The Power of Procurement (page 2)
-- Supply Chain Management Review, 12/1/2005
Page 2 of 2
The consulting firm of A.T. Kearney has found similar performance gaps between what they called the supply management “leaders” and the “followers.” In their latest annual “Assessment of Excellence in Procurement” report, Kearney found that the leaders far outperformed the others in generating savings and then driving those savings to the bottom line. The study looked specifically at four procurement cost categories: capital expenditures, services, direct materials, and indirect materials. In the first three of those categories, the savings percentage of the leaders was more than twice that of the followers. And in the last category, indirect materials, the gap was not two times, but very close. The Kearney study also established that the leaders have consistently outperformed their industry average for net income over the five-year life of their study. (See Exhibit 2.)
What makes a leader?
The A.T. Kearney consultants defined a procurement leader as one that excelled in at least three of eight dimensions of procurement excellence identified. For The Hackett Group, “world-class” status was conferred on companies that had scored tops against a set of metrics centered around efficiency and effectiveness. One of the more robust expressions of procurement leadership was articulated by Tim A. Minahan of the Aberdeen Group, in a recent article for this publication. (See “Strategies for High-performance Procurement,” Supply Chain Management Review, September 2005.) Minahan identified five competencies that companies need to develop to transform their procurement organizations into strategic resources and generators of real business value. Those five activity areas are:
·Improve supplier development and collaboration.
·Enhance and integrate procurement automation infrastructure.
·Adopt low-cost country supply initiatives.
·Transition to a center-led procurement organization.
·Increase amount of spend under management while improving spend compliance. Companies that have developed these capabilities—the companies that Aberdeen has identified as the supply management leaders—have built up a strong competitive edge over the average companies. Moreover, this leadership is manifested in certain practices now ingrained in their procurement organizations. For example, compared to the average companies the leaders have greater spend under centralized management (83 percent versus 60 percent), more suppliers that are electronically enabled (52 percent versus 39 percent), and a lower percentage of maverick spending (8 percent versus 18 percent.) “These leading firms also reported greater contribution from procurement to enterprise value in the form of product and process innovation, faster time-to-market cycles, expansion into new markets, and profitability,” says Aberdeen’s Minahan.
Seize the power
With the kind of competitive advantages documented by the research findings reported here, why would any company hesitate to embark on the journey toward procurement excellence? In theory, there’s no good reason not to move forward swiftly. In reality, obstacles always seem to hinder progress along the path. One of the biggest roadblocks is the built-in resistance to change—and the shift from traditional procurement practices to more strategic supply management represents a fundamental change. Part of the answer is to get the individuals working in the discipline to embrace a new mindset when it comes to things like technology adoption and supplier relationships. Another part is to bring people into procurement with different perspectives and experiences. The Aberdeen study, to that point, noted that the leaders are seeking out MBAs with concentrations in areas like finance and logistics as well as graduates with engineering degrees. Challenges like change management are tough. But when you’re talking about cost savings that are twice that of your competitors and returns on procurement investment exceeding 100 percent, you just have to figure out a way to overcome the challenges. Granted, it requires some effort; but the power of procurement is there for the taking.
Francis J. Quinn is editorial director of Supply Chain Management Review.
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