Typically, procurement makes up approximately 60–80% of the company’s turnover. Yet, it is regrettably rare that the importance of a seamless procurement process is acknowledged. When it comes to customer projects, it is often evident that the company’s management lacks a sufficient view of the current state of procurement, there is no regular reporting, and procurement may be left to just a few people.
Therefore, understanding your company’s procurement process and the will to optimize it are key for business.
An important step in the development of your company’s procurement is drawing up a clear procurement strategy. Often, the starting point of developing a procurement strategy and a new operating model is the company’s management realizing the hidden potential of procurement or otherwise aiming to identify it. The development may also be initiated by lower levels of management, such as procurement management. However, the important thing is that starting the strategic work always requires the commitment and comprehensive support of the company’s management.
Whether the company’s procurement is worth a few million euros or hundreds of millions of euros annually, it is often wise to take advantage of external insights and know-how for drawing up the strategy. Although companies may be able to identify their targets, they may also lack the necessary resources and expertise to implement the project on their own.
So how should your company implement the strategic process to get more out of procurement?
When the strategic work starts, the company’s management may have a vague feeling that procurement is not managed sufficiently comprehensively: the processes are not carefully defined and the current resources or know-how are not sufficient for management.
We have deemed it a smart policy to divide the strategic process clearly into three parts:
Drawing up the procurement strategy always starts with an assessment of the current state. Depending on the customer, we normally set aside several days for this stage. A few of them are used by our consultant on the ground familiarizing themselves with the customer’s operations and interviewing the key procurement personnel.
A typical procurement challenge is a lack of resources and a vast, scattered, and hard-to-manage network of suppliers. After assessing the current state, we use data to analyze the procurement costs together with the customer for the agreed period and draw up a summary of the situation. Based on the summary, it is already possible to identify the initial potential and the most obvious procurement development targets. Once a shared vision has been reached, together we will agree on the next step and focus our attention on it. This process can be tailored according to the company’s situation.
In the actual strategic work stage, we determine a new procurement strategy and a procurement operating model for the company. The project will be assigned participants, some who are procurement personnel but the majority being representatives of other functions, i.e. business decision-makers. Often, the project includes strong participation from the company’s executive team, which gives the progress of the project a great boost.
What is ValueSource’s role in the strategic work? ValueSource leads the project and interviews the participants. At the same time, the project gains an outsider’s insights and more procurement know-how.
ValueSource’ consultant is comparable, for example, to a physiotherapist who helps a patient with rehabilitation.
The strategic project itself comprises workshops as well as reports, analyses, and other agreed upon tasks performed between the workshops. The convivial and engaging workshops normally last from half a day to a full one, and the participation rate is typically high—also with regard to management. And procurement is happy that someone is finally paying attention to these matters!
After all, companies have not normally really talked about procurement strategies before projects like this. Everyone may have their own views on it, of course, but the big picture and a mutual procurement situational picture are missing. Therefore, it is important that the meetings have a clear agenda and materials. They also provide people with the opportunity to discuss a mutual topic, and the discussions help with commitment to the development tasks.
The projects often result in sudden insights. “Hold on, are we really spending this much on procurement?” or “Damn it, we need to fix this!”
After the planning of the strategic process has come to a successful conclusion, the procurement strategy can be tested in practice. During the implementation, you can monitor whether the strategy makes the procurement process smoother and in which ways, and whether any changes need to be made to the strategy.
However, the final result is heavily dependent on the commitment and work of the “patient”, i.e. the customer. In other words, the work is aimed at permanent changes and the customer’s development.
In practice, procurement is almost always under-resourced relative to its financial potential. As procurement represents a major part of the turnover, its proper management often requires greater resources—and, specifically, resources that have experience of not just operational procurement but also of strategic procurement and supplier relationship management. However, regardless of how obvious the potential and business case would appear to be, the threshold for recruitment is often very high.
Here are a few observations on what the preparation of a strategy should focus on:
If you think that your company could use a new procurement strategy, please get in touch!