It is now apparent that procurement can deliver an extensive value proposition in addition to traditional savings and compliance. Procurement can be a revenue center, empower supplier’s product innovation, manage risks, contribute to customer satisfaction and so much more.
Traditional procurement strategy does not sufficiently elaborate on a variety of value elements; it is still pragmatically concentrating on ROI and its enablers. To introduce a new dimension, it is suggested to develop a classification of different values.
A group of authors from Bain & Company in their article The Elements of Value have undertaken such an approach and built the Value Pyramid, which can be customised for procurement.
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Practical level will be all about functional attributes of procurement. Reputational level will represent procurement influence on brand and relationships. Ethical level will reflect upon procurement contribution to the society or community.
Applications of procurement value
Now you can start embedding procurement value into your strategy.
- Start working with sales and marketing to understand consumers’ perception of our products and its value.
- Analyse consumer market trends that would affect your strategy to start building bridges towards the customer value.
- Define value-based category targets.
- Align your category strategy to the respective BU strategy, and link your category targets to the ones of BU to build stakeholder trust and develop relationship.
To put the value classification to work, we ranked its elements by two sets of indicators: what effort is needed to build/improve/maintain a value element and what impact would it have on P&L, brand and procurement itself. In this example, each indicator has been given a scoring range with up to 20 points available for more challenging/rewarding aspects and up to 5 points for less critical elements.
Finally, you plot these scores on a quadrant.
Execute quarter with lower effort and higher impact represents quick win values. Prepare quarter contains strategic values that will be achieved gradually and systematically. Attach quarter has values that are not very attractive impact-wise, but due to their low-effort nature could be attached to some quick wins or strategic ones. Simplify quarter contains values that do not justify extensive effort with its low impact, and hence need to be reconsidered e.g. split into simpler tasks.
You can differentiate compulsory value elements (marked in red), e.g. code of ethics, functional budget and audit trail, which need to be achieved irrespective of its position in the quadrant.
Now you can build these values into our short, medium and long-term strategy. You can also revisit this quadrant upon reaching some critical transformation milestones, e.g. procurement digitalisation. This would very positively reflect on efforts related to source-2-pay, SRM, data and BI, managed TCO, SRM, integrated procurement planning, internal SLAs, continuous improvement and relationships with stakeholders and partners. You will notice how much more achievable the integrated planning and continuous improvement became, and adjust your plans accordingly.
This proposed approach is just one of many tools to enhance the value management part of your procurement strategy. Eventually, acting upon multiple dimensions of procurement value, CPOs will be able to fulfill their long-term ambition to become chief value officers.
Sergii Dovgalenko is head of procurement – corporate services procurement & supply management at Etihad Airways