Industry Market Trends

CPO Priority: Value over Cost

Feb 01, 2011

Organizations are facing the fallout from a deep economic crisis, so it is not surprising that cost-cutting initiatives remain among the top priorities of chief procurement officers. While many organizations spent 2010 in survival mode, focusing solely on cost reduction, there is an increasing emphasis on strategic initiatives that can enhance the value delivered by procurement. To drive deeper savings throughout the supply chain, purchasing leaders must shift the emphasis from short-term cost cutting to building long-term value.

Despite easing distress about supplier health, recent data reinforce chief procurement officers' (CPO) concerns about a more complex, globally dispersed supply chain. According to Capgemini Consulting's latest annual Global Chief Procurement Officer Survey, approximately 65 percent of respondents said they feel that the economy is showing clear signs of recovery from recession, although the mindset has not completely returned to "business as usual."

Based on responses from more than 150 CPOs and senior supply chain leaders in Europe, Asia and the Americas, many organizations clearly spent 2009 and 2010 in survival mode, paring back operations and focusing solely on cost reduction; more than two-thirds of the interviewed procurement leaders continued to review and renegotiate contract scope, prices, price indices and respective terms and conditions. Meanwhile, others used the year to get ahead of the competition.

In 2010, cost reduction continued to be a major focus area, with savings targets increasing as they did in 2009; more than 40 percent of respondents had savings targets at nearly 10 percent for 2010. Strategies that procurement executives employed to achieve these targets include contract renegotiation (62 percent), reviewing and improving supplier management strategies (43 percent), tighter contract compliance (40 percent), global sourcing (39 percent), commodity hedging (19 percent) and outsourcing non-strategic services (15 percent).

"Obviously, a key learning from the economic crisis in most procurement organizations is that quick substantial savings can be expected from contract renegotiations in challenging and competitive markets, but what happens when things turn around?"

If the market is truly on an upward trajectory, Capgemini stresses "two key truths" for which procurement must ready itself: 1) Prices will not be so easy to slash, and simple negotiations will not yield the same quick savings as in recent years; and 2) procurement organizations will not find every business stakeholder clamoring for procurement services.

Capgemini's survey shows that "cost cutting remains important, but sustainable value is the real king."

"When budgets are healthier, cost savings are less of an issue for the business stakeholders than procurement services," the report says. "This raises a question: if procurement is seeing the world primarily through the lens of cost cutting, rather than achieving their deeper potential to operate through a lens focused on total value, are they at least organized so that they can take on a more strategic role when the economy starts to strengthen?"

To that end, procurement must shift the focus from short-term cost cutting to long-term, value-based relationship with suppliers to drive deeper savings throughout the supply chain and to bring true innovation into the organization. This allows for top-line growth as well as continued bottom-line reduction, the consulting firm says.

Capgemini's findings are corroborated in the latest biannual CPO Agenda economic survey, in which a core emerging theme has been balancing supplier risk with the need to look ahead and develop longer-term supplier strategies.

According to CPO Agenda, "procurement organizations have now got their eyes fixed on the longer term, and are moving away from dealing with the immediate risks of supplier security or financial management of suppliers to issues of stabilization and growth."

Nearly 80 percent of respondents to Capgemini's survey said that top management expects them to improve the overall value contribution of procurement. Moreover, 20 percent of CPO leaders stated that procurement is now positioned strategically for future growth.

Meanwhile, almost 60 percent said they were asked to identify new sources for cost reductions while enhancing the overall scope and control of spending. More than half of CPOs also stated that procurement has been tasked with preventing/controlling procurement risks and limiting or avoiding the associated costs of that risk.

"There is a clear and emerging focus on strategic initiatives that can enhance the value delivered by procurement," Capgemini stated in an announcement of the findings.

The procurement strategies used to deliver value include the following:

  • Proactively designing the business requirements through strong collaboration with stakeholders (77 percent);
  • Focusing on total cost of ownership (74 percent);
  • Exploiting supplier capabilities to enhance product/process/service innovation (57 percent);
  • Implementing a social/sustainable procurement strategy (45 percent);
  • Bringing alternate product ideas to optimize buying costs (36 percent);
  • Measuring procurement's contribution toward product positioning or efficient manufacturing; and
  • Using lean techniques in procurement activities (19 percent).

There has been increased pressure on procurement in the last couple of years. Interestingly, more than 60 percent of CPO leaders confirm that the global economic downturn left the procurement function more of a winner than a loser, with an improved image within their organization.

"A newfound position at the boardroom table and the need for immediate action has changed the role and recognition of procurement and its performance capability in most companies," Capgemini reports. "At the same time, a substantially high number of procurement managers exploited the given opportunity and initiated the improvement of organizational set-up to manage their spend efficiently."


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