The ability to generate impressive cost savings is not what separates great procurement teams from the rest. Those who truly stand out are the procurement teams that figure out how to manage the value chain and hence also the suppliers and are able to return real value to the company and its customers.
Most CFOs love cost savings. It’s the traditional approach to measuring Procurement. If you ask a CFO how they measure Procurement, they will probably tell you that they focus on cost saving.
There is no question that every business needs to manage costs. However, the ability to generate impressive cost savings is not what separates great procurement teams from the rest. Those who truly stand out are the procurement teams that figure out how to manage the value chain and hence also the suppliers’ performance, quality, service, risk and innovation, and, as a result, are able to return real value to the company.
If great procurement teams are the ones that create the most value, why do so many of us find ourselves spending so much time in meetings devoted to cost saving?
I think the answer is quite straightforward: Because cost saving is easy to measure and is a financial measure in its own right. However, there are several important issues in measuring cost saving. Cost saving is in most cases complex and difficult to calculate because you need to take into account not only last year’s prices but also price developments in the market, changes of product/service qualities and specifications etc. to be able to truly assess the degree to which the ‘true’ cost saving is benchmarked against the market. This perspective is also supported by Provititi’s 2017 Procurement survey that shows that ‘nearly half of finance leaders claim that 20% or less of procurement savings wind up contributing to their companies’ bottom line’. So, focusing only on cost saving would be wrong.
What do you think would happen if we spent more time on meetings about SRM, stakeholder/customer needs and value creation? About how to manage and collaborate with suppliers to get them to work in your organisation’s direction and support your company in creating more value for your customers?
Consider the example of Google. In Google’s procurement team the term ‘savings’ is banned from being used. The reason is that Google does not focus on saving an extra few percentages on price. Instead, Google focuses on finding and working with suppliers that can help Google develop the next big product or solution for the market, be it self-driven cars or air-balloons to fly in the sky, providing internet to the entire world.
In my opinion, the best procurement teams find a simple approach to managing cost at a reasonably low level, but they are relentless in the task of executing SRM and customer value creation via supplier management.
I would go even further by saying that when it comes to evaluating the strength of a procurement team, you need to determine how likely it is that your organisation will actually be able to gain value from procurement in the offering to customers. Not by enabling your sales teams to reduce sales prices marginally (due to lower costs), but by enabling new offerings, new qualities or maybe faster services (enabled by suppliers) that truly differentiate your company from the competition.
That’s why SRM will always eat cost saving for breakfast. Surely, you would rather have modest cost savings and great suppliers that help your company strengthen your value proposition to customers.