Corporate Management

Procurement, the 5 mistakes the CPO must avoid to achieve the expected results

A vision beyond cost optimisation and a resilient supply chain is needed to address supply risks

5 December 2024

4' min read

The Procurement function is has been evolving rapidly for some time and increasingly has a challenging task and a real opportunity to have a positive impact on the company's results and development. At the same time, however, it does not always live up to this role, failing to achieve the expected results and not getting the recognition of the other functions.

Procurement managers are often unable to break free from established habits and overcome the constraints of the business environment. By becoming aware of and addressing these limitations, it is possible to make the expected role leap. Let us try to analyse the main ones.

Do not align with business objectives

The most serious, and at the same time most widespread, mistake is to focus only on spending efficiency. This often results in excessive negotiating intensity, which is short-sighted in terms of both the economic results that can be achieved and the delays that are caused in the execution of the contract.

Then there is another aspect that recurs in the company: the CPO lexicon is hardly familiar to a CEO. Moreover, the traditional parameters by which procurement measures its performance - savings and compliance - are not on the CEO's agenda.

Instead, it is necessary to translate the message from negotiated savings to realised savings and impact on EBITDA. It is also distinctive to be able to emphasise the value of strategic agreements with certain suppliers, which always goes beyond price savings and often beyond total cost savings, bringing value and new skills.

What is needed, therefore, is a vision that is not limited to cost optimisation but that takes into account the creation of value throughout the business case, thus including speed of response, agility, resilience, innovation.

Do not identify and measure the performance parameters of the function

This need is closely linked to the previous one. Focused on negotiations and pure savings, one does not identify the parameters that measure the effectiveness and efficiency of one's activity.

The design, maintenance and sharing of a dashboard is necessary to drive improvement and to be recognised for the contribution made as a service to the company: from order fulfilment times, to budget or previous year's average efficiencies, from average cost per order to supplier qualification compliance, from technological innovation to new vendor growth, from logistics cost efficiency to the development of new supply markets, ...

The criteria for measuring the success of a procurement action must always be translated into relevant indicators for the profit and loss account and for the business.

Not making good use of new technologies for Procurement

Today's IT tools for e-procurement, spend analysis, contract management, scouting, enhanced by AI capabilities, are highly evolved and high-performance. They can help procurement teams in terms of speed, efficiency, productivity, transparency. A frequent mistake, however, is that the often considerable investment in these procurement applications is not matched by a plan and budget for change management, to the extent that the use of manual processes is still widespread.

It is pointless to have implemented a sophisticated tool top down, perhaps integrated with the company ERP, if the effort required for buyers to understand its value, adopt it, and become familiar with its use is underestimated. Education, training, communication, a reliable help desk and continuous operational support are prerequisites for extensive and effective use and return on investment.

Supply risks

A simple supply disruption, or a defect on even a minor component can have devastating impacts on the business. A resilient supply chain must be able to respond promptly to any disruption. To do so, it must have real-time visibility and develop contingency plans.

Once again, new technologies - in particular Advanced Data Analytics and the Gen AI - make it possible to constantly monitor risk variables, from financial, reputational, regulatory and operational risks of suppliers, to commodity trends, weather conditions on routes, unrest in ports, and war crises. Companies can, by using predictive algorithms, anticipate problems and take preventive measures through a 'what if' analysis or, even, with artificial intelligence generative algorithms, envisage scenarios of the evolution of events and hypotheses of action

Forcing or accelerating the extension of the mandate

It is a fact that any unmanaged expenditure item is both a risk and a potential inefficiency. However, the belief that a strict 100% procurement compliance policy is due for the good of the organisation drives the CPO to devote energy to achieve it. In reality, there may be little or no results, at the cost of staff under pressure and internal friction. Procurement, on the other hand, is called upon to set an example of attention to the cost/benefit equation; hence a robust business case is required to support the investment in managing the entire spend within a reasonable timeframe, in a collaborative manner and with significant cost results.

The best way to approach the mandate is to interpret it as a path in which to build examples of winning results in the assigned area that make an impact on the organisation and costs, with the resources at hand, so as to consolidate credibility and trust that will drive the organisation to entrust procurement with ever wider perimeters.

In conclusion

A CPO who can sit on the Management Team on an equal footing with the other Functional Departments must think beyond his own functional agenda and look at Procurement through the eyes of the Operations and Sales he supports.

*Senior Executive Advisor - EY Business Consulting