Procurement is becoming an increasingly important function of any business, especially in today’s world where the department is not only concerns itself with material goods but with the acquisition of specialized contingent workers to augment workforces. Currently there are 55 million independent workers in the U.S. alone, and PwC predicts that by 2020, 40% of the workforce will be freelance.
To truly achieve success, CPO’s need to understand that they’re the keepers of an ever-changing network of suppliers and vendors, which they need to drive value within. To do this, Procurement must be engrained in the company’s strategy and be able to support and contribute to it. Cost reduction, the historic prime directive of the function, is not enough in today’s fast-paced environment.
Here are three key areas that CPOs should be on top of.
There are a handful of ways to calculate Procurement ROI. One of the most commonly used is Tangible Value Add divided by the fully loaded cost of the team. The Value Add is a measurement of the financial benefit that procurement brings during a given time period. This does include cost reduction, but also encompasses profit gained due to procurement taking action or leveraging suppliers. An example of this is cleaning out a supply chain bottleneck. Some organizations include cost avoidance as well if it’s concrete. For example, if procurement intervenes and negotiates a lower price with a supplier.
This is a measurement of how Procurement influences the speed with which processes happen, possibly through re-engineering or automation. It can also be a measure of how procurement makes things easier by eliminating work.
This is not a concrete numerical measurement, but rather the ability to provide examples of how the supplier community is leveraged to innovate or somehow contribute to company goals or strategies.