Strategy

The New Currency for Procurement

by Michael Koh, Head of Procurement, Asia Pacific, Dimension Data

The procurement function is now more strategic-based than ever before. It requires more collaborative efforts, and needs the procurement executives to do more with less resources, with the help of today’s technology. These transformative trends are ongoing at different paces within many of today’s multinational organisations.

According to Accenture’s article, Procurement’s Next Frontier, the value delivered by the ideal procurement organisation of the future will assume a much broader meaning. Although the traditional cost savings will continue to be valuable, the next generation procurement organisations will be measured in broad terms of how procurement align to the company’s strategy, such as EBITDA (earnings before interest, taxes, depreciation and amortisation), reduction in function’s budget, risk mitigation, supplier innovation, and gross profitability, among others.

The financial impact

Further insights from The Chief Procurement Officer Study was conducted by the IBM Institute of Business Value (IBV) 2013, which surveyed 1,128 CPOs from organisations with annual revenue in excess of US$1bn. The study found that top performing procurement organisations reported an average enterprise profit margins of 7.12 per cent, compared to 6.19 per cent for all respondents and just 5.83 per cent for low-performing organisations. Also, companies with top performing procurement organisations report profit margins of 15 per cent higher than the average company, and 22 per cent higher margins than companies with lower performance procurement organisations. With all these compelling factors, many companies have also embarked on their trails to seek the new currency to measure procurement.

For many procurement executives, it is important to focus activities that have a positive impact on business variables, such as productivity, profitability, quality, and timeliness to market, among others. These variables captures the essence of group performance year-on-year or actual versus budget. The sector leverages on traditional procurement pillars of order and tactical management, contract and strategic sourcing, spending management, vendor performance and partnering to enhance business profitability from make or buy decision. With the respective stakeholders, the procrement sector must host dialogue-rich discussions to solve business concern and guide them through the procuring processes. Only then can the company be a smart buyer and provide guidance to the respective suppliers and partners to be a resourceful seller.

Embracing six-sigma

The “As Is” metric of today cost saving to form the baseline for the “To Be” future model is an important concept for any six-sigma practitioner. The cost saving measurement includes both cost optimisation and cost avoidance. Cost avoidance is avoided spending. For today, cost saving is solely cost avoidance. If you ask your controller how you fare, he or she would say that you have not saved anything.

Hence, it is key to focus with internal stakeholders and suppliers on how to improve the value contribution per unit through initiatives that have an impact to the business variables. One should not relentlessly pursue the cost optimised at the expense of business value. Our reputation is not measured on cost alone. The sooner we realise the perceived value of our products or services in the market we are playing in, the earlier we can advise businesses to anticipate and resell products and services to the market acceptance level.

Learning from the fallen

Eastman Kodak Co. filed for Chapter 11 bankruptcy in January 2012. This is a company that played an important part in the lives of millions of people for more than 130 years through the famous “Kodak moment”. The market changes come very swiftly. In the span of just seven years, from 2005 to 2012, the company lost half its revenue. In another interview, Mr Ng Yat Chung, CEO NOL, said, “In this environment of extreme overcapacity and severe freight rate erosion, competition is based on cost. We have made good progress in that aspect, and every year we have managed to reduce our losses. Unfortunately, we have not been able to cut costs fast enough to offset the collapse in freight rates.”

Although managing cost is critical in above mentioned situation, it is more important to play the advisory role to advise business earlier and make their demand specifications. Today, in some top performing procurement organisations, procurement finds itself as a creative agency to drive the right marketing question. The supply bases are not equal and changes much faster with technology, hence it should be managed as such.

In an article by KPMG, the procurement reinvents itself. We no longer exist in its previous form. It is now structured as an internal agency; it holds a key role in developing new business and finance models for the company, also known as the creative agency linking the business to the supply base stakeholders.

A study from procurement leaders, respondents reports that, on average, it takes 2.4 years to complete a restructure, and around one-third (30 per cent) of procurement staff’s available time is absorbed by transformation. Therefore, it is imperative that all procurement leaders take actions now, and embark on the new currency journey. Most importantly, the procurement executives should share their stories and experiences with the industry, and create a new chapter for the procurement industry.

About the Author

Michael Koh is the Head of Procurement, Asia Pacific at Dimension Data. As a member of the NTT Group, we accelerate our clients’ ambitions through digital infrastructure, hybrid cloud, workspaces for tomorrow, and cyber-security. Prior to his role, Michael served as the Head of Procurement, Asia Pacific at T-Systems and Schneider Electric ITB.

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