Forward thinking business leaders are exploring how procurement can bring new opportunities for growth, as they become increasingly aware of the huge potential that exists in the upstream supply base.
That potential can manifest itself in many ways, but organizations that remain fixated on driving cost from supplier contracts alone will be at a significant competitive disadvantage in the years to come.
It is an evolution that has been taking shape for many years, but which is picking up speed as progressive procurement functions become more strategic and wield more influence over company boardrooms.
Recent research by Procurement Leaders illustrates this shift well. The report, Procurement as a Growth Engine published earlier this month reports that 86% of senior procurement executives claim their teams support revenue growth, with almost three quarters of those claiming that innovation scouting is the biggest opportunity for doing so.
So, innovation scouting, both within the existing supply base and beyond, presents procurement’s greatest opportunity to contribute to revenue growth. Too often, however, businesses limit their search to those suppliers with which they spend the most money, or those that present the greatest risk, criteria that say little about a supplier’s innovation potential. Instead, CPOs must adopt more meaningful segmentation criteria and cast their nets much wider to take full advantage.
Looking further afield: Advanced segmentation
The report explores how organizations are tapping into innovation from myriad sources, including long-term strategic suppliers, but also looping in others with innovation potential, including startups and small to medium sized enterprises.
Procurement Leaders member, Schneider Electric, is a good example of an organization that is fully focused on driving innovation and procurement has a leading role in doing so. As explained in detail in the report, 20% of the supplier innovations identified have ultimately been adopted, and, of those, 60% have gone on to have a positive revenue impact.
Of course, supplier innovation and scouting aren’t the only methods that procurement can use to drive growth – cost optimization is another powerful lever, and one which must be differentiated from traditional savings. By adopting advanced cost modelling techniques and working collaboratively with suppliers to engineer cost out of the value chain, procurement functions can drive meaningful competitive advantage without harming supplier relationships or introducing unviable risk.
Advanced procurement teams are optimizing costs by practicing value-based procurement, synchronizing sales and purchasing, using supplier expenditure to release capacity for growth opportunities, and enhancing cost modelling through digitization.
Advanced techniques are being deployed by some organizations to tackle the volatility that companies face and gain an edge in the market by responding to price movements incredibly quickly, and the report explores how one company has developed a mobile app in order to do just that. “In 12 hours, the bill of materials for every product related to that raw material will be updated, and an email goes to the marketing manager to warn them the price has changed by this much, so they need to change their price by this percentile to maintain their margin.”
Those organizations that open their eyes to the opportunities that exist in the supply base will be the ones that prosper and outperform their peers in the coming years. That means adopting new digital techniques and new segmentation approaches, but it also means being open to collaboration with a more diverse set of partners than ever before.