The top priority for procurement executives is measuring and managing their procurements business value, but there is difficulty in calculating the function’s value contribution when one compares it to the achievement of its strategic goals. When one reduces the cost of purchase, companies can increase their investments in value-channel activities that come up with ways to create value is beyond purchase-price reductions.
Adjusting Procurement’s Value Scorecard in an Era of Diminishing ReturnsThe benefits from savings diminish when major spend categories are sourced properly as well as suppliers are rationalized, according to research. Companies need to consider other sourcing and purchasing methods which come with more coordination with all internal stakeholders and suppliers, minus the negotiated cost itself.
Achieving Price Reductions Is Still Essential, But Top Performers Demonstrate Broader ValueThe misalignment of desire between moving away from focusing on price reductions and its recognition can create a dramatic impact on the time spent by all procurement staff. A few examples of how it can hinder procurement’s delivered value are:
- There is no proportionate focus on areas consuming procurement resources and those who don't get recognized.
- There is friction between procurement staff and the other business staff over the measurement of value that is being contributed.
- There is a lack of alignment when it comes to performance metrics and incentives.
Value Streams Supported by Procurement Organizations
Purchase Cost ReductionIt is the new cost incurred by the company vs. its previous baseline. Its requirements are simplified further so that it can support forms of cheaper supplier solutions. It includes early payment discounts, rebates in P-cards among other benefits of supply chain finance. There are savings from all initial and average RFP bids and all discounts are negotiated from a list price.
Cost and Spend AvoidanceIt is the reduction in demand and consumption, i.e., all non-cost-based spends. It derives its benefits from currency as well as inflation hedging, etc. This means that companies get items and services at no cost. It helps in preventing any attempts at an increase in price.
Non-Price Cost ReductionIt means that companies carry reduced costs from raw material reductions, such as outsourcing processes. There is internal procurement of process-cost savings that comes from process reengineering but at the cost of reduced quality.
- Measuring and managing their procurements business value is a company's top priority
- Achieving price reductions is still important to companies at the same time
- Procurement organizations use purchase cost reductions, avoidance in cost and expenditure and non-price cost reduction to combat this issue