Procurement departments are increasingly evolving away from being an order service to being a powerful strategic instrument within their company. Procurement departments are making more and more important decisions. However, there is still heavy resistance from the other departments. Unfortunately, procurement still takes place locally in complex, international corporate hierarchies without the central procurement department being informed about these procurements…
What strategic spend management means
Therefore, to enable procurements departments to work strategically, the procurement organization is centralized and permanent departments are established for strategic procurement. The head of this new type of procurement department (CPO - Chief Procurement Officer) bears genuine responsibility to the CEO.
Only with companywide spend management will the success of the procurement department become apparent and measurable and their routine tasks and decisions supported:
The Three Most Significant Areas of Strategic Procurement
- Management of the CPO organization
- Cost reduction
- Optimization of working capital
The Windmills of CPOs
1. Management of the CPO Organization
Many companies still have no standardized software for spend management and reporting – they try to combine the order data manually from all areas of the company with Excel.
This leads to a number of problems:
- The employees are substantially burdened outside of their daily business.
- At the beginning of the month, the procurement organization is virtually paralyzed.
- A standardized structure for the Excel data is difficult to enforce. It has to be manually consolidated, which is very tedious.
- The manual preparation of the reports allows for potential errors.
- The preparation of the necessary basic evaluations can often only be done by the IT department, which is already burdened.
Moreover, there is the threat of the “subjectivity of the data” in this case because not every employee prepares his Excel file according to the same methodology (e.g. calculation of a figure). Additionally, the results can be easily manipulated, which is difficult to detect.
Paradox: In this case, the CPO has to assess his employees based on his own compiled figures.
2. Cost Reduction
To save costs, the most effective bundling potential must be quickly identified. Only then can negotiations be held optimally and suppliers changed in a strategically sensible manner.
Neatly consolidated, valid data is necessary for the adequate preparation of framework agreement negotiations, etc. However, this cannot be achieved without a content management and cross-company spend management system.
The result: The negotiating position with respect to suppliers is substantially weakened. Savings cannot be clearly evaluated, as a result of which the CPO cannot make the success achieved by his department visible to executive management.
3. Optimization of Working Capital
Inventories, turnaround times, and processing times as well as insufficient utilization of payment terms tie up vast amounts of capital.
In Germany, paying invoices after 10 days and deducting a discount for that is still favored. In this case, money left the company much too soon – current costs must potentially be intermediately financed on the capital market. However, if we consider the production and storage time of the final product as well as the payment terms granted to the client, a longer time span can arise between the payment of the supplier and compensation through the sale of the final product to the client.
Missing possibilities: Payment terms are directly influenced by procurement as it guides the negotiations with suppliers. However, the implementation is not the responsibility of the CPO, but rather the accounting department and, thus, the CFO (Chief Financial Officer).
Orpheus offers software for strategic procurement, which applies precisely in this case:
» SpendControl - software for professional spend management
We offer you a holistic solution for increased transparency, potential analyses and measuring your procurement success regarding indirect purchasing with our DataCategorizer, SpendControl and InitiativeTracker modules.
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In this blog you will find expert knowledge about initiative management and project management in strategic procurement. InitiativeTracker is a software for planning and monitoring your sourcing initiatives, controlling your procurement organization and measuring your procurement performance.