Procurement today has gained in strategic weight and importance. "The process focuses on the pricing and content of comprehensive long-term agreements, not on the success of each repetitive small purchase," says Fred Fishman, manager of strategic procurement programs at TechSolve Inc. And along with the approach to procurement, the tools are changing as well, with a larger percentage of purchases being made online. Here are five significant trends in procurement:

1) Online purchasing continues to rise. Companies are increasingly relying on the Internet to buy direct goods, indirect goods and services. And in so doing, they're realizing cost savings, says the latest Institute for Supply Management (ISM)/Forrester Research report on supply management technology. For the third quarter, which ended in September 2003, survey respondents said online purchasing accounted for an average of 13% of their total direct materials spend and 12% of their total indirect materials spend—both up one percentage point from the second quarter. Moreover, in the third quarter, 35% of respondents reported saving money from using the Internet—up from 30% in the second quarter. And large firms—those that spend over $100 million on procurement every year—are saving the most, as their size and buying power let them more easily control costs and get suppliers to participate.

"Larger companies so far have been in a better position to afford the available solutions and gain supplier participation," says Andrew Bartels, research analyst at Forrester. "Non-manufacturing companies have made e-procurement and Internet-based sourcing a higher priority than manufacturers have, which also use alternative channels like EDI networks." The survey also found that online request for proposal (RFP) usage continues to increase, with 69% of companies saying they post RFP's on the Internet, seven percentage points up from the second quarter. (For this report, ISM and Forrester collected responses from 294 supply management executives from both manufacturing and non-manufacturing companies).

2) "Green" procurement takes root. A growing number of procurement officials are seeking eco-friendly products from more environmentally aware companies. While purchasers working for the government and other large institutions are leading the way, many other purchasers are taking the green route to address environmental and health concerns, to slash long-term costs or to simply do their part for the environment. For example, purchasers are finding out that safe, eco-friendly cleaning products are just as effective and affordable as conventional formulations. And they're discovering that buying recycled-content paper can do tremendous good for the environment, cutting greenhouse gas emissions by 37%, halving solid waste emissions and water use, and nearly doing away with wood use. Moreover, two recent developments are making it easier to source minimally polluting products. First, more companies are taking advantage of environmental purchasing criteria established by trustworthy standard-setting organizations, and second, purchasers and environmental experts are increasingly collaborating to set consistent and clear purchasing criteria.

3) Procurement becomes strategic. The role of the purchasing organization has grown in complexity. Gone are the days when purchasers simply received requests, placed orders and made certain that the factory had needed supplies. According to Fishman from TechSolve Inc, purchasers today need to have "a degree of cross-functional understanding, cooperation and training unheard of years ago." He writes, "Procurement has outgrown its tactical roots and blossomed into a true strategic function. Every company, and especially every manufacturing company, would be wise to consider its purchasing organization to be a powerful weapon in its arsenal to achieve its financial objectives." Moreover, the concepts of lean thinking—which have already transformed manufacturing—have taken root in purchasing. In particular, the four key principles of most lean processes—center on people, postponement, optimization and waste elimination—are being applied to purchasing and encouraging organizations to empower employees, avoid ordering wasteful items, automate the submission process and remove unnecessary steps from the process.

4) Indirect spend garners increased attention. Managing indirect spend is getting more imperative, as a growing number of companies outsource non-core competencies, the services sector continues to expand and cost pressures mount. As a result, large companies are paying more heed to this category of spend, which is defined by CAPS Research as the "sum of all purchased goods and services that do not end up in products or services delivered to the customer." Some examples of indirect spend include professional services, utilities and office products, though what one company classifies as indirect spend may be considered direct by another. In particular, senior managers at large companies are focusing on indirect spend and attempting to reduce or eliminate it in order to improve their firms' cost structure. Generally, the methods they use to better manage indirect spend include enhancing data collection, relying on electronic catalogs and purchasing automation systems, becoming more centralized, and improving processes and systems.

5) Procurement outsourcing is set to double in the near future. According to a recent survey by Accenture, nearly half of companies in the United States and Europe are contemplating outsourcing procurement functions within three years. That's more than double the 22% of respondents who reported currently outsourcing parts of their procurement operations. The survey, which polled over 200 procurement directors from the manufacturing, telecommunications, retail, services and public sectors, found that after France, companies in the United States and U.K. were the most likely to use this strategy by 2006, with 58% of respondents from each country indicating interest. "Survey results show that procurement outsourcing is here to stay," says Richard Laub, the partner who heads Accenture's European procurement practice. "Looking ahead, however, the principal challenge will be to derive more than just cost-savings. Procurement outsourcing is a powerful weapon that savvy companies can use to build new strategic and competitive advantages."

Indeed, procurement outsourcing can impart two key benefits—cost reduction and value creation—two things that are highly coveted by companies in today's economic climate. The Accenture survey found that the areas most commonly outsourced are indirect spend and non-strategic processes—including application hosting and requisitioning-to-pay. What's more, larger companies are more interested in and more frequently using this strategy. "The businesses most likely to outsource all or part of their procurement processes are large companies that might have exhausted most of the gains available to them through their own internal efforts but nonetheless continue to set aggressive cost-reduction targets," observes Laub.

Sources:

Online Purchasing Continues to Grow, Especially By Larger Companies
Supply & Demand Chain Executive, October 28, 2003
www.sdcexec.com/article.asp?article_id=4712

Earth-Friendly "Green" Procurement Gains Ground
Scot Case
Government Procurement, October 2003
www.govpro.com

Good Procurement is an Art—and a Necessity
Fred Fishman
Cincinnati Business Courier, October 27, 2003
cincinnati.bizjournals.com/cincinnati/stories/2003/10/27/smallb4.html

A Guide to Streamlined Procurement
Jon Strande
Darwin Magazine, October 2003

Critical Issues Report: Indirect Spend
Phillip Carter, Stewart Beall, Christian Rossetti and Eric Leduc
CAPS Research, September 2003
www.capsresearch.org

"Procurement Outsourcing Is Here to Stay"
Supply & Demand Chain Executive, November 5, 2003
www.sdcexec.com/article.asp?article_id=4757

Primer Links

Associations

Institute for Supply Management www.ism.ws

International Federation of Purchasing and Materials Management www.ifpmm.org

National Purchasing Institute www.npiconnection.org/

Publications

Purchasing.com www.purchasing.com/

Supply & Demand Chain Executive www.sdcexec.com