How Effective Procurement Provides Real Value to Business

How Effective Procurement Provides Real Value to Business

Effective procurement may seem like a basic business process. However sometimes the obvious can be overlooked. It can have a massive positive impact on your profits for a relatively small amount of work. 

1. Ask your current suppliers for a lower price 

Research the market and if you think you were overpaying ask for a better price. Don’t assume that because you’ve been loyal to a supplier for a long time they are giving you their best price. 

2. Review your prices and supplier lists regularly 

It’s also important to benchmark them against the market. Complete a full review of your supplier portfolio at least once a year. For high-value items and one-off purchases get at least 3 comparative quotes as there can be a surprising range of prices available.

3. Use your negotiation skills

Reduce the size of your order from your current supplier and push extra volume or activity to a new one. Once you inform your supplier that you will send more orders their way if the price is right you just might see a sudden willingness to negotiate.

4. Look out for hidden fees

When ordering looks out for suppliers adding unwanted charges like delivery insurance handling fees. These items tend to be low-value add-ons but can mount up and add zero value.

5. Look out for opportunities 

In addition to your trade suppliers, the following areas often provide an opportunity for cost savings Insurance for motor vehicles liability or workers compensation bones and wireless connections, banking and finance charges and marketing. 

However, settling with the lowest price isn’t always the best decision. Other factors can be equally important such as reliability, quality, competence and expertise. Achieving an optimal mix of price and service creates value.

There’s an unprecedented level of expectation of procurement as a function in corporate and government today. The traditional role for procurement was mainly around trying to achieve savings on the addressable spend. However, there’s an emerging role for procurement and an expectation to deliver corporate, social, and environmental outcomes.

How does procurement deliver savings? 

For a long time procurement has focused on strategic sourcing and contract negotiation as a way of delivering savings to a business. But now more and more businesses are looking beyond that point to post contracts to deliver real value to the business.

The real savings come from post-contract awards through managing the contract more effectively. The savings are sustained by making sure that suppliers are delivering to their obligations. Supplier performance management is where we’re seeing real value being extracted from the contracts that procurement has put in place. Leading companies are going a step further than that and looking to work more closely and more collaboratively with their key suppliers. They’re un-tapping new streams of value to the business through collaboration and supplier innovation. 

How does procurement deliver real value to the organisation? 

It requires a very tight alignment of procurement objectives to the business objectives. More specifically, procurement strategy to the supply chain strategy of the business. Often, there’s a misalignment of procurement strategy and supply chain strategy. The two can even be opposing when developed in isolation. 

Procurement strategies largely focus on delivering the lowest cost goods and services to the business. In financial terms, you might consider it a gross margin, however, your end motive is to maximise a gross margin on those goods or services. Whereas supply chain is taking into account all of the supply chain logistics, inventory, including working capital costs, associated with the delivery of goods or services. As a financial measurement, it’s more about a net margin approach as compared to procurement that’s focused on gross margin. Together they can deliver suboptimal outcomes in terms of cost, quality, and service.

Beyond this, there’s also a need for supply chain and procurement to work together at a more operational level to extract the real value of the contractual arrangements. Essentially, these contracts are an asset to the business, and procurement and supply chain needs to work together to deliver real value to the businesses. In practice, it can be executed by managing the contract more effectively and managing supplier performance

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