Strategy & Operations » Procurement » Procurement leaders must look beyond simply cost reduction

The pandemic is slowly receding in Europe and North America, but other parts of the world are still battling outbreaks. Supply chain bottlenecks remain a challenge, with whole port shutdowns to control the spread of the virus. Unforeseen events such as the Yantian terminal closure, and blockage of the Suez Canal, will leave a lasting impact and push up costs for manufacturers. Though while cost remains a key concern for procurement, other challenges have emerged.

According to Oscar Reitsma, Business Director at Transparent, the trend over the last few years was, and still is, cost reduction. “Currently, the target of procurement is not only to select the right vendors but also to select the cheapest products possible, as long as they meet quality standards. This results in lasting s for procurement, and thus requires a change in priorities, as well as a change in how to approach supplier relations.”

Reitsma believes that procurement needs to look beyond cost and take on a more strategic and holistic view. He uses the microchip shortage as an example: “if your procurement team negotiated for the lowest price, your team will most likely also be the lowest priority for delivery. The selection and criteria of the past do not hold any value to today, because if microchips are unavailable, they cannot sell you anything. The relationship between you and your vendor should be based on added value, and not only cost reduction.”

There are many ways corporates and suppliers can work together. With inflation on the rise, both parties will be reviewing their relationships sooner or later. One way in which vendors can help address client challenges is by ‘shrinkflation’. As opposed to simply raising the price of a product when costs such as goods/inputs increase, companies can instead reduce the size of the product sold to compensate for increased costs. Reitsma elaborates, “shrinkflation could provide a cost-cutting of 10 percent and therefore, the cooperation between procurement and the vendor needs to be approached in a creative and flexible manner.”

Procure-to-pay

For most firms, procurement is not managed by a single point of contact or department, but by several stakeholders that oversee different parts of the process. “On paper, it is a very straightforward process,” Reitsma explains. “What makes it complicated is that there is hardly any company, worldwide, that has this process reduced to one owner. The stakeholders involved are not located in the same office, and often they do not engage in frequent interaction with one another. The person signing the contracts is not the same as the person controlling the final payments.”

This makes it very difficult for the procurement leader to become more strategically minded. Because these two departments have different priorities, this often leads to miscommunication between them. Finance is more focused on compliance, whereas procurement is more focused on the gains for their business. These are different day-to-day goals.

However, better oversight of the entire process, can help to alleviate some of these friction points. “Anything that provides more insights will help ease the relationship and make your full end-to-end process more seamless,” says Reitsma. Businesses will also benefit from having access to data, necessary to empower their procurement teams to use this data for both the negotiation of better contracts, the profiling of vendors, and the monitoring of competitors.

ESG future

Even when inflation recedes and supply chains stabilise, procurement will need to continue to view their tasks from a more holistic standpoint. Yes, cost will remain a primary concern, but businesses are increasingly looking at their relationships with suppliers, through an environmental, social and governance (ESG) lens, caused by pressures of shareholders and regulators.

ESG disclosures will soon become mandatory for many firms across the EU and the UK. According to Reitsma, many large organisations are already incorporating these ESG factors into the requests for proposals (RFP) scoring. And while ESG is only a small part of the ‘RFP scorecard’ today, Reitsma expects this to grow in prominence as pressure mounts, on governments and corporates alike to play their part in reaching the Paris Agreement’s climate goals. He predicts that, “big names and brands will not only prioritise price but will also consider whether their suppliers have started to look at environmental sustainability, as well as an honest wage for their workers.”

 

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