Procurement transformation is the key to a competitive advantage in this tough economy.
Without procurement transformation- it would be challenging to stay on top of your process that might affect your bottomline.
That’s exactly what we want to discuss in this blog- we want to help you craft a a well-thought-out procurement transformation strategy if you want your business to stay in the game and gain a competitive edge against your competitors.
If you’re ready to explore on your business’ true potential, read along!
What Is Procurement Transformation?
Procurement transformation refers to the evolution of your business’s strategic procurement process. It discusses how quickly and efficiently you can acquire goods and services by improving your procurement function.
Take note: procurement transformation isn’t just about finding the cheapest option for your business.
It’s about optimizing your entire processes to create strategic value for your company. As we’ve mentioned, your company’s procurement leaders need to understand what it means to take your procurement game to a new level to stay competitive in your industry.
Here’s a breakdown of what procurement transformation involves. As procurement leaders, make sure you take note of the following:
- Shifting from tactical to strategic: Your procurement teams should move from simply buying things for your business, to actively doing the actions to contribute to your business goals. Identify and manage business risks, build stronger supplier relationship management, and leverage data to make informed decisions to boost your business agility.
- Improving efficiency and effectiveness: For procurement transformation to be fully realized, you need to streamline and automate tasks within your business units. Using artificial intelligence to automate your purchasing process will help save you time.
- Embracing technology: The transformation of your procurement involves digital tools. They play a key role in automating your tasks, analyzing your data, and facilitating collaboration within your organization. Think AI, cloud-based solutions, and e-procurement systems.
- Focusing on sustainability and ethics: Your organization must incorporate responsible sourcing practices. This will help your organization drive better ethical and environmental standards within your supply chain management.
What Are The 7 Stages Of Procurement Transformation?
There are about 7 stages to procurement transformation. But it’s important to note that these exact stages might vary depending on your company’s needs and goals.
Let’s discuss the general stages of procurement:
Stage 1: Assessment And Visioning
This stage of your procurement transformation involves assessing the current state of your procurement process and identifying your pain points and areas for improvement. In addition, this also involves setting clear goals for the transformation of procurement.
You need to understand your baseline to outline your ideal future state easily.
Stage 2: Strategy And Planning
Once you have a vision, developing a strategy to achieve what you want is next. This includes everything you want to define, from key initiatives to selecting appropriate technologies and building a roadmap for your implementation.
Stage 3: Building The Foundation
This stage involves laying the groundwork for your efforts of procurement transformation. It can include things like:
- Establishing a governance structure
- Putting together a skilled procurement team
- Implementing basic digital tools and processes
Stage 4: Technology And Automation
In this stage, you must implement automation and digital tools to streamline your processes. This helps you reduce manual work and get the data-driven insights you need for your business.
In this stage, focus on leveraging your technology to optimize your procurement operations effectively.
Stage 5: Supplier Collaboration And Supplier Management
You need to build strong relationships with your key suppliers. This is important to ensure the quality of your supplier performance and can even reduce your risks of any issues.
To make this stage successful, have effective communication with suppliers. This will ensure all parties understand the contract terms and conditions to make a successful transaction.
Stage 6: Continuous Improvement And Measurement
Your transformation is a continuous journey. It’s not just a one-time thing.
Your procurement transformation involves monitoring your progress, measuring your results, and adapting your approach.
Stage 7: Cultural Change And Sustainability
Build a culture that embraces change, digital technologies, and the courage to achieve strategic goals. Boosting your procurement performance takes a strategy that’s:
- data-driven
- collaborative
- and innovative
Always keep your head up high, and search for opportunities for improvement within your company!
What Is A Procurement Transformation Roadmap?
Here’s what you should remember about procurement transformation:
It is not just about cost savings anymore, but depending on the industry, procurement could be tasked with enabling new product development, managing supplier risk, and sustainable procurement.
The first step is defining the strategy for procurement transformation. In this, we are answering the “Why” of procurement transformation. Why is it needed, and what are the factors which are influencing it?
The changing expectations from management drive the need for transformation.
Procurement is expected to be equipped to be an advisor to the finance and operations along with other supply chain functions. Such an organization needs a different approach, skill set, and people.
So, where do you get started with the procurement strategy?
Start with interviewing key stakeholders to understand the long-term vision for the company as well as the expectations of the procurement department. Some of the stakeholders you should talk to
a) CEO/ COO – You can talk to the COO, or if your company doesn’t have a COO role, talk to the company’s CEO. The goal is to understand key operational goals for the short and long term (5 years) and the potential barriers to achieving these goals.
From there, map out the role procurement can play and the capabilities your team needs to develop to support operations requirements.
b) CFO – Conventional wisdom is that CFOs only care about cost savings when it comes to procurement. That is not true anymore. CFOs are looking to procurement teams for better spend visibility, understanding cash flow trends, and managing cash flow goals.
Talk to your CFO and understand where you can add value; that assessment should drive your procurement department transformation strategy.
What Are The Benefits Of Procurement Transformation?
Once you have defined your strategy, it is time to define the benefits of procurement transformation clearly. It is important for two reasons.
- It helps you get buy-in from executives and internal stakeholders on your transformation journey.
- It helps you define a clear roadmap for delivery
The model divides the outcomes of procurement transformation into four areas, and the additional skill sets your team can gain as a result of a transformation.
For example, Financial metrics could cost savings and cost avoidance.
Risk management could lead to fewer disruptions; it is always better to have SMART goals. If you have a baseline of previous supply chain disruptions, you can clearly state the benefits and how the enhanced risk management can help reduce such disruptions.
More and more procurement organizations now better appreciate the value of enhancing customer experience. This is one of the major drivers for many procurement transformations, especially when trying to drive a behavior change or spend consolidation in the Indirect Spend categories.
A better end-user/customer service experience leads to better stakeholder engagement, and procurement teams should spend time articulating the benefits of a better customer experience.
The supply chain can tremendously help gain a competitive advantage, especially in discrete manufacturing. So, you should consider what benefits an organization can achieve from your transformation efforts.
What Is The Procurement Transformation Assessment?
Let’s review each area of your procurement transformation assessment:
People
Of course the most critical and valuable assets. This assessment aims to understand current skill sets and what skill sets are required to achieve the end state of procurement transformation.
For example, procurement transformation aims to align procurement with finance. The obvious requirement is that your team understands key financial terms and how to talk finance language.
Now, if they already do, then great. You are already ahead of the curve. If not, you might want to identify this as a gap and acquire the necessary training to bridge the skill set gap.
The other example could be to build low-cost sourcing capabilities, and if none of your team has ever done that, then that is a gap that needs to be filled.
Process
The next step is to assess your current processes and understand if they are aligned with your procurement transformation goals.
For example, suppose the goal of the procurement transformation is to improve customer experience. In that case, a process that needs five approvals to procure a laptop is not going to cut it.
In this case, your focus should be to simplify the approval process. That could be done by giving more approval authority to individuals and building better controls to prevent rogue spending.
Focus on the process changes required to meet your procurement transformation goals.
Technology
The right technology solution can help expedite the procurement transformation journey.
Start with documenting the role technology will play in transformation.
For example, if your goal is to modernize the experience for your end users, then an old ERP system will not work.
You should look for a Procure to Pay technology provider who can provide a consumer-like shopping experience.
Similarly, if your goal is to bring more spend transparency around spend, then you should invest in a good BI tool, assuming you have accurate and granular spending data.
What Is The Scope Of Procurement Transformation?
Now, it is time to define the scope of transformation clearly.
It is important for two reasons.
One, it helps you clearly define what is covered and how long it will take to achieve the defined scope.
Second, it will help you assess the cost of procurement transformation and build the business case to get senior management approval.
The scope should answer these questions.
- What will you do as part of procurement transformation?
- What will you not do as part of procurement transformation?
These questions depend on the objectives and benefits defined in the previous sections, For example.
We will train our resources to improve their financial and data analytics skills. This will require training and continuous collaboration with finance.
Another example is that we will modernize the procurement process by implementing next-generation procurement tools. This will require substantial investment and executive buy-in for enterprise-wide change management.
Making Technology The Backbone Of Procurement Transformation
Technology should be a key part of procurement transformation, but technology needs investment and time.
So, it is important to prioritize the technology investments. Generally, procurement technology can be divided into upstream and downstream technologies.
Upstream is focused on driving efficiency and productivity for procurement teams.
Downstream applications are focused on driving better experience and enabling your employees through better purchasing experience.
Depending on your procurement transformation objectives, you can prioritize the technology deployment.
For example, a Spend Analysis tool can help you get better visibility into spend but doesn’t improve the purchasing experience for your employees.
If you want to make your organization a world-class data-driven procurement organization, then spend analysis could be a good start.
List your objectives and the technology backbone required to enable and automate wherever possible. The more automated the systems, the better the chance for repeatable success.
What Elements Should Your Procurement Roadmap Cover?
With all you need to achieve for transforming your procurement department, you should create a roadmap for how long it will take to achieve your desired goals.
Your procurement roadmap should cover the following:
Clear Objectives Of Transformation
Clear benefits you would achieve. Please find a way to quantify the benefits of transformation so that it is easy to sell and track. Just saying that we want to improve customer experience is not a benefit.
Improving the customer experience to bring more spending under management is a benefit.
You can easily quantify the benefits of more spending under management through additional savings you can generate via additional negotiation leverage.
Resources
Your roadmap should also cover the resources required to achieve your objectives.
That includes internal resources, external resources, and technology investment.
It is best to run an RFI to assess the cost of procurement transformation. If it is all internal resources, the cost might be just an additional headcount.
Timelines
Your procurement transformation roadmap should also have the timelines in which you want to achieve those milestones.
Sometimes, it might be very difficult to assess timelines with greater confidence; that is fine for now.
You can refine the timelines later once you get approval to move forward.
What Does It Mean To Get An Executive Buy-In?
You need a sponsor for the procurement transformation. Most likely, it is going to be CFO or COO, depending upon where the organization reports.
And depending upon the scope, procurement transformation could be expensive. So spend some time calculating the return in the form of IRR’s (Internal rate of return) and NPV’s (Net Present value) of your proposed investment.
Procurement success is based on stakeholder engagement. The better the engagement, the better the chance for success.
Though limited to your function, your procurement transformation scope impacts the entire organization. So it is critical to get the buy-in from your immediate manager or CFO (In case you report to the CFO) and the key management executives or your stakeholders.
You should form a procurement advisory council if you don’t have one already. The advisory council should consist of your key stakeholders.
You should make sure that the advisory council has both critics and supporters so that you are getting real feedback on how procurement is doing currently and how the proposed transformation is going to impact the organization.
For example, suppose you are looking to transform how you purchase and pay your vendors through a procure-to-pay system implementation.
Your stakeholders would be concerned about the disruption it may cause with the supply chain or how the vendors would react to it.
Whatever the concerns, list them down, discuss them, and make sure you and your stakeholders agree on the game plan.
I can’t overemphasize the need for stakeholder buy-in, so please spend time on this.
The Bottomline
Procurement transformation is generally a 3-5-year roadmap to elevate the value of Procurement in the organization.
This could deliver significant benefits to your organization, help you realize your business potential, and even lead you to your business success.
Some are cost reduction, improved employee experience, reduced supply chain risk, and a more agile supply chain to address ever-changing customer needs.
