Driving Up Value While Driving Down Cost

“Competitive advantage is secured by procurement initiatives that deliver value minus cost from suppliers ahead of levels obtained by competitors.”

Sourcing & Supplier Relationship Management are Levers for Competitive Advantage

Another Insight Guide covering Nine Major Cost & Value Options summarised those capable of “Making Procurement Cost and Value Management a Core Competence”. However one of the other key elements in the procurement equation is the operational activities and strategic initiatives associated with capturing and harnessing value from suppliers. The challenge is the development of internal and external change programmes that enable organisations to drive cost down and out of the supply chain while simultaneously driving up and extracting additional value. Company performance in this area can be assessed using competitive benchmarks, with those companies that are demonstrably superior in this area exceeding the laggards on critical dimensions by more than 50%. Through their success, they are achieving competitive advantage as a result of “value minus cost” with their supplier base. Progress, though, is decidedly uneven, and this has been confirmed by Future Purchasing’s “Strategies for Procurement Transformation” practitioner research. Several extracts from the research, below, illustrate this.

Increasingly Aggressive Cost Reduction Targets are being Set by Companies .....

The cost management ambitions of European and US companies have become increasingly aggressive, with one in five of our web survey respondents needing to achieve 5% annual cost reduction after inflation. 63% of respondents need to achieve in excess of 2% per annum. However, surprisingly, almost a third of respondents have no cost goals and / or do not believe that they are relevant for their organisations over the next three years.

• Must achieve 2% to 3% annual cost reductions after inflation
• Have no cost reduction goals or quantitative targets
• Must achieve more than 5% annual cost reductions after inflation
• Must achieve 4% to 5% annual cost reductions after inflation
• Must achieve 0-1% annual cost reductions after inflation
• This has no relevance to my organisation or company
• Will be expected to compensate for annual inflationary price increases

..... But Properly Structured Campaigns of Supplier Management are Sadly Lacking

A strongly emerging theme from the Future Purchasing research is that supplier management, while much discussed in both practitioner and academic literature, is relatively ignored in practice. Or, alternatively, there are major organisational or resource constraints inhibiting it. Neglect in this area clearly undermines the potential for competitive advantage through addressing the value part of the purchasing equation. Coverage is very patchy.

• Less than 5% of suppliers are covered by well planned and resourced active supplier management
• Between 5% and 10% of suppliers are covered
• Between 21% and 50% of suppliers are covered
• Between 11% and 20% of suppliers are covered
• This has no relevance to my organisation or company
• Between 51% and 75% of suppliers are covered
• At least 75% of suppliers are covered

Having outlined the necessary linkage between programmes of cost management (“cost down”) and supplier management (“value up”), it is now possible to create a framework to assess the current and potential impact that procurement can make on overall corporate performance. The metrics required to track this will be examined in later Insight Guides on www.futurepurchasing.com. A considerable number of organisations are still relatively early in the change process and their cost and value initiatives are essentially tactical, delivering moderate impact. This is certainly the case for many organisations addressing cross-country and regional supplier consolidation. Others are building on their progress, redefining processes and applying, for example, strategic sourcing and lean supply tools. However, the real pioneers are aligning strategic supplier initiatives with product development, brand equity and customer value propositions. The procurement mix is increasingly being focused on value creation and business growth, as well as value capture.

Understanding the Implications of the Value Gap

Future Purchasing, in procurement transformation and cost reduction consulting, and through its leadership of ongoing practitioner research, has found that many procurement professionals and their executive colleagues are optimistic about the progress being made, and also the opportunities still to be realised. For many organisations, however, the value gap between current performance and future potential is still considerable. Creating an appropriate organisational design, recruiting the necessary leaders, embedding the required processes and mobilising teams remain a major challenge and call for substantial investment in human resources and team development. This route to business advantage through pioneering procurement will be explored in much more detail in later Insight Guides.

Properly planned and implemented programmes of cost reduction are always a high business priority.

Find out how Future Purchasing can support your initiatives in procurement transformation, cost reduction, category management and performance learning by getting in touch with us here.