Trends in the Procurement 

External and internal forces, such as  globalization, cost pressure, and innovation are contributing the greater importance of Purchasing: Current financial crisis and its impact on the economy  is driving a sense of urgency to enact changes in procurement such as:

• Cost reduction to sustain margins and profitability
• Corporate Procurement Office (CPO) being a strategic partner to the board
• Leveraging Information Technology (IT) to implement changes and greater visibility

The ability to  growth is harder due to constraint on attracting money to invest. To reduce procurement cost is a good option to increase margin, profit in order to survive the financial/ economic storm.  The procurement function has a direct influence on the profit via managing and controlling the spend. Every Dollar or Euro spend reduction is directly effecting the profit of the company. No marketing , sales cost are required to increase revenue, it is just easier to save money than to make money. For example, a company with annual revenues of US$1 billion would add 12% to its bottom line by decreasing external spend by 5%. By directing the efforts toward cost reductions, companies can significantly impact profitability.

Income statement	$ millions	increasing  % revenue	decreasing % direct spend
		5%	5%
Revenu	1000	1050	1000
cost of revenue (direct & indirect spend)	700	735	665
gross income	300	315	335
gross margin	30%	30%	34%
taxes 38%	114	119,7	127,3
net income	186	195,3	207,7
Income increase	0	9,3	21,7
% income increase	0	5%	12%

How can spend / cost reduction being achieved?

Most multinational companies have already implemented purchase to pay solutions to support the operational procurement process for indirect spending in goods and services categories suchas maintenance, repair, and operations (MRO) travel, office supplies and ICT commodities.The strategic Source to Contract process is mostly implemented but not fully integrated with the   operation procurement process for all purchases. Additionally, companies have piecemeal components of the solution implemented due to technology improvements over a period of time.This complicates organizational goals of achieving system-wide savings and productivity in procurement. 

Service Procurement: Potential for high benefits

We have learned that service procurement is a growing area of focus to drive savings with over 77% of companies plan to increase their management of services spend {source: Services procurement within SAP SRM 7.0 by SAP author: Jan Willstrand, Solution Management and Carolyn Beal, Solution Marketing October 2008 Source: W.P. Carey School of Business at Arizona State University}  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What is service procurement ?

• Supports a company in managing resources and monitoring costs over services
• Consist of complex categories, such as maintenance, construction, IT and temporary labor
• Requirements often undefined in quantity duration, and price at the point of purchase
• Deliverables are milestone or time based

Why are service procurement processes not optimized and improved with the latest technologies available?

To improve a procurement process for a commodity which is plotted in low ease of implementation is not a commodity to start an improvement program with. The complexity for service procurement like professional (ICT) services as commodity to improve the procurement process is related to: 

• Poor visibility; decentralized control over services spend due to lines of business ownership over supplier relationships
• Maverick buying; employees engaging unauthorized suppliers
• Ineffective Supplier Collaboration; suppliers can’t easily collaborate with buyers in services definition, bissing, purchase orders, receipts and invoices
• Poor savings; savings opportunities not fully captured
• Slow processes; manual processes that are not integrated

 Given the above It is now time to improve the procurement of service procurement spend categories like temporary labor, ICT services and professional services. 

More to come in the next blog about applying Business Suite 7 to address these trends/issues