Good procurement = success

Companies adopting good practice in procurement/supply chain management can generate significant value in terms of cash flow and profitability. The benefit of this can be multiplied when the company is looking to float or to put itself up for sale. Misjudging procurement can seriously damage the business from a financial and reputational perspective. This is particularly true in the uncertain times we currently live in.

 The procurement essentials that companies need to consider can be grouped into three areas.

Value of service or product: By adopting a professional procurement approach, businesses can see annual cost improvements of 10-20% across certain spend categories/commodities.

Supply sourcing and management effort: Understanding the business need is fundamental to selecting the right supplier and negotiating the appropriate service level. It is crucial to segment suppliers to understand which are mission-critical and where to focus efforts and resources. It is also key that exit clauses are negotiated as part of a supplier contract – many companies find it both expensive and resource-intensive to extract themselves from inappropriate contracts. Executives also need to make allowances for the time that is taken up by supplier relationship management.

Contracting compliance: If the chosen supplier agreements do not meet the business needs, employees are likely to circumnavigate them and find their own arrangements. Maverick spend is an issue in many companies, which exposes them to potential value/cost challenges, as well as issues with legal/regulatory compliance related to, for example, data protection or modern slavery acts, and to cyber security and corporate social responsibility.

Capability to support company growth: Businesses should select suppliers that can scale with them as their organisation grows. Changing suppliers mid-contract can result in resource and cost difficulties, especially if a supplier implementation team is not prepared for the change.

Adequate service proposition: Understanding the capacity/capability of the supplier to provide the right support in the right place is also a key consideration. For example, being able to service only in London when the direction of a business is to set up an operation in Manchester or vice versa is not helpful.

Access to appropriate level of support: Employees expect an appropriate level of supplier support and not meeting their expectations can again discourage their compliance with supplier policy. Increased remote working may introduce more challenges in this area.

Financial stability of suppliers: Businesses need to have confidence in supplier stability and ability to survive. The financial challenges of COVID-19 will make this a sensitive area for many businesses: unravelling arrangements after supplier insolvency is both time-consuming and costly.

Service/product delivery resilience: Suppliers should offer an appropriate level of resilience as this is critical in terms of a company’s ability to deliver on time for customers. Something as simple as a fire at a key supplier’s factory can affect the ability of a company to meet customer demand and secure relevant financial investment support.

Contractual and supplier compliance: Companies are increasingly held accountable for the actions of their suppliers. This can relate to matters of health/safety, corporate social responsibility, cyber security, data protection and bribery. Reputational and other due diligence challenges are taking up an increasing amount of management time. Added to this is the impact of social media, which means these areas are becoming more transparent in customer and investor due diligence procedures.

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Further reading on procurement and supplier management is available through the resources below.