Procurement Driven Competitiveness

Remember Porter’s Five Forces Model? This theory connects competitive advantage with the five forces- barriers to entry, the threat of substitutes, rivalry, supplier power, and buyer power. This framework was developed by Harvard Business School’s Michael E. Porter to assess and evaluate the competitive strength and position of an organization.

Porter’s Five Forces give us an idea of where power lies in a business situation. Two of these forces- bargaining power of suppliers and the bargaining power of buyers are directly related to an organization’s Procurement function.

It is an evaluation of how easy it is for a supplier to increase prices. Factors affecting the bargaining power of suppliers are:

• Number of suppliers available for each product or service that the organization needs
• The uniqueness of their product or service
• Relative size and strength of supplier
• Cost of switching from one supplier to another

It is an evaluation of how easy it is for buyers to lower prices. Factors affecting buyer power are:

• Number of buyers in the market
• Importance of each buyer to the organization
• Cost of buyer switching from one supplier to another

The Procurement function acts as a conduit between internal customers and suppliers and provides a competitive advantage to the organization. With automation and intelligence getting employed in different aspects of Procurement, there are some caveats to be wary of:

Metrics focusing on cost reduction: It is a problem, especially when the boundaries of cost savings and cost avoidance are not clear. Apart from cost leadership, other metrics such as innovation, agility, and risk mitigation are equally important.

Lack of customization: Legacy systems might migrate to the cloud, but they remain so because they built it to satisfy standard requirements. Each company has different requirements which cannot be configured into behemoth legacy software.

Change management: It is time to shift the role of Procurement in the minds of stakeholders from transactional to value-add activities.

Strategic Sourcing:

Strategic sourcing refers to the process of identifying the spend profile of an organization and its supplier base to ensure their business requirements are aligned with the suppliers. The boom in the adoption of strategic sourcing implies that almost everyone has heard of it.

Outlining 4 Key Benefits of Strategic Sourcing

Now that the concept of strategic sourcing is clearer, it is crucial to understand its benefits and why it makes sense for more organizations to adopt strategic sourcing. A whitepaper authored by Zycus talks about the various advantages an organization can leverage by implementing strategic sourcing:

• Increased Level of Cost Savings

The most obvious benefit businesses will experience from strategic sourcing would be higher levels of cost savings. Identifying and selecting suppliers that will provide the highest value at the right price will enable an organization to achieve higher cost savings continuously. It is even more important as, according to Zycus’ Pulse of Procurement 2019 ,

67% of procurement organizations had made a top priority of streamlining and automating such processes as strategic sourcing.

• Better Alignment of Sourcing and Business Objectives

Aligning the sourcing activities of a business to its organizational goals and objectives are at the crux of strategic sourcing. Better alignment allows the business to achieve higher business performance with higher efficiency and minimal supply chain risks.

• Optimization of Ideal Suppliers

To effectively implement strategic sourcing in your organization, it is necessary to analyze the suppliers, their profiles, and their core capabilities. Once this is accomplished, an organization is equipped with information that will allow them to match their business objectives to their ideal suppliers. This implies the highest value-creation at the lowest possible cost.

• Long-term Relationship Building with Suppliers

Strategic sourcing helps an organization build long-term relationships with its suppliers. By reinforcing the focus on the suppliers’ core capabilities and assuring the right suppliers for the right sourcing objective, strategic sourcing helps create a synergy between organizations and their suppliers. Sustained relationship with suppliers also implies that when the suppliers are valued and considered in various sourcing decisions; they feel motivated to optimize their performance to meet the organization’s objectives.

Supply Side Optimization

By optimizing the supply side, we mean, linking the enterprise business objective with the procurement strategies. It means making sure that the supply base is contributing and aligned with the strategy. At a microscopic level, it means having the right suppliers in the right contracts.

What is the purpose of Procurement? For this, an understanding of the opportunities to enable and support business strategies and the right operating model is necessary. The operating model encapsulates the Source-to-Pay process, which has three specific functions:

Portfolio Optimization: Selecting the optimal portfolio of suppliers to achieve the purpose and choosing the right contractual terms that minimize risk

Performance Management: Actively ensuring that the KPIs are being monitored to measure and benchmark performance and non-performing suppliers undergo development programs

Digitalization: Making the most of technology to automate processes and include A.I. where applicable

Known for their excellent management skills, Japanese procurement firms rarely change suppliers. They have long-term relationships, and while they focus on getting a competitive price, there is transparency and guarantee that the supplier will be getting a sufficient margin, which gets invested in productivity. This competitive advantage is what Procurement needs to focus on.

It would be funny for companies to assume that a supply of materials will be there as and when they need them, in the quantity and price that they want. Compliance with strict regulatory requirements, supply disruptions resulting from political unrest and increasing competition are just some of the other forces that a company has to face and overcome continually.