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1 INTRODUCTION: Why Procurement, and Why Now?

      What Follows Is a True Story

      Many years ago, I was at a cocktail party hosted for expats in London, with my wife. Many of those present were from the big New York investment banks. At one point, I started chatting with one of these individuals.

      “So, what do you do?” he asked.

      “I'm a consultant.” I replied.

      “Consulting in which field?” he asked.

      “Procurement” I replied, at which point he looked at me with an expression of disgust and said, “Excuse me while my eyes glaze over,” then turned around to signal that the conversation was over.

      Now, that's very rude behaviour, but that's not the point. The point is that Procurement has such a poor image that it's not even deemed worthy of a conversation by those who consider themselves to be at the top of the business food chain. Procurement is just not exciting, and it's certainly not sexy.

Well, how exciting does it have to be? How about having the potential of increasing your EBITDA by a third? How about having the resilience to keep your supply chain up and running during a global pandemic? Procurement is an enormous profitability lever, and it should be a core competence—especially in modern times, in which companies accomplish more and more through outsourced relationships.

      Yet in the majority of companies, Procurement is far from optimized, and there is a massive prize to be had if we could only do a better job. Since Procurement represents between 50 and 80% of a company's costs depending on the industry, and since most savings extracted from that spend flow straight to the bottom line, then I'd say that makes it interesting!

      In this chapter, we will set the scene for the book, by examining why there is an opportunity in Procurement, what the size of the prize could look like, and why many companies have failed to cash in on the promise to date. At the end of the chapter, we provide some background to the book, along with an overview of what you can expect from the remaining chapters.

      Let's now step right back and examine why there is an opportunity associated with Procurement. There are, in essence, two reasons: (i) Procurement is typically a company's largest cost bucket, and (ii) in most companies, that cost bucket is not optimized. Let's look at each in turn.

Procurement Is a Company's Number One Cost, Making It a Huge Profit Lever

      Procurement represents between 50 and 80% of a company's total costs, depending on the industry. That feels like a big number, but that's just because external spend is not usually counted in one place. A company's external spend contains so many things (from office supplies to raw materials to factory maintenance services to energy, fleet, marketing, and IT), fragmented across so many business units, geographies and budget lines, that it's rarely seen in aggregate (see Figure 1.1).

OK, so the spend is big, but how big is the opportunity? In many companies that have not yet optimized Procurement, it can be very significant. Figure 1.1 looks at a typical manufacturing company, with revenues indexed to 100. Well, if you simply subtract from that 100 your EBIT (or add back in your losses), then take out depreciation and your whole salaries and wages bill, then what's left of the 100 is by definition externally procured. In this example (see Figure 1.2), that amounts to 60…60% of the revenue!

       Figure 1.1 Procurement Spend as a Percentage of Total Cash Outflows

      The next question is, how much can you take out of that 60? Well, a common mistake is to assume that “10% should be possible.” Maybe 10% is possible, but not on the whole 60 of spend, at least not in the medium term, because some spends will be non-addressable or locked in, and there is always a “tail” of specialist one-off suppliers. These non-addressable spends can be significant, so it's safe to assume that maybe 60% of the 60 is addressable in the medium term. If your organization is global, you may also have a collection of very small, remote geographies whose spend may be too small to merit addressing in the medium term, which could reduce the 60% further.

In terms of how much can be saved, this of course varies by category and by company. But, long story short, a company that has not optimized Procurement, can look to take roughly 10% out of its addressable spend. In the worked example in Figure 1.2, that equates to a saving of 3.6 from an addressable spend of 36 (60% of 60). Given that the company had an EBIT of 10 going in, then that's a 36% uplift on a 10% margin. And that's before you factor in any Capex savings (which of course hit EBIT only indirectly).

       Figure 1.2 Procurement's EBIT Impact

      The beauty of Procurement is that this opportunity (or your spend) is spread across some 40

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