Cost is important. Very important. It’s one half of the P&L and, for procurement, it will never be deprioritised – nor should it be. But very recent history teaches us that low-cost supply arrangements do not equate to value. They do not equate to receiving that supply. Nor do cost competitive products ensure they sell to new and changing consumer demographics.
We argue that within procurement, where once “Total Cost” was the best practice approach, it is now “Total Value.”
So, what do we mean by this? Simply, procurement as a function needs to not just be evaluated based on price and service; it now needs to be much more multi-dimensional, covering, for example, supply chain security, value generation, and ESG or sustainability improvement considerations. Not just because they are “nice to haves,” but because they are must haves. Essentials.
In this year’s issue, we touch on many of these new demands or rules of engagement to explore what life is like for procurement ‘beyond cost.’ We dig into what we should be doing and why we should be invigorated by the challenge ahead.
A multi-dimensional approach
For example, when sourcing third-party manufacturing services, we can’t necessarily turn to the Far East and select the lowest cost vendor able to meet the required production standards. We need to assess the risks within their supply chains, the potential failure of transport, unilateral government decisions, the reputational damage of ESG failures, the opportunity cost of missed innovation and collaboration, and more. Many of these aspects drive not just cost, but revenue.
Leading procurement functions have pushed an agenda of value-adding partnership and strategic business support for a while, but this has been accelerated by an unprecedented convergence of macro factors in the last five years, including:
- Climate impact
- Consumer trends
These factors have all impacted demand, input costs, availability, lead-times, and market opportunities. As such, organisations need to pay much closer attention to their supply chains: how goods and services are procured, what is procured, from whom, and from where.
Total Value makes ‘good’ procurement much harder. For example:
As we evaluate options beyond cost and service, we increase the data sources required, exponentially increase options analysis, and require more – and more considered – input from a wider group of functional stakeholders
Accepted category norms all need to be challenged. Stable assumptions, such as "China is a 'low-cost' country” or “lead times are two weeks” or “the 14-18 year-old demographic wants low cost, short-life items,” need to be revisited in any procurement strategy, and this requires time and research
Our ways of communicating and representing success and performance need to be different and more sophisticated. How do our now more considered actions improve whole system costs and support revenue?
Incumbent team skills and tools may not give the right answer anymore; they will likely need updating with more data and analytic capability, a fresh lens on strategy and innovation, as well as the ability to collaborate more quickly and effectively.
We risk drowning in complexity,
so we need a very clear direction.
Action plan: Translating Total Cost into Total Value
DOUBLE DOWN ON THE BASICS
Refocus effort and attention on really good category planning. Don’t just go through the motions; instead, ensure these critical documents are reviewed and critiqued by peers from inside and outside of the function.
INVEST IN EXPERTS
Few, if any, procurement teams have the scale or budget to be self-contained, especially as we lean in to a new set of challenges. Identify and leverage trusted experts to help fill gaps and provide new approaches and perspectives.
CHALLENGE THE STATUS QUO
Don’t fall into a cycle of “source – contract – repeat.” If your category approaches are the same as they were three years ago, chances are they are wrong.
TALK ABOUT TOTAL VALUE
Talk in terms of Total Value until it becomes engrained in the function's approach. More so, talk widely in the business demonstrating the true commerciality of the procurement skillset.
Make a commitment and build a plan to drive a sustainability agenda, focussing not just on the environment, but on people and the long-term ability for your organisation to grow and thrive in a responsible way.
We believe that good procurement has moved “beyond cost,” but we’d love to hear your view.
What do you think?
Find out more
If you’d like to discuss any of the topics in this Beyond Cost article, please get in touch with Edward Cox.
You can also read Edward Cox and Ben Lambert's 2020 whitepaper, Survive then thrive: Building stronger supply chains in a post COVID-19 world.Download the whitepaper