The past year has seen businesses thrown into complete chaos, as the pandemic brought supply chains to a halt across the globe.
Watching from the sidelines, it has been easy to spot those that were ill-prepared or, worse, blindsided by the crisis.
Conversely, it was also obvious to identify which businesses had their supply chains in order, and the competitive advantage they managed to leverage over others in a tough economic landscape. In the heart of this melee lies procurement.
Long overlooked in the shadows of supply chain administration, procurement has been pushed into the limelight amidst tighter budgets, supply restrictions, and a shrinking global network. During this time of transition lies the perfect opportunity to re-establish procurement’s role on the frontline longer term, and to make its time in the shadows a thing of the past.
The reason for procurement’s sudden emergence at the centre of chaos, is that said ‘chaos’ has called some perceived supply chain norms into question. Notions of just-in-time delivery, single sourcing, choosing value over convenience by utilising the full global geography – they were all designed and honed to make the supply chain as efficient and cost-effective as possible, even though they came with more risk should an unforeseen circumstance damage such an integral operation. An unforeseen circumstance like, say, a global pandemic.
What this period has exposed is that optimisation of procurement can’t simply revolve around financial value in calm seas. It must also account for resilience, flexibility, insight, data leverage, and collaboration in stormier conditions.
Procurement isn’t just for disasters
And that’s why 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 aforementioned benefits, such as globalisation or cost-effective one-vendor models. On cue, 2020-21 has served up more than just the one outside influence. Alongside Covid, the UK has also been contending with a new international make-up 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 nearshored sourcing. The Covid vaccination effort amid the rise of the Indian variant is another tick in the box, too.
As we, hopefully, emerge on the other side of these events, businesses can’t go back to how things were. If procurement and the CPO were 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.
Value across the entire organisation
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 spend 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 given. 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.
The beating heart
To not take advantage of these numerous possibilities for improvement, in a marketplace which is crying out for heightened agility, resilience and efficiency, is what can be referred to as ‘bad best practice’.
For so many years, procurement has sat in a sort of defensive position, achieving what it needed to achieve and blocking out the idea of needing to improve upon an already-functioning discipline. Organisations had, they thought, achieved best practice. And this is why positioning and leveraging procurement as a core competence and as a driver of value is more than just a technical tweak, or a shifting of the CPO’s prominence. For most, this re-evaluation of the CPO’s role and influence will require a mindset and cultural shift.
And it needs support across the whole organisation to ensure a successful transition. Support in the form of people and skills, tools, and technology. Only with this mindset change, and requisite investment into a new procurement culture, will the true influence and impact of the CPO be realised.
For too long, procurement has sat at the heart of the company without any acknowledgement of it being the lifeblood. As organisations look to establish more control, insight, variability, and robustness in its numerous expenditure channels, it’s time to get that heart beating more visibly and loudly.
☛ Alex Klein is COO and co-founder at Efficio Consulting.