The value of the purchasing department is not only to cut costs

Since the beginning of the year, the urgency to cut costs has increased.

Even after the global pandemic and years of supply shortages, most companies’ purchasing departments are still tied to the cost function rather than the strategic function. In a recent study, when asked where the work of the purchasing department had had the greatest impact over the past three years, most respondents pointed to cost savings in first place, with cost avoidance in second place.
Since the onset of the pandemic, procurement executives have incorporated risk management and supply chain agility into their job functions. After experiencing a severe shortage of semiconductors, automotive companies have partnered with semiconductor companies to develop and produce chips to reduce the risk of another shortage.

“In turbulence, procurement teams are expanding their focus from cost to other, more strategic goals, such as ensuring continuity of supply, mitigating risk, protecting revenue, fostering innovation, and improving sustainability performance,” the study states. During the pandemic, consumers are beginning to realize the complexity of their supply chains, as toilet paper, groceries, and other everyday items are often in short supply.
But recently, cost-cutting has once again become a top priority for procurement.
A survey conducted in April 2023 by Procurement Leaders, one of the co-authors of the procurement research report, showed that the urgency to cut costs has increased since the beginning of the year. They noted that given the prolonged period of high inflation buyers face, the fact that the majority of respondents highlighted saving as their top area of influence may indicate the depth of the purchasing team’s skills in this area and their ability to meet business needs.
Value beyond cost control
However, these responses reinforce the perception of procurement as a cost controller. While this is a vital feature, it should not limit the efforts of the procurement department to achieve other goals. Supply chains intersect with corporate environmental, social and governance (ESG) initiatives. What materials are included in electronic components, where the components are sourced from, and labor practices related to the production of parts are controlled by the purchasing department.
According to research partner Ivalua, one reason procurement appears to be limited in addition to cost is the lack of specific performance indicators. Cost savings are the most commonly used metric among procurement teams, followed by cost avoidance. Respondents noted that they had no way to track sustainability progress or supplier risk.
Less than half of respondents ranked risk management as one of their top three impact areas, while less than a quarter listed improving sustainability as an impact area. According to Procurement Leaders, more than half of chief procurement officers see improving sustainability performance as the biggest opportunity in this function over the next three to five years.

“Given the pressures we are currently facing, it’s easy for us to [prioritize] issues like risk or revenue protection,” said one procurement professional. “But we need to be mindful that our long-term focus should be on sustainability if we are not only to deliver on the company’s ambitions, but more importantly, to have an impact on the environment and communities in which we live.”
“When there is any form of financial stress, sustainability has to take a back seat. When cost savings are a priority, spending an extra 15% on a more sustainable supplier is not possible. Another buyer noted.
The survey’s authors recommend that procurement teams capitalize on their successes during the pandemic. Procurement is well positioned to increase risk management, innovation and sustainability. Stakeholder support can also be effective in expanding the procurement function, as is engaging with senior leadership to identify areas of growth.
The study concludes that there is growing evidence that sustainability is no longer a “nice-to-have” but a “must have”. “Organizations must recognize this and prioritize ESG accordingly. As stakeholders and shareholders spend more time focusing on this topic, procurement departments are able to demonstrate their progress towards sustainability and the value it can provide in the future. ”