Understanding Procurement’s Value Creation Model

It’s Time to Redefine Value Creation

If you’ve been following the New Rules of Procurement Engagement for a while, you’ll know we’ve recently launched Rule 4: Redefine Value Creation.

In this fourth instalment (to catch up, read the Rule 4 intro), it’s time to step back, take stock, and see the bigger picture. We need to shift our focus from minor details and improvements to the broader perspective; or what we like to call Procurement 4.0.

Procurement 4.0 represents a significant evolution in procurement practices, leveraging advanced technologies and data-driven insights to create substantial value.

Unlike earlier stages, Procurement 4.0 emphasises a holistic, strategic approach. It integrates Industry 4.0 technologies like AI and automation, machine-to-machine communications, and big data analytics to enhance decision-making, foster innovation, and drive sustainable competitive advantage for organisations.

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What is Value Creation?

“One of the big challenges is to know what you want, know what’s going to deliver value and then go after it.” Richard Nixon, Management & Tech Consultant, Rule 1

Value creation in business involves generating added benefits for stakeholders that exceed the original inputs or investments. This process extends beyond simply making a profit, encompassing the delivery of value to customers, employees, investors, and wider business environment.

This idea is crucial for achieving sustainable growth, gaining and maintaining a competitive edge, and ensuring long-term success.

Role of Procurement in Value Creation

“How does procurement bring greater value? Continuing to expand the value proposition that procurement brings to an organisation, to the company, to the stakeholders. It’s about the total cost of ownership”which is much more than, ‘How much can I reduce the purchase price on an individual item or on an individual order’”it’s about total value.” Canda Rozier, ex-CPO and Procurement Evangelist, Rule 1

For Procurement teams, value creation is thinking beyond cost savings and process improvements.

It’s about delivering tangible value at every level:

• from increasing revenue, strengthening supplier relationships, and minimising risk;
• through driving innovation, improving competitiveness, ensuring compliance, and positively impacting our society and planet.

“You cannot work alone, not anymore. It’s not about negotiating on price and being a cost killer”not anymore” it’s not like this. The key is to work together to have clearer guidelines, to have strong sponsorship, to always communicate internally, and to communicate all the success stories that you have.” Caroline Huberdeau, Global Procurement Strategist, Rule 1

By embracing a number of core principles (10 to be exact, see below), procurement teams can redefine their role to deliver strategic value within their organisations.

10 Value Creation Principles in Procurement

1. Strategic decision-making: Move beyond a cost-focused mindset and use data insights, economics, psychology, and internal relations to drive supply chain design

2. Value definition and alignment: Understand and define value in a way that connects supplier capabilities to customer needs, creating compelling value propositions

3. Supplier-led innovation: Consult suppliers for recommendations on quality improvements and cost reductions that can be integrated into existing and new processes

4. Process discipline: Establish standardised, streamlined and automated processes for example, supplier onboarding, sourcing, and financial/commercial controls to create a competitive advantage

5. Operational efficiencies: Ensure efficiency throughout supply chain for example, reduce excess or redundant inventory, optimise warehouse space, remove obsolete or faulty equipment, sell unused assets, and leveraging negotiation to secure better terms with suppliers and service providers

6. Technology enablement: Leverage AI and autonomous procurement”including spend analytics, sourcing and supplier management solutions”to streamline workflows, reduce errors, improve decision-making, and address skills shortages

7. Ethics and social responsibility: Factor ethical considerations into sourcing decisions, supporting programmes that align with organisational values and meet compliance obligations and ESG/CSR goals

8. Risk management: Identify and mitigate risks associated with processes, products and services, establishing plans to prevent or recover from supply disruptions or supply shortages

9. Time to market: Optimise supply chains to increase speed to market for time-sensitive products and services, improving competitiveness and internal/external customer satisfaction

10. Measure value: Go beyond price negotiations as the sole metric of success. Track metrics related to strategic synergy and adoption; revenue and the bottom line; employee, customer and supplier satisfaction; brand value; reputational risk; and ESG to name but a few

Underpinning these core principles is the ability to proactively manage the internal changes required for Procurement to be viewed as a value creator.

How to Develop a Procurement Value Creation Model

Every Procurement team’s situation is unique, involving various inputs, industry-specific business activities, and targeted outputs, all of which contribute to the organisation’s overall impact.

“Focus on value creation. Shift your focus from transactional interactions to value creation opportunities.” Temeena Hussain, Specialist in Strategic Partnerships & Collaboration, Rule 3

The value creation model below is intended as an example to explain the concept.

In the next blog, we’ll step back and take a holistic look at the various factors to consider.

Can’t wait…? Download your copy of the Redefine Value Creation eBook now!