By Susan Avery
Managing costs is always procurement’s responsibility, and, in uncertain times, it is the priority. Such is the case currently as reported in The Hackett Group’s 2016 Procurement Key Issues Study. The study also finds procurement leaders continue to place importance on aligning with key internal stakeholders, becoming a trusted advisor to the business.
This year, the research looks more closely at procurement priorities than before, Chris Sawchuk, Principal and Global Procurement Advisory Practice Leader at The Hackett Group, tells My Purchasing Center. As in years past, it asks procurement leaders to rank their priorities, but it also examines the change in importance from the previous year. So, while procurement leaders for the most part view costs as “table stakes,” they are placing more emphasis on working towards being a trusted advisor.
The image (below right) shows 85% of participants in the 2016 research say “reduce and avoid purchase costs” is their number-one priority. Fifty-eight percent say it’s a major focus; 26% say it’s critical. “Elevating the role of procurement to trusted advisor” is a priority for 81% of participants. Fifty-five percent say it’s major; 26%, critical. Other objectives for procurement are “increase spend influence” (76% of participants), “improve agility” (74%), “increase stakeholder satisfaction” (70%) and “reduce supply continuity risk” (68%). Please click on image to enlarge for viewing.
In 2015, “elevating the role of procurement” was the top priority for 72% of procurement leaders participating in the Key Issues Study. It was a major focus for 44%; the other 28% said it was critical. Sixty-nine percent said “reducing or avoiding purchase costs” was a priority, with 42% considering it a major focus.
The Hackett Group’s 2016 Procurement Key Issues Study is based on results gathered from executives at nearly 180 large companies in the U.S. and abroad, most with annual revenue of $1 billion or more.
In its research, The Hackett Group asks procurement about its ability to address priorities. It determines that since procurement’s operating budget is expected to grow by only 1.1% this year, it can afford to fund only a selected few of its high priority initiatives.
One of these is tapping supplier innovation. “It’s a relatively high priority, with more than half of respondents indicating that, and they say it’s more important than last year,” Sawchuk says. “But the study also shows that procurement doesn’t feel very confident that it can address the priority very well.”
He recalls a recent conversation with a procurement leader who is interested doing more with his team in supplier relationship management (SRM). As Sawchuk sees it, SRM consists of three elements: compliance, risk, and other supplier capabilities such as innovation. That last element is the one which the procurement leader feels the team could use some work.
“SRM capabilities are becoming more important, and encompassed with that is innovation,” Sawchuk says. He suggests procurement leaders will need to think differently about how to segment suppliers when engaging them in activities that encourage bringing forth new ideas. “Standard approaches don’t work,” he says. “We have to look at each of the elements and tier each of them because we don’t have the resources to work on tapping innovation from every supplier.”
Procurement as Trusted Advisor to the Business
Trusted advisor is a term coined by The Hackett Group in 2014, coming from conversations with procurement leaders, not benchmarking research, Sawchuk recalls. He says he was surprised when he saw it made the list of procurement priorities in the 2015 Key Issues Study. He also says he gets many questions on how procurement organizations can become a trusted advisor. His response: “Deliver on the basics consistently.”
The 2016 Key Procurement Issues Study also identifies other areas where procurement could improve: increasing spend influence and agility. As procurement influence over a company’s spend grows, does the organization focus its attention on the remainder, or tail, spend? Sawchuk says, “Not necessarily.”
About 20% of an organization’s spend that can be with up to 80% of its suppliers is considered tail spend. For procurement leaders who focus their attention on these smaller purchases--often from smaller suppliers--Sawchuk says there are two ways they can approach the tail spend.
The first way procurement can address tail spend is quantitatively. If its influence over the organization’s entire spend is at 80%, it can work to extend this figure to 85% or 90%. The other is qualitatively. “Look at areas where you influence spending today and see if you can improve upon that,” he says. “If procurement influence is mainly on managing costs, there may be other ways you can extract value from the spend.”
The Hackett Group research shows organizations that focus procurement resources on managing tail spend could help save about 7%.
Uncertainty, Agility, Big Data
Sawchuk looks at current volatility in the marketplace--due to uncertainty of oil prices and the upcoming election--as a reason procurement may want to spend more time on improving its agility. One way to do that is through big data. He recommends procurement work on its capability to use big data to make predictions, which may not always be correct, but which could be a differentiator. He also suggests procurement digitize relationships with internal stakeholders and become more customer centric in its activities.
Finally, the study also looks at investments in procurement. In 2015, the number-one area was strategic sourcing. This year, for the first time, it’s category management. “This helps us understand that procurement is becoming more strategic, getting more aligned with stakeholders and key business functions,” Sawchuk says.
Download a complimentary version of The Hackett Group's 2016 Procurement Key Issues Study.
Susan Avery is Editor-in-Chief at My Purchasing Center. She writes articles, blogs and white papers and manages and creates other content for the online procurement and supply management publication. She produces and moderates roundtable discussions, podcasts, webcasts and video interviews. Susan has 30 years experience covering procurement and supply management for Purchasing magazine and Purchasing.com.
George E. Krauter
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