Towards the end of every fiscal year, the leadership team evaluates the past year and plans for the fiscal year ahead. This planning translates into a clear set of organizational goals. Each department is then expected to help move the organization closer to meeting these goals. In the past, Procurement’s role in moving towards these goals was mostly operational, but this role has since shifted. Best-in-class organizations are now seeing Procurement as a core, strategic function. As such, the link between organizational goals and Procurement goals is critical.
Here’s how a strategically-placed procurement function can support common organizational goals:
Social & Environmental Impact
If the organization is striving to increase its efforts to become more socially and environmentally focused, Procurement is in a unique position to support these efforts. For example, Procurement can source from vendors who not only produce sustainable products, but have fair employment practices, or by investing spend in developing countries. Take Apple for example, whose Supplier Diversity Program provides benefits to minority-owned business, women-owned businesses, or veteran-owned businesses, just to name a few. These efforts add strategic value by increasing the organization’s immediate impact on the Triple Bottom Line and by providing material the company can use for hiring, marketing, or sales.
Expanding into new markets around the world requires strategic initiatives from every function in an organization. Procurement especially plays a critical role by setting goals not only to ease expansion, but to enhance its impact. For example, imagine your organization is a restaurant chain moving into a new country. As a limited operational function to ease expansion, Procurement would be required to source ingredients to supply the restaurant. As a core, strategic function, Procurement can set goals to source 100% of the organization’s ingredients from local vendors to boost the economy of the growth country.
Procurement has the ability to mitigate risk in an organization incredibly effectively. By setting goals to actively monitor resource distribution, transparency and compliance, Procurement can be ready to course correct by adopting new processes. Additionally, Procurement can use technology to reduce corruption or fraud internally and externally, to decrease the organization’s overall vulnerability to security.
One instance where this is incredibly important is supply chain risk and sourcing via multiple suppliers. The women’s sportswear company Lululemon may understand this better than many. In 2013, they were forced to recall about 17 percent of their signature yoga pants due to the sheerness of the fabric. As a major player in a competitive market, Lululemon used a secret fabric blend, called Luon, to help them stand out. However, this fabric was manufactured by a single source in Taiwan who, in turn, received the fibers from a single supplier. This supply chain issue cost them a CEO, millions of dollars in sales, and immeasurable damage to their reputation. Sourcing from multiple suppliers helps mitigate downstream risks in the event that a core vendor or multiple vendors are suddenly unable to supply goods, like in the event of a natural disaster, or if there’s a temporary quality issue, such as was the case with Lululemon.
Innovate & Launch New Products
There is a misconception that an organization’s innovation initiatives should be owned by the product development team, when in reality every department plays an important role in innovating and launching those new ideas, Procurement included. Supplier enabled innovation gives the procurement team the ability to source revolutionary new technologies that strategically fit with the organization’s offerings.
Organizations that take advantage of the Procurement department for this can solve customer problems innovatively and attain long-term competitive advantage. For example, Electrolux has used SEI to develop a dishwasher where the bottom rack can be raised to the height of the top rack once pulled out of the machine. Once these innovations are ready to be developed, Procurement can help drive efficiency by analyzing component prices and the supply chain costs, which will directly impact the price consumers pay for those products.
Cut organizational costs
Traditionally, this is where most organization’s see alignment between organizational and Procurement goals. Procurement can set internal goals like reducing maverick spend or streamlining the bid comparison process to ensure the most cost-effective sourcing. While these actions certainly have a positive impact on the organization’s bottom line, they also have positive impacts on negotiations and supplier relationships.
When each function in an organization moves together towards a common goal, it creates alignment and motivation. Whereas traditionally Procurement was seen as an operational function, a strategic procurement function can have immense benefits to achieving organizational goals and adding value — and not just in the form of reduced costs. When creating organizational goals, make sure to include Procurement as a strategic partner.
To learn more about transforming Procurement into a strategic function, get the free Guide to Strategic Sourcing.