Problems in Purchasing

Sept. 12, 2008
Pricing pressures and attracting new talent are the most imminent threats to the purchasing department.

Purchasing managers are sure to be challenged by a number of different problems over the next couple of years, but according to consulting firm Ernst & Young, pricing pressures and attracting the right talent will rank right at the top of the list. Following close behind is a widespread concern with the procurement function's ability to manage change effectively in the current economic environment.

The firm recently asked 257 senior executives around the world to discuss what factors they feel will have the biggest impact on the procurement function in their organizations. A "downward pressure on prices" was cited by 33% of respondents, while 26% agree that "price fluctuations of critical commodities and services" is among the top issues likely to impact their business. Also finishing high on the list of concerns is the "requirement to change existing operating models" (28%) and the "growing complexity of global supply chains" (27%).

But while downward pressure on prices is viewed as critical, it comes at a time when there is consistent and accelerating upward pressure on input costs, says Adrian Edwards, the firm's global head of supply chain and procurement. "Collectively, these issues create a significant barrier to companies achieving sustainable high performance," Edwards explains. "To respond to these challenges, companies must be able to manage complex transformation programs."

The ability to deliver against the major issues facing the organizations is severely constrained, with 20% of organizations not confident that their sourcing function has the ability to effectively manage change arising from price fluctuations, and the same, too, for downward pressures on prices.

Despite the low confidence in dealing with pricing pressures, "controlling and containing costs" (52% of respondents) and "driving EBITDA growth" (37%) are the top two initiatives that will be a priority for the sourcing function over the next two years. In fact, 77% of respondents believe in its ability to deliver shareholder value in terms of bottom-line cost reduction.

"There is a clear paradox here. However, the scope of the [procurement] function is expected to grow considerably... playing a far more significant role across the whole organization," Edwards adds. "The barrier to tackling these issues lies in the complexity of the current operating models, which only 49% of respondents are confident they will be able to manage effectively."

Attracting and retaining talent is the second-biggest issue, cited by 30% of respondents, to impact sourcing functions in the next two years. In fact, it is also the second biggest barrier to managing change, cited by 39% of respondents, just behind the complexity of the operating models (40%). Only 11% of respondents are confident in being able to attract and retain the required talent.

"The high demand for skilled procurement experts and the challenges they will face are only likely to increase with the growth of globalization and cost pressures," says Edwards. "Securing this talent with differentiated compensation packages and a clear development strategy will be crucial."

The return on investment from the procurement function can be considerable, and it can be an opportunity to create real differentiation, according to Edwards. But success in the current economic environment will depend on an organization's ability to complete a few straightforward, albeit increasingly difficult tasks.

"[Success] relies on the redefinition of global operating models and optimizing business processes," he says. "And those that are successful [will] have the ability to create a wider performance gap against their peers, helping to achieve competitive advantage in the process."

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