2020 has been a year that's made companies across the world completely rethink the way they do procurement. As opposed to the common belief that the pandemic has made the environment more challenging, in reality it's made the need for procurement transformation all the more critical.
We at Ignite believe in the vital role strategic and data-driven procurement can play in helping organizations recover from the current economic crisis. If you ask where this belief stems from, the answer is simple: Procurement has done it in the past and can do it again.
To understand this better, let's take a look at this research from McKinsey and Company . According to this research, companies with robust procurement functions saw valuations return to pre-GFC levels an average of three years faster and were able to lower costs of goods sold (COGS) as a percentage of revenue. Both these factors resulted in improving EBITDA by three percentage points more in comparison to the bottom performers.
The research further highlighted that in five years following the global economic crisis, total return to shareholders (TRS) for companies with top-quartile procurement capabilities was 42 percent higher than for companies whose procurement operations were in the bottom quartile.
How COVID 19 Changed Procurement? More than ever before, the current pandemic-related disruptions demand procurement professionals follow a flexible approach that focuses on value creation, innovation, and sustainability.
The COVID-19 crisis has also lead to widespread supply chain disruptions and changes in the way consumers behave. And this isn't the end of the story sadly, the COVID pandemic isn't a short-term crisis. What we've experienced so far is an initial blow of the economic crash, the ripple effects of which will keep seismically moving through our economy in years to come.
Using Goodhart's Law to Move Beyond Cost Still, a majority of the procurement functions across the world are obsessed with the cost KPI. But the fact is, cost KPI has become one of the most misunderstood concepts in the procurement industry.
How to Plan and Prioritize Your Procurement Initiatives?
Procurement involves multiple steps that require a lot of preparation, coordination, and collaboration techniques. Naturally, the sheer volume and complexity of the processes involved in the function ask you to sit back and look within to figure out what the organization really needs. It's only then that you can look up and say: "We know how to fulfil that need best."
The foundation of any procurement strategy depends on a comprehensive understanding of spend data and how you slice and dice it. Kraljic Matrix is one such effective analytical tool that identifies areas of improvement in your procurement strategy by classifying spend categories depending on two key factors: strategic importance of procurement and complexity of the supply market.
Category management is a circular exercise that involves many internal an external decision-makers and processes. When managing categories, procurement must follow a structured approach that considers factors like risk assessment, value levers, latest market developments, and strategic supplier relationships, to name a few.
These fact-based analyses tend to spark your thinking and help you formulate strategies to guide procurement activities. The strategic classification also lays the foundation of transparency, and the initial insights for creating value beyond the cost savings soon begin to emerge.
Now you have all the strategies and insights your need, but the real work only begins when you list the initiatives, tactics, and action plans to deliver the results. Here, a Prioritization Matrix helps you to plan your project and efficiently implement your initiatives to see progressive results.
The current market landscape is complex and competitive, to say the least. While embracing this reality, procurement must show readiness to listen to what the situation demands. The way forward is a structured and well-defined approach to recognize and lever potentials.
Want to learn more about how you can plan and prioritize your procurement initiatives? Watch our instant on-demand webinar on Setting Procurement Up for Success in 2021 .
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