Alex Klein, COO and Co-Founder at Efficio Consulting, explores why now is the time to focus on procurement.
The coronavirus pandemic threw the spanner of all spanners into supply chains across the globe, effectively stopping them in their tracks. Amidst the fallout from border closures, lockdown restrictions, and budget cuts, businesses with a two-hand feel on their supply chain operations leveraged the situation to their advantage, emerging from the chaos head and shoulders above their lesser-prepared counterparts, for whom the crisis spelt disaster. At the heart of the maelstrom lay procurement, hitherto eclipsed by the “sexier” functions of supply chain administration – that is, until now.
2020 thrust the procurement function centre-stage, with all eyes on the Chief Procurement Officer (CPO). This moment, therefore, marks the perfect opportunity to reframe how we think about procurement as a whole, calling curtains to its time waiting in the wings.
Again then, why now when, historically, the procurement function has been so undervalued? Put simply, the events of the past year raised doubts over the once iron-cast conventions of supply chain management. Single sourcing, just-in-time delivery, choosing value over convenience by utilising the full global geography – all were created to make the supply chain as efficient and cost-effective as possible. What they failed to consider was the need for a contingency should it all collapse inwards in the face of black swan events like a global pandemic.
The last 18 months have uncovered the precarity our supply chains rest on, the weak links exposed. Procurement optimisation can no longer be predicated on financial value beneath blue skies – it must also factor resilience, flexibility, insight, data leverage and collaboration in stormier weather.
Not just a contingency
For this reason, the CPO must be given broader influence. To the wider organisation, procurement – for too long – has been seen and treated as a back-office function. Without getting too technical, this is largely because, at face value, it is just not an exciting or “sexy” part of the business. It’s seen as the culmination of administrative effort and has subsequently suffered from being part of a vicious cycle in which it doesn’t have the platform to prove its worth, and therefore can’t flex its muscles enough to earn a more prominent pedestal.
It took an external influence to highlight existing inefficiencies or risks that had been overlooked in favour of the aforementioned benefits, such as globalisation or cost-effective one-vendor models. On cue, 2020-2021 has served up more than just the one outside influence. Alongside COVID, the UK has also been contending with a new international makeup off the back of Brexit. In addition, the recent Suez Canal blockage also confirmed a need to optimise supply chains in preparation for more ‘black swan’ events that may lie ahead. And for manufacturers, in particular, the ongoing global chip shortage has made a further case for diversified or nearshore sourcing. The COVID vaccination effort amid the rise of the Indian variant is another tick in that final box, too.
Emerging, hopefully, on the other side of many of these events, businesses can’t go back to how things were. If procurement and the CPO is needed for the worst of times, then imagine how it thrives in the best of times. The most successful organisations today know this, and it shows.
This difficult time has proved that procurement is more than a background staple, and certainly more than a ship for stormy seas. It is an enormous profitability lever, whatever the weather. After all, procurement represents between 50% and 80% of a company’s costs, depending on the industry. And most of the savings extracted from those expenditures, flow straight to the bottom line in terms of overall ‘value’. In fact, procurement has been shown to have the potential to increase an organisation’s EBITDA (earnings before interest, tax, depreciation, and amortisation) by 30% or more.
This significance makes sense if you think about it. External spending isn’t just one line. It’s a network. Procurement pertains to everything from office supplies to raw materials, maintenance, equipment, energy, haulage and transport, marketing, IT, and more. As a function, procurement spans business units, geographies, and budget lines. And yet, it has been seen as an administrative gift. An unchangeable necessity.
In reality, and what organisations are hopefully now realising, is that true optimisation of the procurement channel means potential refinements across 40 or more categories, avenues, and channels.
Waiting in the wings
All that said, this re-appraisal of the role and influence of the CPO will require more than a technical tweak or intellectual repositioning. After years of gathering dust in the back office, seeing procurement as a core competence and value driver will involve both a cultural and a mindset shift. Procurement sat guarded, feet up, as an ‘if it ain’t broke’ entity. It achieved what it needed to achieve and shut down the idea that it had to improve upon an already-functioning discipline.
Organisations had, they thought, achieved best practice. But how, in a market crying out for increased agility, resilience, and efficiency, can opting not to take advantage of these opportunities be considered anything but ‘best bad practice?’ For this reason, they must become self-aware. If this shift in thinking is to be in any measure successful, it will require the support of organisations – support in the guise of skills, tools, people, and technology.
Procurement has sat just out of frame for too long – it’s time now to shine the spotlight on the CPO and its team, as businesses look to build greater strength, resilience, control, and insight into their expenditure channels. Procurement is ready for its close-up.
Alex Klein is the author of PROFIT FROM PROCUREMENT: How to add 30% to Your Bottom Line by Breaking Down Silos with Efficio colleagues Simon Whatson and Jose Oliveira, published in 2021 by Wiley.