Procurement has historically been a process that few people know much about, and even fewer understand. Worse still, company boards have rarely had to focus so heavily on this aspect of the business at a strategic level.

But a series of events and economic circumstances means procurement is, or at least should be, a boardroom topic, and one which the finance director will tout as the best way forward.

The reality is, most companies are still failing to unlock the value in their supply chains, warn experts, with companies losing millions to wasted processes, duplication and poor research. ‘Procurement can provide an excellent opportunity to unlock tangible value in many organisations. It never ceases to amaze me how many organisations have failed to address this opportunity – much of which can be realised within a relatively short timeframe,’ says Bill O’Reilly, head of procurement at KPMG.

Experts say that FDs’ lack of procurement knowledge means they are not doing enough to extract value from their procurement strategy – for example, by improving efficiency and reducing costs. ‘FDs can play a leading role in realising this potential, since many are responsible for the procurement function,’ O’Reilly says. Even when they aren’t directly responsible, FDs should be challenging its performance. It is not unusual to identify opportunities to be able to reduce buy-in costs by up to 40%.

With most companies continuing to ‘fail to unlock the value in procurement’, O’Reilly warns that many will lose their competitive edge in the increasingly tough economic environment, unless they review their sourcing methods and systems.

An insurance company KPMG recently worked with to overhaul its procurement process has already saved £5m in the first 12 months since a new strategy was put in place. Over the next three years, the company hopes to make cost savings of £15m a year.

The impetus for businesses to review their procurement strategies is three-fold. The marketplace for almost all goods is now global, so strategies should be global. Price and quality are vital to the equation, especially for retailers and manufacturers. In a tightly knit world economy, business is much tougher, meaning the procurement department should always be on the lookout for better deals. Lastly, software and technology solutions for procurement are now available to take the process to a more sophisticated level.

Increased competition means FDs have to turn to their procurement teams to cut costs. Since most departments consist of just one specialist, reducing headcount isn’t a solution, but changing the way the department works does offer the possibility for savings.

With between 40% and 75% of costs to organisations (as much as 75% in manufacturing) relating to the purchase of goods and services, boards should certainly be probing the possibilities for change.

Estimates of cost savings should serve to concentrate the minds of most. Experts suggest that businesses can reduce indirect operating costs by 15%, and even as much as 25% – the exact amount depends on the point at which they start to review their procurement.

Companies with a dual listing in the US have had to review their procurement process because of Sarbanes-Oxley legislation. Section 404 requires complete standardisation and full documentation of all aspects of the procurement process. Although time-consuming and arduous, the process lends itself to improved control, transparency and accountability because it offers visibility and an audit trail.

‘Sarbanes-Oxley requires an organisation to understand where it has material contracts and who they are with. It must be easy to see that information, and someone must own it,’ says Paul Bakstad, senior manager in business advisory services at Ernst & Young.

Until Sarbox came along, many businesses didn’t understand, let alone know of, all the material contracts they had around the world with different service providers, Bakstad says. Once a business has this information at its fingertips it can conduct a ‘spend analysis’ to see to whom, and on what, the budget is spent. Although a very basic exercise, and one which many non-business people would assume organisations already had in place, experts are repeatedly surprised at how little is understood about the supply chain.

Just giving staff information on previous negotiations, bidding processes and prices brings benefits. ‘There is real value in understanding your supply chain so you can get better judgements in contract negotiations and de-risk the process,’ says Bakstad.

The possibility of maverick purchases, Bakstad says, can almost be wiped out of the process because you know exactly what your money is doing and where. The result, he says, is low prices, less risky vendors or purchases, compliance and visibility.

On the back of the Sarbanes-Oxley process, many businesses are looking to place the transactional part of procurement in a shared service centre. O’Reilly advises businesses against making any decision before they understand what the costs relate to, whether they are core or non-core, and differentiate between the transactional and core aspects of procurement.

KPMG foresees a rise in the number of companies adding aspects of procurement to a shared service centre. ‘There is an increasing trend towards the transactional elements of procurement being taken into shared service centres. If this transfer of process is undertaken successfully it can not only deliver process-related cost savings, but also improve the quality of spend information available for decision-making,’ O’Reilly says.

Experts argue that now is the time, whatever your current situation, to review procurement and supply chain processes. There are, however, more auspicious times than others. For example, if a company’s sales are slipping, procurement changes could help.

Ethical supply chains are hip. Everyone’s doing it – from household names such as Marks & Spencer to Cadbury Schweppes, which bought organic chocolate brand Green & Blacks last year.

Since the reputation and profits of multinational companies such as Nike took a nose dive following the discovery that its suppliers’ working practices in South-East Asia were dubious, companies have begun, albeit slowly, to pay more attention to their supply chains.

When companies review their sourcing strategies, the initial goal isn’t always to go ethical, but businesses are realising that ethical procurement in the long term can cut costs by avoiding risk. Marks & Spencer is a good example of how to turn around a beleaguered business by applying clear supply chain principles to a fusty old business, viewed as out of touch with the British public.

A change in business structure due to a merger or acquisition can also be a useful trigger and perfect opportunity to review procurement. The high street chemist Boots, which merged to become Alliance Boots in July, is another company that has been on a ‘journey of enlightenment’ with respect to its procurement process, centralising stock sorting, which has already delivered savings in labour and stockholding, according to the company.

Alliance Boots plans to ‘further centralise operations to deliver greater efficiency’ through the development of a centralised, automated order-picking warehouse in Nottingham. With the application of new and proven supply chain technology, the company will also replace 17 existing regional warehouses with a similar number of simpler cross-docking facilities.

Outsourcing is another possibility, but it must be done for reasons of saving money and not avoiding the task in hand. ‘Some organisations have sought to realise this opportunity by outsourcing the function. However, this decision should only be taken after careful consideration and evaluation of all options. Otherwise, there is a risk that significant potential value could be lost,’ O’Reilly says.

Procurement strategies should be at the top of the boardroom agenda today, with board members understanding the intricacies of the supply chain; in other words, where the money is going, to whom and what the risks are. By knowing this, companies are already adding value. Whether directors are astute enough to pick up the gauntlet on this matter remains to be seen.

MODERN SUPPLY CHAIN RELATIONS

Marks & Spencer and Sainsbury are sending senior managers on a training course that aims to teach mainstream business leaders about the ethics of product sourcing.

The Ethical Trading Initiative (ETI), an organisation comprising trade unions, companies and non-government organisations, has put together the course in a bid to improve supply chain relations. A total of 36 companies are already enrolled in the scheme, aimed at encouraging UK companies to have better relations with primary producers.

Capitalising on the growing public awareness of fair trade issues, the ETI course offers practical advice and training for retailers wishing to change their sourcing practices. With the food industry coming under pressure to recognise their responsibilities in sourcing products, the opportunity to learn more about sourcing is timely for the industry.

The ETI was formed to promote the implementation of corporate codes of practice in supply chain working conditions. It requires all corporate members to submit annual progress reports on their code implementation activities. These reports show that significant activity has taken place in this area, and that members’ suppliers are making concrete improvements to labour practices. It is funded primarily by membership fees (about 60%of the funding base).The remainder comes from a grant from the Department for International Development. Corporate members include M&S, Boots, Chiquita International Brands, Gap, Levi Strauss, Mothercare, Typhoo Tea and WHSmith.

For a full list of members, go to http://www.ethicaltrade.org/Z/home/index.shtml

www.kpmg.co.uk