With the global health pandemic, economies around the world are grinding to a halt and we are faced with an imminent recession.
Companies large and small are urgently trying to lower their operating costs.
To empower businesses to run their supply chain more efficiently and make valuable cost savings, we are running a series of Q&As with Mayank Chandla, a leader in procurement technology.
What should organisations and procurement teams be focusing on in the current climate?
Naturally, a recession is the time when the lens turns to cost savings and operating margin, rather than sales and revenue.
Organisations can potentially have more grip on controlling their costs than getting customers to buy their products and services. This is truly the time where procurement professionals are under the spotlight – and have the chance to step up and steer their ship in order.
The best place to start is to assess the current maturity and performance of their organisation’s procurement and then focus on how to make improvements.
Whatever the current state of the organisation, there are so many levers to create a positive impact.
How can organisations assess their current procurement state?
To examine procurement maturity, you need to start with answering some fundamental questions.
- Is the procurement function organised to deliver optimal value based on outcomes or is it merely seen as a cost saving support function?
- What level of procurement governance is in place?
- Is there a well-defined procurement policy that governs how spend is managed across categories?
- Is there a well-articulated buying channel strategy across categories and spend levels?
- Is there sufficient processes, tools and procedures in place to enforce compliance across procurement policy?
What else do you need to consider in a procurement review?
- Is there a well-defined strategic sourcing program aligned to the wider organisational strategy?
- Is the procurement function involved in Demand Management Initiatives?
- Is there a set of clear procurement performance KPIs and ways to measure them?
- Is there a shared understanding of key activities, competencies and responsibilities that are required for each role to achieve the wider objectives?
- Is there communication and training in place to allow for approved ways of working?
- Does the procurement lead have a well-defined supplier performance and risk management program, and have supplier classification in place?
What are the typical performance indicators?
Like a doctor can measure the health of their patient, a procurement organisation can measure performance on defined key performance indicators.
- Percentage of spend under management control and influenced by procurement organisation 80% or more would indicate an agile mature organisation
- Percentage of spend with top/strategic suppliers – e.g. how long is your supplier tail spend or percentage of maverick spend? 40% or more maverick spend would indicate a fairly immature procurement organisation
- Percentage of contract spend compliance 95% or more would indicate a world-class organisation
- Percentage of e-invoicing enabled suppliers 90% or more would indicate a mature performing organisation
- Average requisition to order cycle time
- Simple efficiency measures such as: Average cost per PO, cost per invoice processed, number of PO and invoices per FTE, percentage of timely invoice payments, percentage of spend under payment term, discounting etc.
Can you provide insight on the potential impact of improving these KPIs?
If you are processing 5,000 POs per FTE annually and the industry benchmark is 20,000 POs, even if you were to double your PO efficiency through better tooling or processes, for a company that does 200,000 POs annually, it could mean saving $1million plus on PO processing costs alone.
Or if you are introducing a payment term discounting program and applying it to 10% of spend, this could result in an additional $2million (of a $1billion spend).
In our next Q&A we will go into more detail on how to improve performance on procurement KPIs, and practical suggestions to deliver value for more mature organisations.
Feel free to message the team at SapienceS2P if you have any questions or topics you want to hear more about.