The pure price focus is grouped into a maturity level that we designate maturity level 1. At this level, price is the procurement function’s only focus. Moving over to maturity level 2, the focus expands to include total costs of buying something, including external and associate costs. However, why a given purchase has been made is still not a point of focus or optimisation. At level 3, reducing complexity and risk is included, though still with focus on the costs of complexity and risks of cost increase throughout the supply chain. Consequently, there is a fundamental shift in approach and focus when working with optimisation of the variables at maturity level 4. Focus shifts away from the costs to the benefit or value side of the cost-benefit equation. ARE YOU READY FOR VALUE-FOCUSSED PROCUREMENT? How do you know when your procurement function is ready to make the transition into a value focus? To ensure success and consistent competence development, Valcon recommends that procurement functions develop linearly along the maturity spectrum. This means that departments should not move into optimising total costs or ownership before they have optimised the core prices (1 before 2). Likewise, we recommend optimising the full and real total cost of ownership before tackling complexity and risk reductions (2 before 3). Obviously, immature procurement functions cannot completely ignore risk, but the point is that the function should be measured on and focus on optimising realised costs before being responsible for minimising risks. In other words, when you have excellent prices, and total cost of ownership has been optimised, when you have worked extensively with reducing complexity across the value chain and have risks under control, then and only then should the procurement department attempt to take responsibility for optimising valuefocussed aspects of the external spend. WHERE TO START WITH VALUE OPTIMISATION? Not all areas of a company’s spending are suitable for a value-focussed optimisation approach. Categories such as electricity, travel or car leasing have no or only very limited impact on an organisation’s value creation for its own customers. Valcon’s portfolio purchase matrix can be helpful in determining which types of categories the procurement function should focus on. LOW BUSINESS IMPACT LEVERAGE + Cost down + Cost out + Complexity down + Risk down NON-CRITICAL Price attack Price down STRATEGIC + Value up + Revenue up + New business BOTTLENECK HIGH LOW HIGH SUPPLY MARKET COMPLEXITY 4
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