Beyond Cost: Unveiling the True Value of Purchasing

Prior to Covid, an eye-opening 58% of CEOs expressed doubts about whether their purchasing departments were truly contributing to the bottom line. Post Covid it is still a frequent lament when we talk to CEOs. This skepticism often stems from a narrow focus on cost reduction metrics, overlooking the broader value these operations bring. But if value is what we seek, why does the measure of success remain tethered to cost?

The Misalignment of Metrics and Value

Our collective experience highlights a concerning fact: While CEO’s want value, they most often evaluate Chief Purchasing Officers on purchase order (PO) price reductions, sidelining the concept of ‘value’. This PO-centric approach fosters behaviors detrimental to holistic success:

  • Shortsighted Cost Cutting: Buyers might chase cost reductions without considering the broader implications, such as the impact on other departments’ budgets or overall operational efficiency. 
  • Compromised Investment Decisions: Investments aimed at cost reduction are often not held to the same return-on-investment (ROI) standards as other business decisions, leading to initiatives that don’t meet the ROI threshold. 
  • Lifecycle Ignorance: Celebrating cost reductions on products nearing the end of their lifecycle overlooks the full picture of value contribution. 
  • Supplier Strategies: Suppliers might inflate initial prices to accommodate future reductions, creating an illusion of savings. 
Value vs price balance | metrics blog | Adanced Purchasing Dynamics

Recommendation:

Instead of measuring PO to PO price reductions develop a value based metric broad-based costs and benefits of purchasing activities including total cost of ownership and operational savings.

Delve deeper into how metrics can be used to measure performance, compare teams, fine tune a process,identify a problem, identify what’s working or not working.

A Shared Vision for Value 

Ownership of value based metrics should not be an isolated burden on purchasing. A more integrated approach involves:

  • Cross-Functional Collaboration: By sharing responsibility for material value based metrics, the organization fosters harmony and supports cross-departmental initiatives. 
  • Customer-Centric Decisions: Decisions should be made with the customer in mind, ensuring that value improvment efforts do not compromise product quality or service and costs and benefits activities will have on customers.   

Recommendation:

Purchasing should lead monthly cross functional meetings focused on value improvement activities.

Embracing a Long-Term Perspective 

Most often we find that organizations are focused on delivering the current business plan.  The common practice of valuing immediate financial impact over long-term benefits is shortsighted.  Instead of just focusing on the current year metrics should be based upon a rolling 12-24 months.  This focuses the organization on long-term as well as short term activities and lets Purchasing’s contribution be evaluated on its sustained impact, encouraging strategies that deliver enduring value rather than transient savings. 

Recommendation:

Move to a rolling 12 – 24 month planning horizon. 

Charting a Path Forward 

Transforming purchasing metrics from a cost-centric to a value-centric model involves:

Forward Path | metrics blog | Adanced Purchasing Dynamics
  • Developing Comprehensive Metrics: Incorporate factors like savings realization, implementation costs, and customer value into purchasing metrics.
  • Fostering Cross-Functional Teams: Encourage collaboration between purchasing and other departments to ensure a balanced approach to cost reduction and value creation.
  • Adopting a Long-Term View: Shift focus from immediate gains to long-term value, considering the rollover effects of purchasing decisions across financial years.

Moving Forward 

The journey from cost to value in purchasing is not just a shift in metrics but a fundamental change in perspective. It’s about recognizing the multifaceted role purchasing plays in driving organizational success. We encourage you to delve deeper into this topic, join our upcoming webinars, and become part of the movement redefining value in purchasing. 


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