Procurement Transformation of Indirect Costs
  • Complete spend and demand visibility
  • Increased cost awareness, reduced maverick buying

Contact

LinkedinXing
Florian Dederichs

Florian Dederichs

Founder & Partner

M.+49 160 93882573​

E.florian.dederichs@ocmconsulting.de

W.www.ocmconsulting.de​

Procurement transformation: effective & sustainable cost optimisation

 

COOs, private equity investors, and senior management often quickly turn towards cost cutting in order to achieve cost and EBITDA targets. “Brutal” or unsensible cost cutting can do substantial harm to a business. Which is why we heavily advocate considering the significant and far-reaching opportunities that effective procurement transformation alongside the entire procurement and manufacturing process of a company can and should yield.

Successful and well-executed transformation programmes can typically achieve double-digit percentage cost savings in procurement without causing any damage to the business. If implemented sustainably and measured transparently, these reduced procurement costs can directly impact EBITDA. Why is procurement transformation continually underestimated when it comes to cost reduction and improved efficiency along the procurement process? To address this, we discuss questions such as:

  • Why procurement transformation? We seem to be constantly transforming and optimising...
  • When is it the right time for procurement transformation?
  • What does a lack of mandate, prioritisation, and buy-in mean for a transformation or sourcing programme?
  • What are the most common mistakes made in project planning, management and coordination?
  • Is there a lack of resources, know-how, and skills in cost optimisation?

In discussing these and other issues, we identify the common challenges and propose solutions for successful procurement transformation. In addition, we will reveal 3 critical factors to make a decisive value contribution to a company's success.

 


 

Why procurement transformation? We seem to be constantly transforming and optimising..

 

Continuous improvement within your purchase department is appropriate and important. However, deeper, more transformative procurement transformation is needed for 2 reasons.

First, within existing departments, the transformative impact of new ideas, approaches, and structures wears thin: the innovation required to make real change increasingly diminishes.

Second, deep procurement transformation requires a skillset beyond conventional procurement activities, as well as a sufficient amount of experience in transformation or procurement optimisation.

By procurement transformation, we refer to fundamental changes in procurement as an action or reaction to a changing environment. A procurement transformation programme pursues clearly defined goals, drives and implements this organisational change over a set period of time. Common procurement transformation objectives include:

  • Realignment of the procurement strategy, realignment of the procurement management, and procurement process optimisation
  • Comprehensive procurement programmes for various categories to achieve far-reaching procurement savings and/or quality improvements
  • Digitalisation of procurement and the introduction of new, disruptive technologies

A procurement transformation programme is typically entrusted with implementing the solutions to the purchase department’s strategic or organisational challenges. In addition, procurement transformation often addresses existing significant procurement savings opportunities across several categories. The time pressure and the expertise required in the topic, as well as the workload of implementing a procurement transformation programme, necessitates specialised project managers and project teams. If the working conditions of your procurement department have changed considerably or the last major transformation project took place some time ago, it is advisable to review the opportunities.

 

When is the right time for cost optimisation, procurement transformation and a sourcing programme?

 

Many companies make the mistake of not regularly taking an in-depth look at the potential for procurement transformation with the help of unbiased external expertise. The traditional view of procurement is often too entrenched in the organisation. It is seen purely as a buyer and procurement costs depressor instead of a central body for the efficient management of all external expenditure. However, the integration of a procurement perspective – e.g. in product development or supply chain management – usually brings unimagined potential for optimisation to light.

The need and opportunity for procurement transformation often only arise reactively as a result of changes in the market, changes in the company structure, and technological innovation. If there are regulatory changes, a new production technology is introduced, or a price declines, and this opportunity is missed, the impact can be significant. This is where rapid action by procurement management and strategic sourcing is even more critical. The speed at which these changes are hitting companies continues to increase, making forward-thinking procurement transformation and rapid response critically important.

A proactive and effective procurement optimisation and transformation capability is therefore not only an instrument for success, but also an increasingly important performance indicator for procurement.

 

Pitfalls & solutions for successful procurement transformation & sourcing programmes

 

In the following section, we would like to highlight a common problems and best practice solutions on a few examples where the approval of a procurement transformation initiative was at risk or the initiative itself was on the verge of failure.

Change begins in the mind – to bring about change, the goal of any transformation programme, it is necessary to reach the minds of those involved so that they live the change on a daily basis.

Resistance to most procurement transformation programmes results from the necessary additional effort required to adapt to the change and alterations to lived behavioral patterns. Also, the optimisation team often doesn’t create enough awareness of the absolute urgency of the change for those who have to go through it, and do not achieve the appropriate prioritisation of the project with management.

Another typical reason for the failure of procurement tranformation programmes is the lack of a clear vision and a common goal; the common goal is rarely repeated enough. Beyond the missed project objectives and wasted resources, a failed procurement transformation results in an extra dose of pessimism towards successful change.

Successful procurement transformation requires the conviction and active sponsorship of management. Only through the appropriate prioritisation of the programme within the organisation, as well as regular steering committees for rapid decision making and the avoidance of road blocks, can an optimisation project be successfully implemented. For far-reaching procurement transformation programmes, we advise that our clients communicate the need for change at all levels of the company, both rationally and emotionally.

A particularly effective method is the presentation of an accessible vision, which illustrates the negatives of the current position and the positives of transformation. Used in combination with other factors or individually, a "Burning Platform Speech" by an emotionally respected leader in the company helps to reach the employees and partners. In addition, we recommend a rational explanation as to why this particular direction holds up against the alternatives and how to achieve the overarching objectives via a roadmap.

Transformation projects often fail because projects are delayed by slow decision-making processes toward the end of the project or by resistance within the organisation. In addition, a lot of time often has to be spent on managing critical voices and uncooperative or laissez-faire attitudes. To improve communication and create buy-in, the introduction of a communication plan with tools such as a "weekly newsletter" or a "change workshop" is very effective.

Last but not least, many programs fail because transformation successes are announced prematurely, causing carelessness and the reemergence of old behaviours, rendering the change unsustainable.

In order to avoid these problems, we place a lot of emphasis on planning and governance, the early and regular involvement of all the relevant stakeholders in the company, and predefined coordination loops. This is because the timing and the way in which information is shared often play a decisive role.

In reality, however, not all skeptics and doubters can be convinced through involvement and communication. Therefore, it is important to convince such doubters through early and regular results, or at least to reassure them in the meantime to avoid disruptive interventions.

Demonstrating regular success can also lead to a positive feeling within the organisation. To accommodate the time-consuming nature of collaboration among many stakeholders in complex and large projects, clear communication rules and the prior definition of mutual expectations are required.

Sustainable change is best achieved through regular monitoring and reporting of the project successes so that they and their consequences are remembered well beyond the project itself.

Are the project resources overburdened with the workload or does the quality of the performance not meet the requirements? Do the ideas introduced lack ‘big picture thinking’ or a different perspective on the problem? The causes for the problems mentioned above are complex. Too few resources and a lack of prioritisation of tasks are both time-related constraints. These often go hand in hand with a lack of skills or know-how in procurement transformation projects. Regardless of the cause, a successful transformation project stands or falls with the available resources and their skills and experience.

One approach is to build up specialised transformation resources within the purchase department, e.g. in strategic procurement. These resources are technically specialised and also have a better knowledge of company-specific procurement processes and circumstances, but usually lack an objective perspective and the experience of similar situations at other companies. In addition to providing specialised skills, external support can help cover the resource peaks of the irregular demand for transformation experts.


 

What is the added value of a successfully implemented procurement transformation project?

 

Established companies that have always been successful and still are today have one thing in common: they are adaptable – they succeed in adapting to market conditions, technological innovation, and internal changes. The same applies to procurement. In addition to having the right strategy and organisational structure, this requires the ability to successfully carry out the transformation – whether with in-house personnel or with the support of external resources. Procurement transformation often pursues different goals – but success is always based on 3 elements:

  • Optimal results due to an optimal strategy and choosing the right approach. The most important factors are the skills of the resources, including technical, methodological, and, above all, strong communication skills
  • Efficient project execution as a result of a structured project plan and project management setup in combination with buy-in from the entire organisation
  • Sustainability as a key gauge of a successful transformation. Good and fast results are costly if compliance is not sustainably embedded in the organisation

OCM offers comprehensive support in optimising your procurement processes. Our comprehensive product offering Procurement Consulting contains 100% application-related project modules for procurement transformation and is based on our broad expertise across all levels of procurement.

We offer our support along the entire project lifecycle: from the identification and analysis of opportunities, through the conception of a project plan and its realisation, to the sustainable implementation and control of the realised opportunities.

We would be happy to present our approach and project modules in this regard or discuss concrete solutions based on your individual challenges.

Contact

LinkedinXing
Florian Dederichs

Florian Dederichs

Founder & Partner

M.+49 160 93882573​

E.florian.dederichs@ocmconsulting.de

W.www.ocmconsulting.de​

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