What benefits shall you get from your Non-Core Procurement function

Non-Core Purchasing (i.e. Purchasing non directly related to the end-product and not manageable through a full automated MRP system) has from the very start be appreciated as a low-value contributor in a company strategy, but year after year this vision evolved under increasing cost pressure and by now Best in Class (BIC) companies are positioning Procurement as a key component of their success and inviting CPO to the Management Board; Objective # 1: get rapid and sustainable cost cut-down.

Nowadays, It’s almost a given than cost reduction and net bottom-line benefits from non-core purchasing  are significant enough to get awarded a dedicated non core spend Procurement organisation. Let’s remind the math briefly with averaged illustrative numbers :

  • Non-core spend (1) = 15 to 35% of total revenue
  • Spend baseline potential reduction, so called Hard Savings (2) : 15-20% over 4 to 5 years
  • EBITDA % net increase as a result : (1)*(2) = 15%*15% to 35%*20% = 2,25% to 7%

Just to get the feeling ofthe importance of such an increase, let’s remind how much sales % increase would be required to get to such an improvement on a already nice 10% EBITDA: (2,25%-7%) /10% = 22,5% to 70% so annual growth of 4,5% to 14% every year over 5 years. Knowing that the total costs for such an organisation should not exceed 1% this is still 3,5% to 13% net growth year on year.

The business case for non-core Purchasing Management is a no brainer. At least it should be. Unfortunatly, there are several Procurement Value Killers blurring this business case:

  • Impossible for Finance to find the claimed Hard Savings in the P&L,
  • Speed to 15%-20% Hard Savings exceeding 5 years,
  • Under-estimated change Management as well as Business and Finance critical involvment
  • High Savings leakage due to lack of compliance
  • Once costs have been taken out twice, end of story..

On the other hand, isn’t the value from the Procurement function much broader than ‘just’ running cost reduction initiatives?

Companies are somehow an ‘association’ of service-providers with specific capabilities (sales, operations, marketing, HR, Finance, Procurement etc…) strongly connected together to solve their client business issues. Some of those capabilities are core, the ones part of the value chain, and others are non core, in general the support functions like non-core Procurement. From this perspective, keeping costs down as much as possible for categories like Office Supplies or Prints looks right, but for some other categories indirectly connected with the value chain, like Contracted Labor, IT software and infrastructure for customers,  Agency Services, Procurement should go beyond Price optimisation and contribute delivering all of the 4 values below:

  • Business Growth
    • Creating revenue growth opportunities by leveraging as earlier as possible
      • Supply Market trends and Innovations / Evolutions (example: usage of flat screens, of Internet or personal coffee machine in Hotel rooms packages )
      • Converging Offerings  (example: providing in-room service combining in-house restaurant capabilities and external food chains (pizzas – burgers etc…)
  • Risk reduction
    • which risks : such as Supplier financial failure, raw material shortage or delays, brand impacts, commodity/service  price high fluctuation, Increase agility to better manage customer demand fluctuation
    • How: through supplier performance management; market & supplier trends and analysis
  • Inter-enterprise process efficiencies
    • Efficiency : Supplier Plug and Play capabilities, Process automation with technology (i.e. Productivity), business platforms, work-information-cash flows,  process standardisation, compliance management, historics Analytics, supplier enablement, contract management (SLAs) etc…
    • Quality : customer or end-user satisfaction, sustainability
    • Turn Around Time
  • Price optimisation (of course)
    • Unit price: competitive selection process, cost breakdown analysis, Market & Supplier intelligence, Analytics, specifications, contract continuous improvement, vendor committments, advance fee models (value based models)
    • Volume: Volume aggregation, preferred vendor selection, usage optimisation & policies.

With regards to non-core spend, companies are still very much focused on short-term cost take-out and  I have hardly seen any  with a Procurement mandate such as described above and with necessary capabilities…

4 major business opportunities  for non-core categories service providers,  as long as they find a way to commit on value to be delivered.

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