Balancing Cost and Value in Procurement
Procurement is no longer simply measured by cost. It’s a strategic function which increasingly must balance the idea of value. Understanding that crucial relationship between cost and value is an important part of ensuring your procurement department is operating in the best possible way for your business.
Value is a term we use a lot at Procurehere. Our mission is to generate value for our customers by empowering them with a simplified e-procurement solution that delivers a more efficient and cost-effective procurement process. That means value is at the heart of what we do. But how do cost and value interact in procurement?
When we’re talking directly about the procurement function, calculating how cost and value balance for your business is something that shouldn’t be neglected. Procurehere’s e-procurement solution can play a part in supporting you to contribute business value. But understanding the key differences, and how you can use that knowledge to generate greater value, is the first step to success.
What’s the difference between cost and value in Procurement?
If we’re going to discuss cost and value, we should start with a firm understanding of what we mean by these two terms.
Cost is a measure that relates to the total amount of money utilised in order to deliver a particular good or service. It should not be confused with Price, which simply put is the amount a customer pays for a particular product or service. Cost is a measure of all relevant inputs and resources that contributed to the end product or service, from energy to raw materials.
Value can be considered an overall measure of the total benefit realised by a company. It’s not simply down to the cost of the goods, but encompasses the wider return on investment relating to the actions and undertakings of delivering a product or service.
Delivering value in an evolving marketplace
It’s important to understand that cost plays an integral role in value. Suddenly tripling the procurement costs of a vital piece of equipment is on the face of it unlikely to win you executive support. However, if you’ve somehow sourced equipment with a significantly longer life-span, greater reliability, or any number of variables that provide a long-term positive impact, then you’ve potentially realised that aspiration of unlocking broader business value.
The Deloitte Global CPO Survey 2017 reveals some clear indications of a growing focus on value in leading procurement executives.
- 79% of procurement leaders aim to focus on cost reduction
- 57% see managing risk as a priority
- 58% want to increase cash flow
- 52% are focussed on new product, services and market development
These findings paint a picture of a strategic procurement function that’s looking beyond the borders of simple cost. Managing risk, innovating new products and services, and overall focus on cost reduction as part of that, highlight an industry where leading procurement departments are looking to the wider value they add to their business.
How can you add value in Procurement?
Procurement is a dynamic and business-critical function, and as it has evolved so too have the opportunities for improving the value we add to business.
The importance of great relationships is a key area to explore, and one which is always at the heart of good procurement. Ensuring you have reliable suppliers can help build increasing value into your procurement function by enabling you to mitigate on-going business risk. It can also provide you first access to innovative new supplier products that enhance your product or service offering and provide a competitive edge.
The significant benefits of e-procurement like Procurehere offer a powerful platform to deliver wider value to your strategic operations. Amongst other benefits, our user-friendly solutions empower you to reduce maverick buying, improve organisational requisitioning, and support a more efficient procurement department with the tools to help generate greater value to your business. The ability to include essential documents such as questionnaires as part of the evaluation process for RFx events provides further insight into the wider value you can generate in partnership with your suppliers.
Creatively innovating new procurement solutions can also provide a further avenue for generating value. Demonstrably improving the ethical transparency of your supply chain could be one example in a world where sustainability plays an increasingly valuable role in customer decision making.
We should be wary of measuring the contribution of a great procurement department today only by cost. Procurement professionals need to promote our role as creators of value. With e-procurement like Procurehere, we have a powerful tool to support us on that journey. Ultimately our success will be down to the hard work, expert knowledge, and strategic understanding that are the hallmarks of any effective procurement function.