The procurement discipline has been around since ancient times; the earliest recordings dating back to the Greeks, Chinese and Egyptians. As a profession, modern day procurement and the so called ‘materials man’ was first termed by Charles Babbage, considered by some as the ‘father of the computer’ in his book, ‘On the Economy of Machinery and Manufactures’ (1832).
Despite these early beginnings, procurement has only been recognized as a management function since the 1960’s becoming more prominent as organizations understood a need for a more strategic approach to supply chain management. This begs the question, how is procurement valued?
The traditional and main key performance metric ingrained into Procurement is savings measurement. Throughout my career there seems no hard and fast standard; each organization measures savings differently (‘hard’ cost reduction, ‘soft’ cost avoidance inclusion or exclusion, as well as different definitional permutations and combinations in an attempt to establish a measure that the senior leadership of the respective organization understood and value).
Sales and procurement are two sides of the same table, but mathematically, providing you have the sales, sustained procurement effort gets the bigger ‘bang for buck’. For example:
- Assume a $10 million organizational revenue, whose cost of sales of 65%, returning 20% profit. To grow the operating profit by an extra $1 million, sales would need to increase by 50% ($5 million). That’s a lot of sales effort!
- In contrast, for the procurement organization, to deliver an extra $1 million operating profit for that same organization, procurement would need to reduce costs by 15.4%. That’s not easy either, but it’s less effort.
The challenge is that the above is a simplistic view and ignores the interlink between sales and procurement. Without the supply assurance of materials or resources, the organization has no sales. Without sales, the organization does not need to consume. The better way is to capture and align supply side value measures that link and support sales. The metrics need not only to capture the effectiveness, but also efficiency of the related processes. Additionally, with ever increasing complexities of supporting organizational brand reputation, supply initiatives around ESG integrity, sustainability, anti-slavery etc., dictate a need for a set of broader value measures.
Technology advancements are playing a major part in enabling organizations to generate and collect data, connect the dots, and support the ability to seamlessly integrate and grow the business. Intrinsic, automated reporting should be incorporated at the start of any digital journey, allowing the function to implement new value measures to track and visualize contribution. Define your measurable goals and start calculating your value add!
AYSCO CONSULTING 