Source-to-Settle #2: What is the Procurement Value Equation?
Kerri McMurray - July 17th, 2015
Crack the code. Solve your business’s procurement value equation with a fully-automated source-to-settle suite
In our previous source-to-settle blog post, we introduced you to the concept of the procurement value equation and how solving your business’ equation can lead to many benefits on a theoretical level. Now it’s time to get to the nitty-gritty.
What is the procurement value equation precisely? It is a formula that will bring you beyond the hard dollar savings, risk avoidance, and general efficiency that procurement promises. Generally, we can define the equation as the sum of total benefits minus the sum of total costs is equal to the total value of procurement. However, if you want a true understanding of the value of procurement to your business, you need to dig deeper.
The equation represents a cycle of the how the value created in upstream products impacts the value captured in downstream products, and how the value captured in downstream products impacts the value created in upstream products and so on. We can define this process visually as follows:
( Value Creation / Upstream )
( Value Capture / Downstream )
And for you math geeks yelling "it's an equation, so show me the formula!" we provide a proof:
When upstream and downstream products are integrated, the value created and captured becomes cyclical. The change in value created upstream (ΔVU) from incorporating data collected downstream plus the change in value captured downstream (ΔVD) by capitalizing on opportunities created upstream, will always be greater than zero. The calculated sum of this cycle represents the change in value produced from the integration.
ΔVU(VDi) + ΔVD(VUi) > 0
Formulaically, an organization can define procurement's value (VT) as the sum of benefits minus the sum of costs across a source-to-settle platform. When upstream and downstream products are integrated into a full S2S suite, procurement's total value (VTi) can be quantified by adding the initial value (VT) to the change in value produced from the integration.
VTi = VT + ΔVU(VDi) + ΔVD(VUi)
Because the change in value is always greater than zero, it can be determined that procurement brings more value to the organization when upstream and downstream products are integrated into a full source-to-settle suite.
VTi > VT
Take some time to figure out procurement's value to your business. Is your solution working for you? Explore new ways to get more value from procurement by reading our white paper, Rethinking the Procurement Value Equation.
Image: Akash Kataruka via Flickr