcing, as the core basis of procurement.
Time to cook
For instance, imagine yourself cooking lunch, let’s say steak with rice. Clearly, the steak is the most crucial part of the meal, and also the most expensive part too. To make sure this dish is perfect for you every time, you need to make sure you source the right ingredients, including getting the best piece of meat, freshly cut, and nice and tender. You always buy your meat at the same butcher because you know he will provide the right cut for you every time, and you are prepared to pay a premium for that. In procuring your ingredients, the steak is your high-priority sourcing event, often referred to as the “A” item.
In this dish, with this steak goes rice. The rice is obviously still quite significant. If the rice isn’t good enough, it could ruin the meal for you. There are three brands that you usually buy, but you don’t have a clear preference among them. Whichever is ok, and so you usually just buy the one that is cheapest at the time of your purchase. That is a medium-priority sourcing event, more often referred to as the “B” item.
For the perfect meal, you also need the right spices. There are plenty of different herbs and rubs you could use to season your meal, but you don’t have time to spend thinking about where to buy each of them from separately. Also, individually they are not so expensive, so you don’t want to waste too much time shopping around looking at price tags — that’s not a good use of your time considering the potential low savings possible. Also, the brand doesn’t matter, so you are happy just to buy the one that is most handy and easiest to get at the time of your purchase. That is a low-priority sourcing event, more often referred to as the “C” item.
ABC spend analysis
Analyzing and categorizing purchase items into priority brackets in procurement in order to adjust and optimize spend is called “ABC spend analysis.” This is a technique used to identify priorities in business decisions, essentially following the Pareto principle. The Pareto principle states that 20% of the invested input is responsible for 80% of the results obtained. A Pareto chart in procurement includes classification of the items that a business is procuring into different segments in order to minimize maladministration and to identify items requiring different management tactics and controls based on their value.
Classification is important because procurement departments usually only focus on optimizing A items, and to a lesser degree B items. This usually leaves between 20% and 40% of procurement not optimized and usually this part cannot be optimized systematically without intensive human effort, which is inefficient and extremely costly to perform on repetitive procure-to-pay procurement parts. However, by automating and optimizing this non-strategic (low- and medium-priority sourcing events) procurement, businesses could unlock new levels of cost-efficiency and potentially save up to 30% on procurement costs, and up to 90% on transaction costs: the time that would otherwise be spent in manual operations for workers, such as calling vendors, to send out emails and receive and process competitive offers. Automated procurement also minimizes exposure to business risk due to missed opportunities or misinformation.
Enter Procurean network
The Procurean network supports various procurement scenarios that could be used for items requiring different management tactics, such as:
Being accessible and easy-to-use, a cloud-based web application could be utilized by businesses just minutes after registering to access the blockchain-driven features of the Procurean network. There is also no need to transform existing processes or to fully integrate with Procurean, since Procurean can also be used to complement and support current in-place systems.
