Procurement organizations tapping into data and collaborating with other internal business units widened profit margins by more than 1 percent, according to a new study.
The companies in the report reported profit margins of 7.12 percent, compared with 5.83 percent for companies with low-performing procurement organizations, according to the Chief Procurement Officer Study 2013 from the IBM Institute of Business Value. The study, which was released last week, highlights the impact that chief procurement officers (CPOs) can have on a company's competitive advantage and profitability.
It hasn't always been that way. CPOs, along with chief marketing officers, have struggled for years to gain the same respect in the board room as chief technology officers, chief information officers, chief operating officers, and chief financial officers. The use of data to support procurement decisions and improve margins continues to change the perception of the CPO's role across the organization.
While IBM produces analytics products like those endorsed by the study, the report also touched on non-technical solutions. IBM Industry Solution General Manager Craig Hayman said successful CPOs collaborate more often with their peers from across the business. No longer do they solely rely on their own division's data, but rather work closely to pull in stats from the company's IT and marketing departments.
They also reach out to collaborate more with business partners and suppliers. It lets them better understand gaps in their supply networks and diversify the supplier base to ensure products are available at the correct store locations, while maintaining stable prices to improve margins.
“Analytics in the hands of chief procurement officers isn't something you would typically think about when trying to negotiate a better deal that fell out of contract,” Hayman said in the study. “By understanding analytics, CPOs can identify areas where they're spending more, and where suppliers are not being compliant with contacts.”
Rather than nailing suppliers to the wall for not complying with sourcing contracts, CPOs have begun to more closely collaborate to gain insights and learn, according to the study, which surveyed 1,128 procurement executives in 22 countries across North America, Europe, and Asia Pacific. Of the respondents, 15 percent were identified as top performers, defined by an ability to influence and drive innovation across their companies to increase profits.
Aside from a closer relationship with suppliers, the report identifies that successful CPOs demonstrate specific traits like the use of analytics, and the ability to quickly adapt to market conditions through supplier insights and data. It turns out that 83 percent of high-performing CPOs rely on analytics, compared with 63 percent of the lowest performers.
Top performers also more closely collaborate with suppliers, spending about 38 percent of their annual spend through strategic alliances. Successful CPOs also quickly adapt to market conditions by gaining insights through the supplier community.
From supplier insights, CPOs may agree to spend a little more on parts, Hayman said. “The supplier might say to the CPO 'I know you typically buy component A, but there's a version of the component with an added capability that costs a dollar more,' ” he wrote.
The CPO takes that insight and goes back to the marketing and product development teams to ask, “If I can get this added feature for just $1 more, can you market it?” The report suggests that 75 percent of successful CPOs gather these insights from suppliers and put them to good use.
Although companies oftentimes increase operating costs to improve margins, enhancing performance and streamlining processes typically means better profits in the long term. He said CPOs recognize the opportunities and have begun to embrace a variety of technologies that support this shift, including analyzing data to make procurement decisions.
Technology as a differentiator
The study found 94 percent of top-performing companies are more effective in their use of procurement technologies, compared with 44 percent considered average or below average in their use of technology. Companies with top-performing procurement organizations report profit margins 15 percent higher than the average company, and 22 percent higher margins than companies with low-performing procurement organizations.
The ability to analyze supplier contracts, relationships, and performance through a “360-degree” global view will become the most important area of investment during the next three years, according to the report.