It may be stating the obvious, but what a difference a couple years make. If you’re in procurement, the last two years have seen our profession transforming itself in real time from a finance and operational function to one that creates value and plays a key role in risk management.
In a wide-ranging study sponsored by SAP, Economist Impact looked at this ongoing transformation, interviewing 430 C-level executives between January and February 2022. The interviews went beyond conversations with procurement leaders. The team also spoke with their peers across functions and reporting lines, offering a more nuanced perspective on the future of procurement and where leaders should focus their efforts.
The resulting report, “Chain reactions: Building value in procurement through digitalization,” reveals how events in recent years have elevated expectations for the role of procurement within the business.
“The importance of procurement in supporting changing business strategies, managing risks and costs, and ensuring continued access to key resources and inputs has magnified given the disruptions that have roiled the globe over the last two years,” the report states. It cites the pandemic, geopolitical developments, and shifts in consumer behavior as key catalysts for the disruption.
Reimagining Procurement as a Value Center
Given current global economic conditions, it’s not surprising that business leaders consider cost control an imperative. In fact, according to the Economist Impact survey, more companies will focus on maximizing cost savings (39.8%) to bring value to their businesses – the strategy of choice for chief procurement officers (45.1%).
The second-most-selected strategy in the top three to deliver increased value to procurement is reducing risk (37.9%), an issue that has grown in importance due to the dependence of the U.S. and Western Europe on Asian manufacturing.
Additionally, the Economist Impact survey offers hints about other directions procurement leaders are taking as they look to increase business value. These include a shift away from just-in-time inventories, an evolving focus on category management, and movement toward decentralized or hybrid operating models.
Just-In-Time Gives Ground to Inventory Management
In the Economist Impact report, the third-most-selected strategy for driving value through procurement was inventory management (19.3%). It points out that this mostly applies to developed economies like Japan, the U.S., and Western Europe.
“Supply chain disruptions in the wake of COVID-19 have helped puncture the glittering promise of the existing ‘just-in-time’ philosophy that allowed companies to reduce waste by minimizing or eliminating superfluous inventory,” the report offers.
In its analysis, Economist Impact observes that managing inventory through long-term strategies like nearshoring or backup supply chains enables companies to protect their operations from future supply shocks. That said, it finds that nearshoring has not yet taken off as a strategy because of high expenses, limited access to labor, and significant lead times to relocate factories.
In terms of building up inventory to hedge against disruptions, the report finds industries that depend on reliable and available supplies – like healthcare (30.8%) and manufacturing (26.2%) – are more likely to have an increased focus on inventory management.
An Evolving Focus on Category Management
According to the Economist Impact report, category management has emerged as the second-biggest driver of digital transformation and the fourth focus area for procurement value (18.6%). The report attributes this to the “increased use of digital technologies like smart contracting platforms that leverage sophisticated indices for identifying risks and opportunities.”
“Category management is undergoing a subtle evolution thanks to the increased use of digital technologies like smart contracting platforms that leverage sophisticated indices for identifying risks and opportunities,” the report observes.
Procurement Takes Center Stage as Operating Models Change
In an interesting turn of events, the Economist Impact survey reveals a two-way trend in how businesses are choosing to operate their procurement functions. “While four in ten companies are seeing procurement move towards increased centralization or a center-led model, half are going the other way, seeing increased decentralization or a move towards a hybrid model.”
This is having an impact on staffing, including staff increases and the use of the external workforce. And changes in the operating model are expected to continue. According to the Economist Impact survey, three in ten (31.2%) companies list it as a priority item on their agenda, just below supply chain risk (34.4%). It concludes, “procurement is going to be central to changes in organizational models over the next one to two years, given its centrality in all business operations.”
Procurement Powered by Digitalization
Through interviews and extensive research, the Economist Impact report provides a forward-looking snapshot of procurement and the impact of digitalization on this key business function. View the infographic and download the report.
Baber Farooq is head of Market Strategy, Procurement and External Workforce, for Marketing and Solutions at SAP.