Procurement

Supplier and raw material management

Most companies have undergone several waves of procurement performance improvement. An overwhelming amount of publications and knowledge is available on the topic of supplier management, strategic sourcing and procurement transformation. That said, there is still (or again) value to be captured by linking the procurement functions closer to supply chain value potentials.

Improvement efforts in the past have focused on the optimization of the supplier structure and spend in each category. Once-off implementation is frequently considered concluded. A typical statement heard is "we have completed a lot of projects in procurement — there are no additional potentials to be gathered." Looking closer and re-applying the principles of strategic sourcing still provides value. The key levers for value capture are "price", "process" and "usage" in the total cost of ownership (TCO) triangle.

The price dimension is the natural focus area in procurement. Over the years price negotiations have become a lot more sophisticated on both sides of the table. Gains on the demand side now tend to be offset by surcharges for non-standard services on the supply side, and vice versa. Pricing instruments, especially in combination with volume consolidation and article consolidation, have generally been applied, although opportunities still exist with more sophisticated pricing approaches — e.g. index-related pricing, or application of financial instruments for commodity and raw materials with fluctuating market prices.

The "process" and "usage" dimensions often leave value uncaptured as procurement functions are not always organizationally integrated into supply chain management. Deriving value with these two dimensions requires a deep understanding of the supply chain & production processes and an openness to share information & knowledge across departments (areas).

Process opportunities still exist in the reduction of inventory levels, transportation costs and the administrative procurement process. Capturing these potentials is often difficult because procurement functions have gained more responsibilities but have frequently become so strategic that operational potentials are lost.

Material usage is still regarded as one of the least important levers by the procurement decision makers. The common assumption is that production owners know best what materials to use as raw materials. Looking for substitute materials with similar characteristics is mostly left to the production function. Yield is as important as a pure pricing consideration to capture value. The question needs to be asked, however, whether similar end product characteristics can be achieved with different raw material input, allowing for a broader range of materials to be taken into consideration in the procurement process.

Optimizing TCO is a multidimensional task that needs to be continuously monitored, also requiring the appropriate reporting mechanism.

The StepChange team is experienced in auditing your procurement function along all dimensions because of our deep cross-functional experience. Together, we can help you capture potentials with your team.