Mickey North Rizza, research director with Gartner, lays out the critical areas that companies need to be addressing, in order to get more than just the lowest price from their procurement organizations.
How does one define real value in procurement? "It's about delivering shareholder value," says Rizza. Companies need to fixate on improving their overall gross margins, and lowering the cost of goods sold. Such goals are critical factors in helping a business to grow and generate additional revenue.
There are six areas on which to focus in addition to price, Rizza says. The first is leadership and vision; a successful company needs a top executive who is geared toward ultimate business outcomes and understands where the organization needs to go. The second is around the alignment of the business to corporate objectives. Merely taking cost out of the process doesn't ensure that one's efforts are making a difference to the bigger picture. Companies need to adopt key performance metrics that track bottom-line value, productivity, and the overall effectiveness of the procurement organizations.
The third key area is talent management. Many businesses have employees who want to do a good job but aren't being properly guided in their career paths. "They don't understand what to do to deliver value," says Rizza. The fourth area is capability sourcing. Too many companies merely source commodities in categories and ignore the benefits that an outside consultant or service provider can deliver.
The fifth area is a sharp focus on the numbers, and what they are actually achieving for the business. Companies need to know whether their efforts to lower inventory numbers and shorten order-to-cash cycle times are really making a difference to their margins. Finally, Rizza notes the importance of technology, linked to predictive analytics. Best-in-class companies are achieving 10- to 15-percent savings on "low-hanging fruit," then another 10 to 12 percent through the use of sophisticated optimization techniques on the procurement end.
Companies are only gradually becoming aware of the need to adopt these six areas of focus. Only about 10 to 12 percent are making active use of them in an integrated fashion, says Rizza. Others will require three to five years to get fully up and running. "It's not going to happen overnight," she says. "It's a transformational exercise."
