“If procurement wants to have an outsized impact, they need to provide value in a way that alters how decision making happens.” – Philip Ideson, Founder and Managing Director of Art of Procurement
Every year since 2018 I have written an annual letter that shares some perspectives on the year ahead, formed by the hundreds of conversations we’ve had with procurement leaders, subject-matter experts, and AOP community members. This year, considering all the challenges and transformational opportunities facing procurement, it seems more important than ever before to ask ourselves the big questions and to look inward to redefine – in the new realities we’re facing in 2024 – procurement’s purpose.
And what an interesting time it is to be in procurement and to consider where we’re headed.
From technologies like AI that, after years of promise, are now changing the face of the profession we love; to a macro environment where the needs of organizations to manage cost and risks show no signs of abating in an ever more uncertain world; to an internal environment where collaboration between procurement, supply chain, finance, HR, operations, IT, and all our other business functions are more important than ever before… one thing is for sure – procurement is certainly never boring!
Amid all of these changes, challenges, and opportunities, I would encourage everyone to head into this new year by thinking deeply about how you define procurement’s purpose in today’s landscape and start by asking yourself three questions:
- What is the purpose of procurement in your organization?
- How can you create a true competitive advantage, and what are you doing to achieve that?
- How are you driving differentiated decision making in 2024?
What is the purpose of procurement in your organization?
Why does procurement exist?
What is our purpose?
Why should procurement receive internal investment over a myriad of other potential investments that a CEO or CFO could make?
What value do we bring to the business beyond just investing in technology that allows stakeholders to buy everything on their own?
In some industries, procurement exists in some form thanks to regulatory requirements. In others, there is a clear value proposition because of very slim margins, complex supply markets, and very high switching costs.
For the rest, the role of procurement and the impact we can have (and the investment or support we receive from the business to make it happen) is based in large part on what company leaders believe the purpose of procurement to be. Our purpose is also defined, in part, by perception.
This leads procurement to an existential question about purpose that we must ask ourselves (mainly, so that we can build the capability to deliver for our organization).
This question is more important than ever before, due to the accelerating pace of change led by the AI explosion in 2023. Last year, the attention of the world was captured by OpenAI’s ChatGPT. We are now seeing generative AI tools powered by large language models (LLMs) that will be game-changing for procurement.
I’m particularly excited about advancements in procurement data capture and enrichment. Data quality has been our Achilles heel. Just imagine the possibilities of enriched master data that we have 100% trust in! But, if we don’t break some old bad habits and move fast enough, then these same generative AI tools (like bot-assisted sourcing) also have the potential to take away huge swathes of the work we do today. All automation is a huge opportunity, and a huge threat to the procurement profession. It just depends on how you play it…
How can you create a true competitive advantage, and what are you doing to achieve that?
Procurement’s purpose rests in our ability to drive competitive advantage.
I sometimes cringe at the phrase “competitive advantage” as it is so overused, so cliche, and is often a way to signal “what we do is important” without actually defining what is actually being done.
One dictionary definition of competitive advantage is: “the conditions that make a business more successful than the businesses it is competing with, or a particular thing that makes it more successful.”
What conditions does procurement enable that makes their business more successful than the businesses it is competing with? To know that, we need to know what is the REAL competitive advantage of the business that procurement supports.
It could be things like cost, risk management, or supplier performance. It could be supplier driven innovation, diversity spend management, speed and urgency, or simply that you are enabling your stakeholders to focus more of their time doing what they do best rather than spending time on buying-related administration. Or, it could be the relationship you have with a single supplier in a single part of the supply chain, upon which the entire industry or geography that you operate in depends on.
When it comes to procurement maturity, I think about the creation of competitive advantage on two dimensions:
- First there is competitive advantage that is driven based on your speed in the procurement – or buying – maturity journey. Over the long term, there isn’t really a moat around this form of competitive advantage. This makes it easier for your competitors to catch up to you: They’ll buy and use the same technology you do. They’ll replicate your successful operating model. They may even hire your staff or echo your marketing campaigns.
- But, there is also an advantage to being an earlier adopter, and the head start that you give your business may turn into a longer-term competitive advantage based on how it is used. (This was covered in last year’s annual letter when we talked about procurement’s journey in crossing the chasm.)
It is important for procurement to think more deeply about the ways to invest in people, processes, and technologies to create competitive advantages that build moats for your company.
For example, if you are an automotive company, what are you doing that ensures that your key lighting suppliers are bringing forward innovations around the advanced usage of LEDs to you before your competitors?
If you are a pharmaceutical company, what are you doing that helps your business accelerate the clinical trial process to be first to market in a new drug category?
If you are a financial services company, what are you doing to help your business create more accurate risk profiles on loan applicants based on the innovative use of data from credit bureaus?
Hopefully, you get the idea.
The thought process can span both direct and indirect purchases, but this type of strategic thinking is what truly creates long term competitive advantage.
How are you driving differentiated decision making in 2024?
Differentiated decision making is important for procurement on two levels:
- Helping your organization make decisions that are different – and better informed – than your competitors is a competitive advantage, and one that you can build a moat around, giving your company a competitive advantage that is not easily replicated or penetrated by others.
- Differentiated decision making transforms the perception of procurement internally and connects our impact with a higher value… driving additional investment and creating a virtuous cycle.
If procurement wants to have an outsized impact, they need to provide value in a way that alters how decision making happens:
- Business Strategy: What are the organization’s goals and challenges? Are there stakeholder objectives and/or constraints that procurement can impact?
- Internal Customer Experience: What are their wants and needs? What motivates them to buy? Will that same motivation work in the future?
- Supply Markets: Which category trends, cost drivers, and pricing levers can procurement use to drive supplier-enabled innovation?
- Operational Excellence: Is procurement’s operating model fit-for-purpose? Is the current level of digital enablement driving desired outcomes? Is procurement backed up by mature strategies, tactics, tools, and templates?
If procurement doesn’t show up with relevant data or uniquely synthesized information, they will struggle to connect with the business beyond a tactical level. Differentiated decision making will remain beyond their reach.
This is not an easy endeavor. It requires a data foundation you can trust, with advanced data hygiene techniques. It requires the integration of third party data from established data sources, but also, and even more importantly, from field research undertaken by your procurement team.
Where the magic happens is when your procurement team can – at scale – utilize this data, their field research, their knowledge of their individual stakeholders, the nuances of their business, the ability to process and apply context, and the soft skills of influence and being a catalyst to drive this differentiated decision making.
Driving differentiated decision making that creates competitive advantage is our purpose. If I had to pick ONE THING that is core to the future of procurement, that we should all be focusing on this year, this is it.
Here’s to a happy and healthy new year!
- Subscribe to This Week in Procurement
- Philip Ideson on LinkedIn
- 3 Key Messages to Procurement Leaders in 2023
- 2021 Annual Letter (Part 1): Day 1 for Procurement
- 2021 Annual Letter (Part 2): Celebrating Successes and Looking Forward
- 2019 Annual Letter (Part 1): Procurement In Review
- 2019 Annual Letter (Part 2): Art of Procurement In Review
- AOP 2018 Annual Letter (Part 1): Procurement in Review
- AOP 2018 Annual Letter (Part 2): Art of Procurement in Review