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Is your procurement department helping your company serve end customers and simultaneously helping the firm make ‘targeted profits’ when doing so?

Executives today expect results. Procurement spends half or more of every dollar the firm receives in support of operations. Because of this, the procurement group is expected to play a much larger role and bring value to the entire business enterprise.

Understandably, the need for this kind of performance has many companies taking a ‘fresh look’ at their procurement departments and benchmarking performance, identifying opportunities, and managing commodities. Likewise, it is necessary to introduce technology that provides a competitive advantage.

Benchmarking

If you don’t measure your performance, you cannot tell if you are improving in an activity. Furthermore, you must have a starting and an ending point in mind so that you can develop a strategy to get from one place to the other.

Procurement strategy is no different in that it is necessary to develop a ‘road map’ to reach higher levels of performance. This is accomplished by measuring performance against key metrics. Next, the performance is compared to leaders in the industry or industry standards. One such standard would be the ‘netted’ Purchase Price Variance (PPV) for a purchasing group.

Identifying Opportunities & Risk

As discussed above, the primary goals of the company are to serve end customers and be profitable. At the same time it is important to understand risk.

One important tool, to understand your company’s raw material mix, is to identify the contribution and supply risk for each of the raw materials and products purchased by the company. This helps to pinpoint financial opportunities, classify the risk, and seek the best ‘balance’ for the company’s ‘fixed’ resources.

Commodity / Category Management

Companies purchase products from numerous commodities when supporting production. It is important to identify the relevance and how important a commodity is to the company to pursue the best financial position.

Often, category management works the same way (some organizations use category management as a synonym to commodity management). Again, aggregating or even identifying the direct or indirect spend in these areas proves challenging and can depend to a large extent on the production system and methods used when ordering and receiving items.

Technology

Procurement has evolved rapidly over the last two decades. There are many programs available to increase productivity and reduce costs that range from consignment programs to a fully integrated supply chain that reduces ‘total cycle time’ and inventory investment. There are also front and back end processes to improve planning or reduce the cost associated with Receipts and Accounts Payable.

The Bottom Line

It is necessary to know whether or not the company’s procurement group is bringing value to the company by managing its purchases. Benchmarking the group’s performance against industry leaders or industry standards can help determine if there are any opportunities. It is important to identify ‘contribution and supply risk’ when assigning and balancing fixed resources for strategic and tactical solutions. The company should leverage its purchases and use technology whenever and wherever possible to achieve improvements that reduce costs.

Related Topics

Transforming Procurement Operations. Today, procurement is expected to bring value to the entire business enterprise. Some organizations have difficulty migrating their legacy processes to more advanced procurement models. For more on this topic, please follow this link.

Process Management. It is important to have effective business processes in place. Otherwise, it is very difficult for departments to reach high-performance levels. For more on this topic, please follow this link.

Organizational Structure and Performance. Top performing organizations require structure, culture, and resources to produce high performance. Departments designed around four areas achieve much higher performance levels. For more on this topic, please follow this link.

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