Many companies invest as much as 50 percent of their revenues into procurement spending - buying goods and services from external suppliers - so ensuring it is competitive is a key part of every transformation project. Making the right changes will also have an immediate impact on a company’s cash flow and profitability.

“Streamlining a product portfolio, leaving an unprofitable market or right-sizing the number of employees are all important elements of a transformation, but they take time to deliver value,” says Jürgen Wetzstein, Managing Director with Alvarez & Marsal (A&M) in Munich, Germany. “Procurement is one of the only levers that can help a company straight away.” Early wins include negotiating longer payment terms with suppliers, which will improve a company’s cash position immediately, or reducing inventory by using consignment stock. In that case, goods in the company’s warehouse are still owned by the supplier and held on the supplier’s books, and only paid for when they are used, which also frees up cash on the balance sheet.

“Over the long term, adding value as procurement means proactively assessing every contract,” says Mr. Wetzstein. He adds, “Relationships with incumbent suppliers get stronger over time, and that’s natural human behaviour, but partnerships only work efficiently for both sides if contracts are regularly put out to tender. What typically goes wrong is that procurement organizations either do not get the support from their internal business partners to continuously inject competition into their supply base or they lose focus on their key objective, which has to be striving for the most competitive products and services.”

Dealing with Disruption

Companies in need of transformation are often experiencing disruption, whether from a competitor taking market share or a sudden increase in the cost of materials damaging profitability. As a result of the newly imposed tariffs on Chinese goods imported into the U.S. for example, companies may decide to change their supplier footprint and switch from a Chinese supplier to one that is U.S.-based.  “Such changes in the supply chain can dramatically impact procurement, which is why constant vigilance is needed,” says Mr. Wetzstein. “Transformation comes with opportunities but also the need for change,” he says. “When it happens, companies need to rethink procurement – the product itself, what you make versus what you buy, and where/who you buy it from.”

Building in Competitiveness

Quality, delivery and cost are the key factors that must be weighed up in every procurement decision, and in doing so, procurement teams help drive the competitiveness of the company as a whole. The decision to make a part in-house or buy it ready-made should be taken based on defined economic (cost, capital requirements, etc.) and strategic (customer importance, intellectual property, supplier capability, etc.) criteria. It should not happen simply because the company has a machine that can do it and it has always been done that way.

“If you look at a company like BMW, their reputation is built upon the quality of their engines and so they would never outsource the manufacturing because customers rely on BMW having full control of that process,” says Mr. Wetzstein. “However, for a ‘commodity-type’ part that other companies manufacture very cost-competitively as their core competence, procurement teams should continuously drive the organization to question whether they should make or buy.”

When it comes to services such as maintenance contracts, procurement teams can improve competitiveness by basing contracts on efficiency improvements rather than simply negotiating lower hourly rates, which often results in contractors taking more time to do the same amount of work. “In a downturn, leaders will start to focus more intensely on costs and the results they expect from procurement teams. Agreeing to lower rates for time and materials when you buy services may seem like an answer to that – but it’s only half of the answer,” says Mr. Wetzstein. Basing contracts on results and performance measures such as the amount of time machines take to operate without breaking down, can instead lead to cost savings of 15 to 25 percent,” he adds.

Many sectors, from industrial manufacturing to clothing retailers, rely on “strategic partnerships” with major suppliers. The long-term nature of the relationship is designed to give suppliers the security to invest in customized products and services for the buyer, and to provide a seamless service without the inevitable teething problems that occur when companies switch to a new supplier. “However, such partnerships must be subject to the same level of scrutiny as every other procurement decision,” says Mr. Wetzstein: “The only way strategic partnerships work for both parties in the long run is if they are continuously assessed and always based on competitiveness – this means, you can’t stop questioning the business relationship.”

With what can be a very large share of a company’s revenues going back into procurement spending, ensuring that the right decisions are being made is a vital part of a successful transformation. It’s also one of the first areas that yield results in profitability and cash flow, which can start to rebuild investor confidence. “When we start working with clients in need of transformation, procurement is top of the agenda,” says Mr. Wetzstein.

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