Procurement’s focus: boosting cost saving vs. EBTA

As part of the organizations, what is the true value of procurement team? The first thing comes to the mind is the cost saving. For many years, the amount of the cost saving is the key OKR for the procurement team across the board. Every companies have their own definition of cost savings that include not limited to budget saving and cost of avoidance etc.. Cost saving is important for the organization but the question is how much value the cost saving brings to the organization. The reason is simple that there is no way for CFOs to cash out your cost saving on the balance sheet. In my option, the cost saving is important but should not be the only focus for the procurement team. The cost saving is one of our values to drive the companies EBTA as the final goal. We have to deep dive on the focus to answer why.

Processing focus is the fundamental tactic for the procurement team. At this stage, the procurement team plays governance role to reduce the risk and police on the companies’ processes and policies. The limited cost saving and value is generated by the team.

Price focus means the procurement team runs on the RPx on the deal based. Most of the category managers are running RPx on the individual engagement. Since it is deal based, the saving is based on the price negotiation. The cost saving is accumulated by the RPxs. At the beginning, the cost saving is very sizeable.

Cost focus brings the team thinking about the TCO(total cost ownership) to the company. You will learn that all your deals are not isolated, when you are working on the category strategies. Regardless how much the cost saving you generate from the single deal, the company picks up the whole tab. Also, the internal processing cost is also in the tab for the company to pay. The procurement team should deep dive on the TCO from the category structure and end to end processing cost.

Value focus is the real deal for the company to boost EBTA. At this stage, the mind of procurement has been shifted from cost saving to the innovative relationship management. Focus on the suppliers’ innovation not the price on the proposal. Any advanced innovation could help your organization to be a lead in the market. Building mutual beneficial deals between your company and your suppliers. Optimize your procurement expertise to be another product offering.

In conclusion, the cost saving is a start and foundation for the team. However, the value is the key to drive the EBTA which keeps the company more competitive