As the procurement function matures in Australia and New Zealand, value delivery has to become more sophisticated than ‘just’ achieving price savings from sourcing events. Markets are becoming more concentrated, and the Law of Diminishing returns tells us that any price savings tend to zero over time.
This is most likely in the indirect categories, which is bad news for Australia and New Zealand, being service-based economies and therefore more exposed on indirect spend. To make matters worse, we are in a time of high inflation. So, it is important for procurement teams to find ways to deliver value beyond simple cost control, as PASA CEO Jonathan Dutton explores.
Value delivery when costs are rising
Inflation is above 7% in many economies. Simple mathematics means that our relative cost base will double in less than ten years. How can the procurement function be expected to make any savings in the face of such relatively high ‘cost-plus’ inflation? The answer is that procurement has to build value in other ways, or at least show how they have delivered more value, even when costs are rising.
This idea of finding value in other ways, beyond price and cost savings, for both Indirect and direct spend categories, is the core idea behind the theme for many of our primary PASA events during 2023. Firstly, the regional PASA Connect Big Breakfasts in seven cities during the winter months, and secondly, The 8th Annual Health and Aged Care Conference live in Sydney on May 10-11 and The 12th CPO Exchange in August.
Solving the ‘rising cost/higher value’ challenge can yield real benefits for organisations regardless of category – although it obviously works best in sectors of relatively higher spend and more direct categories. Targeting other sources of value can realise other benefits for your organisation, especially in terms of alignment with business priorities. One problem is that when articulating non-savings benefits, procurement people can easily slip into generic language. “Lower risk, better quality, more sustainability!” These vague terms can be almost meaningless for stakeholders; platitudes more than specific business benefits. What does lower risk look like in practice? Which ESG initiatives will be completed, and with what impact?
Where can we find other sources of value?
Better practice is to target specific objectives that grow ‘value’ more tangibly for your stakeholders, especially in the Direct space, for example:
- Reduced product liability rates
- Higher stockholding by suppliers or larger standby/impress stocks
- Product upgrades
- Higher quantity ratios delivered, for the increased cost
- Delivery preferencing over other clients
- Guaranteed DIFOT rates and improved MTBF rates
- Enhanced services and greater supplier-side work contributions
- Better payment terms or supply chain finance options
- Annual price reviews not seasonal reviews
- Targeted ESG initiatives and projects
- Innovations and exclusive new product trials
This is not easy and is compounded by the de-globalisation trend. Sourcing nearer or onshore to assure supply lines might make costs rise. But can we trade-off improved resilience and a smaller carbon footprint against any cost increase, at least partially? These are real business challenges and may be valued by your broader stakeholders and, ultimately, by your consumers. The procurement challenge is not just to deliver tangible ESG benefits, but to measure the associated benefits and the impact from them. How can you identify tangible or measurable reductions in emissions, reputational risk and non-compliance?
These issues will be sub-themes around the core theme of value. We will also address other directly relevant challenges for the procurement audience, topics like; digitalisation and transformation, the skills shortage, low-cost country sourcing v buy local, working remotely, and how such questions affect the outcomes we target.
In addition, some geographies around the ANZ region also have specialised interests: capital procurement as a topic is of special interest in Western Australia (resources sector) and in Adelaide (defence influence). There are large infrastructure builds in Victoria, South Australia and other States too. Assurance of supply in remoter markets is a concern (like New Zealand and the ‘Top-End’), indirect spend management in core business markets (Sydney & Melbourne), public sector issues (Canberra) and utilities (Queensland) also of local interest.
With a rising cost environment, how the procurement function demonstrates it has delivered value which is demonstrably greater than the rising cost base will be the key to its future.
The PASA programme for 2023 will help buyers under pressure to address all these questions in their own organisation, drawing off best practice, others’ experience, detailed case studies and industry-leading thinking.