Yesterday we started looking at “procurement with purpose,” which was a hot topic at last week’s SAP Ariba event in Amsterdam. In our first post we discussed how procurement with purpose is easy to say but hard to do, especially since money talks quite loudly both inside and outside organizational walls.
Despite all of the talk we hear about the power of procurement to drive innovation, to drive sustainability and to drive social responsibility and change, this is only the case when there is enough money on the line to warrant the effort it takes for a supplier to change. And even then, there has to be no significant financial impact to the buying organization because the CRO will try to squash the effort if risk is noticeably increased, and the CFO will definitely halt the effort in its tracks if costs substantially increase.
Thus, as per our last post, you’re only going to make progress on any effort, be it innovation, sustainability or social responsibility, if you have not only board approval but board commitment in terms of new suppliers (for innovation initiatives), hard dollar spending (for the selection of more sustainable suppliers), guaranteed participation in initiatives (that make an effort to improve working conditions and fair wage throughout the supply chain) and a pledge to immediately eliminate any suppliers that use subtier suppliers that break the laws (by using child or slave labor).
But getting the board’s commitment is just the first step. You then need to come up with a way to make the commitments reality. You’re not going to be able to choose just any 10 suppliers for just any innovation effort; rather, you’re going to have to demonstrate that you’ve identified the right supplier who can make the right change to the product or production process to provide innovation that will take the company to the next level. How do you do that?
Similarly, while you may be permitted to spend “more” to invest in more sustainably qualified suppliers to meet a target of a certain spend level, the CFO is not going to be too happy unless the incremental spending over the lowest cost option is minimal or acceptable against the margin. The same goes for initiative spending. You won’t be permitted to spend that money on just any green energy supplier — the new choice will have to be certified and stable (and backed by the rest of the initiative).
The only sure thing will be permission to replace a supplier in violation of the law. This is because even though the CFO and the CEO will not like the increased cost of business, they will much prefer it to criminal charges.
So how can a platform help? Let’s start with supplier selection. A great platform with a great network will help a buyer find suppliers that have been certified, audited and even de-risked by established parties. It will enable a detailed product and service review and validation process, encourage communication and collaboration, and empower joint design and development efforts.
Let’s move on to meeting target sustainability and diversity spending goals. In order to justify the increased spending to meet the target, the buyer/buying team is going to have to show that the incremental spending is minimal and still permits appropriate margins. And in order for the organization to continue to back an initiative (that costs money or requires using certain suppliers), there will need to be a performance justification, if not a financial one.
A great platform will enable both of these needs by way of cost models, benchmark comparisons and even optimization algorithms to find the best cost solution that meets a certain need. It will also track performance metrics by supplier and compare them to internal performance benchmarks and industry average. And it will enable an organization to make value-based decisions that balance cost, risk and sustainability.
So, how can procurement technology help? In SAP Ariba’s case, its integrated network, cost modelling, optimization, benchmarks, analytics and bill of material-level data (which is often found only in an ERP, to which SAP Ariba natively integrates) can help an organization find a supplier, model the real costs, compare that to the current cost, easily see the incremental cost of increasing sustainability or diversity, calculate the effect on margin, and figure out if the net increase is worth it relative to other efforts being considered and the impact against the corporate goal.
This not the complete answer, but the bigger picture it provides powers better decisions and helps organization push towards procurement with purpose, which we all know, at least for now, is still a journey and not a destination.
For more details on each of these capabilities, see our deep dives on SAP Ariba below. And don’t forget you can download a new briefing paper here from our colleague at Spend Matters in Europe, Peter Smith, titled “Procurement with a Purpose — Making a Positive Impact on Organisations, Human Rights and Communities.”