Buying into change

While cost reduction has always been a key driver for procurement in organisations, today the need to reduce spend is even more keenly felt. Britain may no longer be in recession, but the Federation of Small Businesses Voice of Small Business Index for Q1 2016 found that confidence was at its lowest ebb since Q1 2013. Factors affecting confidence include the introduction of pensions auto-enrolment and the national living wage. ICAEW and Grant Thornton’s UK Business Confidence Monitor for Q1 also reported an overall fall in positivity, with capital investment continuing to fall and employment growth easing (see section Taking a temperature: How confidence could affect procurement). These factors add financial pressure to businesses, not least within procurement teams.

According to the latest global procurement survey from Deloitte, while cost reduction remained the top priority for procurement professionals, many are now placing a premium on better innovation and collaboration to create sustainable supply chains, particularly through greater use of technology. It is here that CFOs and FDs need to be able to make a persuasive case to fellow executives of the benefits of modernising procurement and investing in the people and technologies needed to make it a reality.

“I don’t think the focus on cost reduction will ever change,” says Mark Ellis, partner at procurement consultancy 4C Associates. “[But] how we drive that change through technology will alter things. Setting the criteria by which you are evaluating a service, product, brand or relationship – that matters.”

One of the first steps to creating a more efficient procurement process, and one often overlooked, is developing a clearer understanding of where money is spent through analysing spend data and evaluating contract delivery. Using digital systems and statistics to provide cost insight and market intelligence should set the basis for any improvement project.

“Procurement is most effective when it goes beyond this focus on cost reduction. Not focusing purely on securing the lowest price and squeezing suppliers. Businesses that ditch this traditional approach in favour of a procurement strategy centred around business intelligence are seeing more substantial, longer-term returns,” says Rob Peck of procurement consultancy Inprova.

It should be no surprise that the other top priorities for procurement chiefs, according to the Deloitte study, were stronger ties between specialist procurement teams and the CEO/CFO and increased levels of supplier collaboration. Although the principles of efficient procurement are the same for small and medium-sized businesses as they are for large multinationals, the obvious difference between the two is resource. For smaller businesses finding ways to enable greater efficiency and speed up processes by utilising new technology could arguably be of most benefit. This is especially the case where a company’s procurement “team” consists of just one person operating within the finance function.

It is becoming increasingly rare for smaller businesses to see procurement as a separate function looking just at pure purchasing. Rather it is more likely to be seen as an end-to-end process that must be continually managed to get the best results. Some sectors have been slower to move away from this view than others.

Richard Turnock, who became executive director of corporate services at River Clyde Homes in Scotland in December last year, has restructured his organisation since joining so that procurement sits in the finance team and “finance gets involved in procurement from the start to see that the procurement strategy is aligned to the corporate strategy”. Although not affected by the housing association rent caps introduced in the 2015 Budget in England, Turnock’s changes could help River Clyde Homes adapt and innovate around procurement and the supply chain, saving money in the event of similar rent caps being introduced north of the border.

Turnock, who is a Scottish CA, says he is challenging the approach from both a finance point of view and that of procurement to ensure a clearer end-to-end process that matches corporate goals.

How to apply emerging technologies to procurement and supply chain management remains high on the agendas of many running businesses of all sizes. Some argue that technology will be what really drives significant changes in purchasing and shapes what best procurement practice will look like in the future. “It might be that the differentiation of leading procurement practice might be defined less by the war for talent, and more by the war for technology,” says Brian Umbenhauer, global head of sourcing and procurement principal at Deloitte Consulting.

Although Deloitte’s survey of 324 procurement professionals found 60% do not have a clear digital strategy, the 40% utilising it are turning to the likes of cognitive analytics, crowdsourcing and digital reporting. The report identified a clear uptick in the use of these technologies. And most (70%) businesses reported investing in the use of self-serve portals. Mobile technology was being used by 42% (up from 23% last year). The same was true of cloud services (45% up from 26%) and social media (16%, up from 6% in a year).

Stuart Hough, managing director of Travis Perkins Managed Services, which works with public and private sector organisations, says his business is using new technologies to transform its procurement services and foster greater collaboration. It is saving its clients as much as 20-30% of labour costs through a “rapid response” service in areas such as local housing associations by delivering goods and services to the sites where repair and maintenance teams are working.

It is also taking this “just in time” principle one step further using unmanned facilities based on near-field communication technology. Clients use hand-held PDAs to swipe items they need, which then update stock registers at Travis Perkins’ headquarters, allowing them to remotely restock. Hough estimates using this technology allows clients to save between 20-25% on headcount.

“We can do these things if it’s a real partnership, but it doesn’t work if there is a traditional supplier relationship,” Hough says.

And as the Deloitte survey concluded, it is that relationship that remains key. Over the coming year another major focus for most procurement professionals will be to restructure supplier relationships to continue to deliver value. And delivering value is at the very heart of this issue. Procurement must evolve into a value driver rather than merely a buying service within a business. This is the model established within the most effective and progressive procurement functions.

In the construction sector, businesses are finding huge benefits from better collaboration with suppliers. Paul Chesworth, director of building at property consultants Bilfinger GVA, explains: “Over the past year there’s been a culture change in the supply chain. People want to work collaboratively. We need to be more selective and foster longerterm relationships rather than one-off projects.”

Greater collaboration is taking root in the housing sector, too. Housing trusts are seeing more collaboration in the form of longer contracts, pooled resources with other housing associations and more investment in technology by suppliers. Sharon Brookes, property service director at housing association Pickering & Ferens Homes, says: “Because suppliers know they are in it for the long-term we get a better relationship with them and they can invest more in technology.

“There’s also a better understanding of our business and stronger performance from suppliers. I can see increased use of technology and collaboration because we need things more cheaply and efficiently.”

Umbenhauer believes that although technology will trump talent in shaping the procurement process of the future, talent will remain a critical part of improvement process. Perhaps worryingly, 62% of the procurement leaders surveyed by Deloitte reported that they don’t believe their teams have the skills and capabilities to deliver a procurement strategy. This is up from 48% two years ago. As 4C Associates’ Ellis adds: “New blood and innovation are missing from procurement in most businesses. The skills to deliver procurement projects are limited. Generally you see the same people going round in circles in different roles within procurement in different sectors.”

While it’s easy to see procurement as a back-office function, it is essential that in an age of global scandals and easily damaged reputations, risk assessment must become a key part of any procurement process.

“Brand image in all markets is paramount,” says Ellis. He points to various corporate scandals from the BP oil spill, to the UK horsemeat scandal and Bangladeshi clothing sweatshops. All of these impacted on household brands from BP to Tesco and Marks & Spencer. And they pushed down profits, which is where the procurement brief comes in. “As procurement becomes more engaged in the wider business, it should help to mitigate risks. This is a different way of thinking for procurement,” Ellis adds.

Until recently, most supply chain risk was considered reactively and on a case-by-case basis by senior management. If a supplier went insolvent, steps would be taken to bring in a new supplier or extend financial support to the existing one to help keep it afloat. But in recent years the fall-out from high-profile supply-chain disasters, notably in sectors such as food manufacturing and the car industry, have increased senior management interest in the risks inherent in the supply chain. And gradually, assisted by the added pressure of a global financial crisis and new requirements for greater transparency on board thinking on strategic risks, this has led to stronger focus on procurement and supply chain risk.

As Turnock says: “Procurement is a standing agenda item in our audit and finance committee. We also use internal audit to review our procurement processes.”

When things go wrong it is likely to have a negative impact on a business’s reputation, customers and credit rating. At worse it could put the entire company out of business and harm a raft of other suppliers reliant on that business.

It’s one area where the manufacturing sector as a whole – and in particular car and aeroplane manufacturers, where key suppliers are critical to the production process – is more advanced. Many manufacturers have had to learn painful lessons on procurement risk the hard way.

When supply chain and procurement together can account for 60-70% of business costs, it is clear that team has a robust argument to present to management when it comes to investing more in the procurement function.

Another trend identified in the Deloitte research is the continuing desire to outsource procurement activities, although there is less of a focus on outsourcing strategic activities for the first time since 2011. This reflects a caution that hasn’t previously existed or perhaps a tipping point in the perceived value of external support. This may be the proof that procurement teams are getting through to management in the struggle to make sure procurement and supply chain management are viewed as a strategic function.

The digital revolution has changed a lot for procurement professionals, whether working in large or small businesses. Those in smaller businesses looking to improve procurement are arguably more agile in terms of adapting and absorbing new technology.

And while technology alone won’t be the complete solution to improving procurement and overcoming the challenges the function faces, it presents an opportunity for procurement leaders to embrace during a tough economic time. Better still they may possibly create an environment for more sustainable procurement for the future.

The quarterly ICAEW/Grant Thornton Business Confidence Monitor looks at five key areas as well as overall confidence which, while still relatively positive, was found to be at its lowest level for three years. What effect could this have on procurement?

Profit growth
Despite the weakest outturn growth since Q3 2013, businesses “predict turnover and sales to continue growing”. A decline, particularly in manufacturing, was put down to the strength of sterling, making it harder for companies to compete at home and abroad – in procurement this could lead to more expensive raw materials, with those in the supply chain able to command higher prices in their respective territories.

Export growth
Subsequent falls in sterling resulting from a belief interest rates would not rise before later in 2016 may have fuelled some recovery in exports. Could the ability of businesses to output goods for export turn on the strength of relationships in the supply chain that were affected by the earlier high value of sterling?

Capital investment growth
Capital investment growth continues to fall and R&D remains subdued according to the monitor, with muted sales and profits resulting in weaker investment plans. Could this mean vital investment in modern technological systems – capable of transforming stock monitoring, replenishing and automation etc – is delayed?

Spare capacity More firms are operating below capacity, especially in manufacturing, IT and communications. In retail, a move away from bricks and mortar towards online has weakened demand for floorspace. Is this increasing the cost of warehouse space for components and goods?

Employment growth
While employment growth has eased off, an earlier concern about skills shortages seems to have plateaued. This could mean teams, including in procurement, are feeling the benefit of earlier recruitment strategies

Visit our Economic Insight hub for the latest Business Confidence Monitor updates.

• Buying into change
  Finance & Management Magazine, Issue 243, May 2016

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