Implementing changes in the procurement process is a major undertaking for any company. Often, long-term cost reductions become possible only after upfront investments are made. These expenditures might include new technologies such as procurement software that can help streamline the firm's sourcing practices, or the enterprise may devote time and capital to realigning its supplier relationships for a better fit.
As such, before new procurement strategies are put in place, businesses must clearly articulate the return on investment they expect to see from these changes. While it's critical to bear in mind the company's broad, long-term goals - and in many ways, these remain the most important factors to consider - firms must also take a more granular approach, analyzing cost-benefit in order to evaluate whether new sourcing practices are working or if they need to be adjusted.
Moving toward high-level strategic aims - increasingly sustainability or speeding up operations, for example - is a step-by-step process, and the key benchmarks along the way are often things that need to be measured: cost reduction, ability to get products to market faster, reduced supplier-related disruptions. In a column for the Journal of Commerce, government procurement expert Stephen Bauld discussed how public sector organizations can adopt measurement systems that help increase vendor accountability. For instance, agencies can calculate the actual costs of the goods and services they are procuring in order to ensure that supplier-provided bid prices are fair.
"It is also beneficial to have in place a systematic approach towards rating the capability and performance of contractors and suppliers," wrote Bauld.
The principles that Bauld outlined can be applied across sectors. The core of his message is that strategic sourcing must produce real, measurable value. Even if the most important cost reductions will be taking place in the future, it's important to keep track of ROI so that firms can tell whether or not their procurement initiatives are heading in the right direction.
However, in a recent post for GreenBiz, business sustainability strategist Helen Clarkson questioned the methods by which companies make these determinations, especially in an increasingly eco-minded corporate landscape. She criticized the notion of net present value.
"Sustainability is about meeting the needs of both current and future generations, whereas NPV says that the time value of money means that the cost or benefit in the far future (beyond about five years) isn't worth much to decision-makers today," wrote Clarkson.
Procurement management must add value to the business - but firms have to avoid narrow-minded ways of calculating ROI.