World-class supply practices boost shareholder value: a focus on both direct and indirect spending, including smaller items, can have a powerful effect on corporate performance. Top companies involve their procurement group and other internal functions, plus suppliers, to boost competitive advantage.

• Author: Rudzki, Robert A.
• Position: Procurement

During the last 20 years, procurement departments around the world have adopted some new and very powerful processes and tools. Done well, advanced procurement and supply management can trigger a compounding positive effect on a company's lifeblood--its return on invested capital, or ROIC.

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When it comes to improving margins and profits, procurement can build results through initiatives that favorably impact revenues--and other initiatives that directly target business costs. Figure 1 (on page 57) shows examples of some procurement initiatives that, when done properly, can significantly improve margins.

Procurement can improve the capital intensity of a business through initiatives that help working capital and that impact the total investment in capital assets. Figure 2 (on page 58) shows examples of some procurement initiatives that can significantly improve capital intensity.

What Is the Potential Impact?

If you could reduce your product development cycle time by 50 percent and beat competitors to market, while also reducing costs, would that be meaningful to your business? For most companies, that would be a huge plus. That is why world-class competitors involve their procurement group and other internal functions, plus suppliers, in an aligned effort to increase competitive advantage.

With regard to costs, the conventional wisdom is that procurement should focus principally on the "big ticket" areas of spending, such as raw materials and energy. And, you certainly should devote attention to raw materials and energy--not just to reduce costs, but also to reduce volatility through better risk management.

But if you focus only on the big-ticket spending categories, you'll be missing out on the enormous opportunities presented by all other, indirect areas. It is often possible to achieve double-digit reductions in costs for those indirect spending categories. The bottom line is this: focus on both direct and indirect spending. Doing so can have a powerful effect on corporate performance.

With regard to working capital initiatives, world-class procurement departments are including payment terms in their requests for proposal (RFPs), and are often pleasantly surprised by the responses. The impact on a business can be meaningful indeed. For example, for each $1 billion of purchases, moving from Net 30 days to Net 45, 1 percent-15 (realizing a 1 percent discount for paying early) offers the option of:

1. improving earnings...