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Future of Procurement

November 27, 2012

“The function must re-invent itself or it will not survive”.

That was the view of one supply chain academic at an executive forum i attended last night in Germany. The audience – primarily current or former Chief Procurement Officers – appeared to agree. Indeed, one made an analogy with the Pony Express, put out of existence almost overnight by the final link being made in a new technology, the telegraph.

It was in this context that the forum was wrestling to address questions over the future role and purpose of the Procurement function. They did not doubt the need to buy things; they simply wondered what need there would be for ‘a profession’ to oversee the process.

While it is certainly possible to redefine and extend the role that today’s Procurement practitioners could play, there are at least two major challenges. One, of course, is the nature of the skills or knowledge required, relative to those held by the incumbent community. The other is the openness of others in the business to the expanded or altered role that is envisaged. In this context, the issue is not only whether they feel the activities need to be undertaken, but also whether they view Procurement as the right place for them to be done. Given that many other functional groups are also busily redefining their future role, there is potentially a lot of competition.

The organizers of the forum had undertaken considerable research – and it did not appear to offer a comforting message. Specifically, even in those areas where Procurement executives believe there is potential for the function to expand, there appeared little receptivity by other parts of the business to allowing them to do so. Indeed, the best hope was in shifting to a more holistic role in determining total business cost associated with purchasing decisions, yet even here there was resistance by the Finance executives.

So in the face of the dramatic shifts in technology, where exactly will Procurement find itself over the next few years? Will the function indeed suffer the fate of the Pony Express?

  1. Transparency is an issue – How do you proove the value of the function and that you are buying as effectively and as smartly as you can? Its like valuing the cost of prevention!
    The projects we do in ERA are very enlightening to Finance Directors and Procurement Directors because we have access to industry wide benchmarks but also we can intervene in the business and challenge the operations to become smarter spenders and therefore we have an independent and holistic approach. At the CFO Exchange in Siwtzerland, we were talking about where should procurement report into to, to work at its best and the stragtegic importance of procurement in the organisation. We resolved it depends on the industry but it is fundamental to addressing the future of procurement.

  2. The statement is overbroad. The importance of procurement and the resulting need to be “professional” depends very much on the role of purchased items in the buying company. When purchased products are “customer facing” (go to the purchaser’s customers) they are much more important that when they are just used internally. “Customer facing” includes primarily manufacturing but also retail and wholesale operations. That requires a great deal more professionalism than buying supplies such as paper and services such as travel.

    In fact, procurement has become much more important than manufacturing in such industries as electronics where much of manufacturing is outsourced. Procurement must manage both the outsourced manufacturers but also the component suppliers. While assemblers (such as Foxconn) generally place purchase orders for components, they do it against contracts and pricing negotiated by the assemblers’ customers. Because an assembler serves multiple, competing customers who all specify components from the same component suppliers, competitive advantage comes from negotiating better deals with the component suppliers than the competition does.

    In these circumstances purchasing remains strategic even when manufacturing doesn’t.

    • Sammy Rashed permalink

      If I understood your point correctly, you’re right in saying that the complexity of what a company purchases will determine the professional skills and capability that must be possessed by its procurement organisation. However, the larger points of the blog are that:

      1) unless you can evolve Procurement’s approach every so many years, it will undoubtedly generate declining returns (both in the Direct and Indirect areas), which constitutes an obvious risk for the function; and
      2) to play a more comprehensive role in the creation of value (a need that is increasingly more in demand) Procurement professionals must have capabilities that go well beyond its traditional mandate and skill base

      The question remains of whether procurement organisations can rise to this challenge or be relegated to solely to a buying role, regardless of much professionalism or sophistication this may require.

    • well said !

  3. “the best hope was in shifting to a more holistic role in determining total business cost associated with purchasing decisions”

    Silos are coming down left and right in many businesses, and the “old roles” don’t always apply anymore. I think a lot of verticals will need to blend together in the coming years, including procurement, to give businesses a much more blended approach to how they operate.

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