Originally appeared in CCJ Digital
Most procurement professionals during challenging times would file the procurement procedure book in the round file cabinet and resort to a more “hand-to-mouth” strategy, but your procurement process can not only help you through challenging times, but also create a competitive advantage for your organization.
Competitive advantage is your organization’s ability to provide products or services that are better and/or provide more value than your competitor. Competitive advantages are typically developed over time, along with contributions from many different areas of your business.
An effective procurement process allows an organization to select an optimal portfolio of suppliers and align those suppliers to the organization’s mission statement. This can be done via favorable terms and promotes and incubates collaboration through cross-functional excellence.
An efficient and effective procurement process can deliver quick but tangible cost improvement and enhance the agility of the supply chain. Therefore, a well-defined procurement process can provide your organization a competitive advantages by reducing costs across the value chain; causing greater efficiency in the delivery of quality goods and services; assisting with product innovation; mitigating supplier risk; and increasing supply chain resiliency.
Procurement departments should evaluate current procurement processes to determine if it supports their organization’s competitive advantage based on the following criteria:
Reduced total cost across the value chain
The primary goal for a procurement organization is to deliver value. An effective procurement department lowers operational costs by purchasing supplies and services at the best available price.
In addition, optimal procurement practices enable the organization to take advantage of warranties and/or discounts that are often forgotten or not properly managed.
However, if you can’t see what your organization is spending it is nearly impossible to manage costs effectively. Minimizing dark purchasing practices is key. An effective procurement process supports having total visibility into an organization’s expenditures for all purchasing activity, which gives you the ability to reduce procurement costs, improve relationships with stakeholders, and track purchasing patterns to make financial improvements in the long-run.
If you can control costs, you are able to make your products more cost competitive in the market.
Greater efficiency
The fundamental purpose of all sourcing and procurement activity is to utilize the external market and suppliers in an optimal manner to gain a competitive advantage.
Every item or service being sourced should contribute, directly or indirectly, toward competitive positioning. When an organization has an effective procurement process, procurement can eliminate redundancies in the operation, promote collaboration and distinguish between good and underperforming suppliers.
An efficient procurement process provides an organization with economies of scale, which allow it to reduce costs and produce more for less, creating a competitive advantage. Efficiency within your supplier relationships allows your procurement team to easily determine your suppliers’ capabilities, interests, competitiveness, and financial strength, which will give you the ability optimize your supplier base, weeding out under-performers and working with suppliers that have ability to enhance your organization’s competitive advantage.
Embrace innovation
Procurement professionals are increasingly required to not only possess the necessary skills to deliver cost savings, satisfy social responsibility targets, manage supplier relationships and manage risk, but also are now expected to be innovative in order to gain a competitive advantage.
Procurement’s contribution to innovation can occur in the product development phase, because 70% to 80% of the cost of a product or service is determined during the design or specification phase, which has a direct impact on the organization’s competitive advantage in the marketplace.
In addition, innovation within the procurement department can improve the communication of complex data, support the negotiation phase through online auctions and bidding systems or online catalogues, which allow you to check product availability, place and track orders, and make payments.
These tools have become more vital to efficiently procuring goods and services than ever before, thereby removing cost from the process.
Mitigate supplier risk
This is critical. Supplier risk events can happen in four general areas: strategy, compliance, financial, and operational.
Risk mitigation includes risk avoidance, risk reduction and risk sharing, which should be continuous and evolving in order to addresses all the risks associated with the organizations’ past, present, and future activities.
An effective procurement process must address a sustainable method of identifying, assessing and solving supplier risks. When a lack of preparedness in risk management does not match the pattern of a company’s potential vulnerabilities, the results can impact an organization’s ability to compete.
Procurement organizations must evaluate their current process to account for their organizational vulnerabilities and ensure that remedies, or at least temporary solutions, are in place.
Support supply chain resiliency
A procurement process should address solutions and continuity to unexpected conditions such as economic uncertainty, labor fluctuations and natural disasters.
The challenges of 2020 have caused procurement departments to adjust their strategies to manage interruptions in supply and cash flow, while providing continuous service to their stakeholders.
In this new reality, procurement must change its strategic thinking from just-in-time to just-in-case, making its process resilient to accommodate these unforeseen situations. According to Christopher and Holweg, supply chain resilience allows an organization to design a network of partners that is strong enough to adapt to unexpected disruptions while maintaining control and – if possible – continuing past the disruption more favorably, gaining a competitive advantage.
A resilient and robust procurement process that is able to account for future and sometimes disastrous changes that may happen when procurement operations and supply chains are re-defined will fare far better in the long run.