Managing procurement is one of the best ways to strengthen the profit margins of any business. Procurement for any organization starts the process of efficient, profitable and efficient supply. The processes of procurement can be complex and involve several responsibilities that range from sourcing raw materials, managing contracts, building and maintaining relationships with trusted suppliers. In the 2008 economic crisis, the procurement departments saved a lot of organizations by controlling costs, thereby securing jobs and saving companies.
Why having a procurement strategy is important
Procurement controls up to 70% of companies revenue and if optimized, procurement costs and processes can greatly reward the profit margins or set the pace for competitive advantages.
It requires contributions from different areas of a business to gain an edge over competitors but optimizing the procurement area is crucial to maintain any contributions in the long run. For most businesses, competitive advantage could mean the ability to provide services and products at a reduced cost. It could also mean expanding the reach, service, or product provision without affecting quality.
Optimizing the procurement sector of a business could meancreating and managing an optimal portfolio of suppliers that align with an organization’s goals. When goals are aligned, it is easy to grow through collaborations.
Here are possible strategies that can be used by organizations to make procurement a competitive advantage.
Greater Efficiency
Methods of sourcing and procuring should always be optimized. Organizations should want to make maximum use of the external market to help them gain a competitive advantage. In procurement, every activity, item, or service counts. Improving efficiency can mean collaborations, grading, and finding better suppliers. It could also mean reducing hindrances that occur during procurement. Collaborative relationships helps you determine if a supplier is the right fit through their interests, financial performance, and capabilities.
Embracing Innovation
Procurement handlers of any company should always have the skill, foresight, and imagination it takes to find ways to cut costs. Yes, most procurement processes and supply chains are created with a long-term vision. But we cannot deny how quickly technology and innovation changes things. Procurement teams should always look beyond what they have (their current functions and responsibilities) to embrace change and take action towards the right direction. Skills and technologies that promise to manage risks, enhance supplier relationships through faster agreement process and logistics, and cost reduction should always be considered.
Increasing supplier participation
Increasing supplier participation reduces risk. From the key areas of strategy, compliance, financial, and operations. Companies procure 80% of their goods from 20% of supplying companies which calls for more trust-based relationships. Procurement departments should always find time to strengthen relationships with top suppliers. This increases the chances to be involved first-hand when there is an opportunity for the growth of both parties.
Risk assessment and mitigation
Procurement teams can gain competitive advantage by avoiding, sharing or reducing risks. In fact, part of an optimized procurement process involves proper identification and assessment of supplier risks. Proper assessment helps every involved party to consider best practices and solutions. The proffered solutions should enable the organization to point out vulnerabilities and be prepared to manage any future impact to competitive strength.
Centralizing procurement departments with high performing personnel
Across the organization, procurement cannot be properly managed to minimize costs if the environment is highly decentralized. A decentralized decision-making process means increased operational costs, several back and forth transactions, and a wider margin of error. Rather, the procurement department should be an influencer throughout the organization. In fact, the IBM Institute of Business Value carried out a study. They discovered that organizations that focused on the performance of their procurement departments reported 7.12% profit margins as opposed to 5.83% of low performing procurement organizations. Organization should focus on employing high performing procurement personnel. They should also decide to have periodic meetings with procurement leaders to discuss how to improve or maintain goals and KPIs.
Conclusion
When it comes to maximizing profit, the procurement department is a great way to start a centralized process that will have a ripple effect on the competitive advantage of other departments. With the right team, asking the right questions, organizations can:
- Implement strategies to improve procurement performance
- Spot opportunities created by the procurement department that should be leveraged by other departments
- Reduce the risks associated with suppliers while still building a strong rapport with them.
At Thurman Co, we help you develop and maintain strategies that help to develop Supplier Performance Reviews . We show you ways you can maximize contracts with supplier management. Feel free to reach out to us to understand how we can help you gain a competitive edge.