Despite a reputation as a simple cost-cutter, Procurement can and should contribute more within the realm of Private Equity. A modern Procurement department can balance cost optimisation and growth enhancement to deliver increased value to Private Equity boardrooms and actively shape a business’s strategic direction and competitive differentiation.
When the goal is to grow top-line revenue, as it often is in Private Equity, Procurement is in a strong position to deliver. Cost cutting is just one element of this and something that the most-cutting edge Procurement teams will work on, however, there is a much wider remit to explore. Cutting costs will typically deliver 5% – 10% of bottom line savings, however, savings of 20% – 30% are accessible for businesses which integrate Procurement into day-to-day operations.
Leveraging Procurement’s toolkit
Depending on the sector being invested in, there may be opportunities to engage with supply chain partners to optimise performance, access innovation, provide agility and end-customer service. These initiatives often lead to greater value impact on pricing, without the need for increased expenditure and can uncover mutual benefits, such as coordinated delivery times, or reduced packaging.
Supply chain alignment can lead to significant improvements in terms of performance, customer satisfaction, cost and growth. This is particularly relevant when dealing with businesses that have grown rapidly in a short space of time, but also those where supply chains have received little attention – something relatively common in the world of Private Equity.
Another opportunity lies within marketing spend. Marketing and Procurement may previously have viewed each other as enemies, however, now have much to gain from working hand in hand. Procurement’s relationship with Finance and negotiating skills, make the function an invaluable ally for a department expected to achieve more and often with a decreased budget.
In this context, Above The Line (ATL) and Below The line (BTL) marketing activities are also fruitful areas for Procurement to explore. Procurement can again go beyond strict cost cutting and engage with departments to re-invest savings where there are growth opportunities.
To implement these Procurement tools, organisations need access to data and this often proves the first hurdle. 4C Associates regularly work with organisations whose data is imperfect and this seldom proves insurmountable. The use of visualisation tools enables the prompt turnaround of insights and the use of Artificial Intelligence (AI) toolkits means even the poorest data sets can be categorised, enriched and assessed, in a matter of days. This analysis enables cost reduction, value realisation and revenue growth initiatives from the supply chain.
One of the main drivers of innovation for Procurement is an effective SRM programme. These initiatives can go far beyond the function’s traditional remit and can source multiple, mutually beneficial solutions from within the supply base. Releasing value from the supply chain can in turn provide businesses with competitive advantages, but also help differentiate them from the competition.
The issue here is selecting the right partner. This can prove complex, as working collaboratively with the wrong partner can result in exploitation. This is where the implementation of a suitable programme, led by Procurement, can drive real value in terms of cost reduction, access to innovation and revenue enhancement.
Building relationships with key suppliers means sharing information and building trust. This in turn lets businesses point out potential efficiencies and allows for flexibility. For example, businesses faced with unexpected levels of demand greatly benefit from a supply base able to flex production levels. A key difficulty in this scenario is guaranteeing consistency of the output, however, investing in a relationship means both buyers and suppliers can work together to mitigate risk and develop a sustainable, yet agile model.
Failure to invest in SRM is often due to a lack of resource, but sometimes it is simply a serious oversight. In many cases, companies, particularly mid-size enterprises, underestimate the opportunities that can be found by working with suppliers to uncover synergies. Investing in relationships with key partners also results in more secure supply chains, mutual gains, innovative developments and sustainable value.
European Private Equity owned companies are already highly reliant on the benefits Procurement can bring to the table. However, in too many cases these remain tied to short-term cost cutting exercises. The function is, however, increasingly capable of delivering value far beyond cost, by leveraging new analytical solutions and inputting at a strategic level. From enhanced risk management, to supplier-led innovation and reduced operating expense, Procurement is ideally placed to juggle cost-cutting initiatives with growth and deliver value to Private Equity boardrooms.