Click to enlarge image. Image Source: Beckway

Our latest blog comes courtesy of our partner Beckway, a private equity operating company specializing in improving the value of privately held businesses. Beckway provides procurement support to Argosy and several of our portfolio companies.

Whether you refer to your largest spending organization as purchasing or procurement, upper management often overlooks the sustainable financial benefits that strategic procurement offer a company. Procurement saving is the most efficient way to increase earnings before interest, taxes, depreciation, and amortization (EBITDA).

In our experience, low performers in procurement lose five percentage points in EBITDA margin compared to high performers.

Procurement and purchasing are often used interchangeably. However, at the highest level, procurement is a proactive strategic process, and purchasing is a reactive transactional activity and a strategic sourcing component.

Click to enlarge image. Image Source: Beckway

Click to enlarge image. Image Source: Beckway

While purchasing is usually just about the price, procurement is much broader and focused on extracting the best value for the money spent. Procurement’s goals are to tightly balance the Total Cost of Ownership (TCO), Incoming Quality, and Continuity of Supply.

Achieving procurement maturity involves a journey of four stages (Informal, Functional, Cross-Functional, and Integrated). This transformation usually ranges from 12 to 36 months, depending on the size and complexity of the business.

Procurement saving is the most efficient way to increase EBITDA because:

• Focusing on direct and indirect savings is a faster route to a significant increase in enterprise value.
• Procurement saving has a leverage effect – modest decreases in costs equate to large increases in profitability.
• Procurement initiatives are self-funding, even when outside resources are necessary.
• Success improves profitability, synchronizes values, and enhances integration between procurement and other business areas.

Click to enlarge image. Image Source: Beckway

The benefits of strategic procurement are numerous:

Corporate efficiency

• Procurement: Centralized organization focused on managing and controlling company spend
• Business Units: More time to focus on selling and less need for supplier management
• Accounting/Finance: Improved visibility to spend and a clear view of savings opportunities

Efficiency through process and policies

• Consolidated purchasing, reduced rogue spending, better and more accurate data

Standardization of payment terms

• Standardized and expanded payment terms to improve working capital and simplify the payment process

Stronger supplier relationship management (SRM)

• Overall reduced exposure to Continuity of Supply risks with increased dual sourcing
• Greater control over suppliers with corporate ownership of relationships

Standardizing shipping modes

• Leveraging of total company freight spend to reduce costs
• Reduced reliance on suppliers managing supply chain

Establishment of the procurement function as a strategic business partner to the organization

• Designing a scalable environment for procurement to sustain future growth
• Attracting procurement talent to the company

Beckway has completed many procurement transformation engagements, from assessment to interim Chief Procurement Officer roles to strategic procurement implementation. Procurement transformation engagements are self-funding and deliver sustainable savings. Typical annual procurement savings range from 5%-16%, with a return on investment (ROI) in the 6-9% range.

Takeaway

If you want to increase EBITDA, invest in strategic procurement. Procurement is a function that provides a year-over-year sustainable advantage for your business. Businesses without a strategic spend organization lose 5% of EBITDA annually.

Questions? Connect with us to learn how we help businesses like yours transform purchasing into procurement.

Click to enlarge image. Image Source: Beckway

Partner Highlight

At Beckway, we are operators, not consultants. Our team of Trailblazers does not just identify the problem and leave you to fix it. We are hands-on and improvement-focused, executing holistic solutions that make your business stronger, more resilient, and future-ready. Want to learn more? Contact Beckway Senior Partner & Procurement Practice Lead John Bradshaw.