A Response (Part 1)
The annual CPO Agenda from the Hackett Group always makes fascinating reading, as it reveals the changing priorities of the world’s procurement leaders. This year it reports that the top three priorities remain the same as in 2023, but the order has changed. Cost reduction is back in the top spot, as it was in 2021. Ensuring supply continuity moves down a place and combating inflationary pressures is at number three. However, it’s fair to say that procurement is really in the pressure cooker right now, with all kinds of new and conflicting demands such as ESG, diversity, compliance and risk management. That means any issue in the top ten deserves a response, and here at JAGGAER we’ve been working through the full set.
But ten is a lot, so I’d like to start by sharing our thoughts about how organizations should tackle the first three challenges, and how JAGGAER can help.
1. Improve spend cost reduction
I can think of many levers here that our customers have to achieve savings. It starts with spend analysis to provide a detailed cost breakdown, providing the information for competitive tendering via auctions using our Sourcing and Advanced Sourcing Optimizer modules, and aggregating spend where it makes sense for better leverage in negotiations. Next, supplier benchmarking is a really important lever: our customers see significant savings if they continuously review pricing. They should also open up discussion on insourcing/outsourcing decisions, as the total cost ratio between make and buy is constantly changing. Cash flow is a further driver of cost, so it is worth analyzing contracts to achieve payment term optimization. So too is off-contract or “maverick” spend, which is a challenge many organizations think they have solved, but if you get complacent it will inevitably resurface.
Segmenting your purchases into categories will help managers identify opportunities not only to save money but also to improve quality, supplier performance, and efficiency.
CPOs increasingly understand that supplier risk is a source of hidden costs so I would advise any company to devise strategies to reduce and mitigate risk. Improving quality is a further lever you have. It will lead to decreased costs by reducing the time and resources required to complete tasks and minimizing the occurrence of defects.
Contracts management is vital to avoid cost leakage. Procurement and Legal departments must have solutions in place to monitor obligations and performance against contracts, ensuring that negotiated savings are realized and non-compliance is actively managed. This is impossible using manual methods or rudimentary tools. Increasingly, artificial intelligence-driven solutions, such as JAGGAER’s Contracts AI, reduce effort and increase efficiency.
Finally, setting supplier performance targets (for example, on-time delivery and defect rates) and continuously monitoring them is essential to avoid cost growth.
JAGGAER solutions to help with this number one priority: Spend Analytics, Sourcing, Contracts, Contracts AI, Supplier Management, Risk Management and Category Management.
2. Ensure supply continuity
This was number 1 on the 2023 list of priorities. Since then the challenges of supply disruptions have eased slightly – but not by much, and some key supply chains remain very fragile – a good example being semiconductor chips, with the vast bulk of global supply coming from Taiwan, which suffered an earthquake earlier in the year and is a source of geopolitical tension. We’ve also seen disruptions to supply with shipping being targeted in the Red Sea.
We can divide the appropriate response into three levels. First, organizations need to get full supply chain visibility. Which are our strategic suppliers? What is the probability of a supply chain disruption? Second, they must diversify their supply base appropriately. This will probably involve reconsidering their sourcing strategy, but it could also involve working with other departments such as R&D and product development, deploying new technologies or, for example, replacing some metal components with carbon fiber. In fact, it might be time to look at your category strategies in the light of risk and cost factors.
Ultimately, your success in supplier continuity planning will depend on the third pillar which is developing and implementing a supplier data platform. To do this you must overcome a huge legacy problem for most organizations, which is siloed and fragmented data. It is not enough, however, to cleanse and integrate your data. It must be continuously refreshed and updated with automated feeds. Artificial intelligence is going to play an increasingly important role in this. Full visibility and knowledge of suppliers and the supply chain are the JAGGAER credo, and this extends across the whole source-to-pay spectrum. We offer customers access to our own vast store of proprietary supplier data plus data feeds from trusted partners on topics such as supplier risk, ESG performance and diversity.
Collaboration is essential for managing continuity, for example to align on demand forecasts, production schedules, and inventory levels, to ensure readiness to meet supply needs.There isn’t always an immediate new supplier option when shipping is impacted. However, it is vital to develop the ability to be prepared, plan effectively, have strong mitigation plans, and react better in collaboration with your suppliers is key.
JAGGAER solutions to help with this priority: Spend Analytics, Sourcing, Supplier Management, Risk Management and Category Management, Rate Manager and Supply Chain Collaboration.
3. Combat inflationary price increases
The Hackett Group notes that inflationary pressures have eased or at least stabilized over the past year but there is still considerable economic uncertainty. To deal with this issue you need in-depth knowledge and analysis of what functions have the best and worst financial performance and where you are spending more than you should. Given the shortage of resources in the procurement function, you must focus your efforts to combat inflationary price increases where you can make the most impact. In fact, one of the biggest sources of inflationary pressure in most of JAGGAER’s customer organizations is delivered not by commodity or component shortages, but by the global talent shortage.
Organizations would be wise to optimize their own costs (total cost of ownership) as much as possible rather than combating the problem by passing on inflationary price increases to their own customers – this will diminish customer loyalty and may in fact lead to loss of revenue.
JAGGAER solutions to help with this challenge: Spend Analytics, Contracts, Contracts AI, and Sourcing.
We’ll go through the other seven priorities in the Hackett Group CPO 2024 Agenda in subsequent articles, but they are:
- Act as a strategic advisor to the business
- Transform the operating model
- Pursue procurement digital transformation and modernize landscape
- Strengthen third-party risk management visibility and capability
- Improve analytics and insights capabilities
- Embed sustainability (e.g., environment)
- Improve procurement agility (i.e., adapt quickly)
One thing that is abundantly clear is that there is much overlap between all of these priorities, which implies the need for a holistic approach that provides a 360-degree view of everything that is going on within procurement and across multiple touchpoints with internal departments as well as suppliers and partners.
Download « The Hackett Group: 2024 Procurement Agenda and Key Issues Study »
