The next generation of direct procurement

Data & AnalyticsEmerging TechnologiesGlobal sourcingGovernance & PolicyGovernance Risk and ComplianceRisk Management Risk Mitigation+-
shutterstock_1461429284

As part of a campaign looking at the trends impacting procurement in 2020, Procurement Leaders has invited a number of thought leaders to provide their insights across a range of different areas. In this blog, Chuck Miller, the head of Bain & Company’s Procurement practice in the Americas and Coleman Radell, a partner in Bain & Company’s Los Angeles office, look at the development of direct procurement.

 

If you would like to hear more from Procurement Leaders you can tune into our webinar, which is examining the results of our 2020 Trends Report.

 

While indirect procurement has benefited greatly from an increase in strategic focus over the past decade, most notably through the introduction of innovative digital solutions delivering e-commerce–type buying experiences and smoother sourcing, spend on direct materials has continued to operate under the status quo.

 

Direct spend continues to utilise legacy approaches through highly tailored enterprise resource planning (ERP) based purchasing and inventory modules along with electronic data interchange (EDI).

 

While this approach has provided stability, it is also leaving value on the table. Between 2000 and 2017, direct procurement as a percentage of revenue remained constant at 67%, while indirect procurement as a percentage of revenue dropped from 20% to 16%, according to a recent S&P Capital IQ survey. This suggests that indirect procurement benefits significantly through new digital technologies.

 

There are three key disrupters for direct procurement that should act as catalysts for an increased focus on extracting additional value. These are:

  • Inflation - The deflationary environment that has existed around directs has now shifted to an inflationary one. This has eliminated the year-on-year quick-win savings that have been seen in direct spend because of falling prices. Buyers of directs must now work to offset inflationary prices as well as generate additional savings through more complex levers in order to continue to meet their annual targets.
  • An economic slowdown - After a decade of economic growth, many experts now predict that a downturn is upon us. A slowdown would further erode revenue and put pressure on direct procurement to improve margins and help weather any storm. The timing and severity of the looming economic downturn are unknown; what is known is that direct procurement must assist in navigating through it.
  • Digital innovation and data - The availability of data is set to grow at a rapid pace over the next decade. Indirect procurement has provided a blueprint for leveraging the latest digital technologies to create additional value. Organisations that embrace new technologies, particularly those focused on improved automation, advanced analytics and insight generation, will be in a stronger competitive position than their peers.

There is no doubt that new digital technologies will have the greatest impact in terms of helping direct procurement deliver improved value over the course of the next few years. In just one example that I know of, one large industrial manufacturing business has partnered with an advanced analytics provider to build a prescriptive analytics model that leverages external market commodity indexes, internal demand plans, contract data, and inventory data. Drawing all this together the analytics tool then determines the best course of action for spot buying on the open market, which draws down inventory, or leverages existing contract pricing with suppliers.

 

Maintaining any kind of status quo in direct procurement is simply not an option. Pursuing new, untapped value levers is a must in 2020, alongside a holistic approach toward understanding what the future will look like.

 

Defining a vision for that future, which considers the role of digital technologies and ambitions for them is essential, as is working backwards to design a roadmap that helps the function get where it wants to go and ultimately helps deliver savings in a sustainable manner.

 

Chuck Miller is a partner based in Bain & Company’s Boston office. He serves as head of Bain’s Procurement practice in the Americas

 

Coleman Radell is a partner in Bain & Company’s Los Angeles office. He is a member of Bain’s Performance Improvement practice, with particular expertise in Shared Services and Procurement.

 

This contributed article has been written by a guest writer at the invitation of Procurement Leaders. Procurement Leaders received no payment directly connected with the publishing of this content.

Chuck Miller
Posted by Chuck Miller

Want to learn more? Please fill in your details to hear from us.