Steps in evolving procurement from a cost

function to providing a competitive

advantage
Niul Burton

Principal, global lead for EY Supply Side Optimization solution

Posted on August 29, 2018

To effectively compete against disruptive forces and new competitors, the procurement
function of the future has an opportunity to provide a competitive advantage to
companies instead of being viewed in a traditional cost-management role.

With today’s extended supply chains and the dependence on supplier capabilities within larger
ecosystems, the procurement function is in the right place to act as a conduit and facilitator
between internal customers (research, engineering, operations) and suppliers – and to do it in a
way that is commercially advantageous.

However, in most enterprises, today’s procurement function is not ready to fulfill this bigger role
to drive a competitive advantage. With the emergence of the need to “go digital” to effectively
compete against disruptive forces and new competitors, the procurement function of the future
has an opportunity to provide a competitive advantage to companies instead of being viewed in a
traditional cost-management role.

Procurement has evolved substantially over the past 20-plus years. In the past, the procurement
function was responsible for purchasing a subset of the business requirements for goods and
services (Procurement 1.0), and then also proactively managing the largest spend categories –
often with a “seat at the table” with their stakeholders (Procurement 2.0).

The evolution of procurement (to 3.0) includes becoming a critical business partner in delivering
on enterprise strategies and providing a competitive advantage. This includes the function
expanding its remit – from a focus on cost leadership to alignment with stakeholders to enable
enterprise strategies in innovation, agility and supply certainty.
Disruptive forces are causing procurement to change and adapt its role. These forces include:

• Global business environment. Global and domestic political turmoil is unsettling traditionally
stable markets and cascading into new tariffs and trade agreements. Immigration policy changes
are impacting the availability of skilled resources, and this is causing uncertain financial and
commodity markets.
• Organization and talent. Growth of the gig economy and the contingent workforce is expected
to continue and fundamentally change the concept of employees. This is accompanied by
evolving expectations from millennials who value purpose-driven missions.
• Sustainability and risk management. Enterprises must continually adapt to a volatile regulatory
environment. Lean supply chains are also leading to dependencies on subtier suppliers that are
often not well understood. In addition, there is increasing consumer sensitivity to sustainable
products.
• Innovation and growth. The continuing convergence of business models, and the global growth
by well-funded competitors, results in shorter product life cycles. This requires companies to
drive their own growth and innovation by collaborating effectively with their ecosystem of
suppliers.
 • Digital technology enablers. Companies are testing how to solve issues by deploying emerging
technologies such as artificial intelligence, robotic process automation, blockchain, the Internet
of Things (IoT), advanced analytics, chat bots and 3D printing. Leaders are shifting from a
mindset of “going digital” to “being fully digital.”

Is today’s procurement function ready for its challenges?

Now that procurement is in a position to deliver on its potential and enable the enterprise
strategy, is it ready? In many cases, no. Today, the function is typically hampered in a number of
areas:

• Metrics focused on cost reduction. This behavior is problematic, especially when the distinction
between cost savings and cost avoidance is not clear. Cost leadership should remain a key
metric, but it must be balanced with other objectives – including innovation, agility and supply
certainty.
• System functionality gaps. Even as legacy solutions migrate to the cloud, these platforms are
inevitably built to satisfy standard requirements. Complementary applications are inevitable as
each company has discrete needs that cannot be configured into commercial off-the-shelf
software.
• Talent. Finding, hiring, developing and retaining top talent remains an issue, especially as
millennials are looking for flexibility and work-life balance. There is also the need to bring
strategic thinkers into the procurement function to work as influencers in changing how internal
customers should work with suppliers.
• Change management. Repositioning the role of procurement in the minds of stakeholders allows
the function to focus on value-add activities and shifts transactional activities to the lowest-cost
technology-enabled solutions.
• Analytics. This involves utilizing available data not just to understand spend and influence
pricing, but also to extract insights in demand patterns that can impact inbound deliveries and
inventory, working capital improvements and standardization opportunities.

Within this context, the function needs to evolve to Procurement 3.0 – increasing the value
delivered by expanding its critical role to the enterprise.

Procurement 3.0 – Supply Side Optimization

Supply Side Optimization is the next evolutionary step for procurement. It entails explicitly
linking to the enterprise business strategy and ensuring that the supply base is aligned and
contributing, with the goal of having the right suppliers, under the right commercial agreements,
delivering the right goods and services. There are clear building blocks required to accomplish
this evolution.
The EY Supply Side Optimization framework

First, start with setting the purpose for procurement. This means understanding the opportunities
to enable and support business strategies, and articulating them in a way that can be internalized
by your teams by cascading metrics and individual objectives. The purpose of procurement is
likely a combination of cost leadership, innovation, agility and certainty/risk minimization, but it
should also reflect commitments to corporate social responsibility goals, such as sustainability.
For example, a large health care provider has committed to support the development of small
businesses in the communities it serves by including metrics on suppliers — by zip code — to
monitor how well it is doing.

Second, the procurement function must determine how to have the right work in the right place,
which is known as the Operating Model (see above diagram). For example, a procurement
function that wants to enable continuous innovation should co-locate its team with internal
customers to facilitate communications and common objectives. A procurement function focused
on cost leadership, however, will group activities into a global hub, or regional hubs, to benefit
from scale. The chosen operating model will define work responsibilities, where to execute these
activities, and the organizational structure and governance to best manage processes.

Within the Operating Model is the source-to-pay process, which splits into three key
subprocesses:

• Supply portfolio optimization. Through rigorous evaluation, this process selects the optimal
portfolio of suppliers to achieve the purpose, and identifies contractual terms that align suppliers
to the enterprise.
• Commercial excellence. This confirms the portfolio of suppliers is fulfilling the spirit and intent of
tailored contracts to help deliver on the purpose. It also actively monitors and helps to manage
performance.
• Touchless procurement. This utilizes leading-edge digital assets to improve P2P processes, and
assists requisitioners to order and receive, in compliance, without procurement involvement.

Within the framework, the execution of these processes is supported by three enablers: utilizing
data-driven insights; building a workforce of the future; and performing effective change
management with team members and stakeholders, internal business partners and external
suppliers.

To date, commercial and legacy systems to manage procurement have fallen short of the end-to-
end functionality that allows for ongoing improvement. That is because the systems are often not
well-integrated and support transactional execution, while not assisting dynamic optimal
decision-making. For example, while category management is well-understood conceptually, the
tools to gather, synthesize, normalize and present data from multiple sources are lacking, which
makes it hard to have effective decision-making. Worse, category managers and analysts spend
too much time gathering data rather than assessing scenarios and making decisions.

There is a sea change happening. Emerging digital tools are complementing existing systems to
add to the functionality map, and are now developed and deployed at an increasing rate.
Intelligent automation is eliminating many basic clerical tasks, freeing up resources for higher-
value activities. However, one critical area still to resolve is data quality to allow ever-improving
analytics.

In future articles, we will build out each of the components of Supply Side Optimization and how
the procurement function will evolve to Procurement 3.0 and deliver significant incremental
value to the business.

https://consulting.ey.com/steps-evolving-procurement-cost-function-providing-competitive-advantage/