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Four pillars for accelerated profit growth

Jon Kirby SVP, Source to Pay
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April 11, 2017 - 

In the second of a series (read the first post here), Jon Kirby, SVP, Source to Pay at Genpact, looks at four key pillars through which procurement can drive out value.

Internal collaboration

Critical to the success of any company is its ability to optimise cash flow. With up to 60% of a company’s operating costs flowing through third parties, procurement is in a position to impact working capital. 

Yet, the lack of alignment between procurement and accounts payable (AP) can result in lost opportunities. In some instances, this division is deliberate due to segregation of duties and responsibilities. For example, to ensure that the same person cannot raise a purchase order and pay the invoice, a business needs both functions working to the same policy with a global, end-to-end process, and aligned metrics.
 
I’ve also seen procurement work to extend payment terms across contracts, only for AP to be measured on reducing invoice-processing time, which leads to many suppliers getting paid early without the company benefiting from early payment discounts.
 
To fully understand the business’ cost-versus-cash priorities (P&L versus balance sheet), procurement must work with the CFO and finance organisations, and respond with agility when external or internal dynamics cause priorities to change. Procurement must also provide data and insight on how best to optimise working capital while mitigating supply chain risk to maintain supply and core business outcomes.
 
A good example of this is the need for a business to understand the liquidity of a supply chain beyond its first tier, making forward purchases of raw materials and holding large volumes of inventory, while managing volatile demand. If not understood and mitigated, these risks can lead to stressed suppliers minimising cash outlay, and reducing material purchases with inventory falling beneath safety tolerance levels. This impacts key performance indicators, such as on-time, in-full orders. 

Procurement can positively impact working capital beyond days payable outstanding, through:

  • Minimising capital outlay with a transition to operational expense through as-a-service/platform solutions.
  • Lease-versus-buy strategies.
  • Asset utilisation strategies to buy only the volume required by leveraging assets over multiple sites.
  • Effective preventative maintenance planning to prolong asset life.
  • Asset registry and operational controls for reuse or to minimise purchase frequency, such as licenses, hardware, and MRO.
  • Leveraging the Internet of Things with triggers for replacement cycles and early purchase opportunities.

 Risk mitigation

As organisations increasingly rely on third parties, significant enterprise risks, including financial risk, assurance of supply, reputational risk, and information security, sit outside the company walls. Procurement is integral to managing a comprehensive and robust third-party-risk strategy.  

To manage suppliers effectively, organisations can segment their supplier base against a risk framework that runs from supplier onboarding to contract end. Best-practice assessments allow suppliers to self-assess, and include both desktop and physical audits. Dynamic discounting or supply chain finance can also flag potential cash-flow issues among suppliers that regularly discount prices for early payment. 

In addition, procurement helps the organisation change its risk appetite by driving strategic change, by understanding third-party outsourcing options and broadening innovation programmes to include the supply base. By helping the business understand how to leverage R&D capabilities with suppliers, for example, procurement can increase the organisation’s risk appetite while managing appropriate controls.
 

Transforming user experience 

People want to interact with organisations as easily as they do when ordering a taxi through Uber or a book from Amazon. They expect intuitive search, user reviews, comparative pricing, regular order updates and flawless fulfilment. Within a large organisation, replicating these experiences is hampered by the need to maintain fiscal responsibility, control, and transparency to support financial and risk objectives. Control trumps the user experience.  

These goals can and must co-exist to optimise business performance. By integrating technology, process, policy, and change management strategies, many companies are achieving strong results.
 
Failure to provide an intuitive, informative and personalised user experience has repercussions. It can lead to policy non-compliance, poor employee satisfaction, lost productivity, spend leakage, and even customer frustration if product development or fulfilment is affected.
 
Digital technologies, such as machine learning, cognitive computing, natural language processing, and artificial intelligence, enable guided and personalised buying experiences based on role profiles, prior purchases, and the organisation’s buying behaviour. The requisite controls, such as the delegation of authority, preferred suppliers and buying channels, are embedded in the technology, and – due to the enhanced experience – are no longer explicit or unnecessarily bureaucratic.
 
Powerful analytics help create interventions that optimise purchasing behaviour. For example, if a sales and marketing employee in Switzerland raises a requisition for a consulting statement of work (SOW) that is very similar to a completed project in Spain, a message can be pushed to the employee sharing the output from a central repository, which reduces the SOW’s scope and cost.

Innovation

In my last post, some people were surprised that I didn’t include innovation as one of the core C-suite metrics. Innovation is an essential component of all five metrics; none can be optimised without it. 

Innovation requires high levels of visibility and transparency with structured, prioritised activities, investment of time, resources, and money, with aligned outcomes. 

By adopting a design-thinking approach that focuses on the end user, drawing on the capabilities, experience, and expertise from within the organisation and across the supplier base, procurement functions can drive change, and continuous improvement to deliver real transformation. This requires robust and creative strategic relationship management with suppliers and the business, supplier development capabilities, and a willingness to move to innovative, outcome-based commercial constructs to secure the best and brightest from across the supply base. 

This blog was first published by Procurement Leaders.

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