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The Evolution of Procurement

A look at how the process, technology and people of procurement have evolved to generate value beyond just savings.

Procurement is a profession that has a deep-rooted history. As long as humans have been trading and purchasing goods and services amongst each other, they have been engaging in a form of procurement. But procurement encompasses so much more than just a textbook definition of acquiring lowest-cost goods or services; it is a wide range of activities that enables an organization to operate more profitably and creating value.

Simply put, creating value in procurement is focusing on aspects beyond “just” savings. The role of value in procurement break out of its traditional mode and moves the function into other areas of the business and the supply chain.

A more comprehensive explanation comes courtesy of the CPO at Thyssen Krupp in Procurement and Supply Magazine:

“At the strategic level Procurement value can be defined by:

  1. Becoming a Customer facing capability
  2. Connecting commercial and technical capabilities of the Company
  3. Activating key supplier relationships
  4. Reducing supply vulnerability; accessing new products, R&D and innovation
  5. Lowering costs
  6. Delivering high quality goods and services
  7. Creating transparency across the Companies spend activities."

Looking to learn more about eSourcing? - Check our resources here: What is eSourcing?

What is Procurement?

Broadly, procurement is defined as the acquisition of goods, services, or works from an external force that are vital to an organization’s operations. The procurement process can be divided into two parts: the upstream process that includes sourcing activities and the downstream process that includes purchasing activities. 

We can’t talk about procurement as just a function when it’s made up of so much more, especially in the age of digitization. Now procurement can be thought of as a three-legged stool that supports the organization’s business objectives of being profitable, but also generating long-term, sustainable value. The three legs that support the stool are process, technology and people, each of which we’ll discuss below.
People, Process and Technology of Procurement

Procurement Process: Upstream and Downstream

Each organization determines a process that is unique to the business, and transparency is critical in each step of the process. The procurement process can broadly be divided into two categories: upstream and downstream.

Simply put, the upstream procurement process is everything that happens from sourcing to awarding the contract. Everything that happens after the contract is awarded is downstream. However, it’s the activities that occur in the upstream process that have the most significant impact on the downstream outcomes. The upstream procurement process generally includes the following activities:

For many years, procurement managed the entire upstream process via a series of spreadsheets or within disjointed databases that do not easily communicate. Now, the entire upstream process can be digitized with source-to-contract technology that makes procurement teams more proactive and agile with better market intelligence and visibility

Procurement Team Structure

How a procurement team is structured depends on many factors, including the maturity level and size of the organization’s procurement department. Most procurement teams have either a centralized or decentralized operating model. 

In a centralized operating model, the decision-making process is held by senior leadership, whereas in a decentralized operating model, decision-making is more distributed. Both models have their unique advantages, but the visibility brought about by digitization has enabled more of a hybrid operating model. 

Additionally, automation has also enabled adoption of the hybrid model. For example, communications can be streamlined with triggered workflows, which reduces the back-and-forth involved in the source-to-contract process.
Best Procurement Team Structure
Centralized vs. Decentralized Procurement Operating Structure

Procurement Technology

Digital transformation may be a buzzword, but there’s no denying its transformative effect on procurement. And while some are threatened that machine learning, artificial intelligence, and robotics process automation would take jobs from humans, it has instead made their work more enjoyable and valuable.

With source-to-contract technology in particular, optimizing the upstream process can save hours or even days of work. Instead of reinventing the wheel for every sourcing event, managing suppliers by manually updating spreadsheets or Rolodexes, or creating complex pivot tables to view spend analytics, you could instead house all this information in a central, cloud-based repository.

Through digitization and automation, information is accessible to all stakeholders, automated workflows trigger approvals, templated contracts and proposals maintain consistency and compliance, and suppliers are held responsible for updating their information.

Increased visibility in the supply chain will help your team more effectively manage risk and mine savings throughout the entire source-to-contract process, while reducing costly errors, eliminating redundancies, and streamlining communication. The result? Shorter cycle times for each sourcing event.

Procurement Professionals

Every organization, no matter its size, engages in the procurement process whether or not it has a formal procurement department.

Unfortunately, procurement has not always been considered with the prestige bestowed on other roles, such as finance or operations. It was regarded as a back-office function and a roadblock to internal departments’ spending wish lists, rigidly reactionary to disruption, and devoid of strategy outside of cost-cutting. The role often reported to various departments that eventually rolled up to senior leadership.

But now, that’s all changing within many organizations. Digitization has brought procurement out from the shadows and into the spotlight, in some cases reporting directly to the CEO. Today’s procurement leaders utilize a variety of tactical hard skills and strategic soft skills, along with an innate sense of curiosity, that touches all levels of the organization. Project management and negotiation skills are essential, but so too is active listening, conflict management resolution, and empathy.

(For those interested in going into a career in procurement, many colleges and universities now offer majors in procurement and supply chain management, and the profession offers a comfortable living, with a mean annual wage of $125,630, according to the latest data from the U.S. Bureau of Labor Statistics.)

Procurement Professionals

Looking Ahead - The Future of Procurement

There has never been a more exciting time to be a procurement professional! Procurement is now a household word, and indeed an essential service as organizations across the world are working tirelessly to ensure the flow of goods.

The evolution of the procurement profession from a back-office, cost-cutting function to one that is strategically important to the organization is an exciting journey that continues onward. With visibility into all areas of the business, procurement is in a unique position to advise executive leadership on solutions that not only cut costs and increase cash flow but also generate long-term value for the organization, suppliers, and customers alike.

Curious to learn more? Read 'Where is Procurement Headed' here.