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Businesses nowadays are emphasizing upon the importance of organizing procurement functions. Why? Because effective and efficient procurement can be the difference between a company’s astounding success or downfall. Most of you must be convinced or are already looking out for ways to organize procurement functions for your business. Here are our six expert tips to help you start building a modern procurement function.
Procurement is one of the first areas companies target when they want to generate cost savings. However, in doing so companies come across daunting obstacles, especially when procurement processes aren't organized to fit their needs. These hurdles make it difficult for procurement to reach its full savings potential and urge companies to find a way out of this predicament.
An organized procurement function provides businesses with a clear, comprehensive, and robust blueprint to work upon. Such a framework enables attributing the right solutions to the precise business needs. Often, procurement operations are plagued by emotional and belief drivers. These factors generate a lot of friction at every step and tend to inhibit procurement transformation efforts.
By organizing procurement, companies follow a fact-based and data-driven approach to overcome these hurdles. But of course, like any other transformational effort, organizing your procurement functions works best when you follow a holistic strategy, meaning you standardize procurement alongside the other aspects of your enterprise strategy. When you combine these efforts, you devise a plan to build a world-class procurement organization that can drive enormous value in the future.
Six Tips for Organizing Procurement Function
Based on our experience, we have compiled six specific tips for organizing procurement processes:
1. Define a Clear Mandate
As part of the process of establishing a procurement function, or redefining the current one, you should always define a clear mandate for the function (or department). The mandate should include a description of the overall function, decision-making authority and key activities, as well as the department's reporting structure.
For the organizational hierarchy or reporting structure, we recommend positioning procurement as a top-level function, with the Chief Procurement Officer (CPO) being a part of (group) management and reporting directly to the CEO. And the reason for this is pretty straightforward. External spend is often the largest cost item for most companies, where a dynamic procurement function automatically becomes one of the most important contributors to ensure competitive costs. Moreover, procurement is a very interdisciplinary role that must work closely with different people throughout the organization, e.g. management, finance and employees with technical expertise. Also note that this is the most common CPO reporting structure in Fortune 500 companies.
The procurement function can create significant values when provided with enterprise-wide visibility along with the opportunity to support and influence business strategy.
2. Involvement and Anchoring
For procurement to have a real impact on and make sustainable changes, you need to ensure involvement and anchoring throughout the organization in procurement processes. A modern procurement function that utilizes professional expertise within the organization, combined with a systematic and analytical procurement methodology, creates the best outcomes for your organization.
Involving relevant users in the procurement process gives you more sustainable processes with a more holistic perspective. These users are more likely to adapt to new or changes in policies, routines and contracts, and are critical to ensuring that changes are successfully implemented in other parts of the organization. Anchoring the process and decisions internally will, among other things, increase contract loyalty - and drive savings.
3. Category Management
We recommend procurement departments of medium-sized and large companies to implement and adapt the principles of category management. Category management is a strategic approach which organises procurement resources to focus on specific areas of spend, i.e. spend categories, by using a structured methodology. This entails working systematically with each spend category to identify and implement levers to reduce the total cost across the entire value chain. The methodology emphasizes innovative thinking and results-enhancing measures, in addition to the more traditional procurement approach focusing on contracts and prices.
Spend categories should reflect the supplier market and what you're buying, where procurement resources should be allocated to the different categories. The category manager is responsible for developing and implementing category strategies for each category, in line with the company's overall objectives and strategies.
Are you looking for a template to create category strategies for your business? Download our free, battle-proven category strategy template.
4. Invest in Procurement
As a rule of thumb, a well-functioning procurement department can contribute to annual savings (or value creation) of at least 3% of the cost base.
Assuming that the total cost for a procurement professional is approximately NOK 1 million per year (~USD/EUR 100k), each employee must at least be responsible for a cost base of NOK 33 million to "cover" their costs. In reality, each procurement resource will be responsible for a more sizeable cost base, especially for larger companies.
Our experience tells us that procurement is a severely underinvested function relative to other business functions. More often than not, too little resources and funding are fueled into the procurement function. However, providing specific advice on this topic is hard without a clear understanding of your company- and industry-specific conditions.
5. Ensure the Right Expertise
Ensuring the right expertise, competencies and skills is vital to unlocking the full potential for any procurement department. For all relevant positions in the department, both current and future ones, we recommend that you prepare requirement specifications.
The procurement department as a whole should have some important characteristics for it to function properly. The ability to collaborate with the rest of the organization is one such attribute, as are analytical and commercial skills. In smaller procurement departments, it's crucial that a larger share of the employees have a broader set of competencies. In larger departments, you should focus on building a team with a more specialised skillset. For example, a procurement controller with core expertise in analytics will most likely be a valuable asset for larger procurement functions.
6. Use Digital Tools
Proper digital tools are a critical success factor in ensuring a well-functioning procurement function. Digital tools can compensate for both limited resources and expertise - and can even boost competencies - in your department.
All procurement departments should invest in and use tools that support them throughout the strategic procurement process, e.g. our spend management solution. Currently, there are some solutions available in the market supporting the strategic processes. However, the problem with most solutions is that they are either expensive, not user-friendly, challenging to implement or only focusing on selected parts of the process.
Best-of-breed procurement tools are usually a small investment that can lift your business to new heights!
It's clear how organizing procurement functions can improve your company’s bottom line and enhance efficiency. But, this transformation can happen when teams are equipped with the right procurement tools to improve the current procurement process.
A cloud-based spend management solution like Ignite Procurement keeps your thumb on the pulse of procurement transformation to help your organization realize a host of benefits. It does the bulk of the work in procurement transformation, thanks to the power of data, advanced analytics, and industry expertise. That means you improve your procurement function, find new moves for your company, and achieve superior results.
If you want to improve your procurement process and achieve everything we have talked about here, contact us to learn how we can help you transform your procurement functions.