Written by Bhavika Patel and Anna Pilipyuk, Procurato
In today's challenging business environment, efficient procurement processes are crucial for maintaining cost-effectiveness and ensuring supply chain reliability. Companies face multiple challenges, from fluctuating market conditions and supply chain disruptions to increasing pressure for sustainability and compliance. Navigating these complexities requires a strategic approach to procurement that not only meets immediate needs but also positions the organisation for long-term success.
Identifying cost-saving opportunities is another significant challenge. The reality is, the procurement function is always expected to deliver savings, and it serves as a key metric for evaluating the success of the function, adding pressure onto procurement executives.
One effective solution to address these challenges is through a procurement Opportunity Assessment (OA). This article explores the advantages of conducting an OA and the significant benefits it reveals. We examine the optimal timing for conducting an assessment, the reasons for doing so, the methodology involved, and the benefits of using internal versus external help. By understanding the nuances of your procurement operations and implementing targeted improvements, an OA can drive substantial value for your organization.
What is an Opportunity Assessment (OA)?
An Opportunity Assessment (OA) is a strategic evaluation of an organisation’s procurement processes, policies, and third-party spend aimed at identifying areas for improvement and cost-saving opportunities. Unlike routine audits or reviews, an OA provides a comprehensive analysis that digs deep not only into savings opportunities, but the intricacies of procurement operations. The key objectives typically include:
Optimising the procurement function
Enhancing supplier relationships
Harmonising and standardising processes
Improving stakeholder engagement
An OA aims to drive cost optimisation and improve the organisation’s bottom line. By aligning procurement strategies with overall business goals, an OA transforms the procurement function into a strategic asset.
When is the right time to conduct an OA, and why should I do it?
Some activities covered by an Opportunity Assessment (OA) are common to procurement executives, and if you have been in an organisation for a while, you may already be doing many of these tasks. The benefit of an OA lies in its focused, time-efficient, and driven approach. An OA should be treated as a project, complete with a dedicated team, established goals, and deliverables. This approach allows you to find savings, pinpoint areas for procurement function optimisation, improve structure and supplier relationships, and more.
There are several scenarios when an OA delivers the most value for your organisation:
Starting a new role: When you join a new company, you may not yet know where the gaps are, how category management is conducted, the status of your tail spend, or the risks involved. The procurement function is responsible for much, and it is difficult to identify all gaps, opportunities, and improvements from day one. Firefighting is the last thing procurement executives want to focus on when they first join. An OA is specifically designed to analyse every area and highlight opportunities quickly. This health check ensures nothing is missed and that the company is in the right condition to progress or has opportunities to improve current operations.
Going through a merger: During a merger, organisations are under pressure to reduce costs quickly, onboard new suppliers, manage contract integration, and handle other complications. A merger is an ideal time to kick off an OA, which will highlight cost-saving areas promptly. Increased spending may necessitate a review of your procurement structure to ensure it can process larger volumes, has new strategies to grow, and can deploy all necessary changes to function effectively.
Going public (IPO): Preparing for an IPO is a significant event that changes your financial structure and raises substantial external capital. Business complexity often grows over time, reducing productivity and increasing costs. This complexity makes it challenging to fully grasp the true cost drivers of the business. It is crucial to get costs under control before going public, ensuring all necessary policies are in place, internal demand is monitored, and costly, non-value-adding materials or processes are eliminated. An OA can quickly address these challenges, enabling harmonised procurement activities that support IPO preparation and the actual event of going public.
If you haven’t conducted an OA for a long time: Although many OA activities are part of daily procurement functions, a laser-focused, project-based approach can give your function and daily activities a boost. It provides a fresh perspective and challenges your daily operations. This article later discusses broader benefits delivered through OA, which also require a review with fresh eyes.
The reasons for conducting Opportunity Assessments vary and can be very individual. There is no reason why you can’t do it today if you want to achieve goals on your roadmap efficiently or need external help with a fresh perspective.
How an OA Benefits Your Organisation
To fully appreciate the impact of an OA, it’s essential to understand the specific benefits it can bring. Let’s explore these benefits in detail, illustrating how each aspect contributes to a more efficient and effective procurement strategy.
Identifying Cost Savings
One of the primary benefits of an OA is its ability to identify cost-saving opportunities. Through detailed analysis of spending patterns, supplier contracts, and purchasing processes, an OA can pinpoint areas where costs can be reduced. Inefficient or redundant processes are flagged, allowing for targeted improvements that increase productivity and reduce administrative overheads.
Procurement represents between 50% to 80% of a company’s total costs, depending on the industry. The potential savings vary by category and company, but on average, a company can aim to reduce its addressable spend by approximately 10%. The best part of Procurement is that the opportunities typically lie in about 40 categories.
This means there are more than 40 opportunities to find savings from a category perspective. To maximise value, you need to prioritise categories based on savings impact, complexity, and amount of spend. Profiling a category is essential for prioritisation, as you need to establish a baseline of what you buy, in what quantities, and from whom. Although it might sound easy, lacking proper visibility of your spend, outdated information and unintegrated systems can be the first hurdles in identifying savings.
For instance, an organisation may find that it is overpaying for certain supplies due to outdated contracts or that it can negotiate better terms with existing suppliers. Implementing these changes not only reduces costs but also frees up resources that can be reinvested into other areas of the business.
Enhancing Supplier Relationships
A company’s goal is to successfully deliver goods and services to its clients, but it can only be done with the help of others – suppliers, who are the enabler of their business activity. If any change is to be done, it involves suppliers – either it is a renegotiation, or consolidation, you engage with them.
Strong supplier relationships are the backbone of a reliable supply chain. An OA evaluates the performance of current suppliers, identifying opportunities for improvement. Identifying a better price from a supplier is not the only purpose of an OA. For example, what if a small supplier has a potential to grow and able to give competitive advantage in the future? The OA allows you to engage with suppliers and working together on your growth strategy can be beneficial not only for your business, but also for theirs, improving the quality of their product, hence, offering you more value.
OA investigates all the potential options, depending on the business agenda, future growth and maturity of an organisation. Consolidating suppliers can also leverage total buying power, driving further savings and efficiency, but it only works if there is a clear business requirement.
Having reviewed your current processes during an OA, a company can identify the areas for improvement, foster long-term, mutually beneficial partnerships that enhance overall supply chain resilience. For example, establishing the need to implement a Supplier Relationship Program with a focus on resilience and innovation to ensure sustained supplier performance and reliability.
Risk Management
In today’s volatile market, risk management is more critical than ever. During the pandemic, companies realised the importance of looking beyond Tier 1 suppliers, as Tier 1 can only be as strong as their Tier 2 and 3 suppliers. This underscores the need to examine the supply chain more granularly.
An OA helps identify potential risks in the supply chain and develops strategies to mitigate these risks, ensuring continuity and reliability. Whether dealing with supplier dependency, geopolitical issues, or natural disasters, having a robust risk management strategy can protect the organization from unexpected disruptions.
By assessing the entire supply chain, an OA provides a clear picture of where vulnerabilities lie and offers actionable solutions to address them. This proactive approach to risk management not only safeguards operations but also enhances the organisation’s agility in responding to unforeseen events.
Improving Quality
Quality is a cornerstone of procurement success. An OA can identify opportunities to improve processes for monitoring and managing supplier quality that will lead to better overall product and service quality.
For example, the OA could identify that regular quality audits and feedback mechanisms need to be established to ensure that suppliers meet the required standards. Implementing this continuous improvement loop would ensure that the organisation consistently receives products and services that meet its quality expectations.
Sustainability and Compliance
As sustainability becomes increasingly important, integrating it into procurement practices is essential. There is no doubt that Procurement is key to making a real difference in ESG. As we all know, the majority of activities impacting a company's sustainability performance occur in the supply chain, or in Scope 3.
When we look at levels of Maturity in Sustainability, we see that market leaders sponsor initiatives to help suppliers reduce their emissions, have policies rolled out to Tier 1 and 2 suppliers, and incorporate CO2 factors into their Supplier Selection criteria, typically weighting them at 10% of the scoring.
An OA identifies opportunities to incorporate sustainability into procurement, reducing the environmental and social impact of the supply chain. Additionally, ensuring compliance with relevant laws and regulations is a critical component of risk management.
Strategic Alignment
Finally, an OA ensures that procurement strategies align with broader business objectives, transforming the procurement function into a value creation engine. This alignment encourages procurement to support the organisation’s long-term strategy, driving overall business success.
For instance, if the organisation’s goal is to expand into new markets, the procurement strategy should support this by securing reliable and cost-effective supply sources in those regions. Aligning procurement with strategic goals ensures that all functions are working towards the same objectives, enhancing coherence and efficiency.
Methodology of Conducting an OA
As a procurement consultancy, we carry out various Opportunity Assessments (OAs). Despite working with diverse organisations across multiple industries, from Financial Services to Construction, one key element remains consistent: the methodology.
Important Steps of the Execution:
Spend Cube: Data lies at the core of any procurement activity. If the data is not accurate, the rest of the project will lack tangible deliverables. While spend/data analysis may not be the most exciting step and can often be neglected, it cannot be skipped or compromised if maximum value is to be achieved. Properly managing and efficiently analysing the data is where all the benefits lie and can be easily discovered.
Category Reviews: Engaging with key stakeholders and applying a collaborative approach is crucial at this step. It's important to understand that the initiatives should be done not to other stakeholders, but with them. The procurement function naturally intermediates between suppliers and internal needs. Initiatives will have little impact if not accepted internally.
Prioritised Savings Plan: After articulating the savings range per category, prioritisation is necessary. This activity should consider factors such as sourcing complexity, size and strategic importance of the category, spend size, potential opportunity size, business requirements, and addressability. Understanding low-hanging fruit and maximising activity leads to categorising priorities into Waves, ensuring that initiatives are not only delivered but successfully implemented.
Procurement Efficacy Model Positioning: Benchmarking your current procurement function is the starting position to achieve your goals. By reviewing the model, you can identify areas for improvement, highlight gaps, and showcase areas where significant work has been done. This exercise helps prioritise and streamline activities and gain stakeholder buy-in with a clear business case.
Future Functional Vision: Future planning is as important as current operations and objectives. To develop your procurement function and adapt to new enhancements, a high-level design should be created, identifying key actions to achieve. In a fast-changing environment, it's recommended to maintain a flexible Future Vision without sticking rigidly to specific methods and plans, allowing adjustments as needed.
Medium Term Plan: Once your Target Operating Model is established and your current level is understood, planning the necessary resources, technology, and process changes is essential to transition from tactical procurement to a more strategic approach.
Integrated Implementation Plan: Identifying and quantifying savings is not the end. Implementation of initiatives is crucial, and many companies struggle at this stage, leaving changes and savings on paper rather than adding value to the organisation.
Timelines and Resource for an OA
The timeline for an OA can depend on the spend size and scope. Some companies may wish to delve deeper and include additional activities related to the assessment.
Typically, an OA should be a focused piece of work and should not last longer than 4 months. Rapid OA’s can be completed in 6 to 8 weeks with a detailed category review taking 2-3 months. Having the available spend data available is a key factor in the timing of an OA. Normally a minimum of 3-4 full time people are required to undertake an OA.
Should You Use Internal or External Help to Execute It?
There is always a debate about whether to carry out project-based activities with internal resources or seek external assistance. There is no definitive answer as it depends on various factors such as the procurement function, current position, budget, and other considerations.
Advantages of Doing It Internally:
Organisational Knowledge: Your team is already familiar with the setup of your procurement function and its communication with other departments.
Familiarity with Stakeholders: It might be easier for your team to engage with key stakeholders since they know them, which can result in greater buy-in as everyone shares the company's values and goals.
IT Security and Technical Considerations: You won't face issues related to data sharing with a third party or go through approval processes. You can start quickly and avoid complications related to IT security and data sharing.
Advantages of Using External Help:
Expertise and Experience: Consultants have deep industry-specific knowledge and expertise. They understand market dynamics, supplier capabilities, and best practices that can be tailored to your unique needs.
Fast-Paced Execution: External consultants conduct OAs regularly, allowing them to move quickly and efficiently. Their experience reduces the likelihood of mistakes, as they know what works best for a variety of clients.
Unbiased Perspective: An external, impartial perspective is crucial for identifying inefficiencies and opportunities that internal teams might overlook due to familiarity and internal biases. This helps avoid the trap of repeating past practices.
Ultimately, the choice depends on factors such as the current capabilities of the procurement function, budget considerations, and the specific objectives of the OA. By weighing these factors, organizations can determine the most effective approach to drive meaningful improvements and achieve their strategic procurement goals.
Conclusion
In conclusion, in an increasingly complex business environment, an Opportunity Assessment (OA) emerges as a vital tool for optimising procurement processes and ensuring cost-effectiveness. The multifaceted challenges faced by procurement functions—from market volatility and supply chain disruptions to sustainability and compliance pressures—necessitate a strategic approach. An OA provides a comprehensive evaluation of procurement operations, identifying significant cost-saving opportunities, enhancing supplier relationships, and improving risk management. By aligning procurement strategies with overall business goals, an OA transforms procurement into a strategic asset that drives long-term success.
Conducting an OA is particularly beneficial during pivotal moments such as new leadership roles, mergers, IPO preparations, or when an organisation has not revisited its procurement strategies for an extended period. The structured, project-based methodology of an OA—encompassing spend analysis, stakeholder engagement, and strategic planning—ensures targeted improvements and sustained value creation.
Ultimately, whether performed internally or with external consultancy support, an OA equips organisations with actionable insights and practical solutions to enhance procurement efficiency, drive substantial savings, and align procurement activities with broader business objectives. This strategic evaluation is not just a routine audit but a transformative process that bolsters an organisation’s agility, resilience, and competitive edge in today’s dynamic market landscape.
Procurato; here to help
With vast experience in carrying out Opportunity Assessment, Procurato can help bridge your knowledge and resource gaps. From analysing spend, reviewing categories and planning sourcing activity to implementing savings and other initiatives, we can ensure to find you the right strategic approach for your organisation that aligns with your goals.
Our team members have a diverse skill base and versatile experience to provide clients with the best solutions. Please read our recent case study on one of the Opportunities assessments which we successfully delivered for our client. Find out more about our expertise or contact us now to learn more.
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