Procurement can be an innovative tool for companies.
At this time, the global economy seems to be expected to head for a slowdown. As such, forward-looking consumers are expecting to reduce their consumption levels and companies that do not innovate should be expecting their revenue to decline or face stagnation. For companies looking to innovate, their leaders will be seeking to reduce the cost of their experiments. Hence procurement becomes a new strategy to boost the company long term capability to innovate.
Existing procurement practices are getting obsolete in the new world.
Yet, it is interesting to know that the existing procurement practices have yet to enable such capabilities because they are risky and going to be obsolete in time to come.
A recent study by Deloitte shows that the existing procurement models might not work in 2020, a future that is only 4 years away from now. In the same study, more than 39% of the procurement leaders responded that they are facing increasing risks in their procurement activities across the following sectors: government sector, life science sector, financial service sector, customer facing sector, energy sector and telecommunication sector.
So what are the existing procurement technologies that corporations are exploring with old frameworks?
Where are the existing procurement platforms?
For example, a company that wants to buy stationaries in bulk across 10 departments over 4 business units in 15 different countries can choose to centralize this purchase or decentralize this decision to the local office. With tools like SAP Ariba and Basware, an international corporation can streamline the procurement process and increase visibility on the effectiveness of various procured products and services.
These tools aim to reduce cost and increase efficiency for big corporations to manage the paperwork involved in the implementation of the procured services and goods. Both of the tools have been the frontier of making procurement efficient and easy for the procurement departments of big corporations for the last 10 years.
For example, the vendor bids for the project. The information feeds directly into Salesforceor similar CRM software and alerts the vendor to make an appointment to pitch its services to the procurement specialist. Upon winning the bid, the IT vendor can use Trello and start the project management process. The IT vendor can then provide the procurement specialist the transparency of the ongoing activities on the specific procurement project. Once the IT vendor finishes the project, the IT vendor can use Xero to issue an invoice to its client and also use Survey Monkey to seek feedback from the client.
By doing so, Thunderquote increases the efficiency of the vendors and hence further reducing the cost of providing the services to the procurer. Furthermore, Thunderquote can provide market intelligence to the procurement departments over the cost, quality and time to complete on a selected category of procurement services because of its hub and spoke initiative.
As we are talking about these procurement technologies, these companies are constantly innovating. They should be looking at incorporating some of these new frameworks to keep in touch with the future procurement needs of corporations.
Experts suggest new frameworks for procurement.
In another study published on the quarterly journal of supply chain, experts suggest looking at value-based procurement and value procurement frameworks as new ways to conduct procurement in the future.
Value-based procurement requires you to buy the goods or services that produce the best overall value. For example, if Company X offers to build a software system that costs $100,000 and later yields $1 million in added revenue, then Company X's bid has a net value of $910,000. In contrast, if the system offered by Company Y costs $200,000 but returns more than $1.8 million in added revenue, then Company Y's bid has a net value of more than $1.6 million.
If we use the old method of “cost only first” approach, then Company X's bid should win the contract because it is the cheaper one. If we use value-based procurement approach, then Company Y wins, paying more up-front but receiving much more in return over the long term.
Value-based procurement is a holistic approach. The benefit may be measured, for example, given all else equal, a software vendor with more expanded services like offering strategy perspectives, offering integrated partner services can be a better choice over the other without. There can be other cases such as reaping long-term benefits by procuring a system with higher initial costs but lower lifecycle expenses and easier updating capabilities.
Value procurement is the realization of all of the benefits to be gained by the implementation of good procurement practice. This demands full alignment with the corporate strategy, and integration internally with stakeholders and externally with the supply base. Procurement must be as mindful of delivering customer satisfaction as any other business unit in the organization.
It’s about time to start talking about it.