In Hackett’s latest Advisory Piece, Evolving the Value Proposition of Procurement: A Five Stage Model, Pierre Mitchell & Christopher Sawchuk present a five stage model (with three supply management stages and two customer management stages) that procurement executives can use to assess where they stand on the evolutionary scale of procurement service models. The five stages presented are:
- Supply Assurance
The goal is the right goods and services at the right place and the right time, with a focus on perfect order.
The goal is the right goods and services at the right price, with a focus on cost savings and avoidance.
- Total Cost of Ownership
The goal is lowest Total Cost of Ownership with a focus on quality, capital, ancillary costs, and opportunity costs.
- Demand Management
The goal is to reduce demand variance and complexity immediacy with a focus on reducing maverick spend and increasing customer satisfaction.
- Value Management
The goal is to increase business value derived from spend with a focus on overall operational metrics.
These stages are more or less correct – the one caveat is whether or not a company approaches them in the order given, or a slight variation. Some companies will start with a focus on price rather than cost assurance, and after achieving a basic mastery of TCO some companies will move on to trying to maximize value before trying to manage demand
In addition to laying out the stages of procurement mastery, they also have a number of insights from their book of numbers. First of all, world-class organizations spend proportionally more on strategic processes than their peers – and 27% more on sourcing strategy and analysis and 45% more on supplier management and development in particular. Secondly, 78% more world class companies actively involve procurement in the firm’s planning and budgeting process. Thirdly, world class organizations spend proportionately less on transactional processes – and 25% less on compliance management and 50% less on supply data management in particular.
Some of the best insights relate to their fifth stage, value management, where procurement has no other agenda than to advance and support the business strategy. This is harder to achieve than it looks since procurement:
- can not use a parallel measurement system as it must be restricted to the metrics that define value for the organization as a whole,
- must harness the power of supply markets to identify breakthrough business strategies instead of simply translating existing business strategies to supply markets, and
- must make the business strategy development process itself a core competency.
Leaders of world-class procurement organizations don’t simply wait for a sea change in business leadership to evolve these value propositions. They sense when there’s an opportunity to elevate the firm’s game to the next level and then fill in the leadership void themselves. As they do this, they evolve not just themselves and their teams, but also evolve the concept of procurement as a whole, raising the stakes for all other firms to follow.
As with the majority of Hackett’s insight pieces, this piece is for members only, but it goes to show that with Hackett, the insights you get with advisory services are worth your time.