The management of procurement value


SergiiDovgalenko_100.jpgIt is now apparent that procurement can deliver an extensive value proposition in addition to traditional savings and compliance. Procurement has the potential to be a revenue centre, empower suppliers' product innovation, manage risks, contribute to customer satisfaction and so much more.

Traditional procurement strategy that pragmatically concentrates on return on investment (ROI) and the enablers of ROI does not sufficiently elaborate on the variety of value elements that can be unlocked.

A step towards introducing this new dimension of value elements is to develop a classification of different values.

A group of authors from Bain & Company, in their article The Elements of Value, has undertaken such an approach and built the Value Pyramid, which can be customised for procurement.

Sergii Dovgalenko (FCIPS), Head of Procurement, Etihad Airways, takes us through the process at a high level:

ProcurementValue1_1024.jpgDepicted in the image alongside (click to enlarge) are the areas where procurement strategy can create value in a business. The practical level is all about the functional attributes of procurement. The reputational level represents procurement's influence on the brand and relationships whereas the ethical level reflects procurement's contribution to society/the surrounding community.

Applications of procurement value
Understanding the above, you can now start to embed procurement value into your strategy:
- Start working with sales and marketing to understand consumer perceptions around your products and their value.
- Analyse consumer market trends that would affect your strategy to start building bridges towards the value that customers seek.
- Define value-based category targets.
- Align your category strategy to the respective business unit strategy and link your category targets to the targets of said business unit. The goal is to build stakeholder trust and to develop relationships.

ProcurementValue2_1024.jpgTo put the value classification to work, rank the elements by two sets of indicators: the effort needed to build/improve/maintain a value element and the impact it would have on profit and loss, brand and procurement itself. In the example alongside, each indicator has been given a scoring range with up to 20 points available for more challenging/rewarding aspects and up to 5 points for less critical elements.

Finally, plot these scores into quadrants, as depicted in the image on the right:ProcurementValue3_1024.jpg

The Execute quadrant contains lower-effort, but higher-impact values. These are quick-win values. The Prepare quadrant contains strategic values that will be achieved gradually and systematically. The Attach quadrant contains values that are not very attractive impact-wise, but, owing to their low-effort nature, could be attached to some quick-win or strategic values. The Simplify quadrant contains values that do not justify extensive effort, owing to the low impact that they will have and, hence, need to be reconsidered, e.g. split into simpler tasks.

You can differentiate between compulsory value elements (marked in red in the image alongside, e.g. Code of Ethics, functional budget and audit trail), which need to be achieved irrespective of which ever quadrant they are positioned in.

Now you can build these values into your short-, medium- and long-term strategies. You can also revisit the quadrants upon reaching some critical transformation milestones, e.g. achieving procurement digitalisation.

This would positively reflect on efforts related to source-to-pay, supplier relationship management, data and business intelligence, managed total cost of ownership, integrated procurement planning, internal service level agreements, continuous improvement and relationships with stakeholders and partners. You would notice how much more achievable integrated planning and continuous improvement have become and adjust your plans accordingly.

This proposed approach is just one of many tools to enhance the value management part of your procurement strategy. Eventually, acting upon multiple dimensions of procurement value, CPOs will be able to fulfil their long-term ambition to become 'chief value officers'.

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