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The Evolution of Procurement: From Transactional to Transformational

The Evolution of Procurement: From Transactional to Transformational

The traditional Procurement Organization, as we have come to know it, is changing.  It will soon look much different, as the trend suggests.

It’s evolving.

Like any other business organization, Procurement is adapting to the needs and demands of the business. It is taking on a more vital role in the operations of the overall business.

Recently, at the ProcureCon Asia Conference in Singapore, a critical Benchmark Report was released entitled “Challenges in Asia-Pacific Procurement.” It provides findings from Procurement Executives of how Procurement is moving from a more transactional role to a more strategic role.

So what does this mean?

It means that Procurement is becoming increasingly important. It’s beginning to play a more prominent role in the overall vision of the company. As a matter of fact, having the Chief Procurement Officer occupy a seat on the corporate board of directors is becoming more commonplace.

 

Moving from Transaction to Transformation

 

Previously, Procurement has served a function that was more transactional in nature. It typically used a more tactical approach to sourcing.

Every day, most Procurement Organizations made their purchasing decisions based primarily on pricing and delivery times. Procurement wasn’t fully incorporating the Corporate vision’s strategy in its  buying decisions.

A shift has has taken place. Procurement teams have started to take a more strategic approach. As a result, Procurement began to have other needs.

Now, under the new business environment, Procurement needs all stakeholders on board in order to operate at its maximum efficiency. They need to work more closely with the various silos that are present in each company.

Additionally, Procurement must find ways to provide more value to the company. They have to focus more on lowering the total cost of ownership, rather than just the upfront costs. They have to claim more control over the company’s purchasing practices.

 

The Challenges

 

Of course, evolving from a transactional to a transformative organization brings up certain challenges. As with any type of transformation, there are obstacles which can serve to impede progress. If your Procurement Department is going to evolve, you will need to have a plan for overcoming these challenges.

Here are some of the challenges facing Procurement today:

 

Managing Too Many Vendors

 

Many Procurement organizations are juggling numerous vendors. Their spending power is being spread over many different suppliers.

Not only does this dilute your buying power, it also makes it more difficult to be effective. When you’re managing too many vendor relationships, your Procurement team is spending tons of time keeping up with purchases and managing each of these relationship.

The problem with this is that your Procurement team could be wasting large amounts of time and money because it is not optimizing its vendor relationships effectively. In order to overcome this challenge, you should consider consolidating your vendors. Figure out which ones you need and which ones you don’t need.

Vendor consolidation has several benefits:

  • Less vendors means less time being spent to manage each relationship. The time being saved can be used to make the team more effective.
  • Increased buying power means lower prices. When a supplier sees that you’re willing to spend more money with them, they will be more likely to give you better terms and pricing.
  • When you consolidate your vendors there is less risk of contract noncompliance. When you have less contracts to focus on, it becomes easier to make sure that you’re complying with your vendor agreements.
  • Less vendors means better relationships. As Procurement evolves, it will become more important for you to see your vendors as partners. Building better relationships can help you do this.

Consolidating your vendors isn’t an easy task. It will require some time and effort, but the potential rewards will be worth it.  

 

Rising Costs

 

This might come as a surprise, but prices on pretty much everything are going up. Okay, so that’s not much of a surprise, is it?

It’s no mystery that rising costs can negatively impact most companies. Rising costs can make it more difficult to find ways to save your company money.

Because of this, it’s important that your Procurement Department learns how to take a more strategic approach to buying its resources. Strategic sourcing can help your company utilize its spend more wisely.

The main focus on strategic sourcing is to lower the total cost of ownership. This means that your Procurement Organization will learn to find ways to lower the lifetime cost of a particular purchase instead of just focusing on up front costs.

 

Maverick Spend

 

Many companies waste tons of money each year because of maverick spending. According to the ProcureCon Asia/Pacific report, 80% of procurement executives view managed spend as a key performance indicator for their team.

Maverick spending is a serious problem. When there are employees making purchases without consulting Procurement, it can result in wasted money and issues with noncompliance.

Gaining greater control of your company’s spending is a key component in becoming a more transformative organization. When Procurement gains more visibility into the company’s purchasing decisions, it’s better equipped to save money and protect the organization.

 

Not Understanding your Contracts

 

Contract compliance is one of the hardest things for a Procurement team to master. Managing a large number of contracts can sometimes be overwhelming.

However, in order to help your Procurement department evolve, you have to learn how to manage your supplier contracts effectively. According to ProcureCon Asia’s report, 50% of Procurement professionals are achieving less than 50% contract compliance.

This is a scary finding when you think about the potential impact of contract noncompliance. If you’re not managing your contracts the right way, your company could lose money and become vulnerable to legal action.

Of course, there are other risks associated with faulty contract management. You may understand your contracts well enough to avoid lawsuits, but that’s not the only concern.

What would happen if you enter into a contract that doesn’t give you the best terms? What if you become locked into an evergreen contract that limits your flexibility?

Contract management is a key skill that will help your Procurement department move to the next level.

 

Conclusion

 

Here’s the bottom line. Times are changing. Industries are changing. If your company wants to remain competitive, it needs to change as well.

This means that your Procurement Department needs to evolve in order to meet the continually-changing needs of your company. It needs to move from a transactional approach to a more transformative approach. It needs to adopt a more strategic approach that enables your Procurement Organization to take more control of its spend.

When you find a way to address the challenges outlined in this post, your Procurement Department will become better equipped to play a more prominent role in the operations of your company.

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