A procurement target operating model serves as a blueprint that outlines how procurement activities are organised and executed across an organisation. It defines the structure in terms of people, processes, and technology involved. Ensuring that the procurement function is aligned and set up to support the organisation's strategic objectives.
Figure 1: Procurement Target Operating Model
The result? An efficient procurement operation that delivers value far beyond cost savings. But what should be included in this blueprint? This article explains what should be included in a procurement operating model, covering:
Procurement vision
If you don't know where you're going, how will you know when you've got there? Think of having a procurement vision as the destination to where you want to go. Typically, it comes in the form of a statement, no more than two lines and should summarise the value proposition of procurement and how it will help the organisation achieve its objectives. Here is an example of a vision statement that we produced for a previous client within the insurance sector
"To be a trusted partner to the Group, supporting effective, efficient and sustainable procurement which increases value, reduces risk and improves supplier performance”
Procurement strategy
The procurement strategy is the foundation of the procurement target operating model. It helps ensure that procurement activities are fully aligned with the company’s broader business strategy.
The procurement strategy is a subset of the corporate strategy and therefore time should be taken to review the corporate strategy, identifying where procurement can add the most value to help the organisation achieve its objectives. Broadly speaking, a procurement strategy will focus on several value creation areas;
Cost Management
Is the function needed to drive cost reduction and support mitigating supplier price increases? Helping organisations to maintain profitability.
Regulatory compliance
Does the organisation operate in a highly regulated environment and therefore has put significant emphasis on maintaining compliance? Especially with its management of suppliers.
Supplier Risk Management
How much dependency is on suppliers and how important is minimising disruption in the supply chain to the organisation? Those organisations who are heavily dependent on their supply base should put a lot of emphasis in this area.
Innovation
How important is supplier innovation in providing a competitive advantage? Are they heavily integrated into the product or service?
Understanding the importance of each of these areas of values and how they align to the organisation's corporate objectives and strategy means that the rest of the procurement target operating model is designed to support the delivery of this value.
A procurement function geared towards risk management will need a very different procurement target operating model to one focused more on cost management. Both will require very different structures, people and processes.
Given the procurement strategy is ever-evolving, It should be reviewed at least every 6 months and no less than 12 months to ensure organisational alignment. It should set objectives across all areas of the operating model to be multi-year focused. Think of it as a roadmap of how to get to a desired vision and maturity stages.
Organisational structure: centralised, decentralised or hybrid?
Next comes organisational structure. The procurement target operating model must decide whether procurement will be centralised (managed by a single department), decentralised (managed at the business unit level), or a hybrid of both.
A centralised approach may offer greater control and consistency, while a decentralised model can be more flexible, enabling teams to respond faster to local needs. This may be particularly relevant where there are more dependencies on local suppliers.
Defining clear roles and responsibilities within the structure is critical to ensure that everyone knows their part in the procurement process. Alternatively, a hybrid version may take the best from both models.
Our blog on “How to choose the right procurement operating model" explores the advantages and disadvantages of each model in more detail.
Processes
Efficient procurement relies on clear, streamlined processes, eliminating bottlenecks to ensure that procurement is conducted in an efficient, compliant manner.
Take time to think about where there should be appropriate reviews and approvals. Using value and risk helps procurement set the right level of oversight and where it makes sense to be more thorough in the process.
It is helpful to sometimes think of the processes in two distinct buckets; strategic and operational. Whilst the two are interrelated and must work in harmony, it is important to recognise that strategic processes are generally those that create the most value. As a general rule of thumb you should aim to have the majority of your people and resources focused on these activities with operational processes being made as efficient and automated with as little intervention as possible.
The key processes that should be considered strategic are;
Sourcing
Category Management
Supplier Relationship Management (including Supplier Risk Management)
Those that are considered operational are;
Purchase to Pay
Supplier setup and information management
Help desk
Technology
In the age of digital transformation, technology is the backbone of modern procurement. The right digital tools can streamline procurement operations through automation and improve both insight and user experience. That said, just because a task is manual today does not mean it should by default be performed in a system or automated.
Time should be spent reviewing the use case for digitalising each process. There are suppliers such as SAP Ariba and Coupa who can automate much of procurement, but implementing such as system may not be necessary at least to start with.
There is a lot of buzz around the use of AI, especially in procurement. It has the potential to significantly change the procurement target operating model and support the function to be more productive and effective. Much like digitalising every process, caution should be taken when considering where to best apply AI and each application must have a clear benefits case. This is further explored in our bog “The future procurement operating model."
People & Capability
People are at the heart of any successful procurement function. It is important to define clear roles and responsibilities as well as the skills required to perform them. Taking time to document what processes and areas people are responsible for managing will ensure there is clear ownership and accountability.
Inevitably with any procurement target operating model, there will be gaps between what is in place today and what is required in the future. It is important to identify skills and capability gaps to understand what talent development is required. Performing skills assessments, conducting training and change management will help to successfully migrate people into new roles and structures. In some situations, external support and recruitment are required.
Governance
A robust governance framework ensures that procurement activities adhere to internal policies and external regulations. In today’s complex global landscape, governance also plays a critical role in managing organisational risk.
Developing clear and intuitive policies will help with adoption and ensure high compliance. Consider how key risks can be managed within the policies, such as Environmental, Social and Governance.
Data & Analytics
How data is mined, cleansed and harvested for insights is critical for any procurement target operating model. The ability to analyse data to identify important trends and behaviours allows procurement to make informed decisions. With the application of AI in procurement this has never been more important, with the quality of data directly impacting AI’s effectiveness, it is no wonder that data governance and stewardship is such an important pillar of the procurement target operating model.
Performance Management
What gets measured gets managed. In your procurement target operating model, define key Performance Metrics (KPIs) that are linked to measuring the value you have identified to be delivered by your procurement target operating model and strategy. These can cover things like;
Cost savings
Compliance
Supplier performance
Risk
Efficiency
ESG
Real-time dashboards and regular reporting will help track these KPIs and inform decisions that continuously improve procurement performance. Time should be spent to define realistic but challenging targets.
Conclusion
A procurement target operating model is not just a roadmap—it’s the key build blocks to unlocking procurement’s full potential. By developing a comprehensive procurement target operating model, your procurement function can become a central driver of value and innovation within your organisation, ensuring procurement is directly supporting business goals.
Ready to take the next step? At Swan Procurement, we specialise in defining and implementing procurement operating models which accelerate procurement maturity and deliver the required value.
By combining deep expertise with data-driven insights, we offer a comprehensive range of services, from technology contract benchmarking to designing target procurement operating models. As your trusted partner, we collaborate closely with you to address and solve your procurement challenges. Please review our case studies, showcasing how we’ve delivered significant value through the redesign of procurement operating models.
Contact us today to explore how we can support your procurement goals.
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