Procurement teams get a chance to shine when their company is making its most expensive purchases. They are often highly complex deals that will have a big impact on core business operations and require a high level of risk assessment and protection.
Teams invest significant time and resources to understand the reasons behind why the vendor is charging the costs it is, and also where this provides good value for the buyer. When Procurement spends this kind of time on a deal, it has a good understanding of where to push suppliers on costs, and where to spend a little extra to avoid deficiencies like quality failures.
The problem for many companies, however, is that their procurement team doesn’t take on nearly as much investigation and analysis for less expensive purchases – what Procurement would call “middle-tier” or “low-tier buys.”
Cost-Driver Analysis Boosts Credibility
Procurement’s assistance on these expensive, top-tier buys certainly boosts its credibility with business partners (see chart 1) but, for other purchases, procurement teams tend to focus on wringing the best price possible out of a supplier. This can lead to damaging results as Procurement often pushes for these prices with scant understanding of what those that actually use the product – line managers who are Procurement’s business partners – find valuable about it.
For middle and lower-tier buys, procurement staff simply don’t have enough information about what constitutes the costs suppliers are setting to consistently make the best decisions. When business partners have a poor experience, Procurement’s reputation suffers (see chart 2).
Chart 1: Good business partner experiences created by Procurement during top-tier buys Illustrative Source: CEB analysis
Note: Top-tier buys are those that are highest spend, high complexity, high criticality to the business and/or with high risk protection required.
Chart 2: Poor business partner experiences created by Procurement during middle- to low-tier buys Illustrative Source: CEB analysis
Note: Middle-tier buys are those that are middle to high spend, moderate complexity, moderate criticality, and moderate risk protection required. Low-tier buys are low to middle spend in a highly competitive/transparent market, low complexity, with low criticality and low risk protection required.
‘Top Tier’ Is in the Mind of the Beholder
Often there’s a big difference between the way business partners see a particular purchase and the way Procurement does. While procurement teams make a distinction between everyday purchases and those that are critical to the business, stakeholders see most buys they’re involved with as important (see chart 3).
Chart 3: Prevalence of an active approach to investigating the drivers of cost n=145 category managers Source: CEB analysis
Heads of Procurement Want More Review
Heads of procurement want their staff to investigate why more purchases cost what they do or, to put it in procurement language, “investigate the cost drivers for more buys.” This would reduce the number of risky purchases, give procurement teams the chance to apply their skills and experience to more of the company’s day-to-day work, and raise their profile at the same time.
At the moment, procurement employees tend to spend a lot more time shepherding purchases through the seven-step sourcing process (see the chart in this post), than they do investigating the cost drivers for particular buys (chart 4 explains this in more detail). But procurement leaders can carve out more time for time for category managers to work on cost drivers by letting business partners run more of the sourcing process.
That’s just a first step, however. As well as more time, procurement staff also need some encouragement, which will be covered in future posts.
Chart 4: Allocation of category managers’ time between strategic sourcing and cost driver analysis n=28 category and sourcing managers Source: 2014 CEB Procurement “A Day in the Life” benchmarking report