The focus of procurement is moving from on cost reduction to value generation. This has major implications for strategy development, supplier relationships, adoption of new technologies, and team skills development.-BY Andrew Hale

Management consultants agree that the role of procurement in business success changed during the pandemic. Instead of sourcing goods and services to satisfy current needs at the lowest cost, procurement became the function that was a major contributor to minimizing operational disruption and all that implies. Going forward, procurement will focus on creating measurable new value through the utilization of technologies, developing higher-level team skills, minimizing future risks, and engaging suppliers in new ways.

Ready for a Stream of Disruptions

Gartner surveyed procurement leaders to identify the priorities for procurement in 2022 and beyond. A quarter of the leaders said category management and building better category strategies were the number one priorities. 24% said the main focus is now identifying and mitigating supplier risk, 16% named leveraging spend, and 13% identified onboarding new technologies as the main focus. Only 4% said improving supplier diversity is a focus which is counter-intuitive for organizations that want to increase innovation. A surprisingly low 3% of leaders said a priority is incorporating sustainable and responsible sourcing practices, even though this strategy includes minimizing disruptions of resources such as raw materials and ensuring the long-term ability to produce products. Procurement leaders view category management as the engine for meeting all other goals, but the difference post-pandemic is that category management needs to include supply continuity and risk mitigation as disruptions continue.

Gartner also asked procurement leaders what they consider to be the biggest challenges to meeting goals. Named were a lack of needed skills or capabilities (35%), managing constant supply chain disruptions (34%), and lack of staff or ability to hire talent with appropriate skills. Other challenges include the lack of things such as resources, visibility in business units and with senior leadership, technology resources, and clarity around goals and metrics.

Moving Past Buying to Value Generation

The Gartner survey offers many insights as to what Chief Procurement Officers (CPOs) are facing. Their challenge is leading the function into the future in a way that remains focused on critical business issues such as unanticipated disruptions, while overcoming the biggest challenges. In some organizations, this could mean restructuring the procurement function to build better category suppliers and mitigate supplier risks in critical categories, through improved supplier relationships. In others, the CPO needs to develop a strategy to update staff skills and hire and retain top talent, or deploy advanced technologies like cloud-based procurement and AI. In most procurement functions, it will take multiple strategies to develop sourcing abilities that meet the “new normal” of disruption, shortages, and intense competition.

With so many challenges and needs, procurement must move beyond merely buying based on cost savings and temporarily navigating supply disruptions. They must shift the focus to supply chain resiliency and risk mitigation, transparency, team skills development, and using technology in all these areas to capture value. Source-to-value is based on enabling organizations to meet future needs not just react to current challenges. As Bain writes, “…a balanced perspective on metrics – ones that look at operational agility and supply base resiliency, then cost savings, will distinguish the procurement leaders from the laggards. To succeed, procurement teams will need to strategically seize hidden opportunities with suppliers, by using a more sophisticated toolkit and partnerships with stakeholders around the business.”

Some of the Bain recommendations for taking a holistic approach to capturing value include making procurement the engine behind ESG initiatives, supplier diversity, and supply risk mitigation; developing a procurement strategy in which goods and services acquired offer the best overall value; developing solutions that enhance environmental outcomes and social impact; developing procurement teams with the right talent and ensuring the appropriate roles, responsibilities, and coordination with other functions are established; taking a structured, strategic approach in each category; and managing and collaborating with suppliers to streamline processes and generate value.

Rethinking Traditional Approaches

Management consulting firm Oliver Wyman recommends procurement disaggregate cost components into supplier cost structures through RFP requirements. This enables separating the “core, commodity-dependent, standardized components from the value-add, competitively source-able, commodity-independent components” to increase transparency, zero in on value-add portions of unit costs, and make price negotiations more targeted. Another recommendation is to rethink supplier partnerships, because the lowest price does nothing to address price volatility. Buyers should use the cost disaggregation strategy and develop more local supplier relationships. This will open up further opportunities for diverse suppliers, especially when companies are bringing business home from other countries.

Developing a digital ecosystem for procurement is becoming critical to meeting future organizational needs. Advanced procurement technology can help the procurement team meet new objectives focused on “translating market value into product or service value for the end customer”. Utilizing emerging technologies such as blockchain, AI, and advanced analytics are rapidly becoming a necessity rather than an option. An AI-enabled data hub can serve as a central point that procurement uses for insights and a seamless end-to-end experience.

Building New Procurement Teams

These many changes related to the procurement function require a team that has the skills to maximize the use of the technologies put in place, and also one that can understand the strategic focus of procurement going forward – value creation. The skills gap is often wide in procurement, because the function continues to rely on legacy systems that make cost minimization the primary goal.

Combining the new technologies with skills development is the best strategy to overcome the current labor shortage which is expected to last for years. The technologies can automate administrative duties, and procurement team members can use higher-level skills to maximize the information that technologies deliver, such as analytics. For those functions that need to increase staffing levels to support the sourcing-to-value strategy and all it entails, organizations need to strengthen their brand as an employer of choice.

Utilizing innovative technologies will also attract millennials and Gen Zers, because one of their requirements for accepting jobs is the organization offering cutting-edge platforms and other tech-based tools. The younger generations want to work in jobs that bring them what they have become used to in their personal lives – a consumer-like experience.

Change is the Norm

As procurement moves towards sourcing-for-value, a lot will need changing – perspective on cost, technology tools, supplier relationships, talent skills, and the relationship with internal functions. It is an enormous challenge, but one that must be met for organizations that want to thrive as a value-producing function in the ongoing business environment defined by disruption, new technologies, and labor shortages.