HOW CAN PROCUREMENT ADD VALUE TO AN ORGANIZATION?

The whole point of forming a competitive strategy is such that a company is in a position to relate to its environment, be it external or internal. This will enable the company to have competitive advantage, that is, whatever gives them an edge against their competitors.

In his book competitive strategy Michael porter argues that an organization’s competitive advantage will in the end come from the value it creates or offers its customers. This is important because people pay for things they see value in. Looking at it from a procurement perspective, the question then becomes, how can procurement add value to an organization?

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What does value and added value imply?

As pointed out earlier, people pay for the value of the product, whichever form that value may take. By value I mean ‘worth’ of the product or service, for instance, mobile phones are currently more that calling or texting devices. The value they offer via utility is the reason why some people, in fact, most people cannot do without smart phones.

Generally value can be measured in two ways;

1. What it costs the organization to produce or provide the goods or services
2. What customers are willing to pay for the goods or services

In short an organization will create value, by ensuring that the activities they undertake or how they undertake them are more effective and efficient than its competitors because customers purchase value by comparing an organization’s products and services to those of its competitors.

This explains why one would spend a lot of money on Nike or Adidas sneakers and not some generic sneakers even though if you close your eyes and tried each of the shoes, they probably will feel the same. As a brand Nike just seem more ‘worthy’.

The term added value therefore means the addition of greater worth or value to a product or service as a result of all the processes that support its production and delivery to the customer this could be through, marketing, design, production, customer service, distribution etc.

So how can procurement add value?

What you should actually have in mind as a procurement specialist, is that, a business is only profitable if the value the customer sees (meaning what they are paying for) is more than the cost of the value creation. The ultimate value a firm creates, as pointed out earlier, is measured by the amount customers are willing to pay for it.

Through securing good quality materials, ensuring reliable delivery, supporting value-for-money pricing by keeping costs down, procurement functions can contribute to value addition. The chief way one gets to answer the how can procurement add value to an organization question, is by ensuring that the procurement department focuses on either driving down costs without compromising on quality or product features or securing operational efficiency, that is, enabling superior product quality or features at no additional costs. Truth is procurement can still aim at achieving both of these objectives by;

1. During the selection and management of suppliers, ensuring that they have Key Performance Indicators (KPIs) in mind, that relate to quality of inputs leading to desired output.
2. Negotiating and managing procurement effectively in order to reduce the cost of inputs
3. Managing procurement activities efficiently to reduce cost of transactions
4. Ensuring effective flow of communication to and from user departments to improve procurement specifications, so that business needs are fulfilled more efficiently and at lower cost.
5. Managing inventory effectively, to minimize the cost of acquiring and holding stock

What are other ways procurement can help an organization add value to the products and services? Suggest so more.

Let me know if you have any questions