How to make procurement more efficient

Procurement is a strategic function critical to an organization’s business objectives. Effective procurement streamlines processes and identifies cost effective sources of supply. However, organizations struggle to leverage sourcing as a bottom-line enhancer and many of them are partnering with third party service providers to do so. Service providers need to deliver value beyond cost and labor arbitrage to make a significant difference to business.

An effective service provider must be able to tailor services so as to minimize the impact of market dynamics on a client’s supply value chain. The provider must also be able to proactively ensure compliance at all junctions of business operations. Emerging technology and the proliferation of digital technologies have opened up avenues for new business models and service delivery frameworks. Third party service providers must leverage such technologies in providing value added services to their clients. Some of them include:

• Synergistic procurement: Service providers can help find commonality in goods and materials procured across the organization in order to unify and centralize procurement and facilitate contract negotiations with suppliers. Synergistic procurement helps organizations wield greater power during negotiations and to take full advantage of any warranties or trade discounts. Additionally, it provides better visibility into company spending and budgets, based on which clients can prioritize and procure products that are of high strategic value and centralize or localize procurement to optimize costs and opportunity.
• Tail-spend management: ‘Tail-spending’ can occur due to reasons like maverick spending, low price-high volume spending, low price-low volume spending, and misclassified and fragmented spending. Providers can help analyze procurement data for their clients to detect and prevent tail spend, as it directly impacts their Selling, General & Administrative (SG&A) expenses and Cost of Goods Sold (COGS). Analyzing the current contract portfolio helps set a clear baseline for the organization to quantify the benefits to be realized through consolidated tail spend. By providing visibility into spending patterns and budgets, providers can also enable the organization to re-evaluate the necessary list of procured products and services.
• eProcurement: eProcurement can facilitate effective relationships with suppliers under centralized control. It provides a single platform for all procurement related processes such as floating RFXs, vendor management, negotiation, documentation, product value evaluation etc.

Business objectives and decisions have a direct implication on procurement, which in turn impacts the overall cost. A customized sourcing strategy that considers parameters such as the nature and complexity of the business, and the range of products it procures can help achieve an organization’s business objectives without avoidable spending. The collaborative team of the service provider along with the client’s procurement and finance teams can ensure that each procurement decision is aligned to the overall business roadmap/strategy to yield the desired business benefits.

How does your organization leverage sourcing as a bottom-line enhancer?

This article is published in collaboration with Tata. Publication does not imply endorsement of views by the World Economic Forum. 

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Author: Avinash Pattabhiram is a part of BPS Marketing team.

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