Setting Procurement Savings Goals

Often procurement can be too focused on savings, to the detriment of other important goals such as risk management, driving innovation, talent management, and supplier diversity, among others.  But let’s face it, a big part of why companies invest in the procurement function is to put a reliable supply base in place and improve profitability.  A recent study by AT Kearney pegs the difference in procurement savings between leaders and laggards in the range of 33% to 50%, often representing a huge impact on the overall profitability of the organization. Over the years, I have seen a number of things that work in organizations to help them set and achieve a high level of procurement savings and wanted to share my thoughts with you.

These factors taken collectively, create the “perfect storm” and help a procurement organization achieve significant savings.  Here are a couple of things that I have experienced first hand.

  • Find Your Burning Platform.  Both at Bristol-Myers Squibb and at WellPoint, we went through a period where increasing profitability was top of mind for everyone.  That made it very easy for us to get the attention of business leaders right up through the CEO, and share what we thought we could do to help.  What was important was for us to have done our homework, looking at spend data, new category strategies, specifications needing right sizing and leakage outside the purview of the procurement policy (i.e. violations or areas not previously sourced), and quantifying the upside possibilities for saving.  What we found were very receptive business leaders, especially when the only other options for them were to reduce headcount or cut back on investments in the business.
  • Set the Bar High.  There is often some resistance to setting big goals for savings, for once that is done, the fear is that you will be busy day and night working to achieve the goal.  The key is to set high procurement savings goals but not so high that they are self-defeating and discourage the group.  But if you only set goals where you know exactly how you will achieve them, I would argue that you have set the bar too low and this can often be self fulfilling and limiting.  I used to enjoy reading the letter to the shareholders of GE, written by Jack Welch.  He argued that if you set small, incremental goals that you weren’t doing your job as a key leader in the organization.  It was only by setting transformational goals (e.g. 25-50% improvement) that you forced yourself out of your comfort zone and explored radical new ways to do things.  I tend to agree.  My first year at WellPoint, I inherited a savings goal of $20 million and there was panic that we would fall short.  We overshot that goal, achieving $33 million and I set the following goal at $100 million despite great push back from my team.  But I knew that we had barely scratched the surface in creating impactful and necessary category strategies, pushing on compliance and recruiting and developing the type of talent necessary to support the business.  And we went on to not only achieve that target but doubled actual savings again the following year.  We were forced outside the box and worked hard to find new ways to create value for the company.
  • Enlist The Help of Your Clients.  Sourcing and achieving results is a shared responsibility between procurement and your clients in the business.  Your team should be working with their respective clients, sharing spend data, looking at their goals and objectives for the next year and partnering with them to help them be successful.  It is easy to charge ahead with your own goals and tell the business what you want them to do to help you.  But from my experience, you will gain more support from them and work on more important projects by first understanding their goals and then sharing what you bring to the table in skills and resources to support them.  I will always remember a meeting I had with the president of the Nutritional business at Bristol-Myers Squibb.  The relationship between procurement and the business was strained but when I started our planning session asking Steve what his goals were and what he thought we could do to support him and his business, things changed.  He smiled and said that this approach would open new doors for us and it did, resulting in a significant impact far beyond what had been achieved in the past.  Your clients should help you set your goals, own them with you, and be willing to put the savings commitments in their goals, just as you do in yours.  And they must be willing to put the appropriate people from their organization on the project teams to leverage their deep knowledge of their business and markets.  Alignment with your business partners is critical.
  • Leverage the Deep Knowledge of Your Suppliers.  If you aren’t using your key suppliers to align with and meet the needs of your organization, you are missing a huge opportunity.  Your suppliers often know more about your business, in the niche that they serve, than you do.  They work with many customers every day that have needs very similar to yours, and have a rich database of best practices that they have seen successfully employed by their clients.  Supplier Relationship Management (SRM) programs recognize this and are part of the repertoire of all leading supply management organizations.  Don’t miss the opportunity to ask them for their best ideas or share your most pressing problems for which you would like their input.
  • Talented People are Critical.  There is no substitute for having talented people in your organization.  This comes from a careful selection process that explores behavioral as well as functional skills, a recruitment process that includes targeting the best supply management schools and an investment in training and development. While it is important to have people well skilled at procurement methodology and processes, it is also important, in many areas, to have people who have deep subject matter expertise (SME). I would be the first to admit that our internal clients generally know more about their category than those in procurement, but having some of this knowledge helps build trust with your clients that you will be acting in their best interests and earns you a seat at the table.  I have found that using a blend of SME’s and pure procurement professionals can be a very successful approach.  And quite honestly, it is easier to teach a SME about procurement than the other way around.  The end product is that you bring much relevant thinking to the table when you are building impactful category strategies for the business, rather than simply reacting to what is asked of you by your clients.

Setting and achieving high and impactful goals is motivating for an organization just like being on a winning sports team.  What you will find is that your people will get more enjoyment from their jobs, procurement will be an exciting and highly sought place to work in the organization, and your staff will have many opportunities to work in new areas, develop new skills and grow professionally.