ESG. Supply chain resilience. Digitalization. Words such as these are increasingly dominating conversations about procurement’s role and objectives. This represents a change from earlier popular perceptions of procurement, where the focus was on cost.
Given the current discourse, it wouldn’t be surprising if you thought that cost doesn’t factor much into what procurement does anymore. (Indeed, in this edition of The Source, we discuss many topics that aren’t directly about cost.)
It’s still all about cost
However, if you speak to procurement professionals, the large majority will still say the overwhelming topic of interest for procurement is cost. Indeed, our own research found that procurement professionals see “delivering cost savings / sourcing critical goods and services” as the primary role of the procurement, with a gap compared to the C-suite's perceptions (noticeably lower, with a disproportionately higher belief in other roles falling within the remit of procurement, compared to procurement professionals).
Q. WHAT IS THE REMIT OF YOUR PROCUREMENT FUNCTION AT YOUR ORGANIZATION?
That said, we do think there has been a shift in procurement’s objectives – just not precisely in the way that is popularly discussed nowadays. At the end of the day, procurement is still all about cost. The shift: previously, it was largely about price. Now, there’s a growing understanding amongst procurement professionals that “cost” is not just what you see in a tender submission: it’s full-life cost.
To do its job well, procurement must understand how and to what extent various factors, including non-cost-centric ones, impact value as a whole.
So, what does this mean for procurement teams today?
Full-life cost is looking beyond price – it's about taking other commercial moments, like opportunity cost and revenue, into account.
It doesn’t mean that factors like ESG and digitalization aren’t relevant to procurement. Instead, it means that such factors aren’t the ultimate aim – they're the parameters through which procurement must manage its main concern: total value.
To do its job well, procurement must understand how and to what extent various factors, including non-cost-centric ones, impact value as a whole.
For example, some investments will be greener, while also being cheaper – these choices are a no-brainer. Greater complexity is involved when greener choices incur increased prices for businesses – but for businesses whose consumers are ESG-focused, investment in initially higher-cost choices may translate into boosted margins (think larger purchases, new customers, long-term loyalty), meaning it’s a stronger value choice in total. In a similar vein, building up a more resilient supply chain can incur higher short-term costs compared to the relentless pursuit of lower prices – but if the supply chain can withstand inevitable shocks resulting from macro events as a result, this is overall a value-adding act.
Procurement’s role is to understand what extent such factors play into commercials. To return to ESG considerations: for businesses whose customers care more, this will be a bigger focus, less so for businesses whose customers are less ESG-focused.
This may sound cynical. For topics like ESG, it’s tempting to believe in a narrative of altruistic businesses that pursue sustainability improvements for sustainability’s sake (while we’re sure these businesses exist, they’re the ones often unheard of – because marketing these efforts must translate to commercial good, and so cannot be “altruistic”). But if every ESG improvement had a $ sign attached to it, we’d surely be much further along on ESG issues. The topic of ESG is a reminder that, for all the high-flying rhetoric about procurement’s role, cost is still the ultimate motivator. But “money” doesn’t need to be tip-toed around like a dirty word. Flip it over: at the business-level, having commercial incentives for these actions can be a stronger guarantee of progress than sheer altruism. This is where procurement comes in: finding where the business’s motivators lie by connecting the dots between considerations such as sustainability or supply chain resilience and total value.
Total value through a cost lens
Of course, all this is not to say we recommend you throw price considerations out of the window: price is still a crucial part of total value. Every dollar saved is profit, and boosting revenue from higher spending is easier said than done. But focusing solely on price means shutting out the opportunity to pursue total value and taking a more strategic approach to procurement.
Procurement teams must take a holistic view beyond price to understand what matters the most to its business, in order to optimize cost.
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The source 10
Realigning procurement: Unite Group’s journey to unlock additional value
We talked to Unite Students group to discuss how they first discovered the need for change and the experience of building a strategy that would take a greenfield procurement function and turn it into something professionalized and future-ready.
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