The role of procurement as a purely administrative activity is over. Three-quarters of companies consider the procurement of goods and services a strategic function. Five years ago, only a third of companies regarded procurement as that significant. Those are the results of a study – “Beyond the Hype: What’s Really Important in Procurement?” – conducted by consulting firm BrainNet between October 2006 and Mach 2007 at the request of SAP. The study indicates a paradigm shift. Today, the potential of procurement is no longer seen as just a way to reduce costs. Management expects procurement to achieve long-term goals that make a decisive contribution to competitiveness. It has become responsible for the procurements of indirect goods like marketing and consulting services, elements that have long been the responsibility of the board and department heads.
For the study, BrainNet surveyed the chief procurement officers (CPOs) of more than 60 leading companies in the United States, Europe, and Asia, including Bertelsmann, Colgate Palmolive, Credit Suisse, and IBM. According to BrainNet, the companies surveyed have an accumulated annual procurement volume of 430 billion Euros – much higher than the gross national product of countries like Argentina, Sweden, or Turkey. These powerful procurement departments – three-quarters of them have more than 500 employees – have the power to influence markets with their decisions.
CPOs must still fight for recognition
According to the authors of the study, the CPOs of the companies surveyed are pioneers in procurement, and the results of the study represent the future development of this enterprise function. A change has occurred. In half of all companies, procurement has come to act at the same level as other strategic departments. It reports directly to company management and administers a budget that is significantly larger than it was five years ago.
Procurement can fulfill its strategic role only when it is involved in cross-departmental decision making at the executive level and when it collaborates closely with a company’s leadership. But that’s just the problem. Despite its increased strategic importance, procurement must continue to fight for recognition with a company. Only one-third of the companies surveyed see procurement as a key factor in adding value. Company structures and processes have not yet been tailored to the increased significance and complexity of procurement activities. Most often, procurement does not have the required authority and occupies a weak position in the organization, according to Sven T. Marlinghaus, a partner at BrainNet and an author of the study. The CPO is usually not part of upper management, and does not have direct access to that level of management. Procurement is not seen as a springboard for a career, so qualified personnel are usually unavailable. According to Marlinghaus, the training budget for a purchasing agent averages about 700 Euros per year. That figure is ten times higher for a sales employee.
In light of the prestige problem, 80 percent of those surveyed see their greatest internal challenges as clarifying the direct influence of procurement processes on a business’ success and focusing upper management more clearly on procurement. The department must also become involved in procurement decisions early on and have sufficient personnel, financial, and technological resources.
Demands for a strategic contribution to business success
Meanwhile, the increased strategic significance of procurement is seen in the changed weighting of individual business processes. Five years ago, procurement focused on negotiation and closing contracts; now procurement focuses on strategic business processes. For example, one of the most important tasks of a CPO is to develop procurement strategies that release synergies within a company and contribute to a company’s long-term success. According to Marlinghaus, CPOs should bring their expertise to make-or-buy decisions, bundle procurement needs throughout the group, and bring the needs to the market in an optimal manner. Vendor management also plays a strategically important role. Global competition and increased outsourcing of services require a well-functioning network of business partners that must be directed effectively.
According to BrainNet, performance processes have also become more important: spend management, supply risk management, and performance measurement. The study sees general economic conditions as the causes of this development: global value-added networks, more intense global competition, and stronger legal requirements. The study also shows that the strong focus on transactional processes like e-procurement and online auctions of the past did not bring about the hoped-for improvement in performance. Important subjects like risk management or knowledge management were quite underdeveloped. “Investments were often made only in the optimization of operational processes like purchasing office supplies, without checking to see if the processes were true value drivers,” says Marlinghaus.
Pent-up demand for IT solutions
The IT industry has not paid enough attention to this development, according to BrainNet. In the study, a majority of CPOs complain about the lack of strategic functionality in software solutions for procurement. The applications are immature in terms of processes critical for success: vendor, risk, and compliance management. Manufacturers continue to devote a comparatively great amount of attention to predominately standardized processes like electronic invitations to bid or catalog management. But the critics say that commodities like these do not enable users to achieve any competitive advantage.
The CPOs surveyed want a better understanding of their business requirements from suppliers of software for supplier relationship management. Manufacturers should provide preconfigured best practices for strategically important processes that influence the business. The best practices should be easy to implement and use open interfaces for integration with other applications.
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