Procurement trends in general and trends in the procurement organization in particular
Today’s procurement is about understanding and manipulating an overwhelming set of variables to deliver on time and within budget. The environment is becoming more and more complex and demanding and thus the trends of how to manage procurement are following this complexity. The following general trends play a major role in the current transformation of the procurement function:
Changed system requirements:
End-to-end purchasing systems: Major players in the industry are moving towards a full service end-to-end procurement suite driven by consolidation in the procurement tech space
The migration towards cloud services: The advent of Cloud technology has driven procurement software providers to adapt their products to web-based applications
Automation through electronic purchasing: Companies automate sourcing processes through e-Procurement rather than relying on centralized and decentralized models
Increased focus on sustainability: Organizations around the globe look at ways to integrate sustainable purchasing process standards into their sourcing strategies
Outsourcing of Logistics and Purchasing function: Outsourcing all, or part of, the procurement and logistics processes is a growing trend among all global organizations
Growing need for qualified purchasing skills: Companies look for expertise in sustainability, supplier collaboration, relationship management, performance management, analytics and much more
Increased cooperation: Integrated supply chains require closer collaboration between all players in the value chain – Procurement, Logistics, Bid, Commercial, Sales, and Finance
The importance of increased cooperation between an organization’s functions and the growing needs of qualified purchase skills leads to the continued topic of this article; the trends of the procurement organization.
Trends within the procurement organization
Trend 1: Procurement as a business partner
The face of Procurement is changing exponentially. The role is stepping out of the shadows as a vital element in the business strategy of any corporation. Procurement’s role is evolving rapidly from a tactical team focused on cost reduction to a strategic entity driving enterprise-wide value.
Enterprises worldwide are asking their procurement teams to play a larger and more strategic role in their enterprise growth and deliver sustainable business results. By integrating Procurement activities more closely to the internal customers, some purchasing units have gained sustainable cost reductions in nontraditional areas. Supply chain or chief procurement officers (CPO) are becoming key participants in the C-suite, partnering with the board and the CEO.
Trend 2: Talent Management
The rapid market changes and the change of procurement organizations creates new demands on skills and competence of purchasers, that is why talent management and recruitment has to be a top priority for the purchasing function.
The requirement’s on the employee’s competence is increasing rapidly. Skills and knowledge needed have shifted from being focused on only purchasing, to a broader context. The skills needed have broadened to include negotiation, risk management, people skills, data analysis and critical thinking, supply chain management knowledge, project management and last but not least, technology and business strategy acumen.
It is shown that European CPO’s investment priorities are focused on recruitment of new talents, training programs and purchasing technology. To meet the demand for this new skillset the focus of CPO’s is shifting towards the recruitment of new talents. But, as the requirements on the employees are increasing, the requirements on the employers are also increasing. There are several ways to manage talents and hence meet their requirements and let them perform as expected. One way is the ability to demonstrate a solid career path for younger staff. Another is to offer high salaries. But this isn’t enough, the ability to offer training programs is another vital parameter, which as mentioned, is shown to be the second highest investment priority for European CPO’s.
Trend 3: Hybrid organizational structure
A hybrid organizational structure is associated with greater efficiency and flexibility, which are important features for the purchasing function. From being de-centralized, Procurement organizations are witnessing a shift towards centralization and thus a more hybrid organization. The complex environment makes it important to have a tighter procurement function, which sometimes is similar to a shared service center. This organization form will for example simplify management of supplier contracts and relationships, helps improve risk mitigation, and makes it easier to standardize in order to manage the large volumes. The resources within the procurement function can still be allocated to the business unit they belong to or support but the organization has to act as one single organization.
Trend 4: Vendor Management Office (VMO)
In order to shift from a cost focus to a value focus changes are needed within the function. One thing that can help changing this focus is implementing a Vendor Management Office. This new function (VMO) will make it possible for the procurement function to move from slow and cumbersome work including management of contracts and administrative tasks. It will instead make it possible for the procurement function to make sure that tasks are conducted with high efficiency and quality with focus on the business impact.
The core of the VMO is the vendor management life cycle which in turn consists of Contract Management, Performance Management, Financial Management, Compliance Management and Relationship Management. So in concrete terms, the VMO will for example conduct benchmarks, audit contracts, monitor financials of projects and keep track of budgets, make risk assessments for new or old vendors, make demand forecasts and make customer satisfaction surveys.
Setting up a VMO will bring new value to the business, where the supplier relations and contracts are handled both critically and concentrated which will lead to higher value of the purchasing organization.
Trend 5: Innovation driven procurement
There are many benefits in working towards innovation driven procurement. First, the efficiency and speed of innovation increases which leads to faster product to market and improved quality. Second, the innovation profitability increases with an improved product volume and enhanced process efficiency. Third, the innovation portfolio value is enhanced and optimized, which means that innovation ideas are assessed and improved to a larger extent leading to better R&D strategies.
Unlike the traditional collaboration model, innovation driven procurement requires an innovative collaboration model which allows for quick exchange of ideas and acceleration of the product design process. This means that there is a shift in the relationship and business model for innovation. Before, the different functions involved in innovation worked in silos, but now this is changing towards a joint working relationship where the different functions, in example R&D, IT, Marketing and Procurement, work tightly together. Furthermore, the Procurement function goes towards centralization even in this matter, where the global/central procurement team acts as an enterprise-wide solution provider The innovation in procurement has to have buy-in from the executive leadership to promote the innovation in procurement, similar to what is stated above, with procurement as a strategic business partner. The grounds for working with innovation driven procurement lies in the above mentioned organizational trends. But of course innovation driven procurement not just involves the internal functions. The external relationships of course play a large role in innovation driven procurement with supplier partnerships and the online technology platforms, that encourages the collaboration with suppliers are most crucial.
To conclude we can say that the future of the Procurement organization will be more focused, sometimes smaller in size but will have a much heavier impact.