PHOTO
Organizations in the region often overlook the opportunities available in one of the most important business functions: procurement
By: Arun Bruce, Partner & Managing Director at The Boston Consulting Group Middle East and Ashish Labroo, Principal at The Boston Consulting Group Middle East
When it comes to daily business operations, procurement has long been seen as just another administrative task; however, the role of procurement is changing quickly and for good. In the current and future economic context in the region, organizations are becoming increasingly aware of the opportunities posed by strategic procurement approaches, and as the regional economy evolves to become more diverse and self-sufficient, it is vital that the procurement topic makes its way to the executive agenda.
Procurement is being reexamined for the benefit of organizations in every sector, and seizing the opportunities posed by this restructuring is invaluable. Strategic procurement has the potential to generate value, develop industries, and improve governance across the region if business leaders make the most of it moving forward.
Procurement as a Value Generator
Procurement is one of the largest components of costs and budgets for organizations, 40%-70% of total revenue is typically spent in procuring materials and services. With such influence on finances, procurement can be the most important driver of cost reduction, as it delivers savings quickly and with relatively low risk. Smart negotiations, volume consolidation, Low cost country cost sourcing, proactive demand planning, and product 'design-to-value' are all means of leveraging the procurement process to drive savings and reduce costs together with other functions within an organization.
Procurement in Local Industry Development
To achieve national goals in the Middle East surrounding increased local content, procurement plays a vital role in effectively restructuring the current supply base and systematically moving purchases from foreign to local suppliers. This shift in the supply landscape on such a large scale is unprecedented in the region, meaning procurement practices must be strategically formulated to carefully balance business continuity with local sourcing priorities.
Procurement and Governance
Procurement is at the core of better governance. With control over significant budgets both in the public and private sectors, procurement is one of the key components in driving improved governance and accountability in the region. Transparency, agility, and compliance in procurement practices will therefore be the new norm for organizations in the region.
To achieve the full potential of smart and efficient procurement practices, organizations must understand that the transition will not be instantaneous; rather, it will be a journey during which current capabilities must be improved as new ones are developed. To ensure an effective and advantageous transformation in procurement, business leaders in the Middle East will need to focus on four key areas:
Defining a clear procurement strategy. Like every other function, procurement needs to have an annual strategy – linked to the company's strategy, with clear objectives for the year, defined in specific terms. The objectives should cover savings targets, and go beyond those as well – covering other elements such as localization / new supplier development / risk management etc.
Infusing technology into the operating model. For many organizations, the procurement process still entails a high volume of transactions. Improving procurement to optimize opportunity necessitates a category management approach with strong cross-functional collaboration. With reasonable levels of process automation already achieved or planned, there must be a strong push towards more advanced digital and analytics technologies to harness the power of relevant data.
Building a skilled procurement team. A lack of procurement skills is one of the biggest challenges procurement leaders face in the region. Over-investing in attracting the tight talent, and developing structured training programs, creating enthusiasm and engagement on the core role are all areas that need to be worked on.
Measuring performance. With its new-found place on the executive agenda, the means by which procurement performance is measured must also change. While the conventional KPIs will still be important, the focus must shift to strategic contributions made in the procurement process, with metrics revolving around savings delivered, sourcing from local suppliers, and better compliance. Measuring procurement performance on a continual basis will not only help track progress against set goals, but it will also give early indications of anticipated course corrections.
Perspectives were shared during BCG’s recent ‘Procurement Roundtable’ event in Riyadh which included top decision makers and procurement leaders from across industries. The event addressed the theme of Next Generation Procurement and the direction in which procurement practices are moving as the global and regional economies evolve.
-Ends-
