2014 Procurement Trends Report

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PROCUREMENT TRENDS IN 2014MIgRaTINg FROM TaCTICal TO STRaTEgIC

aRE ggC PROCUREMENT PROFESSIONalS FallINg bEhIND?

The current economic growth and development in the region provides a massive opportunity in which investment can be optimised with the help of procurement functions. On the downside, with the pace of this rapid growth, organisations may not have the time to develop their procurement departments to the level that is required. Therefore, the sector is under tremendous pressure to keep up with the current growth.

The increasing number of mega projects in the region, as a result of Dubai Expo 2020 and Qatar World Cup 2022, adds to this pressure. The current standards of procurement functions may not be sufficient to support such developments.

“Buildings are not done well. No one pays attention to details; projects are done for the short term. Everywhere you look, the quality is somewhat lacking. So projects don’t last for long. There is also a cost pressure and when people are negotiating they are looking for the cheapest solutions” said Ralf Baudzus, Chief Procurement Officer of Al Rajhi

Holding Group in Saudi Arabia. He believes that these mega projects will elevate the current regional standards. This also reflects the common sentiment in the market, as indicated in the below figure where only 6.25% of our respondents disagreed.

ONly 6% of respondonts disagree that the increasing regional growth raises the importance of strategic, sustainable procurement in businesses

Agree

Strongly Agree

Disagree

6%

44% 50%

As most of the procurement experts indicated that the development of regional procurement functions lags behind other parts of the world, this report is aimed at understanding the reasons behind this hindrance as well as finding new practices that can help the procurement sector keep up with the pace of the regional growth.

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With the pace of this rapid growth, organisations may not have the time to develop their procurement departments to the level that is required


This report is based on research done based on the responses of over 100 regional and international leading enterprises including Shell, PepsiCo, Nokia, AADC, PetroRabigh, Qatar Airways, National Medical Care Co and bp. The roles of those answering the questionnaire and survey ranged from Chief Procurement Officers to Director of Procurement Services to GM of Procurement and Contracts.

bECOMINg MORE STRaTEgIC

Despite this wide range of disciplines, most of the experts that we interviewed had similar concerns. Strategising was a keyword that echoed across the different sectors. Strategic procurement functions entail many features, the predominant of which being the alignment of procurement goals with the overall business objectives.

Shifting the focus to more strategic functions is a natural evolvement to procurement activities. Nick Ford, Customer Service and Delivery Director at Xchanging Procurement Services, explains, “There are three key areas of focus within a procurement organisation. Tactical procurement entails reacting and handling a lot of low value, sometimes high volumes

tail end spend. In the middle area, there is operational procurement which involves working with suppliers in a more organised manner and developing them as an extension of the supply chain, increasing service levels at the same time as minimising risk. Right at the top of the tree, you have strategic procurement which is where the function is an essential part of business process and strategy of an organisation, and it’s adding real commercial, value-added services.”

The typical focus of a procurement department that is low to medium on the maturity curve would be 80% focused on tactical and operational procurement functions, while only 20% of their attention would be directed to strategic procurement. The catch is for these organisations to turn 80% of their focus onto strategic activities.

“Developments in the region will raise the profile and importance of effective procurement as total cost of ownership, sustainability and innovation becomes more significant issues. To date procurement has been less prominent in the region and now is the time to build capability and capacity to take advantage of the significant investment and growth in the region” Tim Drury, Procurement Director at Unilever in UAE

REgIONal DEMOgRaPhICS SECTORS FaCINg ThE bIggEST ChallENgES IN gCC

Aerospace/Defense

Construction

Manufactured Goods

Telecommunication

Industrial Manufacturing

Energy, Oil & gas

healthcare

Almost 23% of participants believe the second most challenging field is energy, oil and gas

6.93%

5.94%

9.9%

12.9%

22.8%

23.8%

15.84%

WhaT IS ThE avERagE aNNUal bUDgET FOR PROCUREMENT?29.7% of participants estimated that the annual procurement spend at their companies was more than $300 Million

21.8%19.8%

12.87%15.84%

29.70%

21.8% <$30M

19.8% $30M - $60M

12.8% $60M - $100M

15.84% $100M - $300M

29.70% >$300M

“Strategic procurement is where the function is an essential part of a business process and strategy, and it’s adding real commercial, value-added services”

TRaDITIONal PROCUREMENT STRaTEgIC PROCUREMENT

Tactical

Operational

Strategic

Tactical

Operational

Strategic

20%

35%

45%

10%10%

80%


TalENT aCqUISITION & DEvElOPMENT

This focus on minimising cost also contributes to the lack of investment in developing and acquiring talent in the region. The right procurement talent seems to be missing, according to our research findings.

Samar Mansour, Executive Director of Procurement, Commercial of Tourism Development & Investment Company (TDIC), believes that the region is full of talent, but she blames the gap on training. According to her, procurement professionals are uncertain in terms of training, “probably because of cost.” As a result, most training providers in the region only offer generic curricula. They would have tailored more specific programmes if there was a demand for them. “Companies always want the best of the best, but they don’t want to pay.” This, she said, is reflected in how organisations do not attempt to offer training to fresh-graduate employees. This is especially necessary since very few universities in the region offer programmes that are specialised in procurement and supply chain.

As quality talent is essential in order for companies to successfully move from being traditional procurement agents to becoming commercial strategic offices, this gap is a setback for the sector. “In coming years talent retention will be the biggest challenge companies will face…Due to increased

pressure on delivering top & bottom line, procurement is currently in the driving seat to meet the business agenda,” explained Ashfaq Hussein, the Senior Procurement Manager at Mondelez.

Meanwhile, the survey results show that there is little concern regarding the talent in the market. Only 20% of our respondents included talent acquisition as one of the biggest challenges they are facing. It is not clear whether this indicates a lack of recognition of the issue or simply that companies are content with the level of their staff, considering their focus on minimising cost.

MINIMISINg COST

Why would one of the essential elements of the business success be the most challenging to implement? Minimising cost seems to be one of the main distractions that hinder companies from focusing on strategising their procurement functions. This was also reflected in the survey results where more than 54% of respondents said that cutting cost was one of the main drivers for procurement.

One of the top tips from Ahsan S. Razzaq, GM of Corporate Supply Chain & QHSE at Olayan Financing Company is “defining procurement value – not only looking at cost, service and quality but while negotiating, knowing what is the value of each negotiated items for the other party”

“In coming years talent retention will be the biggest challenge companies will face…Due to increased pressure on delivering top & bottom line, procurement is currently in the driving seat to meet the business agenda”

48% of participants agree that the most pressing procurement challenge in 2014 is moving from a tactical to strategic function

Gone are the days of postmen and paperwork; Today procurement is no longer a buying function focused on its spend management or on cost

optimisation; Procurement is now embedded organisational business area that monitors supply markets and trends to interpret and respond proactively to the impact of these trends that may have on one's organisational strategies;

Procurement functions seamlessly with the business functions of organisations as prime key to organisation’s needs

hariharan laxminarayan, Head of Procurement of EMal in the UAE

It is a given that one of the main targets of procurement is to reduce cost and maximise productivity. However, companies have to balance that out with a more

strategic agenda by getting more involved in commercial activities. Also, cost isn’t just about reducing the purchasing price; it can be about reducing the cost of ownership

expenses that involve services, reliability, quality, and innovation said Ford

ThE TOP 4 DRIvERS FOR PROCUREMENT FUNCTIONS IN 2014

Reducing supply risk

Quality suppliers

becoming more strategic

Cutting costs

28%

44%

51%

54%


SUPPlIER MaNagEMENT

One common complaint that was frequently repeated is finding the right suppliers. This issue greatly affects the ability of organisations to migrate to strategic procurement functions.

When asked about the quality of regional suppliers, Evans said, “The good suppliers are very rare around the world [not just in this region]. The bad suppliers and the cheap ones are still out there looking for work.” This lack of competition makes it less likely for unqualified suppliers to improve. So, how to find good suppliers? “Understand the suppliers and their cost structure” Evans advised.

Procurement teams have to be wholly focused on relationship building with their key suppliers. Identifying the effective ones will essentially optimise tactical and operational procurement activities, enabling organisations to focus more on their strategic agenda. In addition, maintaining strategic relations with suppliers and considering them an essential part of the organisation’s supply chain will provide a fruitful collaboration.

“If you are achieving these two levels when dealing with your suppliers, then you are optimising your tactical and operational agenda as well as using them to deliver a more strategic function,” said Ford.

When participants were asked to indicate the top priorities for their procurement function in 2014, their answers indicated that supplier management is now at the top of

the procurement strategic agendas in the region. Similarly, up to 44% of companies are realising that maintaining relations with quality suppliers is imperative for the success of their procurement strategy.

INTEgRaTED TEChNOlOgy IN PROCUREMENT

Different experts had conflicting views regarding the impact of technology on talent and, consequently, the move to more strategic procurement functions. Eric Evans, a UK-based Procurement and Supply Chain Expert, feels that the increased trend to automate has reduced the size of procurement teams. “As a consequence, procurement is seen as transactional and administrative rather than as a value adding function, because machines can only process paper work but they cannot do the negotiations or search of better suppliers,” he added.

However, Ford thinks that a better investment in technology will help keep the tactical element of procurement as automated as possible so that procurement teams can focus more on developing the strategic functions.

One of Laxminarayan top tips for driving value from procurement is to leverage the availability of technology and systems towards faster, leaner and higher performances.

44% of companies are realising that maintaining relations with quality suppliers is imperative for the success of their procurement strategy

“Procurement strategies should be set, be sustainable and have high level executive sponsorship in order to succeed” Sam Achampong, Chairman, CIPS

Only 4% of respondonts disagree that integrated technologies play an important role in driving efficiencies and optimising procurement

Agree

Strongly Agree

Disagree

4%

31%

65%


Experts do understand the vital role that procurement plays to the success of business, but has this been agreed upon across the organisation? Even though 52% of companies confirmed that one of the main drivers for their procurement functions is to become more strategic, more than 85% agreed that strategising them is one of the biggest challenges that they are facing. In addition, up to 25% said that their organisations did not invest in procurement functions last year.

Interviews with experts also confirmed that procurement officers are struggling to raise awareness regarding the importance of procurement with internal stakeholders within the organisation itself. Without having the procurement officers reaching the top of their organisations and being involved in the more strategic aspects of the business, the shift to strategic functions cannot be complete. This hindrance can be seen from the survey results where the second highest percentage of our respondents said that they came from organisations where the allocated budget for procurement is less than $30M annually.

CONClUSIONS75% of organisations invested in procurement in 2013/2014

“Procurement will have to work hard on demand planning and to define long sourcing strategies for the coming years” Ahmed Alrayyes, Senior Director Commercial Sourcing at du

“When I was a CPO, I spent 80% of my time selling and marketing the services of the procurement functions within the organisation,” confirmed Ford. This hardly gives the procurement team the time to focus on growth and development at all, let alone strategising their functions.

In the meantime, Sebastian Vitzthum, Director, Business Network Marketing at SAP Asia, believes that “procurement teams have often been seen as people who just say “No”. [They] need to engage the business to show how strategic procurement will help them achieve their goals. Also, strategic procurement requires a transformational shift

internally as internal processes would need to be extended into the network of business partners for collaboration, innovation and commerce. Finance, Sales and Marketing, Treasury/AP and IT can all be united in the attempt to streamline B2B processes to enable strategic procurement across the value chain.”

While most of the experts seem to be skeptical about whether the importance of procurement – and particularly the strategic functions of it – will be recognised across the organisation, the regional growth continues to put increasing pressure on the sector to evolve and reach maturity.


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abOUT ThE REPORTWe would like to thank all the professionals who took part in this edition of the survey and helped provide an insight on the actual priorities and challenges they face across the region.

This report cannot be considered as professional advice as it only aims to give an overview of some timely issues.