Procurement, or the actions associated with product and vendor sourcing for an organization, can account for over 50% of a company’s overall expenditures. Without the proper sourcing strategy, organizations can lose money and miss out on opportunities to innovate due to the inability to reallocate valuable funds.
To better understand procurement and how organizations should design their strategies, I have asked Krishnan, Managing Director of Global Procurement Services at Softtek, to share his experience with us. With over 25 years of experience in procurement, he has worked with several organizations to select the right tools and services available in the market to manage spend and drive procurement efficiencies within their organizations.
Lilian: What do you see as the biggest challenges facing companies today regarding their procurement strategies? How can companies turn these into opportunities?
Krishnan: Procurement has not been the forefront of management attention in most organizations. A lot of initial level of budgeting is typically put toward Research and Development and other areas that are typically considered more revenue producing. Organizations have traditionally categorized procurement as cost center where the main focus is cost reduction. However, as businesses have become less vertically integrated, the cost of procurement has increased 50-60 % and the need to have procurement as a frontrunner has shifted. Having the proper tools, processes and people in procurement can drive down costs of materials and services significantly.
Lilian: So how can they turn this into opportunities?
Krishnan: With new technologies, there are several ways to innovate without having to make a significant initial investment. If capital expenditure is a constraint, companies now have the option to choose services rendered in a utility based model (pay as you consume). Also, new product adoption is one of the hardest aspects, as change management involves getting people to accept and learn ways of working. To reduce these adoption problems, there are very niche service providers who provide managed services intended to reduce the impact of these changes. Also, making procurement initiatives a focus of the organizations and focusing heavily on metric and KPI management will make a tremendous difference. If procurement continues being viewed as a way to drive cost down versus being a value enabler, organizations will not be able to find the right partners and right solutions for their businesses.
Lilian: What are the trends that you see emerging in procurement and sourcing, and how should companies prepare for these coming trends?
Krishnan: As the procurement world changes and grows, organizations have many new options to consider. Procurement deals with two distinct sectors: indirect (office supplies, etc.) and direct goods and services (directly related to the product). We really must consider both items individually. For indirect materials, e-procurement applications with an extremely friendly user interface allow employees to select their products and services in a privately built e-commerce application with pre-contracted prices already built-in. Since the user experience is so high, adoption becomes easier. Direct material procurement starts with a detailed spend analysis which helps segment suppliers. Segmentation classifies suppliers as strategic, critical, leveraged and acquisition (distributor) vendors. Strategic and critical suppliers are typically long term partners through a long term agreement using digitized contract life cycle management applications. For leveraged suppliers, competitive bidding (e-RFQ) and reverse auctions are useful tools for making better decisions.
Lilian: What new technologies and innovations are available for procurement and how should companies be mindful of these for the future?
Krishnan: There are a few things to look out for. E-procurement platforms where organizations build their own private marketplace are becoming more common. Through a unified marketplace with pre-negotiated vendor prices, orders automatically go through the approved workflow and get transferred to the vendor without the bureaucracy of a purchase order or other paperwork, making the process more efficient and user-friendly. Also, contract applications helps digitize documents like statement of work, MSA’s, and NDA’s, and make it easier for companies to compare what their contracted payment terms, SLA’s, penalties, product liabilities, and so forth versus what is actually going on. Platforms where companies can bid and be subjected to reverse auction are also becoming more common. In these reverse auctions, the customer supplies the price and outside organizations bid. As the bidding war goes on, the price goes down instead of up like in a traditional auction.
Lilian: What are the top three suggestions you have for companies trying to revamp their procurement strategies (global procurement strategy) and how can they best manage their time and resources?
Krishnan: If an organization is trying to become world-class there are fundamentally three areas to focus on. First, Buy-to-Pay transactions can make the process very efficient and less bureaucratic. It helps with the purchase order process, requisition, vendor relation and management, invoice management and supplier payments. Second, strategic sourcing provides supplier segmentation and selective use of tools, like contract management and e-RFQ, which drives annual savings that are sustainable year over year. Finally, Category Management of specific categories of spend is vital for sustained productivity and savings for an organization. The category management activities are specific to industrial sectors of manufacturing and services.
Lilian: Thank you so much for your time today! Is there anything else you would like to leave us with?
Krishnan: Procurement is no longer just about finding a vendor, signing a contract and waiting for delivery. Differentiation lies in a company getting the right materials and services at right time at the lowest cost. People, processes and technologies are all extremely important. If an organization needs support, Softtek is in the right position to offer this as a managed service not only consulting but also to help them implement and remain successful. This is the Global Procurement as a Service (GPaaS) model offered by Softtek .
Krishnan is a Managing Partner in Procurement Services at Softtek, with over 25 years of experience in the Procurement industry. In his spare time, Krishnan explores diverse interests such as coaching school volleyball teams, playing cricket or bridge, and discovering new types of cuisines. He is also an avid traveler and has worked in 6 countries and traveled to 44 countries in the world.