Higher Risk Forces Procurement into a Balancing Act

Procurement Risk

Procurement’s top priorities for 2016 have changed from last year and that may create conflict.

The role for procurement within the enterprise is constantly evolving, setting up this function to play a much more strategic role. But as risks increase, how will procurement manage to achieve goals that are sometimes in conflict with one another?

In January of this year, The Hackett Group published the results of its Procurement Executive Insight Study, listing the top priorities for procurement in 2016. One notable change…in 2015, the top-ranked priority was to elevate the role of procurement to that of a trusted advisor with strategic input and consistently deliver on the fundamentals. However, concern for increased risks in a number of areas has now pushed purchase cost reduction into the forefront when it comes to priorities. Respondents to The Hackett Group study indicate that concerns for these risks will nearly double over the next two years, rising to 50% or higher when it comes to competition, talent deficit, and cybersecurity. Concerns regarding shrinking demand and disruptive innovation follow closely behind.

This “back-to-basics” approach, where procurement is essentially charged with negotiating the best price may actually conflict with the goal of becoming a strategic player. That’s due to the reality that price alone may not result in greater profitability. Procurement needs to find a way to achieve both. Fortunately, the study notes that the main goal of reducing purchasing costs plays to procurement’s traditional strengths. Those in this function have long excelled when it comes to negotiating with suppliers. The hope, according to respondents, is that they will then be able to devote more time to building up capabilities in areas that will allow them to increase the value of their role in the enterprise.

Respondents are very clear about where that value exists: 81% consider elevating the role of procurement to a trusted advisor to still be a major goal. When asked what characteristics of a trusted advisor include, 77% said optimizing their basic cost quality performance; 64% said hiring and retaining high-caliber staff; and 61% pointed to increasing agility. These numbers show that even for those looking to elevate their influence, high performance in the basic procurement function still matters.

Third on the top priorities list, after reducing purchase spend and elevating the role of procurement, is increasing spend influence. The greatest opportunity here is in the area of tail spend; a topic we continue to cover. This has often been the least managed area of procurement. The reality this tail spend can comprise 20% of a company’s expenditures spread over 80% of its suppliers. According to The Hackett Group’s study, there is an estimate of up to 7.1% potential savings through gaining control of this spend. New solutions that give procurement real-time visibility into tail spend will speed up the process and the progress of this important facet of spend. This is certainly one area where procurement can prove its value and be seen as a trusted advisor.

Procurement executives that can find the right balance for these three top priorities will be poised to move their departments to a significant strategic position within the enterprise.

Reggie Peterson

About Reggie Peterson

Reggie Peterson is Director of Indirect Products for AmeriQuest Business services. In this role, Reggie is responsible for leading the company’s growth of its indirect procurement offering that helps organizations better manage their procurement lifecycle to reduce cost and complexity. A 20 year veteran in supply chain management, Reggie’s previous experience includes serving 16 years as a Senior Procurement Manager for Coca-Cola, and as a Procurement Manager – Indirect Materials for Siemens.

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