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Annual value planning for cost optimisation: How procurement can deliver strategic value

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Insight
Summary

Impactful procurement is a crucial lever for navigating increasing cost pressures – but for procurement teams inundated with day-to-day sourcing activities, taking a strategic approach that delivers impact can be a challenge.

At Efficio, we’ve found that annual value planning has helped our clients to build a strong foundation for value-generating procurement. Below, we’ve outlined how annual value planning can help elevate procurement’s strategic positioning within the business – in turn allowing procurement to deliver greater cost optimisation – and how to build an effective plan.

What common issues can annual value plans help procurement teams resolve? 

  • Being perceived as a reactive function that acts as a bottleneck to progress, usually as a result of late-stage involvement in business initiatives 
  • Being seen as a cost centre, instead of a value creator 
  • Acting as the “compliance police”, instead of focussing on delivering value as commercial experts 
  • Lacking capacity and struggling to step up to a strategic role 

Despite its relative simplicity, annual value planning can drive a positive shift in the positioning and effectiveness of procurement. “A key part of the change is reactive to proactive, service provider to equal partner. It’s moving from responding to the business to setting the agenda,” says Andy Clark, Head of Commercial services at Yorkshire Water, whose commercial function delivered savings of £54.1 million (over double the original target) in two years in partnership with Efficio. 

What makes an effective an annual value plan? 

An annual value plan should be a detailed list of procurement activities in the coming year – but an effective plan is more than just a list. In order to put procurement in a position to deliver long-term value, a plan should also be: 

  • Targeted to maximise value. Ensure that decisions on procurement activities are based on value drivers, whether that be from a savings, ESG, or operational improvement perspective. 
  • Jointly owned by the business. Secure stakeholder buy-in to the plan, based on a shared understanding that procurement isn’t a stand-alone function, and communicate that the wider business has an important role to play in contributing to savings (re-evaluating product specifications, for instance). 
  • Integrated with annual budgeting cycles. Align timings to the business’s annual planning to ensure that procurement-related costs and value are incorporated into budgets to elevate procurement’s relevance. 

How to build a credible plan 

Our recommended process for structuring the annual value plan is as follows: 

  • Data collection: Collect and review the available data (expiring contracts, invoice data, existing procurement plans, for instance). 
  • Idea generation: Engage relevant parties within the business and procurement through interviews. Combine this expertise with the data from the previous stage to produce a longlist of procurement opportunities. 
  • Benefit sizing: Estimate the effort needed from procurement and the business (number of days, for instance) to deliver on the longlisted opportunities, as well as the expected benefits (savings, sustainability benefits, operational efficiency improvements, for instance). 
  • Opportunity prioritisation: Organise the longlist based on the benefit sizing output to produce a final plan with an optimised return-on-investment, instead of waiting for the business to challenge the plan. This demonstrates that procurement is a mature, self-scrutinising function. 
  • Socialisation: Share the plan with the business to make the case for change, demonstrate procurement’s leadership role in driving organisational improvement, and embed an elevated, accountability-focussed relationship with the business 

This process encourages a proactive approach to procurement, taking teams from a day-to-day, contract, cycle-driven mindset to a long-term strategic one.  

The annual value planning process starts the conversation with the business at the right point in the cycle – the point where they’re trying to set budgets and where they’re asking themselves questions about how they’re set up, and how they deploy their own resources. It really allows procurement to understand what the business drivers are for the following year and to make an intervention that is beyond tenders but in terms of their cost base as a whole.
Andy Clark, Head of Commercial Services, Yorkshire Water

We’re here to help 

If you would like to explore the development journey of your procurement function and related cost optimisation and value generation opportunities, please get in touch via the form on our Cost Reduction page.