Most industry stalwarts, on their journey to the top, have learned that procurement leaders are cost leaders with a visible edge over rivals. The former can out-invest in innovation, quickly capitalize on new opportunities, and capture share through price flexibility, all while retaining margins. A recent procurement study related to the Asia-Pacific region has found that no business executives would term their procurement abilities as world-class. Procurement represents nearly 80% of overall costs in a few industries such as electronics, textiles, and automobiles. Yet, most firms depend on certain Asia procurement capabilities that are in no way significant than those of their rivals.
In the Asia-Pacific territory, there is intense pressure to improve procurement for multinationals and domestic companies that depend on the area for goods and services. Companies functioning in India, China, and other developing countries have to deal with massive operating complexity. Apart from this, there is also the big problem of inflation. To address these critical issues, the firms aim to reduce their input costs in a short period of time. However, the trouble is, the majority of them do not have sufficient preparation to meet their goals.
They can always learn from the best and swiftly develop capabilities to manage procurement, with systems and processes that match the global leaders’ maturity. They can adopt the practices of 4th generation procurement in this regard. Companies must learn how to use the procurement function to add value to their business every year and keep costs from mounting.
Why Do Businesses Adopt 4th Generation Procurement?
When companies handle procurement, they start as “Tactical Buyers”. Later, they may become “Optimized Sourcers”. If they give importance to the procurement function, they can become “Strategic Procurers” and perfectly align their business strategies and procurement. However, their goal must be to evolve to the 4th generation. Businesses must aim to do it with all the six enablers, as per the sequence dictated by their goals and the industry dynamics. For instance, in a developing market, you may think about investing in IT. But, if your concern revolves around efficiency and margin protection, focus on creating the right tools and methodology. It will ensure consistency.
Firms with 4th generation procurement abilities can tightly integrate their front-end marketing and sales systems and back-end procurement. It lets them identify the procurement costs at a micro-level. This tight alignment allows them to take specific marketing steps like executing focused campaigns to create an incremental market share at a regional or local level. However, in the Asia-Pacific region, only a handful of companies are fully proficient in 4th-generation procurement. With a continuous improvement culture and dedicated efforts businesses can achieve a significant increase in savings every year. But first, they must know about the process in detail to obtain satisfying Asia procurement results.
The 6 Enablers That Will Help You Establish 4th Generation Procurement
● Organization
How can enterprises select a mandate and structure to enhance procurement gains? They let the senior management decide on the specification of targets. Further, the companies need to include savings into regular processes and introduce a rigorous system for daily reviews. Moreover, they should embed a feedback loop for both end consumers and internal customers.
● Process
Firms that focus on 4th generation procurement need to get right a few critical processes: vendor development, category management, and the quality of information. They should rigorously assess suppliers and contracts and always do a total-cost-of-ownership analysis. Firms must form partnerships with the most technologically capable suppliers and focus on stringent supplier management.
● Tools and Systems
Enterprises dealing with 4th generation procurement rely on dynamic and customized dashboards that present transparent and integrated data for direct and indirect spending. This move highlights performance gaps. With smooth access to centralized information, procurement managers can quickly see and adapt the best practices.
● P&L Effectiveness
Firms with 4th generation abilities develop pull-based demand management through formalized budgeting and enforced compliance for all categories. It lets them boost the effectiveness of P&L. An advanced category management toolkit lets the firm witness the direct effect of its sourcing decisions. It is a first step in alerting the company of the need to make modifications. Businesses find that high-complexity categories require much more willingness and attention to reach out across the enterprise. They need suppliers to hit their targets. However, by providing clear financial parameters, category managers and suppliers can work together to bring about improved results.
For instance, it is common in the automotive industry for suppliers and original equipment builders to work together and share knowledge. It lets them work jointly, to improve the time needed for particular steps in a prominent supplier’s production process and achieve Asia procurement success.
● Talent Management
Leaders like to invest in talent. They adopt procurement as a grooming zone for leadership and manage performance through incentives and KPIs. Like when Royal Philips Electronics established the Philips General Purchasing venture, it re-evaluated all of its present procurement employees as per the skills relevant to the new organization. The company also recruited new staff with the right skills, and it helped them create a more talented and leaner team. Now, whenever they recruit a person in procurement, they consult the stakeholders as a part of the process.
● Results Delivery
Firms create risk teams that track and handle all strategic and transactional risks, to stay on course during a big change and to sustain results. The Dow Chemical Company followed the same path when it shifted towards sustainability under CEO Andrew Liveris. When the firm decided to focus on sustainable chemicals and target areas like clean water, its effects were felt in procurement. To continuously manage risk and carefully track progress, the firm set a system of feedback loops. The supply managers began working routinely with business unit managers to assess supply management performance and jointly devise ways to improve results.
The route to 4th generation procurement is laid out perfectly. But, most Asia-Pacific businesses face a range of internal and external obstacles. To overcome them and obtain the best Asia procurement results, contact a reputed sourcing company.