Procurement transformation: Best practice and overcoming challenges

We’re all looking to cut costs, drive efficiencies and growth. But the reality is, most enterprise procurement teams must significantly change their processes and technologies to deliver these objectives. It’s not just a strategic initiative but a necessity in today’s climate. The evolution of procurement processes, driven by technological advancements and the need for greater efficiency, has become a cornerstone for manufacturing companies aiming to maintain a competitive edge. 

This article delves into the best practices for procurement transformation, the implementation strategies for procurement leaders and the challenges they might face along the way, along with solutions to overcome these hurdles (and real-world examples to bring them to life).

Procurement transformation best practices

Align procurement strategy with organizational goals

The foundation of successful procurement transformation lies in aligning the procurement strategy with the overall business objectives. This alignment ensures that procurement activities support the broader goals of the organization, such as cost reduction, quality improvement and innovation. Procurement leaders should engage with stakeholders across the organization to understand their needs and priorities, ensuring that procurement initiatives are strategically focused.

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Case Study: A multi-billion dollar industrial products manufacturer

One of DSSI’s clients was taken over by a private equity firm. As the new owners, they wanted to ensure that all aspects of the business, including procurement, were optimized and aligned with their investment objectives and goals for the acquired company. We then identified and were tasked with optimizing two further areas of procurement, tail end spend and MRO purchasing. The outcome of this alignment effort was significant cost savings, including 16% savings on their high tail end spend items and 27% on sourcing MRO.

Leverage digital technologies

As you are no doubt well aware, digital transformation is at the heart of modern procurement practices. Implementing digital tools such as e-procurement platforms, supplier relationship management (SRM) systems and advanced analytics can significantly enhance procurement efficiency. These technologies enable real-time data access, streamline processes and facilitate data-driven decision-making. For instance, machine learning can be used for demand forecasting, improving accuracy and reducing the risk of stockouts or excess inventory.

Case Study: IBM

IBM, a global technology leader, faced significant procurement challenges due to long-entrenched processes and siloed data across the organization. To address these issues, IBM embarked on a comprehensive procurement transformation initiative.

IBM's transformation involved creating a procurement analytics platform that integrated data from various sources, enabling the procurement team to gain rich insights into spending and market values. They also adopted artificial intelligence (AI), blockchain, cloud-based procurement solutions and advanced data analytics tools. The results?

• Allowed IBM to connect with 13,000 suppliers across 170 countries, enhancing supplier relationships and driving better procurement outcomes. 
• Reduced the incidence of maverick spend, saving $60,000 in procurement order reworking costs.
• Enabled “the targeted automation of 75% of line creation and delivery activities using RPA tools”. Comparable automation in line creation activities shortened lead times by three days, resulting in additional cost savings of $50,000

Optimize processes and eliminate waste

Applying lean principles to procurement processes can help eliminate waste and improve efficiency. This involves conducting thorough process mapping to identify bottlenecks and redundancies. Automation of routine tasks such as purchase order generation and invoice processing can free up resources for more strategic activities. Additionally, implementing best practices like strategic sourcing and category management can optimize procurement operations.

Case Study: Global automotive parts manufacturer

One of DSSI’s clients had acquired several brands, leading to disparate systems and poor data quality across different sites. The manufacturer lacked visibility into their spend data across the 29 different sites, making it challenging to identify areas for improvement.

By capturing and consolidating all transaction data through our platform, they could create a comprehensive item master record, enabling better data management and spend visibility, which is crucial for process optimization.

We worked closely with stakeholders across the business and helped centralize their sourcing strategy, leveraging our combined spend and negotiating better terms with suppliers - ultimately optimizing their procurement processes. The results?

• Achieved gross savings of 16% on managed spend
• $1.27m in savings based on the client's own internal cost to manage suppliers
• Implemented standard payment terms across the 615 suppliers

Foster supplier collaboration and innovation

Building strong, collaborative relationships with suppliers is crucial in the manufacturing sector. Procurement leaders should focus on long-term partnerships that encourage innovation and continuous improvement. This can be achieved through supplier development programs, joint problem-solving initiatives, and robust performance management systems. Effective supplier relationship management (SRM) can lead to better quality, reliability, and cost savings.

Case Study: Toyota

Toyota has developed a renowned supplier relationship management (SRM) approach that fosters long-term, collaborative and close partnerships with its key suppliers, particularly in its Japanese operations.  This approach has been in place for several decades and has been instrumental in driving innovation within Toyota's supply chain.

The core principle behind Toyota's SRM strategy is the creation of interconnected groups of suppliers, akin to the Japanese "keiretsu" model, that persistently learn, evolve and thrive alongside the company.  Toyota's suppliers are not just arm's length vendors but rather strategic partners that work closely with the automaker to reduce costs, enhance product quality and accelerate innovation. 

Their close relationships with its suppliers enable a continuous flow of knowledge and ideas, facilitating innovation in several ways:

• Collaborative learning: Toyota's suppliers are deeply integrated into the company's operations, allowing for a constant exchange of information, best practices and lessons learned. 
• Joint development: Toyota actively involves its suppliers in the product development process, leveraging their expertise and insights to co-create innovative solutions. This joint development approach ensures that supplier capabilities are fully utilized and that new technologies and processes are seamlessly integrated into Toyota's operations. As such, Toyota consistently brings cars to the market years faster than its American counterparts. 
• Shared goals and incentives: By aligning the goals and incentives of Toyota and its suppliers, the company creates an environment where both parties are motivated to innovate and succeed together. This shared vision and mutual benefit drive suppliers to invest in research and development, ultimately leading to innovative breakthroughs. 

Implement rigorous quality assurance

Quality assurance is paramount in manufacturing procurement. Collaborating with suppliers to establish and maintain strict quality standards is essential. This may involve conducting regular supplier audits, implementing quality control checks at various stages and using statistical process control (SPC) to monitor and improve quality across the supply chain. Ensuring high-quality inputs directly impacts the quality of the final product.

Embrace sustainability and ethical practices

Sustainable and ethical procurement practices are increasingly important in today’s business environment - as witnessed by the increasing amount of legislation, particularly in Europe. Manufacturing companies should integrate environmental, social and governance (ESG) criteria into their procurement processes. 

This includes selecting suppliers who adhere to sustainable practices, reducing the environmental impact of procurement activities, and ensuring compliance with ethical standards. Sustainable procurement not only enhances corporate reputation but also contributes to long-term business viability.

Case Study: Levi Strauss

Levi's has implemented several key initiatives to enhance sustainability in its procurement processes, including:

• The Water<Less™ program: Developing over 20 water-saving finish techniques, resulting in the conservation of more than 1.8 billion liters of water and the recycling of over 129 million liters.
• It’s Better Cotton Initiative, which sources cotton from BCI growers, organic cotton farms and recycled cotton suppliers. By 2019, 83% of their cotton was sourced from these sustainable sources.
• Screened Chemistry, a method that involves screening every chemical formulation before it enters the supply chain to prevent hazardous substances from being used. Over 20 suppliers have adopted this technique, ensuring safer and more sustainable production processes.

Procurement transformation strategies

1. Conduct a comprehensive assessment: The first step in procurement transformation is to conduct a thorough assessment of the current procurement processes. This involves identifying inefficiencies, bottlenecks and areas for improvement. Engaging with stakeholders to gather insights and feedback is crucial for understanding the existing challenges and opportunities.
2. Develop a clear vision and strategy: Based on the assessment, procurement leaders should develop a clear vision and strategy for transformation. This strategy should outline specific goals, such as cost reduction, process optimization and supplier collaboration. It should also include a roadmap for implementation, detailing the steps and timelines for achieving these goals.
3. Secure leadership commitment: Securing commitment from top leadership is essential for the success of procurement transformation. Leaders must be willing to allocate the necessary resources and support cultural changes within the organization. This commitment helps in overcoming resistance to change and ensures that the transformation initiatives are prioritized.
4. Invest in technology and training: Investing in the right technologies is critical for procurement transformation as they risk being left behind by the competition. This includes selecting digital tools that align with the organization’s needs and integrating them with existing systems. Additionally, training employees to use these technologies effectively is crucial. Continuous learning and development programs can help employees adapt to new tools and processes, enhancing overall efficiency.
5. Implement change management practices: Change management is a vital component of procurement transformation. This involves communicating the vision and strategy clearly to all stakeholders, addressing concerns and fostering a culture of innovation and collaboration. Creating short-term wins and celebrating successes can help build momentum and sustain the transformation efforts.
6. Monitor and evaluate progress: Continuous monitoring and evaluation are essential to ensure the success of procurement transformation. This involves tracking key performance indicators (KPIs) to measure the effectiveness of the changes and conducting regular reviews to identify any issues or challenges. Making necessary adjustments based on these evaluations helps in achieving the desired outcomes.

Procurement transformation challenges and solutions

Resistance to change

One of the most common challenges in procurement transformation is resistance to change. Employees accustomed to traditional processes may be reluctant to adopt new technologies and practices. 

Suggested solution: Overcoming this resistance requires effective change management strategies. Engage employees early in the process, provide comprehensive training and communicate the benefits of the transformation clearly. Highlighting quick wins and success stories can also help in gaining buy-in from the workforce.

Data quality and integration

Ensuring data quality and seamless integration of new technologies with existing systems can be challenging. Poor data quality can lead to inaccurate insights and decision-making. 

Suggested solution: Implement robust data governance practices and invest in data integration tools that integrate well with their current systems and ensure seamless connectivity between different systems. Regularly audit and clean data to maintain its accuracy and reliability.

Cost and ROI justification

The initial investment required for procurement transformation can be substantial, and justifying the return on investment (ROI) can be challenging. 

Suggested solution: Develop a detailed business case that highlights the long-term benefits and cost savings of the transformation. Use pilot projects to demonstrate quick wins and build momentum for larger-scale initiatives.

Supplier collaboration

Enhancing supplier collaboration requires aligning suppliers with the organization’s transformation goals. This can be challenging, especially if suppliers are resistant to change.

Suggested solution: Foster open communication with suppliers, involve them early in the transformation process, and provide training and support to help them adapt to new technologies and practices. Learn from Toyota’s example!

Talent and skill gaps

The shift to digital procurement requires new skills and competencies. 

Suggested solution: Map your skills gaps. Invest in continuous learning and development programs to upskill existing employees. Consider hiring new talent with the necessary skills and expertise to support the transformation, including digital procurement and data analytics. 

Regulatory and compliance Issues

Ensuring compliance with regulatory requirements and industry standards is a critical challenge in procurement transformation. 

Suggested solution: Implement a comprehensive compliance management system that includes regular audits, monitoring and reporting. Stay updated with regulatory changes and ensure that all procurement activities adhere to industry standards.

Conclusion

Procurement transformation in manufacturing is a complex but essential journey that requires a strategic approach, technological investment and effective change management. By aligning procurement strategies with organizational goals, leveraging digital technologies, optimizing processes, fostering supplier collaboration and embracing sustainability, manufacturing companies can achieve significant improvements in efficiency, cost savings, and value creation. 

By following these best practices and addressing the challenges head-on, procurement leaders can drive meaningful transformation and unlock new opportunities for growth and innovation in the manufacturing sector.